QCR Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to the QCR Holdings Incorporated Earnings Conference Call for the Q2 of 2024. 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 at www.qcrh.com. With us today from management are Mr. Larry Helling, CEO and Mr.

Operator

Todd Gipple, President and CFO. Management will provide a summary of the financial results, and then we'll open up the call for questions from analysts. Before we begin, I would like to remind you 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 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 is available on the company's website.

Operator

Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. 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 1, 2024, starting this afternoon approximately 1 hour after the completion of the call. It will also be accessible on the company's website. I would now like to turn the call over to Mr.

Operator

Larry Helling at QCR Holdings. Please go ahead, sir.

Speaker 1

Thank you, operator. Welcome, everyone, and thank you for joining us today. I'll start by presenting some of the highlights from our strong performance for the quarter, and we'll conclude by recapping our strategic focus. Todd will then follow with additional details regarding our financial results for the quarter. We delivered outstanding second quarter results, highlighted by expanded margin and growth in net interest income.

Speaker 1

We also had another quarter of strong capital markets revenue and well controlled expenses. Our asset quality remains excellent and we further strengthen our capital levels. In the second quarter, we generated net income of $29,000,000 or $1.72 per diluted share. This resulted in an ROAA of 1.34% and an ROAE of 12.72%, which we believe is at the high end of our peer group. Our net interest income increased by nearly 3% in the 2nd quarter, 11% annualized growth rate, fueled by higher average loan balances and an expanded margin.

Speaker 1

Total year to date deposit growth is 8% annualized. Our year to date total loan growth is 9.5% annualized, which is within our annual target range of 8% to 10%. Year to date loan growth, net of loans identified for securitization stands at 2.1% annualized. Our loan growth has been driven by our low income housing tax credit lending program and our traditional commercial lending business. Margin pressure eased during the quarter as deposit costs further stabilized and loan yields increased.

Speaker 1

As a result, our adjusted NIM expanded 2 basis points from the previous quarter. Our fee income remained robust again this quarter, led by our capital markets revenue of $18,000,000 Furthermore, our wealth management business continues to experience exceptional growth. Our year to date assets under management have grown $628,000,000 or 12% with nearly 250 new client relationships added in our established markets. In addition, we recently expanded with key hires in the Southwest Missouri and Central Iowa markets. Wealth Management revenue year to date has increased 26% annualized over the same period in 2023.

Speaker 1

Over the last 10 years, our compound annual growth rate in assets under management has been a remarkable 12%, driving an 8% compound annual growth rate in non interest fee income. During the 2nd quarter, we maintained tight control over our operating expenses. Non interest expenses decreased nearly 2% compared to the previous quarter. This reduction was achieved through a targeted focus on expenses at the local market level and greater efficiencies in our centralized back office operations. All of this enabled us to strengthen our capital ratios during the quarter by growing our total risk based capital and our common equity Tier 1 capital ratios.

Speaker 1

Our asset quality remains excellent and our current credit trends are stable. During the quarter, total criticized loans continued to decline for the 3rd consecutive quarter and net charge offs also declined. Non performing assets as a percentage of total assets increased slightly, but remains well below our historical averages. Our allowance for credit losses as a percentage of total loans held for investment was unchanged for the quarter at 1.33%. The increase in the provision for credit losses during the quarter was a result of strong loan growth and the impact of declining GDP on our CECL model factors.

Speaker 1

We continue to have rigorous underwriting standards, conduct thorough asset quality assessments across all loans and maintain conservative reserves. We remain optimistic about the economic health of our markets and the financial well-being of our clients. We are not seeing any significant signs of economic softness across our businesses and markets. Commercial office space exposure continues to be modest at 3% of total loans with an average loan size of 898,000. These loans are primarily located in suburban markets and are performing in line with our expectations with no repayment concerns.

Speaker 1

We have a strong pipeline of high quality low income housing tax credit loans. We consider this to be the best asset class in our loan portfolio. The entire LiTAC industry has a long track record of strong performance. The LiTAC lending program has been critical in providing affordable housing and has been a key strategic focus for our company over recent years. As you know, this program generates significant capital markets revenue, which contributes materially to our strong non interest income.

