QCR Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Q2 of 2023. Yesterday, after market close, the company distributed its 2nd quarter earnings press release. If there is anyone on the call who has not received a copy, You may access it on the company's website, www.qcrh.com. With us today from management are Larry Helling, CEO and Todd Gipple, President and CFO.

Operator

Management will provide a summary of financial results and then we'll open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, Any statements made during the call concerning the company's hopes, beliefs, expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected. Additionally, Information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the most direct comparable GAAP measures.

Operator

The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non GAAP measures. As a reminder, this conference is being recorded and will be available for replay through August 3, 2023, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Larry Helling at QCR Holdings.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome everyone and thank you for taking the time to join us today. I will start the call by providing some highlights for the quarter, followed by a discussion about our strong balance sheet performance, liquidity position and capital levels, as well as a review of our Specialty Finance business and our loan securitization strategy. Todd will provide additional details Our financial results for the quarter. We continue to be pleased with our operating performance in 2023.

Speaker 1

We delivered outstanding 2nd quarter results highlighted by robust loan and core deposit growth and significant fee income. In addition, we maintained strong asset quality. Our diverse revenue sources, which included capital markets and wealth management fees, more than offset the pressure on our net interest income. We also continued to improve upon our already solid capital levels with exceptional earnings In the Q2, we delivered both reported and adjusted net income $28,400,000 or $1.69 per diluted share. We generated an ROAA of 1.44 percent and an ROAE of 13.97 percent for the quarter and believe that both metrics remain near the high end of our peer group.

Speaker 1

Loan growth was exceptional during the quarter, growing 12.2% on an annualized basis and driven primarily by our low income housing tax credit lending program. I'll expand on our success in growing loans shortly. Our experienced bankers grew core deposits Significantly during the quarter, building upon our strong and diversified deposit franchise. As a result, Our loans held for investment for deposits further improved to 92.1%. Our uninsured and uncollateralized also improved to 19.9% and remain at very manageable levels.

Speaker 1

Our elevated on balance sheet liquidity, bind with other immediately available liquidity at the Federal Home Loan Bank have said, More than cover our uninsured and uncollateralized deposits. We have assembled a strong and diversified deposit franchise Over the years and our 2nd quarter deposit activity continued to reflect the importance of the relationships that we have developed. During the Q2, our core deposits, excluding short term broker deposits, grew $339,000,000 Our asset quality remains excellent as the ratio of non performing assets The total asset increased slightly by 3 basis points during the Q2, yet remains near historic lows at 32 basis points. Our reserve for credit losses represents 1.41 percent of total loans and leases held for investment and continues to be at the high end of procurements. We remain confident that our reserve for credit losses are adequate to weather future economic uncertainty.

Speaker 1

We plan to be disciplined and maintain prudent reserves as we continue to diligently monitor asset quality across all of our business. We remain cautiously optimistic about the economic resiliency of our markets and the financial health of our clients. We are not seeing any meaningful signs of weakness across our footprint. As we mentioned last quarter, our exposure to commercial office buildings is very low and quite manageable at just 3% of total loans with an average loan size of $800,000 These properties are predominantly located in suburban locations within or adjacent to our markets. They are well collateralized and are performing in line with expectations with no significant repayment concerns.

Speaker 1

Our capital levels are strong and we remain focused on growing capital throughout the remainder of the year. We continue to target capital ratios in the top We believe that our modest dividend and strong earnings power allow us to continue to grow capital faster than our peers. During the quarter, we grew loans 12.2% on an annualized basis, driven primarily by the ongoing strength in our low income housing tax credit lending business. With the growing prominence of our specialty finance group and the LiTAC lending business, I would like to spend some time discussing the drivers of this high performing business. Our specialty finance team offers low income housing, active credit lending select group of developers and investors with whom we have built long standing relationships.

Speaker 1

Our clients continue to experience Strong demand for their project as the need for affordable multifamily housing exceeds supply in the markets that we serve. These high quality loans are bolstered by strong equity investment from other banks and corporate investors. The industry has an excellent track record with negligible historical default rates. Strong track makes these loans ideal for securitization. In addition, these loans are made on a floating rate basis, which has greatly improved our ability to manage interest rate risk.

