QCR Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the QCR Holdings Inc. Earnings Conference Call for the Q1 of 2024. Yesterday, after market closed, the company distributed its 1st 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 Web site at 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 the 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 this call concerning the company's hopes, beliefs, expectations and predictions of future and forward looking statements and actual results could differ materially from those projected. Additional 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 directly comparable GAAP measures.

Operator

The press release available on the company's website contains the financial and other quantitative information to be discussed today as well as the reconciliation of GAAP to non GAAP measures. And lastly, as a reminder, this conference is being recorded and will be available for replay through May 1, 2024, 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.

Speaker 1

Thank you, operator. Welcome everyone and thanks for joining us today. I'll begin by providing some highlights for the quarter followed by a discussion on our strategic priorities. Todd will then follow with additional details regarding our financial results for the quarter. We delivered strong first quarter results highlighted by significant fee income and continued growth in both our core deposit and loan balances.

Speaker 1

In addition, we continue to benefit from well managed expenses, improved upon our already excellent asset quality and further strengthened our capital ratios. In the Q1, we produced adjusted net income of $26,900,000 or $1.59 per diluted share. We generated an ROAA of 1.25 percent and an ROAE of 11.83 percent for the quarter and believe that both metrics remain near the high end of our peer group. We grew total loans 6.4% on an annualized basis during the quarter, driven primarily by our low income housing tax credit lending program. We also grew core deposits significantly increasing them by $316,000,000 or 20.3 percent on an annualized basis, adding to our strong and diversified deposit franchise.

Speaker 1

As a result, our loans held for investment to deposit ratio improved to 93.6%. The exceptional deposit growth achieved during the first quarter was driven by growth in our correspondent bank deposits. Our success in growing deposits underscores our commitment to expanding our market share with existing clients and establishing new relationships within the communities we serve. Our asset quality remains excellent as the ratio of non performing assets to total assets improved by 4 basis points during the Q1 and remains below our historical average levels at 36 basis points. Our reserve for credit losses represents 1 point 3 3 percent of total loans and leases held for investment and continues to be near the high end of our peer group.

Speaker 1

We remain disciplined in our underwriting, maintain prudent reserves and diligently monitor asset quality across all business lines. We also continued to see positive trends this quarter and our total criticized and classified loans as a percentage of total loans and leases. We are cautiously optimistic in the economic resilience of our markets and the financial health of our clients. We are not seeing any meaningful signs of weakness across footprint. Our exposure to commercial office billings is minimal and well controlled, constituting just 3% of total loans with average loan size of $859,000 These properties are primarily situated in suburban locations either within or adjacent to our markets.

Speaker 1

Importantly, they are well collateralized and performing in line with expectations and we have no significant repayment concerns. In addition, our construction and land development portfolio is performing well. Balances in this sector declined 19% from the prior quarter as projects reached completion and transferred into permanent financing. The majority of our construction and land development loans consist of financing on high quality, low income housing tax credit projects. The LIHTC lending program has been instrumental in creating affordable housing units and has been a significant strategic initiative for our company over recent years.

Speaker 1

We consider this to be the best asset class in our loan portfolio. The entire LiTAC industry enjoys an outstanding historical track record and solid underpinnings. In recent years, we've navigated a challenging construction period overcoming pandemic related difficulties, supply chain disruptions and inflationary pressures. Given the superior quality of the LiTec construction portfolio and despite the headwinds, we have had negligible credit issues from this sector of our business. We maintain disciplined underwriting and vigilant credit administration.

Speaker 1

It also underscores the strength of our risk management practices and commitment to prudent lending. Our remaining CRE portfolio is performing well and it's with clients we trust and in markets that we know and understand. Our capital levels remain strong and we believe that our modest dividend and solid earnings will enable us to continue to grow capital faster than our peers. As we delve into our strategic priorities for 2024 and beyond, it's essential to highlight our 965 strategy. We crafted this long term initiative in 2019 with the purpose of driving our financial results to enhance shareholder value.