Speaker 1

In addition, LIHTC loans are a deal for securitization due to their solid historical track record and strong investor demand. Securitization of LiTec loans enhances the optionality on our balance sheet by reducing our capital needs, improving liquidity and enhancing our net interest margin. In addition, it will slow our non balance sheet growth as we approach the $10,000,000,000 asset threshold. Ultimately, this ongoing program will allow us to continue to grow our earnings and tangible book value, while improving our capital ratios. Our next round of securitization is targeted for mid August.

Speaker 1

Our capital levels remain strong and continue to improve. Our solid and consistent earnings growth in conjunction with our modest dividend enables us to grow capital and strengthen our capital ratios at a pace faster than our peers. Turning to our strategic objectives for 2024 and beyond, it's our goal to sustain our exceptional performance for our shareholders and our customers. We are committed to achieving industry leading financial results, including EPS growth, ROAA and tangible book value per share growth. In addition, we enhanced shareholder value by implementing processes that improve customer experiences, employee well-being and the communities in which we live and conduct business.

Speaker 1

In summary, we are dedicated to top tier financial performance and exceptional client service, which will drive continued shareholder value. I will now turn the call over to Todd to provide further details 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 earnings performance for the quarter. We delivered adjusted net income of $29,300,000 or $1.73 per diluted share for the quarter.

Speaker 2

Our strong results were driven by higher net interest income, significant non interest income from capital markets revenue and well controlled expenses. Net interest income reached $56,000,000 a $1,500,000 increase from the Q1. This 3% linked quarter growth in NII was fueled by an expanded margin and strong loan growth. Our adjusted NIM on a tax equivalent basis improved by 2 basis points from the Q1 and was at the upper end of our guidance range. The increase was driven by a combination of improving loan yields and moderating deposit cost.

Speaker 2

Notably, the shift in our deposit composition has stabilized as our non interest bearing deposits remain static, combined with modest changes in the mix of our interest bearing and core time deposits. Looking ahead, while the inverted yield curve continues to be a challenging environment for margins, we expect to continue to benefit from re pricing in our loan portfolio and stabilizing deposit mix. Additionally, we expect our next securitization during the Q3 to create NIM accretion of approximately 2 to 3 basis points on a full quarter basis. Therefore, assuming a stable funding mix, we anticipate continued growth in net interest income and are updating our guidance for adjusted NIM TEE in the 3rd quarter to be in the range of static to up 5 basis points. Additionally, we continue to be well positioned for a rates down scenario.

Speaker 2

As we have previously discussed, during the rising rate cycle, our balance sheet has shifted from asset sensitive to liability sensitive. This will result in further margin expansion when the Fed begins to ease short term rates. Turning to our non interest income of $31,000,000 for the 2nd quarter, which was up from $27,000,000 in the 1st quarter. Our capital markets revenue was $18,000,000 in the quarter as our LiTAC lending and revenue from swap fees continues to benefit from the strong demand for affordable housing. 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 $1,000,000 to $60,000,000 We also generated over $4,000,000 of wealth management revenue in the 2nd quarter, a slight increase from the seasonally strong Q1.

Speaker 2

Year to date, our annualized wealth management revenue has grown by over 26%, driven by increased assets under management from organic growth in our existing client base and our expansion of this business into 2 of our markets. The success of this attractive and growing business is a result of the high touch value proposition that our highly experienced team of advisors deliver, as well as the strong relationships that we have developed with our clients and a network of trusted legal advisors and other key referral sources. Additionally, non interest income during the Q2 included income of $2,200,000 from bank owned life insurance policy proceeds. Now turning to our expenses. And interest expense for the 2nd quarter totaled 50,000,000 dollars an improvement from $51,000,000 for the Q1 and at the lower end of our guidance range.

