QCR Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2025

Key Takeaways

  • Positive Sentiment: EPS improved 13% sequentially driven by net interest income growth from margin expansion, strong loan growth, and disciplined non-interest expense management.
  • Positive Sentiment: Annualized loan growth rebounded to 8% excluding planned M2 equipment finance runoff, and management guided for 8%–10% gross loan growth in the second half of the year.
  • Positive Sentiment: LITEK capital markets revenue rose 51% quarter-over-quarter and the company reaffirmed its $50 million–$60 million guidance over the next four quarters, with $13 million–$16 million expected in Q3.
  • Neutral Sentiment: Asset quality remained strong with non-performing assets down 11% and stable credit provisions, though net charge-offs increased due to fully reserved equipment finance loans being written off.
  • Positive Sentiment: Net interest margin reached 3.46% (TEY) at the high end of guidance, benefiting from lower funding costs and ongoing digital transformation efforts to improve efficiency.
AI Generated. May Contain Errors.
Earnings Conference Call
QCR Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, and welcome to the QCR Holdings Inc. Second Quarter twenty twenty five Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Todd Gipple, CEO.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Thanks for joining our call today. I want to begin with an overview of our second quarter performance and then spend some time talking more deeply about the business. Nick will then provide additional details on our financial results.

Speaker 1

We delivered strong second quarter earnings, driving an EPS improvement of 13% over the first quarter. These results were highlighted by a significant increase in net interest income driven by both net interest margin expansion and strong loan growth, improved capital markets revenue and disciplined non interest expense management. We were pleased to deliver margin expansion during the quarter as we continue to drive our cost of funds lower, while maintaining stable loan yields in a persistently challenging inverted yield curve environment. Our loan growth also rebounded reaching an annualized rate of 8% when adding back the impact from the planned runoff of M2 equipment finance loans and leases. This growth was driven by strong new loan production for the quarter.

Speaker 1

We continue to be optimistic about solid loan growth for the remainder of the year and are guiding to gross loan growth in a range of 8% to 10% in the second half of the year. While capital markets revenue from our LITEK business came in below historical run rate, it improved significantly from the first quarter and was up more than 50% on a linked quarter basis as we move closer to more normalized levels. Our LITEK pipeline is as strong as it has been for some time. This remains a highly sustainable and durable business for us, having successfully navigated challenges such as the pandemic, supply chain disruption, significant interest rate volatility, and more recently the heightened level of economic and political uncertainty in Washington DC. We've emerged from this latest challenge with an even deeper network of developer relationships and a stronger LITEC lending business.

Speaker 1

We believe that our capital markets revenue will continue to normalize over the next four quarters. Second quarter capital markets revenue ramped up close to historical levels as we expected and previously guided on our Q1 earnings call. Second quarter production was on pace for even stronger results, but notably two significant transactions that were expected to close late in Q2 shifted into early July. And as a result, we are off to a strong start here in Q3. Given the strength in pipeline, we are reaffirming our guidance for capital markets revenue to be in a range of 50,000,000 to $60,000,000 over the next four quarters.

Speaker 1

In addition, we are also providing guidance over a shorter horizon and expect capital markets revenue for the third quarter to be fully back to a more normalized level and in a range of 13,000,000 to $16,000,000 for the quarter. Our LITEK production team has never worked harder to deepen relationships with existing clients and forge new partnerships with top tier LITEK developers across the country. As a result, we remain very optimistic about the long term durability and profitability of this business. Our non interest expenses were again well controlled in the second quarter, supporting an adjusted ROAA of 1.29% and contributing to the substantial increase in our earnings per share on a linked quarter basis. Asset quality remains excellent.

Speaker 1

While net charge offs increased from Q1, they were tied to previously identified and fully reserved credits. Our provision for credit loss was essentially static from the prior quarter. We had a strong second quarter and our teams performed at a high level. We are a company built on relationships and these relationships matter most during times of uncertainty. I am grateful for our 1,000 employees that take great care of our clients, our communities and each other every day.

Speaker 1

Before I turn it over to Nick to provide more detail on our second quarter performance, I'd like to take a few minutes to share a broader perspective on our company and how I view our business today and the opportunities that lie ahead. I see our company is operating through three primary lines of business, traditional banking, wealth management and our LITEQ lending platform, which creates high quality assets and drives meaningful capital markets revenue. When I step back and view these three lines of business, I see tremendous opportunities in each. Our traditional banking model is built around separate, independent, autonomous community banks that attract top tier talent and the best clients in our markets. We hold number one market share in both the Quad Cities and Cedar Rapids, Iowa markets and number two market share in our Southwest Missouri market.