Speaker 1

We have delivered on those goals and our overall financial performance has been exceptional. Over the last 3 years, core diluted earnings per share has grown at a compounded annual rate of 21% and tangible book value per share by 11% per year. Our adjusted ROAA was 1.41 percent in 2023, up 28 basis points over the 3 year period and near the top quartile of our peer group. Our priority is to sustain this outstanding financial performance. We will achieve this by retaining the core of our 965 strategy.

Speaker 1

We remain committed to delivering top tier financial performance across several key metrics, including earnings per share, tangible book value per share growth, ROAA and continuing to increase our capital ratios. Additionally, we plan to fund future loan growth through core deposit growth and ongoing securitizations. Our qualitative goals encompass enhancing employee and client experiences by investing in best in class technology for greater efficiency and continuing to invest in and support the communities in which we operate. In summary, we believe that our commitment to sustain top tier financial performance will enhance shareholder value in the long run. I will now turn the call over to Todd to provide further detail regarding our Q1 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, our total loans grew 6.4% on an annualized basis during the quarter or $105,000,000 of net growth.

Speaker 2

In anticipation of our next loan securitization, we have designated $275,000,000 of LiTec loans as held for sale at the end of the quarter. As we have previously discussed, our long term securitization strategy allows us to sustain the strong performance of our LiTec lending business. In addition, this will continue to drive the corresponding capital markets revenue that we earned from this business, all while ensuring our portfolio remains within our established concentration levels. Core deposits increased $316,000,000 during the quarter or just over 20% on an annualized basis. As Larry mentioned, growing our core deposits remains a top priority.

Speaker 2

This strategic focus enables us to sustain our future loan growth while reducing reliance on wholesale or higher cost funding. During the first quarter, our exceptional deposit growth facilitated a combined reduction of $252,000,000 in overnight borrowings and broker deposits. Our total uninsured and uncollateralized deposits remain very low at 20% of total deposits. In addition, the company maintained approximately $3,200,000,000 of available liquidity sources at quarter end, which includes $1,300,000,000 of immediately available liquidity. Now turning to our income statement.

Speaker 2

We delivered net income of $26,700,000 or $1.58 per diluted share for the quarter. Our adjusted net income was 26,900,000 dollars or $1.59 per diluted share. Net interest income for the Q1 of 2024 totaled 50 $4,700,000 a decrease of $1,000,000 from the Q4 of 2023. This decrease was influenced by several non client factors, including the maturity of $125,000,000 of interest rate caps on our index deposits and the conversion of $65,000,000 of our subordinated debt to a higher floating rate, which contributed a combined 1,300,000 of additional interest expense. We also had lower loan discount accretion by 310,000 and there was one less day in the quarter, which had an impact of approximately 600,000 decrease in net interest income.

Speaker 2

However, the company's net interest income driven by core activity saw growth of approximately $1,200,000 during the Q1, led by continued expansion in loan and investment yields. Our adjusted NIM on a tax equivalent basis declined by 5 basis points from the Q4 of 2023 and was at the low end of our guidance range. The decrease was driven primarily by a combination of non client factors, including the expiration of interest rate caps and the repricing of a portion of our subordinated debt, which collectively contributed 7 basis points of NIM dilution. However, we were able to partially offset this non client impact with core NIM expansion of 2 basis points. Notably, our core NIM expansion was less than expected due to additional shifts in our deposit composition.

Speaker 2

Specifically, our non interest bearing deposit portfolio has experienced a net decline over the past year as our commercial clients use more cash for operations and are investing excess cash in interest bearing deposits. Looking ahead, we continue to use the forward yield curve as the baseline for our interest rate assumptions, which no longer includes any rate cuts for the 2nd quarter. The inverted yield curve continues to pressure our NIM. However, we do not have any new non client headwinds in the 2nd quarter. Therefore, assuming a static funding mix, we anticipate that our expansion in loan and investment yields will generally As a result, we are reaffirming our guidance for a relatively static adjusted NIM TEY in the Q2 of 2024 with a range of 5 basis points of expansion on the high end and 5 basis points of compression on the low end.