Speaker 2

The linked quarter decrease was primarily due to lower salaries and employee benefits and lower loan and lease expenses, partially offset by higher professional and data processing expenses. This created positive operating leverage and contributed to a 500 basis point reduction in our efficiency ratio, which improved to 57% in the 2nd quarter. We continue to diligently manage our operating expenses, both at the local market level and through back office operational efficiencies at the corporate level. We continue to benefit from our investments in technology and building a best in class group operations team that supports our multi charter community banking model. As we look ahead to the Q3, we expect our non interest expenses to continue to be in the range of $49,000,000 to 52,000,000 dollars Now turning to our balance sheet.

Speaker 2

Our total loans grew by $206,000,000 during the quarter, funded primarily by the strong growth in core deposits of $316,000,000 that we had in the Q1. Year to date loan growth is in line with expectations and in anticipation of our next loan securitization, we have designated $243,000,000 of LITEC loans as held for sale at the end of the quarter. Our long term securitization strategy supports the continued success of our LiTec lending business. Our LiTAC program generates significant capital markets revenue, which enhances our revenue diversification. Our securitization strategy also helps maintain our portfolio within established concentration levels.

Speaker 2

Our upcoming securitization in the 3rd quarter will consist of $243,000,000 of stabilized tax exempt LiTec loans. We've improved our efficiency of execution since our initial securitizations late last year and expect better economics in this securitization through lower transaction costs. However, this pool of stabilized tax exempt flight deck loans were originated several years ago at tighter spreads when we were beginning our LiTEC lending program. As a result, we do expect a modest loss on this securitization next quarter. Importantly, in recent years, we have been originating new tax exempt LiTECH loans at stronger spreads.

Speaker 2

As these loans stabilize and are available for securitization, we will recognize further improvements in net economics. Finally, we do anticipate a securitization of taxable LiTec loans in the 4th quarter. Our portfolio of taxable LiTEC loans that are stabilized and ready for securitization have been consistently priced at wider spreads, which help drive stronger economics. This will more than offset the modest loss from the tax exempt securitization in the 3rd quarter, which will result in a net gain from our securitization activities in 2024. Now turning to deposits.

Speaker 2

Total deposits declined modestly during the quarter, coming off the very strong deposit gathering performance in the Q1. Year to date, total deposits have increased 8% on an annualized basis. Expanding our core deposits remains a top priority. This strategic focus enables us to sustain our future loan growth and when combined with our securitizations helps us reduce our reliance on wholesale or higher cost funding. Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits.

Speaker 2

In addition, the company maintained approximately $3,000,000,000 of available liquidity sources at quarter end, which includes over $1,000,000,000 of immediately available liquidity. Now shifting to asset quality, which continues to be strong. During the quarter, our total criticized loans continued to show improving trends, declining 34 basis points as a percentage of total loans and leases to 2.41%. We are pleased to report the sequential improvement in total criticized loans over the past 3 quarters, amounting to a $35,000,000 reduction in balances since September of 2023. NPAs increased by $3,200,000 to $34,500,000 or 39 basis points of total assets.

Speaker 2

The modest increase was driven primarily by 2 relationships, while nearly half of our total NPAs consist of just 4 relationships. We've recorded a total provision for credit losses of $5,500,000 during the quarter, with $4,300,000 related to credit loss expense for loans and the balance of $1,200,000 related to unfunded commitments. Charge offs were down significantly in the 2nd quarter at $1,800,000 a decrease of $1,800,000 or 50% from the prior quarter. The increased provision was due to the strong loan growth and the impact of declining GDP on our CECL model inputs. This provision, combined with a sharp reduction in charge offs, resulted in an allowance for credit losses to total loans held for investment that was static quarter over quarter at 1.33%.

Speaker 2

Our tangible common equity to tangible assets ratio increased by 6 basis points to 9% atquarterend, up from 8.94% at the end of March. The 2nd quarter improvement in our TCE ratio was primarily driven by our strong earnings as the change in AOS AI this quarter was negligible. Our total risk based capital ratio increased to 14.33 percent at quarter end and our common equity Tier 1 ratio increased to 10%, improving by 3 basis points and 9 basis points respectively on a linked quarter basis. The improvement in both capital ratios was due to our strong We are also pleased to report another meaningful increase in our tangible book value per share. It grew by $1.72 representing just over 15% annualized growth during the quarter.