Speaker 1

In our largest MSA, Des Moines, Iowa, we are currently ranked sixth with plenty of opportunity for growth as we compete quite favorably with the larger banks in that market. Built upon our multi charter business model that maintains the heart of community banking at the local level and the resulting strength of our local banking teams combined with the significant resources of our $9,000,000,000 company, I expect continued strong organic growth in both loans and deposits across all of

Speaker 2

our

Speaker 1

markets. We have two significant opportunities to further enhance our operating leverage and financial performance in our traditional banking space. We are nearly halfway through our digital transformation journey as we create our bank of the future for our clients and our employees. We successfully transitioned all of our consumer clients to an improved online banking platform and are now preparing for the core conversion of our four banks into a unified, more efficient operating system. This new platform will improve performance at a lower cost and will help both our bankers and our shared services support teams work more efficiently and effectively.

Speaker 1

We expect to have this work completed and fully implemented in the first half of twenty twenty seven, positioning us for improved operating leverage in 2027 and beyond. The second significant opportunity in our traditional banking business is to improve the right side of our balance sheet. It will require sustained focus and effort over several years, but it's our top strategic initiative across our company. I can tell you that every one of our 1,000 employees here at QCRH understands that our number one focus is growing and strengthening our core deposit base. And I'm confident our people come to work each day focused on doing that.

Speaker 1

As a result, I expect an improved funding mix to further enhance our profitability in our traditional banking business. Over the past five years, we significantly expanded our wealth management business, growing both AUM and revenue by a compound annual growth rate of 10%, remarkable results by our team. Wealth Management is the ultimate relationship business and we excel at this. Our relationships in the traditional banking space and with key professionals in each of our markets are uniquely personal and deep. These relationships provide us with an excellent pipeline of wealth management opportunities to fuel our continued success in this business.

Speaker 1

We also benefit from a competitive landscape in wealth management, where larger institutions often fall short on service and relationships, allowing us to consistently gain market share. Wealth Management is highly accretive to ROA as the AUM is of course off balance sheet. We like to say that this business is the ultimate ROA business as it has no A. We plan to continue investing in this business and I expect it to play an increasingly important role in driving top quartile returns. Our LITEQ lending business has proven remarkably durable through the pandemic, supply chain disruptions, significant interest rate volatility and the recent political and macroeconomic uncertainty.

Speaker 1

We are devoting significant resources to this business and are building third party relationships that will allow us to expand our level of production of LITEK perm financing and the capital markets revenue this business generates. We continue to grow our network of LITEK developer relationships, which we believe over time will lead to larger pipelines and more robust production volumes. The need for affordable housing in our country remains significant and the newly enacted legislation has expanded the availability of affordable housing tax credits. The combination of this relentless long term demand for affordable housing coupled with our deep relationships with many of the best light tech developers in the country is why we are optimistic about growing this business and further enhancing our already strong financial performance. In summary, I see it like this.

Speaker 1

We are focused on building something here that is materially different and significantly better than others who operate in these spaces in which we compete. Our ability to continue to leverage our many unique capabilities and competencies here at QCRH is why we have such great confidence in our ability to maintain and extend our competitive position. Executing on these opportunities across all three of our core lines of business positions us to sustain our top tier financial performance and reward our shareholders. I will now turn the call over to Nick to provide further details regarding our second quarter results.

Speaker 3

Thank you, Todd. Good morning, everyone. Before I begin, I would like to thank the Board of Directors and Todd for the opportunity to serve as Chief Financial Officer of QCR Holdings. I also want to express my appreciation for the warm reception I've received from the investment community. I'm honored to take on the CFO role of our company.

Speaker 3

After a twenty year career here at QCRH alongside a highly experienced and talented team. I'm excited to continue serving all our stakeholders as we build on QCRH's strong momentum and drive future success. Now moving to the financial results for the second quarter. We delivered adjusted net income of $29,000,000 or $1.73 per diluted share. Net interest income for the quarter was 62,000,000 a $2,000,000 increase from the first quarter driven by strong earning asset growth combined with margin expansion.

Speaker 3

Our NIM on a tax equivalent yield basis increased by four basis points from the first quarter and was at the high end of our guidance range. The increase in our NIM was driven by strong growth in both loans and investments along with higher yields on those assets. We also continued to benefit from lower deposit costs, which we've been able to steadily reduce as the Federal Reserve began cutting interest rates last year. Our liability sensitive balance sheet and our progress in lowering deposit rates have resulted in strong deposit betas, enabling us to capitalize on the declining rate environment. We are also well positioned to benefit from any potential future interest rate cuts.

Speaker 3

Our NIM TEY has now expanded by 21 basis points over the past five quarters. We expect our NIM TEY for the third quarter to be in the range of static to an increase of four basis points, assuming no further Federal Reserve rate cuts during the quarter. Non interest income totaled $22,000,000 for the second quarter, driven in part by $10,000,000 in capital markets revenue. During the quarter, we saw improved LITEC activity compared to the first quarter, resulting in a $3,000,000 or 51% increase in capital markets revenue. Our pipeline continues to improve as clients adjust to evolving market conditions.