Speaker 1

Due to the long term ownership structure of these projects, Borrowers seek to lock in their financing costs over the life of the loan. As a result, our bankers arranged interest rate swaps for the borrowers, enabling them to secure the desired fixed rate financing and generating significant capital markets revenue for our company. The LiTAC business has been a consistent and important component of our non interest income. In addition, as the economy has softened, Some of the previous headwinds that our clients were experiencing in this space have eased. We saw a nice rebound in capital markets revenue from swap in the first half of twenty twenty three as the supply chain constraints and inflationary pressures on the construction costs have begun to abate.

Speaker 1

In short, this is an extremely valuable business and we believe that it deserves a higher valuation multiple than traditional banking. Furthermore, based on decades of stability in the industry And our own experience, we believe that this business is countercyclical and will be very resilient in future recessionary environments. We are increasing the size of our planned securitizations of LiTAC loans to achieve improved pricing and execution. We now expect to close on the transactions early in Q4. The securitization of our LiTAC assets will be an effective tool in managing our liquidity and capital.

Speaker 1

In addition, it will provide expanded capacity for continued LiTec production and the resulting capital markets revenue. While economic headwinds remain a risk, we experienced strong loan growth during the Q2. As a result, we are increasing our guidance for loan growth for the remainder of the year to be in the range of 9% to 12% on an annualized basis, which would result in a 0 to 3% growth on an annualized basis, net of brand LITEC loan securitizations. I will now turn the call over to Todd to provide further detail regarding our Q2 results.

Speaker 2

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our balance sheet performance during the quarter. As Larry mentioned, we grew total loans by 12.2% on an annualized basis during the quarter or $189,000,000 of net growth.

Speaker 2

In In anticipation of our first loan securitizations, we have classified $291,000,000 of LITEC loans as held for sale. We added an additional $152,000,000 of LITEC loans to the held for sale category during the quarter as we continue to build towards the first Total deposits grew $105,000,000 during the quarter, driven by strong core deposit growth from a mix of commercial, retail and municipal deposits. The growth in core deposits of $339,000,000 which excludes broker deposits, increased Total available liquidity and allowed us to reduce the amount of our broker deposits by 234,000,000 Our core deposits continue to have strong diversification due to our separate charters and markets as well as a commercial client base that is spread across a variety of industries. 55% of our core deposits represent deposits from our commercial clients and have an average balance of $214,000 Approximately 35% of our deposits consist of consumer deposits and have an average balance of $21,000 The remaining 10% of our deposits are from our 181 correspondent banking partners with an average balance of $2,300,000 Now turning to our income statement. We delivered net income of $28,400,000 for the quarter, an annualized increase of 18.7 percent as the decrease in our net interest margin was overpowered by strong capital markets revenue and well controlled expenses.

Speaker 2

Our adjusted net interest income on a tax equivalent basis decreased $2,400,000 to $59,500,000 down from $62,000,000 in the Q1. Adjusted NIM on a tax equivalent yield basis was 3.28%, which was down 19 basis points from 3.47% in the prior quarter and within our guidance range. As we anticipated and guided last quarter, we experienced a continued increase in the cost of funds during the Q2. This was primarily the result of a shift in the composition of our deposits from lower beta to higher beta deposits. We've been pleased with the beta performance of our low beta deposits throughout the cycle.

Speaker 2

However, the continued shift from non interest and lower beta deposits The higher beta deposits has been more than expected and has led to an outsized increase in our cost of funds. As we look to the Q3, including the 25 basis point rate hike announced yesterday and a yield curve that continues to be sharply inverted, Our moderate liability sensitive balance sheet creates an interest rate environment that continues to be challenging. However, we expect the pressure on margin to lessen as the deposit mix shift has slowed and we benefit from strong late second quarter loan growth. We are guiding adjusted NIM, TEEY, in the range of static to down 10 basis points for the 3rd quarter. Turning to our non interest income, which increased $6,700,000 or 26% during the Q2.

Speaker 2

Our capital markets revenue was $22,500,000 compared to $17,000,000 for the Q1, which outperformed our annualized guidance range. Capital markets revenue from swaps continues to benefit from stabilization in the supply chain and construction costs. In addition, developers have been successful in restructuring their capital stacks in the new interest rate environment. Capital markets revenue from swap fees has been a consistent and strong source of fee income. And importantly, this revenue source has provided significant Countercyclical benefits during the pandemic and is expected to do so in future economic downturns.