Speaker 2

Over the past 5 years, our tangible book value per share has increased by nearly 12% on a compound annual basis, reflecting the results of our top tier financial performance and our focus on creating long term shareholder value. Finally, our effective tax rate for the quarter was 8% and at the low end of our guidance range. We continue to benefit from our high yielding 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. We continue to expect our effective tax rate to be in the range of 8% to 10% for the full year 2024.

Speaker 2

With that added context on our financial results, let's open the call for your questions. Operator, we're ready for our first question.

Operator

Thank you. We will now begin the question and answer session. And the first question will come from Damon DelMonte with KBW. Please go ahead.

Speaker 3

Hey, good morning guys. Hope you're doing well and thanks for taking my questions. First question, just wanted to start off on the margin. Todd, could you just remind us the amount of rate sensitive liabilities you guys have that would reprice immediately when the Fed decides to cut rates?

Speaker 2

Sure, Damon. Thanks for the questions. We actually have about $3,300,000,000 in RSAs, but RSLs, which you asked about, right now, it's $4,200,000,000 So about $900,000,000 of positive RSLs. And so that would give us roughly 3 basis points of margin expansion for every 25 basis point cut. That's our modeling right now is 3 bps.

Speaker 2

So that's about 2,200,000 dollars in annual NII run rate, again, for every 25 basis points. And that $2,200,000 of expanded NII annually is worth about $0.11 in EPS.

Speaker 3

Great. Okay. That's helpful. And then with regard to the outlook for loan growth, the full year guide with the 2 securitizations, is that still kind of in that, I think it was 2% to 4% for the year, is that still hold?

Speaker 1

Yes, Damon, that's still true. Net of securitization, that's kind of what we're guiding toward. That still looks appropriate going forward.

Speaker 3

Great. Okay. And then just lastly on the wealth management side, you mentioned some hires in the Southwest Missouri market and in other areas within Iowa. Can you kind of quantify the potential AUM that could come over from those new hires? Are those teams that got lifted out that have books of business that they could bring over?

Speaker 3

Or are those individual advisors that might not have as large of a book tied to them?

Speaker 2

Damon, thanks very much for asking about wealth management. So they were lift outs of established organizations. We're very pleased to have added them to the team, and they are bringing clients over. In addition, it's a significant relationship based business, as you would expect, probably the ultimate in relationships. And so many of the new AUM dollars are coming from established commercial and private banking clients.

Speaker 2

So we now have people in those markets in Des Moines Metro and in Southwest Missouri to handle those referrals in house as well. So really three things, bringing over existing relationships that they would have had in their past life, taking advantage of some strong referrals from our bankers within the market. And then, we really develop strong relationships with some of the best legal minds and some of the other centers of influence in this space. And so we're getting those teams out to meet those people. And those referral sources become very important over time.

Speaker 2

I will tell you that in Des Moines, we already have about 210,000,000 in AUM, about 50,000,000 in Southwest Missouri and growing. So very pleased to have added that capability in those two markets.

Speaker 3

Great. Appreciate all the color. That's all that I had. Thank you.

Speaker 2

Thanks, Damon. Thank you.

Operator

The next question will come from Nathan Race with Piper Sandler.

Speaker 4

Stable position.

Operator

Mitchell, your line is open. Our next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 5

Hey, good morning guys. Good morning, Dan. Maybe just a follow-up on the margin for you, Todd. You've got some sub debt left there, which I think is repricing somewhat soon here. Just curious what your updated thoughts on that piece of sub debt those pieces of sub debt are if you're planning to refinance those or get rid of them and if there's any opportunity to see expanded margin from that?