Speaker 3

We believe the long term demand and our growing backlog for new deals will continue to provide robust support for our LiTech lending program. Our wealth management business generated $5,000,000 in revenue for the second quarter, consistent with the first quarter. As compared to the like period in 2024, wealth management revenue has grown by 8% reflecting the strength and momentum of this business. Our continued investment in wealth management is paying off, reinforcing our position as a trusted local partner to our clients. Notably, the strategic expansions we announced on previous calls in Central Iowa and Southwest Missouri are attracting new client relationships.

Speaker 3

Our consistent AUM growth in our markets not only strengthens our foundation, but also helps temper revenue pressure during periods of broader market volatility. Now turning to our expenses. Non interest expense for the second quarter was $49,600,000 an increase of $3,000,000 coming in just below the lower end of our guidance range of 50,000,000 to $53,000,000 This increase was primarily driven by higher capital markets revenue and strong loan growth resulting in an improved ROAA, which drove higher variable compensation. Professional and data processing expenses also increased and were related to our digital transformation. Compared to the first half of twenty twenty four, non interest expenses remain well controlled and are down 9% on an annualized basis.

Speaker 3

Our highly incentivized variable compensation structure is designed to enhance operating leverage and provide expense flexibility across changing revenue cycles, rewarding our employees only after value has been delivered to our shareholders. We remain disciplined in managing core operating expenses, while continuing to invest strategically in technology and automation to further support our high performing operations team. These investments are essential to strengthening our operating leverage and supporting our multi charter community banking model. As Todd noted, we are making progress on our comprehensive multi year digital transformation initiative that encompasses several strategic projects. We will continue to manage expenses with discipline.

Speaker 3

Our updated non interest expense guidance is projected to be in the range of $52,000,000 to $55,000,000 for the third quarter. This updated guidance captures costs associated with our digital transformation and assumes both capital markets revenue and loan growth are within our expected guidance ranges. Moving to our balance sheet. During the quarter, total loans grew by $137,000,000 or 8% annualized when adding back the impact from the planned runoff of M2 equipment finance loans and leases. Our loan growth was driven both by our and traditional lending businesses.

Speaker 3

Since 2023, loan securitizations have played a key role in supporting the continued success of our LITEK business, which remains a significant driver of capital markets revenue. As our LITEC permanent loan pipeline continues to build, we expect our next securitization to close in early twenty twenty six. Following the robust deposit growth of $276,000,000 or 16% annualized in the first quarter, we retained the majority of those balances throughout the second quarter. Total deposits declined slightly by $19,000,000 or 1% on an annualized basis during the second quarter, while average deposit balances rose by $72,000,000 compared to the first quarter. Year to date, core deposits have increased by $311,000,000 or 9% annualized.

Speaker 3

Turning to our asset quality, which remains excellent. Total non performing assets declined $5,500,000 or 11% during the second quarter. Our total NPAs to total assets ratio also improved to 46 basis points, which is approximately half of our twenty year historical average. Total criticized loans increased $9,000,000 or 10 basis points to 2.16% of total loans and leases. Net charge offs increased by $2,000,000 primarily driven by the charge off of loans that had been previously fully reserved.

Speaker 3

Additionally, over half of our total remaining NPAs are comprised of just five relationships. Total provision for credit losses of $4,000,000 was down slightly from the previous quarter. The allowance for credit losses to total loans held for investment was 1.28%. We continue to closely monitor asset quality across all business lines as part of our historically strong credit culture. Our tangible common equity to tangible assets ratio increased by 22 basis points to 9.92% at quarter end.

Speaker 3

This increase was driven by strong earnings as AOCI remained consistent during the quarter. Our common equity Tier one ratio increased 16 basis points to 10.43% and our total risk based capital ratio increased eight basis points to 14.26%. The improvement in our regulatory capital ratios was also driven by our strong earnings. We remain committed to growing our regulatory capital and we consistently evaluate our capital mix to support both our business model and growth objectives, while benchmarking against peers. Additionally, we plan to call and replace our $70,000,000 of subordinated debt in September.

Speaker 3

This will maintain our current Tier two total risk based capital levels and we expect to do so at a favorable fixed rate. We delivered another strong increase in tangible book value per share, which rose by $1.64 reflecting 13% annualized growth for the quarter. Over the past five years, TPV has grown at a compound annual rate of 12%, highlighting our solid financial performance and long term focus on creating shareholder value. Finally, our effective tax rate for the quarter was 5%, up from 1% in the prior quarter. The linked quarter increase is primarily due to higher pretax income from higher capital markets revenue.