Speaker 2

We continue to be well positioned for a rates down scenario. In the past year, our balance sheet has shifted from asset sensitive to firmly liability sensitive. This shift is primarily due to changes in our funding mix to more higher beta funding. Turning to our non interest income of $26,900,000 for the Q1, which was down from our record $47,700,000 in the Q4 of 2023. Our capital markets revenue was $16,500,000 in the quarter as our LiTec lending and revenue from swap fees continues to benefit from the strong demand for affordable housing.

Speaker 2

Our pipeline in this business remains healthy and therefore we are reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50,000,000 to $60,000,000 We generated $4,300,000 of wealth management revenue in the Q1, up 16% on an annualized basis from the 4th quarter. In addition to the expansion of our wealth management business at our Guaranty Bank Charter in 2023, we are pleased to announce the recent launch of our wealth management business in the attractive metropolitan market at our Community State Bank Charter. We have a highly experienced team in place and anticipate further growth of our already successful wealth management business model. Now turning to our expenses. Non interest expense for the 1st quarter totaled $50,700,000 compared to $60,900,000 for the 4th quarter.

Speaker 2

The linked quarter decrease was primarily due to lower variable employee compensation related to our record Q4 and full year performance in 2023. As we look ahead to the Q2, we expect our non interest expenses to continue to be in the range of $49,000,000 to $52,000,000 Our ongoing focus is on effective management of recurring non interest expenses and we continue to benefit from our investments in technology and creating a best in class group excellent. During the quarter, NPAs declined by $3,000,000 to $31,000,000 or 36 basis points of total assets. The provision for credit losses was $3,000,000 during the quarter and our allowance for credit losses to total loans held for investment was static quarter over quarter at 1.33%. Net charge offs were also static to the 4th quarter and remain at historical lows at just 5 basis points of average loans and leases.

Speaker 2

Our tangible common equity at the tangible assets ratio increased by 19 basis points to 8.94 percent at quarter end, up from 8.75% at the end of December. The first quarter improvement in our TCE ratio was primarily driven by our strong earnings and was only partially offset by a $5,400,000 decrease in AOCI. Our total risk based capital ratio was 14.30% atquarterend and our common equity Tier 1 ratio was 9.91%, improving by 1 basis point and 24 basis points respectively on a linked quarter basis. The improvement in both capital ratios was due to strong earnings. We are also pleased to deliver another meaningful increase in our tangible book value per share, which grew by $1.12 or just over 10% annualized during the quarter.

Speaker 2

Finally, our effective tax rate for the quarter was 4% compared to 12% in the prior quarter. The linked quarter decline was due primarily to the sequentially lower capital markets revenue we earned during the quarter, decreasing the mix of our taxable income as compared to our tax exempt income. In addition, we've recognized a stronger tax benefit on our stock based compensation, which tends to be elevated in the Q1. We also continue to benefit from our tax exempt loan and bond portfolios. As a result, this has helped our effective tax rate to remain one of the lowest in our peer group.

Speaker 2

We continue to expect our effective tax rate to be in a range of 8% to 11% for the full year 2024. With that added context on our Q1 financial results, let's open the call for your questions. Operator, we're ready for our first question.

Operator

We will now begin the question and answer session. At this time, we will take our first question, which will come from Nathan Race with Piper Sandler. Please go ahead.

Speaker 3

Hi, guys. Good morning. Good

Speaker 2

morning,

Speaker 3

Nathan. I wanted to start just in terms of kind of thinking about the impact of the upcoming Light Tech securitizations in terms of when you expect that to occur? And then also just in terms of how we should think about the core margin impact from that. I think from the last securitization, you had some benefit there to the margin and also trying to think about what kind of offset we can expect in terms of the reduction in earning assets relative to maybe some higher gain on sale revenue?