Speaker 2

Our tax credit lending and capital markets revenue pipeline remains healthy as our clients continue to experience strong demand for new projects. As a result, we are increasing our capital markets revenue guidance for the next 12 months to a range of $45,000,000 to $55,000,000 In addition, we generated $3,800,000 of wealth management revenue in the 2nd quarter, consistent with the Q1. Our wealth management team continues to benefit from new relationships, adding 148 new clients and 455,000,000 and assets under management in the first half of this year. Now turning to our expenses. Non interest expense for the 2nd quarter totaled $49,700,000 compared to $48,800,000 for the 1st quarter and within our guidance range of $48,000,000 to $51,000,000 The increase from the prior quarter was primarily due to higher variable compensation, Increased FDIC insurance rates and higher direct costs from holding more deposits in the ICS program.

Speaker 2

Our strong fee based performance in the 2nd quarter led to an increase in variable compensation, while other salary and benefit related expenses decreased. We remain diligent in controlling our expense growth. For the Q3, we are reaffirming our non interest expense guidance again this quarter to be in a range of $48,000,000 to $51,000,000 Our asset quality remains exceptional and better than our historical average. During the quarter, NPAs increased modestly. NPAs for the quarter were $26,100,000 or only 32 basis points of total Approximately half of our total NPAs consist of one relationship and we believe that this credit will be resolved without a loss.

Speaker 2

The provision for credit losses was $3,600,000 during the quarter. We expect to continue to maintain strong reserves given the economic uncertainty. Our reserve to loans held for investment was fairly static at 1.41 percent and continues to be at the higher end of our peer group. Our total risk based capital ratio declined slightly by 2 basis points to 14.66 percent due to the strong loan growth during the quarter. We increased our tangible common equity to tangible assets ratio to 8.28%, up from 8.21% at the end of the prior quarter.

Speaker 2

With our continued strong earnings coupled with our modest dividend, our tangible book value per share increased by $1.28 or 13.2% annualized during the Q2. As interest rates moved higher during the quarter, Our AOCI declined sequentially, which partially diluted some of the growth in our tangible common equity and tangible book value. During the quarter, we repurchased a modest number of shares. Our capital allocation priorities remain focused on growing our capital and targeting capital levels near the top of our peer Finally, our effective tax rate for the quarter was 12.2% compared to 9.3% in the 1st quarter. The increase was due to a higher mix of taxable income, primarily from the significant growth in capital markets revenue this quarter.

Speaker 2

We continue to benefit from our strong portfolio of tax exempt investments and loans, which has helped our effective tax rate remain one of the lowest in our peer group. We expect the effective tax rate to be in a range of 11% to 14% for the remainder of 2023. With that added context on our Q2 financial results, let's open the call for your questions. Operator, we're ready for our first question.

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Damon DelMonte with KBW. Please go ahead.

Speaker 3

Good morning, guys. Hope everybody is doing well today. Good morning, Damon. Just wanted to Start off on the revised outlook on the capital markets revenues. I think you said $45,000,000 to $55,000,000 over the next four quarters.

Speaker 3

Given the strong performance here in the first half of the year and especially in the second quarter, do you feel that The pipelines might be a little bit slower here in the back half of this year and it kind of ramps back up in 2024 or do you feel that just given the kind of Buying out of supply chain and construction costs that you're going to keep a higher level for the next couple of quarters.

Speaker 1

Damon, I'll start with a couple of data points for you first. First of all, our average Per quarter of swap fee income in 2022 was $10,000,000 per quarter. And our 4 quarter trailing is $15,000,000 So the middle of our guidance is kind of right in the middle of those two numbers. So We're certainly trying to give you numbers that we think are achievable. The pipeline remains strong, but as you know, it's a modest number of deals And timing can move the income dollars between quarters.

Speaker 1

So we certainly believe our guidance is achievable, Barring headwinds that we can't see today because as we talked a lot during the pandemic about Supply chain and inflation pressures on those projects, those came through those beautifully, but it took some time. And so we certainly feel good about the pipeline going forward. As you know, we're trying to turn this into a 4 quarters in the future business, Not trying to predict what's going to happen next quarter because of the variability, but probably tell you we love this business. We think it's a great business long term. There is some variability, but long term, the underpinnings are really solid.

Speaker 3

Got it. Okay. Thanks for that color. With regards to The guidance on the margin, Todd. I believe the accretable yield this quarter was only like 130 $4,000 compared to like $800,000 last quarter.

Speaker 3

So if you kind of back both of those out of the first and second quarters, it looks like the core margin was like 3.47 3.28. So when we talk about the I think you said 0 to 10 basis points compression, is that based off that like I guess based off the $328,000,000 number and I guess how should we think about fair value accretion going forward?