Speaker 3

These factors increase the mix of our taxable income relative to our tax exempt income. Our tax exempt loan and bond portfolios have consistently supported a low tax liability. Given a more normalized mix of revenue in line with our guidance, we expect our effective tax rate to be in the range of 6% to 8% for the third quarter of twenty twenty five. With that added context on our second quarter results, let's open the call for your questions. Operator, we are ready for our first question.

Operator

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

Speaker 4

Hey, good morning guys. Thanks for taking my questions and congrats on a nice quarter. I guess first question just related to the margin and the outlook. I think the guide was for flat to up four basis points here in the third quarter. Can you just talk about some of the dynamics behind that that give you confidence that, that can continue to kind of grind higher?

Speaker 3

Yes. Good morning, Damon. Thank you for the question. We are guiding static to up four basis points, and this assumes no Fed rate cuts. So as you think about Q2 and our performance there, our peak NIM month in the second quarter was June, and that was a 3.49%, and that compared to 3.46% for the quarter.

Speaker 3

So that gives us confidence on some further expansion here in Q3. We have about $350,000,000 of loans scheduled to mature in Q3. About $110,000,000 of that is fixed at a six zero five. Now with payoffs and pay downs, that 110,000,000 fixed generally would grow to about $300,000,000 So we expect to be able to pick up about 50 basis points on that fixed portfolio. The floating portfolio, what is scheduled to mature, we believe we can replace at similar rates.

Speaker 3

So not a big change there. So when you take into account also on the funding side, pretty I think we're going to continue to manage our interest bearing non maturity deposits. The team is doing a great job of fighting for every basis point there. I think the biggest impact we'll see in that space here in Q3 is more related to our CD portfolio that's scheduled to mature. We've got about three fifty million dollars of CDs maturing in the third quarter.

Speaker 3

That's a weighted average rate of about $430,000,000 and we think we can shave about 30 basis points off of that. So a similar amount in Q4 scheduled on the CD portfolio to roll off, not quite a 30 basis point delta on those, but closer to 10 basis points. So we think we can continue to move the needle here, especially as we look at Q3.

Speaker 4

Great. Appreciate that color. And if we do have a couple of rate cuts in the back half of the year, given the liability sensitive position, is it fair to assume a little bit bigger lift on the margin?

Speaker 3

Yes. No, that's fair. And Damon, I think as we've talked on other earnings calls, we are and continue to be have more rate sensitive liabilities here today. So when we think about 25 basis point potential Fed cut, we think that's about two to three basis points of margin, about 1,200,000.0 to $2,000,000 of NII dollars. So if the yield curve steepens a bit, we'd expect to be at the high end of that range and maybe some upside.

Speaker 3

If we kind of maintain yield curve where we're at today, probably closer to the lower end of that range.

Speaker 4

Got it. Okay, great. And then I think in the comments you guys noted that your next securitization is expected to be in early twenty twenty six. Are you at a point yet where you can kind of talk about the sizing of that?

Speaker 1

Sure, Damon. Yes, we expect that to close in the first quarter of next year. And one of the reasons we pushed that back into the 2026 is we want that to be a very sizable securitization. Right now, we're targeting $350,000,000 as kind of the floor there. That's probably around where we will land.

Speaker 1

The main reason we want that to be larger is we've discovered that we get much better economic execution with a larger securitization. And we intend to sell the B piece in that securitization. So better economics on the A give us more room and more confidence that we're going to be able to sell the BPs. And in doing both, that will that $350,000,000 notional will free up about 40 basis points of CET1. So for all those reasons, we're pushing it back a little bit to accumulate a bigger pool.

Speaker 4

Got it. Okay, great. And then just sneak in one more question on the wealth management. It sounds like things are continuing to progress well there. Is it fair to kind of assume a near double digit growth rate kind of going forward in this area?

Speaker 1

Damon, we're very pleased with the performance of Wealth Management over the last five years. I think I mentioned in our opening comments that it's been a 10 CAGR over 5%. Yes, our expectation is that we'll continue to grow double digits, 10% -ish or more. We actually added two thirty four new relationships and $500,000,000 in new AUM in the first half of the year. So really on pace with the growth from 24%.

Speaker 1

I will tell you, of course, the law of large numbers makes that a bit tougher each year. We're at $6,700,000,000 in AUM, so that hurdle of 10% gets higher and higher all the time. But we've invested a lot in this space. We're really good at it. We have great teams.

Speaker 1

I think I mentioned in the opening comments that the competitive landscape really favors us as well. The larger bank competitors in the space just are not keeping up service levels. So 10% -ish is our expectation.

Speaker 4

Great. Okay. Well, thank you very much for all the color. I appreciate it.

Speaker 5

Thanks, Damon. Thanks, Damon.