Speaker 2

Sure. Nate, I think I'll start let Larry chime in a little bit with our longer term strategy on securitizations. But would tell you that $275,000,000 securitization, we do expect that to occur in the Q3, not late here in the second. So for modeling purposes, you can expect that in the Q3. As we've talked, for us, it's less about ultimate gain or a loss on sale of those securitized loans.

Speaker 2

It's more about the benefit it gives us in liquidity and therefore core deposit pricing. So we do expect a lift in net interest margin in the Q3 when that securitization is complete. As we've seen in past securitizations, it really does help take the pressure off funding costs. And we've seen that in the past. We actually feel like perhaps that benefit will be a bit more in the Q3 because core deposit pricing really in our markets has eased a bit, and we're starting to see more core deposit generation in the 4s versus 5s.

Speaker 2

So a combination of that and the 2 $75,000,000 in liquidity will get we're very optimistic about that helping us with margin going forward. And then, of course, all the benefits to allowing us to keep that LIHTC engine running and the capital markets revenue going. We're very pleased to have securitization in hand. I know Larry's probably got some comments on the next securitization and a little more around our strategy in the future.

Speaker 1

Yes, Nate, the of this securitization, the next one that we'll do early in the Q3 is on tax exempt loans. We'll likely do a smaller one later in the year. That will be taxable loans, so likely roughly half the size of this one probably late in the year. Again, our focus is not we certainly want efficient execution, but this is more about creating capacity for us. And so we've learned a lot, haven't done 2 securitizations.

Speaker 1

I think we'll need to do several more before we figure out the most efficient ways and the timing in the marketplace and how to package these to get the most efficient execution. Over time, we'll certainly expect to get some gains on sale. Again, that was never the intent here and it'll probably take us a few more to learn the best way to get more efficient with that. So and then future securitizations, that's something we would expect to do on an ongoing basis annually or semi annually. It will depend the timing of that on what our liquidity looks like, other loan demand, all those kinds of things as we go forward.

Speaker 1

So it's a little hard to tell, but certainly as Todd telegraphed, this first securitization early in Q3, likely another smaller one late in the year.

Speaker 3

Okay, great. Very helpful. And then just going back to Todosport in terms of deposit cost pressures, obviously a decline in non interest deposits in the quarter. I'm curious in terms of the driver there and just in terms of what you saw in terms of the degree of deposit cost increases over the quarter and in terms of if you're seeing continued slowdown in that pressure?

Speaker 2

Sure, Nate. Thanks for great questions around that. First, I'm going to talk about non interest bearing. We did see that $79,000,000 reduction in non interest bearing that really cost us about 5 basis points of margin this past quarter. We are monitoring NIBs very, very closely in all locations.

Speaker 2

And I'm pleased to say that so far this quarter, we're down only about $5,000,000 in terms of average. So that stress seems to have abated a bit here in the second quarter. In terms of interest bearing deposit costs, if you look at our NIM table, that went up interest bearing deposits went up 18 bps, but really 8 basis points of that was the expiration of those caps. So really more 10 basis points in terms of non synthetic or really core margin impact. And that 10 basis points is slowing from prior quarters.

Speaker 2

What I will tell you is we're very excited about the fact that we are starting to reprice CDs and bring on new money in the 4s versus the 5s. We actually have CD rates somewhere between $435,000,000 $4.74 at our 4 charters for new money, and we're getting some traction at those pricing levels. We're very pleased to see a little bit of the competition for deposits abating. I think that has a lot to do with the fact that many of our peers are not growing, not growing loans, not growing relationships. And so some of the edge has been taken off of deposit pricing in our market.

Speaker 2

So another reason we're guiding to a more static NIM in Q2, For example, we have $340,000,000 of CDs repricing. They have a weighted average rate of 4.72 and we actually expect to replace them at roughly that rate. So we think we're hitting somewhere near the end of that creep in interest bearing deposit costs.

Speaker 3

Okay, super helpful. And if I could just ask last one on charge offs. The last couple of quarters are slightly elevated here relative to your historical levels. Just curious kind of what

Speaker 2

the driver was in the Q1 and how you're kind

Speaker 3

of thinking about charge off levels or if we could maybe assume that there's some additional normalization going on with charge offs?