Speaker 2

Yes, Danny, thanks for the question on sub debt. Yes, we did have a fairly significant tranche, $65,000,000 reprice in February, and that impacted Q1 margin, and we've overpowered that now. Next up would be September of next year, September of 'twenty five. So that's out of ways. We've got a $50,000,000 and another $20,000,000 tranche flipping to a floating rate at that point.

Speaker 2

We're actually starting that work right now, as you might guess. We're taking a look at the sub debt market. We're taking a look at our cash position and our cash flows. And my guess is it might be a combination of some refinancing and perhaps some pay down of some of the sub debt. No real clarity there yet.

Speaker 2

We've got some time. The good news is the market seems to be coming around a bit and others are starting to wait into that space and it seems like that's worth of capital will be there for us. But right now, we're evaluating the alternatives. And my guess is we'll have some color for you probably in January with full year results, we might be talking a little bit about 25 plans.

Speaker 5

Okay. Thank you. And then I guess just more on the core side of the margin. So you talked about the benefit from rate cuts, you talked about what you're expecting in the

Speaker 4

the

Speaker 5

the deposit mix shift has stabilized. I'm just curious how much upside to the margin you see from here absent rate cuts from repricing of that loan book going forward as just thinking about maybe like the base case or the other scenario, right, if we have a higher for longer, like where the margin could move to?

Speaker 2

Sure. Danny, I'm really glad you asked that. Rate cuts would, of course, help and accelerate that margin expansion, but we're really well positioned right now. We believe that core deposit mix is very static, very reduced pressure on the highest beta financing that we have. I'll give you an example on that and then I'll flip over to lending.

Speaker 2

But our most expensive deposits, we've got about $2,600,000,000 that we would call 100 beta. Those actually cost us $5.27 in Q1 and that was 5.20 $6 in Q2. So our most expensive, our highest beta funding has really become very static in terms of both mix and cost. On the loan side, that's where I think we're going to be in good shape if it is in fact higher for longer and we don't see cuts. As you would guess, the loan betas are lagging deposit betas, but they are really coming on strong for us right now.

Speaker 2

So our loan payoffs in the Q2 were to 6.90 and our new loan production in Q2 was 7.77. So that's an 87 basis point improvement. That positive delta in the prior quarter, Q1 was only 45 basis points. So we're really starting to see a nice ramp in new loan production and rates there. And in fact, in June, loan payoffs were 6.83 and new fundings were 7.95, so almost 8%, and that's 1 112 basis point delta.

Speaker 2

So again, what gives us confidence that we're going to be able to expand margin even without Fed cuts would really be those 2 things, stable mix and deposits and fairly stabilized cost of deposits and new loan production really ramping up and giving us some nice yields.

Speaker 5

That's helpful. I mean, do you have an internal budget or thoughts on what that number may be? Is it a similar number, the 0 to 5 per quarter absent cuts for a while out? Or is it slower than that, do you think?

Speaker 2

Yes. I think that's a fair question, Danny. I would expect us to be able to be somewhere between static and 5, even in Q4, absent rate cuts, and that would accelerate it.

Speaker 4

Okay. All

Speaker 5

right. Thanks for all the color, Todd. Appreciate it. Okay. Thanks, Danny.

Operator

Your next question will come from Brian Martin with Janney Montgomery. Please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 1

Good morning, Brian.

Speaker 2

Good morning, Brian. Hey,

Speaker 6

Todd, just one question. You talked about the loans that are still repricing. How much in the way of loans do you have? I mean, if you stick with that higher for longer environment, how much in the way of loans do you have kind of repricing, whether the next couple of quarters or next 12 months? And kind of what's the pickup on those loans?

Speaker 2

Yes, that's a fair question, Brian, in terms of how quickly that mix will shift for us. I'd probably answer that this way. So in Q2, we had net loan growth of around $200,000,000 but the new production was $600,000,000 and about $400,000,000 of payoffs. So that's 600 of new coming on at 777, 400 leaving at 690. Somewhere in that 600,000,000 or so of new production each year or I'm sorry, each quarter and 300 or 400 rolling off at lower yields.