Operator

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

Speaker 6

Hey, guys. Good morning. Thanks for taking the questions.

Speaker 5

Good morning, Nate. Good morning.

Speaker 6

Curious just on kind of the appetite for buybacks going forward. Obviously, you guys are building capital, and have a securitization teed up early next year. So just curious in terms of maybe the appetite to be in the market to buy back the stock, maybe provide some downside support during certain periods of volatility that we've seen year to date?

Speaker 1

Sure. Thanks for the great question, Nate. So TCE is at $9.92 CET1 at $10.43 Both of those are up around 40 bps since the end of last year. So we are building capital at a fast clip with solid earnings and our low dividend payout. So we are accumulating capital nicely.

Speaker 1

Really, the issue for us, while we've been on the sidelines a bit here, is TCE and CET1 decoupled a bit as we were securitizing. We weren't selling the BPs on our four prior securitizations. So we were getting GAAP capital relief, which is why TCE has grown so significantly. But we weren't getting regulatory capital relief, and that was holding CET1 down. We do expect to sell that B piece in the next securitization.

Speaker 1

I already mentioned we'd get a pretty big lift in CET1 at that point. So we see a path to where those are getting back more in alignment, the GAAP capital and CET1 reg cap. So we do see some optionality with capital coming back into the picture for us. I don't think that we necessarily have to actually achieve it in the first part of next year, but we can now see it and have a clear path to getting there. So we are going to be evaluating this here in the back half of the year in terms of deployment of capital.

Speaker 1

We know our TCE is going to creep up over 10%. That's a good thing. We are clearly able to take care of our organic growth. We don't really have M and A on the short term horizon. So then it comes to dividends and buybacks and we're going to be evaluating that here back half of the year.

Speaker 6

Okay. That's really helpful color. I appreciate that. And then, Todd, you mentioned this in your prepared comments around the implications from the latest legislation in terms of what that implies for affordable housing developments going forward. Just curious if you're seeing any of that come through in your pipeline more recently or maybe what you think that could suggest in terms of maybe driving higher volumes and just overall capital markets revenue perhaps longer term?

Speaker 1

Sure, Nate. Thanks for asking about that. I will tell you, we don't anticipate that impacting us here yet this year, maybe not even for quite some time, might be a year or more out. But the implications are very significant long term. And it's one of the reasons we have confidence that we're going to be able to start growing this business.

Speaker 1

The OBBB really did two things. It increased the 9% credits in LITEQ by 12% and it reduced the threshold for qualification for the 4% credit, really made it easier for more projects to comply with the requirements. And a recent study by Novogratik who really follows this industry, they think that long term and so again, I would say this is probably 2026 into 2027. But long term, they think this will grow LITEK allocations from $29,000,000,000 which is really where they've been here for a while to as much as $37,000,000,000 a potential 20% increase in LITEK credit. So it was a very good outcome both from the perspective of what got in the bill.

Speaker 1

I think even more so optically, was great to see that there was unified support for affordable housing in DC. That was a great thing to see.

Operator

Hi, Nathan. This is the operator just confirming. Do you have any other further questions?

Speaker 6

I'm all set. Thank you.

Speaker 7

All right.

Operator

Thank you so much.

Speaker 5

Thank you.

Speaker 1

Our next question

Operator

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

Speaker 2

Hey, good morning guys.

Speaker 1

Good morning, Brian.

Speaker 2

And welcome, Nick, and congratulations. Just one for me was just on the margin, kind of as you look out, either Nick or Todd, I guess, if you look out at the out quarters with maybe less rate cuts than kind of people were expecting, if you can just talk about just the path of the margin or trajectory kind of as you go out into 2026, how we should be thinking about that if the cuts don't materialize?

Speaker 3

Yes. Thanks, Brian. When we think about maybe Q4 and into 2026 and assuming again that yield curve kind of stays where it is today, I think it is becoming more challenging to continue to expand NIM into those areas without a future Fed rate cut. But again, we do continue to focus on every basis point on our funding side. And so yes, I think that is how we're viewing it right now.

Speaker 3

And I guess time will tell here shortly if we see some Fed action and how we'll think about that.

Speaker 2

Okay. Yes. And then just maybe the you mentioned the sub debt, just kind of the timing of that. And then I think the securitization, I guess, can you quantify any if you get economically the benefit of that, how we should think about that? Think part of that will play into the margin as well, but just how we should think about that in the beginning of next year?

Speaker 1

Sure. Yes, Brian. The securitization of that $350,000,000 in terms of the transaction itself, we would anticipate with very good economics on the A piece and being able to sell the B piece. We think at a minimum, we should be able to breakeven on that transaction. But again, being able to fully sell the BPs would be a great outcome for us.