Speaker 1

Yes, Nate. What I'd say is the charge offs are primarily common in what I'd call our micro business portion of our portfolio. There's no big charge offs in there. It's really $100,000 average kind of charge offs in small deals that I think that's the sector of the economy that's suffered the most from the

Speaker 4

pandemic and probably didn't have the

Speaker 1

kind of liquidity that little bit larger businesses had. So, I'd say there's nothing unusual. These charge offs are still running well below our long term 20 year historical averages. But I kind of expect them to stabilize and slowly move down here later this year based on what we're seeing today. I've had conversations with our Chief Credit Officer in the last couple of days.

Speaker 1

I go, are you seeing anything? And yes, I mean, there's just no movement from our clients portfolio. If we look at our businesses, they're being successful generally. There's like normal little spots here and there of management issues that create problems. And then I talked to our appraisal review people yesterday, have you seen anything on valuations and cap rates?

Speaker 1

And the answer is not really. So real estate values are holding up and the strange thing going on in the real estate market that the last recession was all about housing. The housing is holding up amazingly well in our markets, really because of shortage of supply, which means existing inventory is very marketable. And I think that holds on the commercial side of things too. New construction is more expensive because and the higher interest rates.

Speaker 1

So existing properties have value and it's really when that's a big chunk of our collateral that's helped us avoid significant charge offs.

Speaker 4

Okay, great.

Speaker 5

Thanks, Nate.

Operator

Our next question will come from Damon DelMonte with KBW. Please go ahead.

Speaker 1

Good morning, Damon.

Speaker 5

Sorry about that. I couldn't figure out how to unmute myself. Good morning. Hope you guys are doing well. First question just with regards to loan growth.

Speaker 5

I think last quarter, Larry, you had said kind of going into the year, you thought 4% to 6% growth ex the securitization and kind of 8% to 10% without it sorry, 4.6% with it, 8% to 10% without it. Does that has that guidance changed at all? Do you still feel that confident for that kind of growth?

Speaker 1

Yes, we do still feel confident that those are the right numbers. Quarter to date, we're off to a really good start in the 1st 3 weeks of the quarter here. So more in line with that 8% to 10%. I think the slightly lower loan demand in the Q1 was just kind of seasonality things that sometimes happens over the end of the year. So we certainly feel at this point that that guidance is still solid.

Speaker 5

Okay. And the loans that you added this quarter and last quarter or this year so far, what are some of the rates you guys are getting on new production?

Speaker 2

Yes. Dan, I can take that one.

Speaker 1

It certainly depends on what Yes. It certainly depends on this go ahead, Todd.

Speaker 2

New loan pricing was 764 for the quarter, Damon, roll off was 718, so 46 basis point lift there. And that blended 7.64, also has a fair amount of floating at 824 in it for the quarter. So the 764 continues to grow. We're optimistic about that getting closer and closer to an 8% handle on a blended.

Speaker 5

Got it. Okay. That's helpful. And then with regards to the margin and the impact you had this quarter from the interest rate caps expiring, do you see that moving higher and being more of a headwind in the upcoming quarter? Or is it kind of fully been absorbed into the margin?

Speaker 2

Yes, Damon, it's really cooked into Q2 now. That did cost us $1,100,000 in additional interest expense and 6 basis points of margin, but that's for the most part fully baked into the run rate now. So we don't expect any further drag from that. The $65,000,000 in sub debt that did reprice went from a 538 to a floating of 812. That cost us $200,000 and one basis point in Q1.

Speaker 2

That will lift to a full run rate of $400,000 per quarter and two basis points in Q2. So just that additional one basis point of drag there. As we said early in our prepared opening comments, we expect to be able to overpower that with core margin.

Speaker 5

Got it. And then just lastly on the provision, credit has been pretty strong. The reserves stayed flat at $133,000,000 Do you kind of try to keep that level and based on the recent net charge off history kind of use that as the data points to back into a provision? Is that a reasonable way to look at it?