Speaker 2

Sure, Damon. First off, You're spot on in terms of what happened to accretion Q1 and Q2. I'll answer the last half first. I would expect that to be More like $500,000 per quarter in Q3 and Q4, so a more normalized number. The $328,000,000 is what you should leap off from For the 0 to 10 basis point contraction in our guide.

Speaker 2

And just a little more color around how we got there. We did expect, as we said in the opening comments, the 25 basis point hike. We're assuming that we Continue to have this inverted curve and it remains fairly static. We modeled a range of outcomes on core deposit mix Over the quarter, under all scenarios, we do replace the $290,000,000 of brokered CDs that we have maturing In Q3, those $290,000,000 of brokers are at a $506,000,000 rate today. So going to be nice To see those roll off and replace with core deposits.

Speaker 2

And then we assume the midpoint of our loan growth guidance. So that modeling gives us a range of outcomes From a favorable static to as unfavorable as 10 basis points of contraction. So that would be off of that 3.28 base.

Speaker 3

Got it. Okay. That's very helpful. Thank you. And then I guess just lastly and then I'll step back.

Speaker 3

On the credit quality, the slight uptick in non performing loans this quarter, A little bit under $4,000,000 Was that one credit in particular or was there a couple involved in that?

Speaker 1

Yes. Thanks, Damon. Good question. The pickup was just a handful of mostly equipment loans From small companies that came under pressure. And while we're not seeing any broad based degradation in our portfolio, it seems like The companies that are having the most stress are really the smaller companies with less sophisticated management and those kind of things.

Speaker 1

And That's maybe longer term as we've talked about normal as normal credit costs come into Long term, I don't know when that's going to be and it depends on what happens to the economy, but normal is going to feel different. And so there's we had a handful of small companies that felt some pain. We're trying to be out front and deal with them. And so It's really not a concentration one big deal, it's a half a dozen smaller deals that created that NPA increase.

Speaker 3

Got it.

Operator

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

Speaker 4

Yes. Hi, guys. Good morning. Thanks for taking

Speaker 1

the questions.

Speaker 2

Good morning,

Speaker 4

Nate. Just wanted to kind of think about the balance sheet size entering the Q3. It looks like the average balance, Including loans held for investment held for sale were about 3% higher than the end of period balances. And I just want to make sure we're thinking about the Asset size accurately heading into the 3rd quarter. Can you provide any color along those lines?

Speaker 5

Yes, sure.

Speaker 2

Go ahead, Larry.

Speaker 1

Yes, I mean initially, the guidance we gave you was for the back half of the year. And so we expect securitization to happen in the Q4. So the growth in the Q3 We'll be toward the higher end of that range that we gave you. And then we're going to do the securitization that will take some of that growth off the balance sheet in the Q4. So I mean, I think we expect continued growth.

Speaker 1

We had strong growth late in the second quarter, so that's going to run into the 3rd quarter. And so we expect the growth to be towards the higher end of the range in the Q3.

Speaker 4

Got you. That's helpful. So it sounds like a lot of the growth occurred late in the quarter and so earning assets should be up maybe $150,000,000 to $200,000,000 quarter over quarter?

Speaker 2

That would be right. That's what we're expecting And that margin outcome that we talked about, Nate.

Speaker 4

Okay, perfect. Just want to make sure I have that right.

Speaker 2

Sure. Sounds

Speaker 4

good. And then Todd, within your expense guidance, does that kind of contemplate you guys hitting the midpoint of the next 12 months Capital markets revenue expectations or I guess how should we kind of think about the variability of the expense base relative to that revenue source in particular?

Speaker 2

Sure. As you well know, Nate, that has a pretty significant impact on non interest expense. I'm comfortable that we would still be within that upper end of the range at $51,000,000 even if we continue to Form at the higher range of our annualized guidance that we just increased to the 55 for a rolling 12 months. I think we'd still feel very confident about coming in at that $51,000,000 or a touch under.

Speaker 4

Okay, great. And then just maybe one last one. I think last quarter, Larry, you were describing a pretty strong core deposit pipeline Coming into 2Q and it seems like that kind of came to fruition here in the second quarter. So I would just be curious kind of what the kind of the pipeline looks for Additional core deposit wins and share gains?