Speaker 1

I would tell you, I don't know that we would expect that single transaction to notably impact NIM percentage. Certainly, we'll pull back earning assets for a bit. But what we're very happy about is with the new pipelines we're seeing in LITEK, we anticipate filling that up pretty quickly. So I think we're going to get back to the point where we're using securitizations to simply make room for more production. So while you'll see a little bit of a pullback in earning assets, we think that hole gets filled in pretty quick with the ramp up of existing construction debt that we put in place.

Speaker 1

So we're very pleased to be lining up this one big securitization. When we started doing this, we talked about after a couple, we'd have it all figured out. This will be our fifth one. I think we are really starting to get it figured out. We thought it might be efficient to just simply do a smaller one each quarter or a couple of times a year, but we're likely going to continue to do larger ones less frequently.

Speaker 1

So that's going to provide us with a better outcome.

Operator

Got you.

Speaker 3

And Brian, I'll chime in on the sub debt question you had there. So we have $70,000,000 that becomes callable in September, 50,000,000 of that on September 15 and $20,000,000 of that on September 30. We do intend to call the entire $70,000,000 in replace. Right now, I think we're targeting September 15 for that replacement of the full amount. We think based on some market deals that have closed so far here more recently, we're targeting something in the low 7s.

Speaker 3

And that's about 200 basis points less than if we allowed those sub debt tranches to convert to floating here and also allows us to retain some of that Tier two capital for total risk base. So that's kind of how we're viewing the landscape and the timing there for sub debt.

Speaker 2

Got you. That's helpful. And then just the last one for me, just on the loan growth, just the outlook. Mean, guess the breakdown of the growth this quarter, LIPEC versus kind of traditional kind of how did that look? And then just the outlook going forward, just how do you expect the growth to be driven in terms of is the bulk of it still going to continue to be the LiTech?

Speaker 2

Or are you seeing a pickup in the traditional side?

Speaker 1

Sure. Thanks, Brian, for that question. We did have solid growth of 8% in the most recent quarter when you carve out the impact of the M2 equipment runoff. And again, that's going as scheduled and as planned. The growth was in CRE, both traditional banking and LITAAC.

Speaker 1

C and I backed up a bit. We still had some very nice new production in C and I with new and some existing clients, but we continue to see strong payoffs in C and I. I'll just give you a little bit of color. I was at one of our sub bank board meetings just yesterday. Comment from the team was they had three great clients with really strong balance sheets, very strong performance.

Speaker 1

They simply decided to pay us off when their loans were up for renewal. Their rate was going from a high three or four handle to a high six or a low seven rate. They had the cash available. They just simply paid us off, told us they'd be back when they do something new or have another need or if rates come down, they might relever the balance sheet again. But I think that's why loan growth is a bit soft across the industry right now is for the most part, clients are doing really well.

Speaker 1

They have strong balance sheets, a lot of cash. And some of them are just opting into taking some leverage out when the new rate gets in front of them. So I do think we'll continue to see some strong new production in C and I, in CRE, in traditional banking. But yes, certainly, the LITEQ ramp up will continue to help us with that 8% to 10% rate. And I do think it's fair that a big chunk of that 8% to 10% gross loan grade growth would come from LITEQ.

Speaker 1

And honestly, that's been the case here for a while now.

Speaker 2

Yes. Okay. And I'll that's it. And just one, if I can sneak it in, Todd, I think you already answered it, but your comment about the capital deployment, it sounds like even despite it in the environment that's picking up in terms of potential M and A, you're still kind of in the camp that it's not a priority and not really a near term likelihood given kind of the dynamics in front of you currently. Is that accurate based on your earlier comments?

Speaker 1

Yes. Brian, I think that's fair. I'd say it this way, we're open to M and A certainly. Candidly, conversations are ramping up around the industry. I think everyone's seeing that in the announced deals.

Speaker 1

But our strike zone is very tight for something that works for us. We have great momentum and a lot of organic opportunities to grow EPS and TPV per share. So it's going to really have to be a strong opportunity for us to consider it. Our interest would be in Central Iowa, certainly, or a fifth new market, similar in size and opportunity to our existing markets, but it's going to have to be a very strong fit strategically, culturally, financially. We do not want it to distract us from building and growing EPS and TBB.

Speaker 1

So we're open to it, narrow strike zone. Since we don't have anything really on front burner or even back burner at this point, that then tips us over to be thinking about spending some of the capital versus using it for M and A.

Speaker 2

Got you. Thanks for taking all the questions, guys.

Speaker 1

Thanks, Brian. Thanks, Brian.

Operator

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

Speaker 7

Thank you. Good morning, guys.

Speaker 5

Good morning, David. Good morning.