Speaker 1

Yes, Damon, I think that's a good estimation. There's certainly some science and some art in the loan loss reserve. We've tried to be conservative in keeping that number high, but I think your parameters are in line.

Speaker 5

Great. Okay. That's all that I had. Thank you.

Speaker 1

Thanks, Damon. Thanks, Glenn.

Operator

And our next question will come from Jeff Rulis with D. A. Davidson. Please go ahead.

Speaker 6

Thanks. Good morning.

Speaker 1

Good morning, Jeff.

Speaker 6

Sorry to circle back to the margin. I just want to make sure I got this right. If the tax equivalent was 3.25%, it's not as if those non client factors go away. That's your guide for plus or minus 5 basis points hugs the 3.25, it's not as if it's kind of around a 3.30 with the elimination of the non client headwinds?

Speaker 2

Yes, Jeff, thanks for the clarifying question. Our guide to static is at that 3.25%, 3.24%, tax equivalent NIM. That's the number we're putting in on in terms of static, yes.

Speaker 6

Okay. Appreciate it. And maybe just on the fee income, obviously, capital markets gets kind of the fanfare, but that wealth management piece is growing nicely. And I think you talked about the rollout in Des Moines. Maybe the outlook there and where you're seeing kind of the wins, it's kind of a little further outlook seems like a nicely growing business.

Speaker 2

And Jeff, thanks for asking more about Wealth Management. It is a great business for us. We're very excited to having had that start last year in Southwest Missouri at Guaranty Bank and getting started here this spring in Des Moines. Des Moines is a great metro for wealth management. We're excited to have hired 2 very experienced folks to lead that effort in Des Moines.

Speaker 2

The good news about this business for us is we can leverage off our infrastructure in the Quad Cities market that really provides the shared services around that business. So when we stand that up in Springfield or Des Moines, we don't have to put a whole lot of operational folks with it. It's really client facing folks. AUM was up 11% for the quarter, so we're thrilled with that. We actually brought in 136 new clients in the quarter and 413 of new AUM crossed all 4 of the bank charters.

Speaker 2

So this is a very good business for us. If you think about it, as Larry said, in his opening comments, 965 for us, We really expect this business to continue to grow at a better than 6% clip organically. And it's the ultimate relationship business. And we think we do it well and we like it very much.

Speaker 6

Is the just thinking about the timing of Des Moines, what did you see as considerable as you rolled out in Southwest Missouri? Is there a kind of company wide, but are there some artificial jumps that you've taken because it really impactful in the new rollout areas? Trying to get into that, you talk about 6% growth rate, but are there some leg ups as you get Des Moines rolled out?

Speaker 2

Yes. We certainly expect some of the added lift to come from Des Moines and Springfield, Southwest Missouri. But what I'll tell you is of the 400 and some new AUM, 350 of it came in Quad Cities in our longest tenured market and 84 new relationships. So it is a bit of a momentum business. Once you get that momentum going, you get on all the right radar screens for the right centers of influence in the markets, the right attorneys and other relationships, you can build some really good momentum.

Speaker 2

So we expect to keep growing in Quad Cities and Cedar Rapids, both of those really, really good wealth management teams, really deep client base in both Cedar Rapids and the Quad Cities. And we're just excited about building that over time at Guaranty Bank and CSB. One thing I'd mention is because of our model, it's only going to take us about 125 $1,000,000 to $200,000,000 in AUM in each market to really breakeven. So it's not a big lift in terms of those revenue producers that we've added. We get to breakeven pretty quickly.

Speaker 6

Great. And last one for Larry. Just checking in on the M and A landscape and how you're feeling you've got you can eat on the plate organically, but just thinking about combinations in those conversations on the M and A front?

Speaker 1

Yes. Thanks, Jeff. Not a big priority for us now. We certainly have some longer term potential partners that we think might make some sense. But again, our focus is on managing our current business as effectively as we can because we think that's going to give us in the short run the best return for our shareholders.