Speaker 1

Yes, I'll start and then maybe let Todd finish here. Certainly, The pipeline still remains strong and I'm certainly really proud of our team for 23% core deposit growth during the quarter. As you You can see what we did late in the Q1 when the banking market was just getting disrupted, we added a bunch of brokered CDs just to boost liquidity. And then What we did very successfully in the last quarter is rotated a lot of that out and replaced it with core deposits. So I'd say the pipeline is Certainly still there and we've proven that our client base, when we need the money, we can go get it from them.

Speaker 1

So we certainly feel good about that, certainly in this environment. So Deposit pipeline still feels fine to us.

Speaker 4

Got it. That's great to hear. And then if I could actually just ask one last one just in terms of the outlook On the ACL, it came down a little bit quarter over quarter. Is the goal to kind of just hold it here and just provide for growth and any charge offs? And it seems like The charge off outlook looks fairly benign coming out of the 2nd quarter?

Speaker 1

Yes. We Good question, Nate. And I'd say, yes, we're going to hold it probably in the 140s given what we know today. Bar and some change in the economy, good or Certainly, we think this is a kind of prudent level to be at. We'd be high in our peer group and have credit quality, certainly consistent with our peer group.

Speaker 1

So I think we're trying to take conservative approach and manage it around these numbers as much as we can.

Speaker 4

Okay, perfect.

Operator

The next question comes from Brian Martin with Janney Montgomery. Please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 1

Good morning,

Speaker 6

Brian. Hey, Todd, maybe just one back for that on the core deposit that swap from what you're changing out from the broker to the new core deposits this What's kind of the range of outlook as far as where those funding costs where those get replaced at?

Speaker 2

Sure. Really glad you asked that question, Brian. So again, just to reset, we've got $290,000,000 of brokers we're going to replace at a 506. Our expectation is to do that really at that 506 or slightly better. We had a lot of success in Q2 with growing deposits as you could And I'm looking at a sheet of some of our big wins, and we had some new money from existing clients at $50,000,000 In the mid-5s, but we also picked up some significant dollars from existing clients in the mid-4s.

Speaker 2

And we continue to bring on some new clients. Certainly, some of those new funds would be with a 5 handle, but I'm looking at a couple of wins here with a couple of $4,000,000 $5,000,000 new relationships in the $2,000,000 $3,000,000 in terms of ICS Money market. So we're working really hard to replace that at a lesser weighted average rate than that 506. And that really is part of our even though we guided static to 10 basis points of contraction, That may be a little more optimistic than most might have expected. And we think that's certainly achievable.

Speaker 2

We are really focused on growing core deposits. And While they're pricey these days, we think we'll beat that 506.

Speaker 6

Got you. No, that's helpful. And is that kind of your outlook for rates, Todd, I mean, does it kind of contemplate that if it's down next quarter, not picking a number, but sequentially, it's down a little maybe a little bit less Q4 and kind of begins To trough out, to agree to trough, is that big picture how we should think about the near term?

Speaker 2

Well, Brian, maybe if you could be a little more clear. Are you asking me about our expectations on the Fed or more on our deposit fundings?

Speaker 6

Just your margin and your outlook on basically if you have the rate increase,

Speaker 2

Yes. Okay. So kind of a blended answer here. There's no meeting in August. There's a meeting in September.

Speaker 2

I guess no one really knows if we'll see another increase or another pause there. But we're very optimistic about, 1, achieving this guidance in the Q3 of static to 10 down. We're very optimistic about margin in the 4th quarter. Larry gave some more details around the securitization in the Q4. That securitization will actually be NIM Accretive by about 4 basis points.

Speaker 2

So we'll get a little bit of lift in margin from the securitization and that offtake. It has a ton of other benefits, Of course, but will give us a little lift in margin. And we're right now at a 50 beta on total deposits For the entire cycle, we think that's getting pretty close to our peak beta. And while we probably got to peak betas More quickly than most of the industry, we feel like we're through the worst of it now. And maybe the rest of the Might have a little longer tail on that level of beta performance, but we're more optimistic about the back half of the year for all those reasons.

Speaker 6

Got you. No, that's helpful. I appreciate it, Todd. And maybe just the last one on margin. Just remind us the if we do see some cuts next year, just the How QCR sets up in that type of environment?

Speaker 2

Yes. Thanks, Brian. We are now Modestly liability sensitive. Over time, we have gone from an asset sensitivity That helped us in the 1st third of the hiking cycle. So during the 1st third, we saw margin expansion.