Speaker 7

So you guys actually have you got in front of this first question, which, in part, which you talked about all the opportunities from the tax bill, and changes on the related to the LITEC industry. There was also there's been some rumors or there's a Wall Street Journal article about potential budget cuts to HUD. Curious if you have any thoughts on what that could mean for the industry, if that might be an offset or if it could have some impact on either there were some thoughts that could impact credit of those multifamily loans, not that that's a big part of what you guys are holding, but there are some of the LITECH loans are on balance sheet, obviously. Just curious if you have any thoughts on that side of changes to the industry?

Speaker 1

Sure. Danny, I'm really glad you asked that actually, because I know in April with first quarter, we talked about HUD being a bit of a headwind for us. That has gotten better. What I will tell you is only about transactions involve HUD. There is something related to the capital stack or the requirements of that specific transaction where we need a HUD sign off for clear to close.

Speaker 1

And that was holding us up in the first quarter a bit. That's gotten better, more responsive. But realistically, if there's more disruption at HUD, it's just going to take longer to get some of those deals clear to close. We don't really anticipate or honestly fear anything in terms of government disruption related specifically to LITEQ. And again, when I answered that question about the new bill, I mentioned optics.

Speaker 1

And I think it was clear to me that that was one of the big wins that the optics around that were that both sides of the aisle really believe that affordable housing continues to be important. The LITEQ program is the best way to provide it. They've freed up some more credits. So there could be some disruption if HUD goes through some of those things. Honestly, I think it's probably going to more specifically impact Section eight housing and some workforce housing that we don't really play in.

Speaker 1

I think I'm fairly optimistic about that. But with what's going on in D. C, we will continue to be vigilant and keep our ears to the ground a bit. But I'm glad you asked, Danny, because I view it as a big win coming out of this new legislation that both sides of the aisle agreed this was a very important thing for the entire country.

Speaker 7

That's helpful. Appreciate your thoughts there. You've also talked quite a bit today about the B pieces and how you're planning to sell those portions when you're in the process of the securitizations. Just curious what you still have on your balance sheet from prior securitizations in terms of B pieces and if there is plans to sell those and if they do, where you think that would the impact in terms of financials from the sale of those B pieces?

Speaker 3

Yes. Danny, I'll start and Todd will add some comments here. But we've done four securitizations since 2023, and there's about $650,000,000 of loans that we pushed off the balance sheet. We're retaining on the BPs about just over $80,000,000 that we hold as a trading security in our investment portfolio. Those yield about nine percent on a TEUI basis.

Speaker 3

So we're getting paid nicely for those to hold those,

Speaker 2

but the

Speaker 3

capital associated with that really reverts back to that $650,000,000 of loans almost as if they're still on our books. So that's the decoupling that Todd mentioned from our TCE and our CET1 ratio, it's really directly because of that. So selling off some BPs on a future securitization and maybe some existing certainly can help that decoupling minimize a bit here.

Speaker 1

Yes. So, Danny, you asked about our interest in perhaps selling some of these. They are very good yield because we're in the business, we understand the risk. And even though those are the first loss tranches, hence the BPs, feel really good about the asset quality there. We have talked about perhaps selling some of the existing B pieces.

Speaker 1

To be transparent, if we did that, we would take a modest loss to do that because of those being the first loss tranche. I think what it's going to come down to is, I think we're going to fix that with the sale of the B piece in the future securitization and likely not feel compelled to sell one of the existing B tranches. Having said that, if we feel like we get some good economics and we have an investor or honestly, sometimes it's a developer that wants to come back in and buy the BPs. If they have some deals in that BPs tranche, they have more confidence to buy it. So we may consider it.

Speaker 1

I'm sorry to not give you a straight up answer on that. It is something we could consider doing. But we think sale of the large BPs and the large securitization in the first quarter is really our main focus.

Speaker 7

Got it. Okay. So may continue with what's on the balance sheet, but going forward, trying to sell off the full piece A and B?

Speaker 1

In future yes, Danny. In future securitizations, I think you can count on that from us.

Speaker 7

Okay, great. And then lastly, you're crossing, I mean, if you I guess you'll be close to $9,500,000,000 you're pushing up on $10,000,000,000 You've talked about this in the past. But just curious where you guys are now in terms of Durbin impact and anything else on the expense side as you cross $10,000,000,000

Speaker 1

Sure. Thanks, Danny. We believe that maybe 27,000,000,000 more likely $28,000,000,000 when we cross regulatory requirements and the Durbin impact are really the following year. So it's out of ways for us. Right now, we continue to feel like that would be around $3,000,000 of Durbin impact on interchange revenue.

Speaker 1

I think the good news for us is that's roughly two good sized LITEK deals to make up that $3,000,000 So we feel like we've got other forms of non interest income to help mitigate that impact. But it would certainly lower our interchange revenue. And again, that estimate would be about $3,000,000 We expect to have the expense fully loaded by then. We've already been doing that. We've done that over the last two years already.