Speaker 2

That's really how that churn will continue to happen and benefit margins. So that's really, I would say, the notional dollar amount of impact each quarter, if that makes sense.

Speaker 6

Yes. No, that's super helpful. Okay. And just one on the last one on the margin, Todd. Just the I know you talked about the better efficiency on the securitizations.

Speaker 6

In 4th quarter, that probably holds as well on the one you do in the Q4, where you should get some, if you are talking 0 to 5, if that's kind of the range, not putting words in your mouth, but you'd get there would be an added piece to that if you didn't execute did a securitization and got some pickup there as well?

Speaker 2

Exactly, Brian. That's why when Danny asked the question about if the Fed doesn't cut, do we still feel confident in that static to 5% in the Q4? You're spot on. We'll get a little lift from the securitization. It will be a bit smaller in the 4th quarter.

Speaker 2

It might help us couple of basis points.

Speaker 6

Got you. Okay. And then just the capital build, I know you guys have talked about this. Just your thoughts on any change as far as the use of capital going forward, just given you are building it very quickly here and at least it looks like that trend is going to continue in the near term given the outlook?

Speaker 1

Brian, I'll tackle that one. Our perspective on capital and we've talked about this before is given the uncertainty in the economy, 2 wars in the world, the craziest election in my lifetime. Gene, we're planning to hold on to capital certainly in the near term and continue to build what we believe is the appropriate fortress balance sheet to make sure that we're positioned to deal with uncertainty until we get better clarity on those conditions that we just talked about.

Speaker 6

Got you. And given kind of the run-in the sector at the moment, I mean, I guess, is when you think about balancing the potential for M and A versus the buyback, I guess, is there any update on M and A, anything given the organic growth seems great, so not steering away from that, but just are you seeing more opportunities? Is that something you're kind of reviewing today given current market conditions or?

Speaker 1

Yes, it's really just not our focus at the moment. M and A, we're really focused on just funding our organic growth. And as you see from this quarter's results, our momentum, things we're doing in control every day are so good right now. We really don't want to distract ourselves in the short term on something else. So in the near term, focus on our core business, work on our execution, watching our expenses, driving our profitability is what we're focused on.

Speaker 6

Yes, I know you guys have done a great job. So in just the last one, Todd, you mentioned the efficiency ratio. I know there's some puts and takes in there in the quarter, but just as far as kind of where you operate on the efficiency side going forward, is the current level sustainable in your view? I mean, given the upside, I know there's a little bit of like I said, a little bit a couple of things into this quarter, but the current level seems fair to go with going forward in the short term next couple of quarters?

Speaker 2

Yes. Brian, I'm glad you asked the question about efficiency ratio. Certainly, getting down to 57 this quarter was a combination of a little bit of chop on both sides. But I'd like to think that we could be a higher 50s, lower 60s here in the next year or 2. But we do focus very hard on operating leverage and watching our non interest expenses.

Speaker 2

As we're able to grow NIM and NII dollars, that will provide more operating leverage. We'll keep an eye on expenses along the way. Longer term, I think we have an outlook where we're going to become more and more efficient over time. We are investing in technology. We're investing in some of the best people in the space.

Speaker 2

And we do have a lot of internal focus on best in class initiatives to do things better, faster, stronger. So we're very focused on operating leverage. And I don't know that I can tell anyone that it's going to be in the 57% range, but we certainly expect over time to get to that range.

Speaker 6

Got you. I appreciate that. Thanks, Todd, and great quarter you guys. Thanks for taking my questions.

Speaker 5

Thanks, Brian.

Operator

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

Speaker 7

Thanks. Good morning. I wanted to focus on the securitized loans, the balances there. It feels like the Q3 number, was that a little lighter than what you had originally indicated, that? And then did you put a number to the Q4, what the amount would be initially?

Speaker 2

Yes. Jeff, thanks for the questions, because we did not give a number in the Q4, and I can share that with everyone. The Q3 number did lighten up a little bit. Our original pool of held for sale was a little larger than that As we work with Freddie to get things fit inside the securitization box, occasionally, we'll have a deal or 2 fall out of that. So that will get pulled back into our portfolio.