Speaker 1

And until the whole sector gets a little better valuations, a lot of the M and A doesn't make a lot of sense right now.

Speaker 6

If I were to kind of think about the growth rate organically that you've got and if M and A is cooling, what are the priorities beyond reinvestment in terms of either a dividend or buyback?

Speaker 1

Yes. Our first priority is building a really strong balance sheet given the, I'll call it, the world economic uncertainty that could be caused by all kinds of, as you know, to watch the news, the crazy events going on in the world. So our focus initially is to grow our capital ratios a bit more yet. Our TCE is approaching 9. We'd like to get into the low 9s here, which should be kind of top quartile in our peer group.

Speaker 1

We think that's the kind of prudent place to be. After that, it would be stock buybacks when we get to that relative capital levels. We might get a little more active there. Dividends is down the list after that and net M and A.

Speaker 6

Appreciate it. Thank you.

Operator

And our next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 4

Thank you. Good morning, everyone.

Speaker 1

Good morning, Danny.

Speaker 4

I guess, first, just curious on the expense impact of the swaps. So assuming your expense guidance for $49,000,000 to $52,000,000 in the Q2 is aligned with the $50,000,000 to $60,000,000 of swaps. If the swaps end up kind of higher end of that range toward the $60,000,000 number, what kind of impact would that have on the expense guidance?

Speaker 2

Danny, thanks for the question. Upper end of the guidance range would still put us within that ballpark range for non interest expense. So we would not expect, even if we're at the higher end of the run rate to be outside of that 52,000,000 dollars So we'd still be within that strike zone.

Speaker 4

Okay. All right. Thanks, Todd. And then I guess just to reiterate on the caps, I think you said it, but I'm not sure how far out in terms of the interest rate caps. I think you said there's nothing in the Q2, but if we did stay in this higher for longer environment, is there anything kind of back half of the year or even into next year that would come into play?

Speaker 2

Yes, Danny, great question. So really not anything else synthetic during 2024. The caps have expired. So that's over with. It's baked into our run rate now.

Speaker 2

The repricing on the existing sub debt of $65,000,000 that's happened now. And so that reprice is 3 months with sulfur. So sulfur right now at $5.30 is going to control that floating rate. That's already baked into the run rate now. We really don't have anything else synthetically in 'twenty four other than if we choose to do something, but nothing baked into our derivatives right now.

Speaker 2

But in 'twenty five, we will have another $20,000,000 tranche of sub debt repricing in July. And so that will go from a fixed rate of 5.25 percent to floating rate that will be quite high, actually a little over 10%. That's mid year next year. And then, corralled into the Q3 of next year, we have another 50,000,000 tranche of sub debt that would reprice very similar current rate and future rate. So obviously, given those new rates, we'd probably be looking to take advantage of the marketplace and maybe reprice those, but that's well down the road.

Speaker 2

So nothing in 'twenty four.

Speaker 4

Got it. Thanks for going into 'twenty five with that detail, Todd. That's helpful. And then I guess just lastly on the impact from rate cuts just this year as you think about it, just curious where the balance sheet stands now? Hello?

Speaker 1

So would you Danny, could you say that again? Cut out just for a second. The impact of rate cuts?

Speaker 4

Yes, sorry, I lost you. Yes, the question was just around the impact of rate cuts.

Speaker 1

Yes. Well, certainly, we think we would benefit if rate cuts happened. Certainly, the world sentiment in that space has changed a lot in the last 30 days, which the contrarian in me believes maybe makes that actually more likely that that actually could happen here. So I think we're reasonably well positioned. We think we can navigate higher for longer.

Speaker 1

We're also well positioned and we've picked up some additional margin if rates do go down.

Speaker 4

Okay. All right. Thanks for taking my questions.

Speaker 1

Thanks, Danny.

Operator

And our next question will come from Brian Martin with Janney. Please go ahead.

Speaker 7

Hey, good morning, guys.

Speaker 1

Good morning, Brian.