Speaker 1

We're staying within the guardrails on non interest expense growth. So the buildup of these capabilities we need isn't really noticeable, and that is our plan. So we've already been making the investment in talent, continue to ramp this up. We'll be fully ready when we need to be. We have a great relationship with the Chicago Fed, both the Chicago staff and we're blessed to have a Des Moines, Iowa office of the Chicago Fed as well.

Speaker 1

And they have worked with our banks in Iowa for our entire history. So we're not overly concerned about crossing $10,000,000,000 We're not going to feel like we've got outsized non interest expense growth leading up to that. We think we're going to be fully baked in when it happens.

Speaker 3

Danny, I would just add here as part of our digital transformation, we had the opportunity to renegotiate our debit card contract. So we'll see some upside from that when it comes to crossing over $10,000,000,000 here as well. So some of the impact could be muted a little bit as a result of stronger fee income from that.

Speaker 7

Got it. Okay. Very helpful. Thanks guys. Appreciate it.

Speaker 7

That's all for me.

Speaker 1

Thanks, Danny. Thank you.

Operator

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

Speaker 8

Thanks. Good morning. Question on the credit side. I wanted to see if there was correlation on the non performing loan decline and the net charge offs. And maybe if so or if not, the makeup of the charge offs from a segment basis?

Speaker 1

Sure. Thanks, Jeff. Yes, very high degree of correlation there. We essentially got a little more aggressive with charging off some of the M2 equipment finance NPAs that were already fully reserved. So NPAs came down, our ACL percentage came down because they were fully reserved and baked in.

Speaker 1

We didn't need to re provide. So provision expense was static even with charge offs up. Really just trying to clean up the pool of those loans, I would tell you for the most part those charge offs were that M2 Equipment Finance segment of our portfolio, not really other charge offs to speak of. And I would tell you glad you asked about M2. Our projections were always that the back half of this year, we were going to start to see those NPAs and those charge offs start to slow.

Speaker 1

And our projections right now are lining up with that Instead of charge offs in that segment to be more like 3,000,000 or $4,000,000 a quarter, we're anticipating that those are going to roll down to more like 2,000,000 or $3,000,000 per quarter. That is starting to soften up. And that was part of the reason we wanted to be aggressive in charging off some of the ones fully reserved. The NPAs coming in new are slowing. So the velocity of that is getting better.

Speaker 1

And we'll be down to about 190,000,000 in that portfolio at the end of the calendar year. So about 46% of that's run off and we're happy about that.

Speaker 8

Got it. Maybe I want to stay on credit, but I want to circle back to the M2 piece. But the criticized increase, the makeup of those loans that came in is What were those?

Speaker 1

Sure. Yes, sure. And actually that's easy question because it was really just one credit that consisted of that increase. So criticized went up $13,000,000 one large deal getting downgraded to special mention. It's well collateralized at 1.4 times the loan amount on a very recent appraisal.

Speaker 1

And we're just going to nudge that client out of the bank. We've already had that conversation. They are looking for other financing. We think with the amount of collateral that they have, somebody else will end up taking this deal. We do not expect any provision for it, any loss from it.

Speaker 1

But based on the performance of that credit, it did get downgraded and we're working pretty hard to nudge it out by the end of the year.

Speaker 8

A CRE or what was the

Speaker 1

Yes. Actually, we don't do much of this, but it was an ag related loan in Missouri, had not been a problem for a long, long time. We weren't real happy with the performance we were seeing. And so we've asked that credit to exit it. And again, based on the strength of the underlying collateral and its land and land value, we think it's going to be pretty easy to get that moved.

Speaker 1

And the borrower is communicating well with us on that.

Speaker 8

Got you. Thanks. And over to the M2 and growth question. Todd, you mentioned a gross 8% to 10% growth rate for the second half of this year. I guess that's is the net of the M2 runoff.

Speaker 8

Is there anything else that would drive kind of against the eight to 10 or is that the piece that we're largely talking about?

Speaker 1

Yes, Jeff, great question on that, so we can be more clear. It would really be the runoff of M2 that would net that down, certainly until we get to securitization offtake. So that runoff for Q3 is projected to be a little over $30,000,000 is the bogey there. And roughly, the fourth quarter would be a little more modest than that 28,000,000 So it is rolling downhill. So the impact on the net loan growth is more modest now.

Speaker 1

So if you're modeling that number, it'd be, let's say, 32,000,000 in Q3 and twenty eight million dollars in Q4.

Speaker 8

Thanks, Todd.

Speaker 1

Thanks, Jeff.

Speaker 3

Thanks, Jeff.

Operator

With no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Todd Gipple for any closing remarks.

Speaker 1

Thank you for joining our call. We appreciate your interest in our company. Have a great day and we look forward to connecting with you very soon.

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