Speaker 2

And then likely, those will get included in the next securitization. So just a couple of things to clean up to get them back in the securitization bucket. Maybe just give everyone a high level overview of securitization. I know we mentioned in our opening comments that what we're securitizing here, the $243,000,000 of loans in August, that would be some of our earlier production in our tax exempt LIHTC loan portfolio. The economics on those are not as great as some of our other loans.

Speaker 2

But we think it's prudent for us to be securitizing the lower yielding things first. And so we've done that last year and again this year. So we do expect a modest loss in the Q3. Expectations would be $1,000,000 or less. Your question about the 4th quarter, that would be a taxable LiTec loan portfolio.

Speaker 2

Those deals tend to have better spreads. They're smaller deals, but better spreads. We expect that to be around $150,000,000 later in Q4. And we do expect a gain on that securitization of $2,000,000 to $3,000,000 So our net outcome for the year on securitization should be somewhere in a range of $1,000,000 to $2,000,000 in gains. And that compares to last year, where all the securitization activities were in the same quarter, and we had about a $600,000 gain.

Speaker 2

So economics are getting better for us. We're getting better at this. The costs are getting smaller. So we're very pleased to have this program underway. But Jeff, thanks for asking for more detail on the Q4.

Speaker 7

That's helpful. Thanks for that. And then on the credit side, and we're talking about small balances, but just wanted to ask about the increase in non accruals. What was added? Do you have kind of loan type?

Speaker 7

I think you said a couple of relationships, but loan type on that and even the charge offs were pretty minimal, but just wanted to see what sector the charge offs came in as well?

Speaker 1

Yes, Jeff. Let's talk about charge offs first maybe. The charge offs that we're seeing are really in our predominantly in our really small business sectors. Those are the ones that are having the more difficult time adjusting to inflation pressures and wage pressures with their employees and those kinds of things. So those are the ones that are probably having a tougher time adjusting.

Speaker 1

I talked to one of our senior lenders here just yesterday and he basically gave me a cross section of our bigger clients that are manufacturers, distribution, assemblers and some of the best private companies in Eastern Iowa. And their outlook is really pretty strong from an operating standpoint. Sales are good, maybe flat, but not better than post pandemic numbers. But margins are holding, they've managed their expenses. Those companies are doing better than the really micro small business stuff.

Speaker 1

On the credit side, I would say credit is kind of normal. I talked to a couple of our credit people in the last 24 hours. And what I'd say is we're seeing normal movement around, up and down and around. We're upgrading 1, we're downgrading 1, we're sliding 1 down to risk rating, we're charging 1 off, we're collecting 1. That's kind of what's going on.

Speaker 1

The movement inside of the NPAs this quarter, the majority was driven by one deal. That's a medical building where there's a dispute between the landlord and the tenant. And we don't think we've got any loss in it. But until they get that dispute resolved, we may have to work our way through it. So almost all that $1,000,000 $3,000,000 deal and everything else was kind of normal movements.

Speaker 7

Okay. Thanks, Larry.

Operator

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

Speaker 4

Hi, guys. Good morning.

Speaker 1

Thanks for taking the question. Good morning, Nate.

Speaker 2

Good morning, Nate. Just want

Speaker 4

to kind of clarify and piece together kind of the NII outlook for this year and next based on the guidance around margin, at least for the next couple of quarters. Just trying to think about the impact of the securitizations in the back half of the year in terms of the NII trajectory. And I'm curious if you're thinking kind of mid single digit growth in NII this year, assuming you get one Fed cut in the back half of the year and if you get a few next year, do you think in kind of low double digits to that end? Yes, I think, year, do you think in kind of low double digits to that end?

Speaker 2

Yes. Nate, I'll take that one. Yes, we do even with securitizing off the $243,000,000 in the Q3, we expect to grow NII by $1,500,000 next quarter. We don't we rarely give NII dollar guidance, but I do think because of the big puts and takes in the Q3, it makes sense for us to share that. So we do expect to grow NII even with that securitization.