Speaker 2

As our deposits have rotated from non interest bearing and low beta Interest bearing to 100 beta deposits, we've now converted to where we are modestly liability sensitive. So When rate cuts were to take place, however long that might be out in the future, when that does happen, we feel like we're well positioned to see some margin Lift when rates come back down.

Speaker 6

Perfect. Okay. That's super helpful. And just if I can ask one last one. Just The commentary on loan growth and taking the guidance up, it looked you guys talked about the specialty business being particularly strong, but the traditional Besides maybe being a little bit more modest, I mean, I guess, in your guide or just how you're thinking about the next couple of quarters, do you see some rebound in that Traditional business or is it still more the specialty business that's kind of leading the charge?

Speaker 1

Yes. I think the The specialty business, especially the LiDAC space is very resilient and seems to be, As we talked about it in the past, there was kind of a slowing down of that during the pandemic that now seems to be kind of back to a normal pace in that business. The core commercial business, C and I and normal commercial real estate, they're still dealing with the shock up in rates and I think it's affected the psychology of people. So certainly that's I think will grow, but at a modest pace, certainly low single digits there And how we're going to get to that double digit pre securitization kind of numbers is really because of the nice growth in the Liteks.

Speaker 6

Got you. Okay, perfect. I appreciate you guys taking all the questions. Thanks.

Speaker 2

Thank you, Brian.

Operator

The next question comes from Jeff Rulis with D. A. Davidson. Please go ahead.

Speaker 7

Hi, good morning. This is Andrew on for Jeff today. Just another follow-up question in regards to the LIEtech loans. Just wondering what type of servicing revenue or Gain you receive from those? And then also just wondering who the targeted buyers of that product are?

Speaker 1

Yes. So first of all, we will probably not retain the servicing long term. That's not probably a long term play for us because we'd have to build some more infrastructure as we securitize those. So initially, we're going to engage an outside servicer on that. And so the buyers for this because we're turning this into a AAA rated security, Our institutional investors of all kinds, insurance companies, banks, funds, those kind of places is where this would go.

Speaker 1

So we think it's readily marketable and we'll go to the normal kind of institutional buyers.

Speaker 7

Okay. That makes sense. Thank you. And then another question maybe more on the expense side. Just with the surge in fee income this quarter, we thought expenses might have ticked up a little higher.

Speaker 7

But Going forward, is there a way to handicap the variable cost component when swap fees are higher or lower than average?

Speaker 2

Sure, Andrew. There's a correlation certainly between the capital markets results and our variable compensation. And historically, for all in incentives and variable comp around that, you might say that's a 20% of that, I guess, I would say beat. So to the extent We might beat our guidance on a more normal quarter, roughly 20% of that beat would add to the Non interest expense, Carrie. The reason that you didn't see it here in the Q2, quite honestly, is we expected several quarters ago That margins may be getting squeezed in our industry, and we've really had our entire leadership team focused on being deliberate And thoughtful around expenses.

Speaker 2

We've been doing that for several quarters now. That's why our non interest expense guide has remained very static here probably for the last four And we're just really focused paying attention to expenses. We're still making great long term decisions, but we're just being more thoughtful and intentional on spend. So, that's why that 48 to 51 guide, I think we're still pretty comfortable that even though we might be in the upper end of that range, we'd still be within the range even if we outperform on Capital Markets revenue. So kind of a long answer to your short question, but just a lot of moving parts there.

Speaker 2

But really think about a 20%

Speaker 7

And then just one more From me, do you have a June average for net interest margin or a spot rate on cost of deposits?

Speaker 2

Yes. Actually, I probably feel more comfortable just doing the spot margin, but I'm very glad you asked that question because we have not gotten That's one of the reasons that we're pretty confident about a good outcome in Q3. Our Q3 NIM was that 3.28 that we talked about with Damon earlier in the call. The big contraction in margin in the Q2 was really in April May. Our May margin was 3.26% and June was static at 3.26%.

Speaker 2

So that's one of the reasons we have some confidence about A good outcome in Q3. We really saw that level off in June. So I hope that helps.

Speaker 7

That helps. Thank you and congrats on the quarter.

Speaker 2

Thank you.

Operator

The next question comes from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 5

Thank you. Good morning, everyone. Maybe just doing a little bit further digging into the LiTec So first, just if you could remind us kind of how much In terms of what's on the balance sheet is in construction and multifamily, just specific to LYTech at this point?