Speaker 7

Hey, just one question just with the strong deposit growth this quarter, Todd or Larry, just as far as kind of you talked about a lot about the loan growth and kind of managing that, but just as far as where you see the deposit flows and just trying to manage that loan to deposit ratio kind of, do you expect them to kind of outpace loan growth? Or I guess, how are you thinking about that, especially given the pricing appears to be a little bit better here, you know, of late? Yes. I think, I think, I think, appears to be a little bit better here of late?

Speaker 1

Yes, certainly, over time, Brian, we'd still like to move the loan to deposit ratio down a little bit more. We're not trying to do it aggressively. We made really good progress during this quarter. We probably want that number in the next year or 2 down in the 90% loan to deposit ratio range. And the interesting thing is in spite of rates hanging in higher, local market competition has softened, I think because the banks are running more liquid and liquidity concerns of a year ago have kind of become a memory and everybody is kind of comfortable with their new set of liquidity with less loan demand that's starting to impact other people's perception of bidding up deposits.

Speaker 1

So I saw a medium 7 figure deposit that went to the market, a bid from a municipality in our market that got price sub-five here in the last week. So and that's when the market everybody in the market had a chance to buy. So I believe that that's going to help us as we go forward.

Speaker 7

Got you. Okay. So longer term target kind of that 90% level is what you'd be eyeing as you move forward?

Speaker 4

Yes.

Speaker 7

Yes. Okay. And then just on the buyback for a moment, just because conversations on M and A are not percolating, it sounds like. But the given that you're going to be at that 9% level relatively quickly, I guess, is it something you could think about the share repurchases in the back half of the year? Or just kind of the maybe the kind of the change in rate outlook here kind of higher for longer with some incremental credit concerns?

Speaker 7

Is that something that weighs on potential share repurchase activity as you kind of look in the second half of the year?

Speaker 1

Yes. I think it is possible in the second half of the year if things if the environment kind of looks like it does today, I think that's probably the appropriate because you're right. We get into the 9s here on TCE fairly quickly here, given expected continued good earnings and securitization that we're doing and all those things give us some capacity. So yes, back half of the year, I think we'll have the capacity to do it, but it will certainly depend on how we feel about the environment from an economic standpoint. And again, there's really nothing showing up in the portfolio today that gives us pause.

Speaker 1

It doesn't mean that we'll be the same way 6 months from now. But certainly today, if the variables all come in the same, that's certainly possible.

Speaker 7

Got you. Okay. And then maybe just one for Todd. Just on the margin, Todd, I know you talked about the securitization maybe giving a little bit of benefit to the margin. Can you talk I guess, can you just remind us in terms of how much impact you saw from the recent securitizations?

Speaker 7

So maybe just if that parallels not what you think may occur in the one in September here or the one in Q3?

Speaker 2

Sure, Brian. I think last time we got about a 3 basis point margin lift from the securitization previously. I would expect something like that. It again will depend on how quickly we're able to take advantage of that liquidity and driving down cost of funding, but we're optimistic about that. Again, Larry gave you a data point on some money, bid money with a 4 handle now versus a 5.

Speaker 2

So 3 basis points might be a good place to start. We'll likely have some more guidance for all of you on that in July when we talk about Q2.

Speaker 7

Got you. And then just one more housekeeping, Todd, it's small. Just on the you talked about the accretion

Speaker 5

a bit earlier being a

Speaker 7

little bit down this quarter. Just that ebbs and flows a little bit, but kind of in that general zip code is kind of where it may shake out here in the coming quarters?

Speaker 2

Yes, Brian. That zip code is an accurate way to put it. It was 350 some 1,000,000 in Q1 and scheduled run rate is around that 300 mark for the rest of this year, 300 per quarter. So very, very consistent.

Operator

And this concludes our question and answer session. I would now like to turn the call back over to Mr. Larry Helling for any closing remarks.

Speaker 1

I would like to thank all of you for joining our call today. We appreciate your interest in our company. Have a great day. We look forward to connecting with you in the coming months.

Operator

Thanks. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
QCR Q1 2024
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