Speaker 2

We also expect to do that in the Q4 when we have the $150,000,000 of LITEC loans securitized. So we're very optimistic that we're now going to be in a pattern of growing NII. We feel like margin floored in the Q1. And with this expansion in margin here in Q2 and our guidance and our modeling for Qs 3 and 4. We're very optimistic that margin expansion combined with our very strong loan production, that's one of the things that has been a hallmark of QCR forever is we really are good at growing loans and good ones.

Speaker 2

So we're optimistic about strong NII growth in the last half of this year and into the 2025. The what the Fed does or doesn't do could accelerate that if they do start cutting rates and we'll add a little bit more to NII dollars alongside of that.

Speaker 4

Okay, great. And then I apologize if you touched on this earlier, but just any expectations in terms of core deposit growth

Speaker 6

of the

Speaker 4

next couple of quarters, took a little step back here in 1Q, but just curious how you guys are seeing the core deposit covering opportunities today?

Speaker 2

Sure. Yes, thanks, Nate. This would be a much different business if core deposit growth was as linear as lending growth, particularly for us. It's not, but we made great strides in the Q1 growing core deposits. They were fairly static here in Q2.

Speaker 2

Part of that's just the nonlinear fashion of bringing on core deposits. Part of it is we knew we weren't freeing up a couple of $100,000,000 with the securitization in Q3. So we knew we had that liquidity coming right here later this month. So we are focused on growing core deposits all the time. We are really focused on it across the entire company.

Speaker 2

We've improved and increased incentives for all of our bankers and all of our employees, focused on net new relationships and net new deposits. So it's a huge focus for us. So I expect us to get back to growing deposits in the back half of the year. Even with some liquidity from these two securitizations, we want to keep growing core deposits. Our loan to deposit ratio ramp back up a little bit, here to 97.

Speaker 2

Larry and I want to operate that between 90 95. So I would expect the back half of the year for that to get down into that range.

Speaker 4

Okay, great. And then just to clarify on the potential for share repurchases. It sounds like, Larry, you just want to see greater clarity from a macro perspective, I guess, some point going forward before maybe reengaging or is there any other kind of governors that you're keeping in mind that would commit share repurchase activities?

Speaker 1

Yes, I think you've summarized it really well, Nate. We're likely going to pause for a bit here until we have some clarity on those macro factors. And we certainly are getting our capital in the ranges where it's possible to do that. But yes, something's going to go wrong in the back of my mind because of all this weirdness in the world is probably making us pause and making sure we got appropriate capital to get through any uncertainty for the next few quarters.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Larry Helling for any closing remarks. Please go ahead, sir.

Speaker 1

Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day and we look forward to connecting with you all again soon. Thanks.

Operator

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

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Key Takeaways

  • Delivered strong Q2 results with $29 million in net income ($1.72 per diluted share), net interest income up 3% linked-quarter, ROAA of 1.34% and ROAE of 12.72%.
  • Maintained healthy balance sheet growth with year-to-date deposit growth of 8% annualized and total loan growth of 9.5% annualized—driven by low-income housing tax credit and commercial lending—with adjusted NIM expanding by 2 bps.
  • Generated robust noninterest income, including $18 million of capital markets revenue from LIHTC lending and swap fees, and grew wealth management AUM by $628 million (12%) year-to-date, fueling a 26% annualized revenue increase.
  • Controlled expenses effectively, reducing noninterest expenses nearly 2% quarter-over-quarter and improving the efficiency ratio to 57% through local market cost discipline and back-office efficiencies.
  • Strengthened asset quality and capital levels—criticized loans declined for the third consecutive quarter, allowance for credit losses stable at 1.33% of loans, common equity Tier 1 ratio at 10% and TRBC ratio at 14.33%, while tangible book value per share rose over 15% annualized.
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Earnings Conference Call
QCR Q2 2024
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