Speaker 1

Thanks, Daniel. We've got about $800,000,000 of LiTec stabilized that's Up and running that we would be able to securitize at any time as we go forward. And then we got a little over $800,000,000 in construction that is in the process of stabilizing and completion. And so That's what we'll be creating the future pipeline securitizable assets as we go forward.

Speaker 5

Okay. All right. Thank you for that. And then in terms of the kind of The deposit relationship for those borrowers, how do you think about kind of loan to deposit for the LIETech borrowers or how much in Are you getting from them and what type currently are they putting on?

Speaker 1

Yes, we are getting deposits from those that source of business, but certainly not at the pace we're putting loans on. It's around $150,000,000 that we got in deposits out of that sector of the business so far. We have a new initiative that we are Getting more serious about collecting deposits from that space, just because it makes sense from a long term business perspective. It would be a combination, Some interest bearing, some low interest bearing deposit cost because there's certainly reserve funds And those kind of things that are parts of these structurings that we put together. So it's kind of a combination of both, I would say, interest bearing, non interest bearing Accounts typically a non maturity type deposit.

Speaker 5

Okay, great. And then circling back to the loan growth conversation. So you talked about kind of a 0% to 3 Net loan growth of the securitizations. It sounds like the securitizations are going to be a bigger part of the Strategy going forward. There's 2 questions here.

Speaker 5

First, how big are you comfortable letting The LYTech on portfolio or on balance sheet loans get. And number How are we thinking about it or how are you thinking about kind of net loan growth maybe into 2024? It's Probably more a function of the traditional loan growth coming back, but just curious if this is how this all fits into the bigger picture?

Speaker 1

Great. So, yes, if you look at the LiTec loans, they're in total about $1,600,000,000 today. We're going to securitize short of just short of $300,000,000 in the Q4. So we're taking the top off of it there. And if we do let it grow, it would those outstandings would grow at a modest pace going forward, Probably more in the 5% range on balance sheet, which would our capital then could keep pace with and keep it relatively Static at the same percent of capital.

Speaker 1

Longer term for loan growth, I think that's the beauty of this Securitization tool that we have that most of them would have, we can use it to manage liquidity and capital and loan growth pretty nicely As long as we plan out in front of quarter or 2 as we look for future securitizations. So we expect to do more securitizations In 2024, as we get closer to that, we'll probably give you some indication of when and how much. But yes, certainly we're going to take the top off of that growth, grow that much more modestly on balance sheet, Which should keep it close to the same time relative basis on as a percent of capital.

Speaker 5

Okay, great. That's helpful. And just lastly, again, on the LiTAC, what are the yields on those Loans look like, and especially relative to kind of what you already are doing in construction and multifamily?

Speaker 1

Yes, the yields are, number 1, there's exclusively floating rate loans on our books and those yields are between And I'm going to also tax affected because there's a tax exempt component to a big portion of the loans. So the tax equivalent yields are in the 7% s up to 8%.

Speaker 5

That's for the construction portion?

Speaker 1

And for the permanent because the permanent are floating And on our books too. So that's all floating on with those same relative prices.

Speaker 5

Got it. All right. Terrific. Thanks for all the color there. That's all I had.

Speaker 1

Thanks, Daniel.

Operator

This concludes our question and answer session. I would now like to turn the call over to to Larry Hailing for closing remarks.

Speaker 1

Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day. We look forward to talking with you again in the coming months.

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Key Takeaways

  • Q2 reported and adjusted net income was $28.4 million ($1.69 per share), delivering an ROAA of 1.44% and ROAE of 13.97%, both near the high end of peers.
  • Loans grew 12.2% annualized, driven by the low-income housing tax credit business, while core deposits increased by $339 million, improving the loan-to-deposit ratio to 92.1%.
  • Non-interest income rose 26% in Q2, led by capital markets swap fees, and the company raised its 12-month capital markets revenue guidance to $45 million–$55 million.
  • Net interest margin declined 19 basis points to 3.28% amid higher-beta deposit costs, and is guided to be flat to down 10 basis points in Q3 as the balance sheet remains moderately liability sensitive.
  • Asset quality remains strong with non-performing assets near a historic low of 0.32% of total assets, the allowance for credit losses at 1.41% of loans, and total risk-based capital at 14.66%.
AI Generated. May Contain Errors.
Earnings Conference Call
QCR Q2 2023
00:00 / 00:00