QCR Holdings, Inc. (NASDAQ:QCRH) Q1 2024 Earnings Call Transcript

QCR Holdings, Inc. (NASDAQ:QCRH) Q1 2024 Earnings Call Transcript April 24, 2024

QCR Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the First Quarter of 2024. Yesterday after market closed, the company distributed its first quarter earnings press release. If there’s 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 Larry Helling, CEO and Todd Gipple, President and CFO. 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 we’ll 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 be different 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. 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 one 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.

Larry Helling : 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. 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 first quarter, we produced adjusted net income of $26.9 million or $1.59 per diluted share. We generated an ROAA of 1.25% and an ROAE of 11.83% 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 million, or 20.3% on an annualized basis, adding to our strong and diversified deposit franchise. 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 served. Our asset quality remains excellent as the ratio of non-performing assets to total assets improved by four basis points during the first quarter, and remains below our historical average levels at 36 basis points.

Our reserve for credit losses represents 1.33% of total loans and leases held for investment and continues to be near the high end of our peer group. 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 our footprint. Our exposure to commercial office buildings 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. 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.

We consider this to be the best asset class in our loan portfolio. The entire LIHTC 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 LIHTC 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. 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 9-6-5 strategy. We crafted this long-term initiative in 2019 with the purpose of driving our financial results to enhance shareholder value. We have delivered on those goals, and our overall financial performance has been exceptional. Over the last three 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% in 2023, up 28 basis points over the three-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 9-6-5 strategy. 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 first quarter results.

Todd Gipple: 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 million of net growth. In anticipation of our next loan securitization, we have designated $275 million of LIHTC 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 LIHTC lending business. In addition, this will continue to drive the corresponding capital markets revenue that we earn from this business, all while ensuring our portfolio remains within our established concentration levels.

Core deposits increased $316 million during the quarter, or just over 20% on an annualized basis. As Larry mentioned, growing our core deposits remains a top priority. 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 million 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 $3.2 billion of available liquidity sources at quarter end, which includes $1.3 billion of immediately available liquidity. Now, turning to our income statement. We delivered net income of $26.7 million, or $1.58 per diluted share for the quarter.

Our adjusted net income was $26.9 million, or $1.59 per diluted share. Net interest income for the first quarter of 2024 totaled $54.7 million, a decrease of $1 million from the fourth quarter of 2023. This decrease was influenced by several non-client factors, including the maturity of $125 million of interest rate caps on our index deposits, and the conversion of $65 million of our subordinated debt to a higher floating rate, which contributed a combined $1.3 million 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. However, the company’s net interest income driven by core activity saw growth of approximately $1.2 million during the first quarter, led by continued expansion in loan and investment yields.

Our adjusted NIM on a tax equivalent basis declined by five basis points from the fourth quarter 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 seven basis points of NIM dilution. However, we were able to partially offset this non-client impact with core NIM expansion of two basis points. Notably, our core NIM expansion was less than expected due to additional shifts in our deposit composition. 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 second quarter. The inverted yield curve continues to pressure our NIM. However, we do not have any new non-client headwinds in the second quarter. Therefore, assuming a static funding mix, we anticipate that our expansion in loan and investment yields will generally offset any further increase in our funding costs, leading to growth in that interest income. As a result, we are reaffirming our guidance for a relatively static adjusted NIM TEY in the second quarter of 2024 with a range of five basis points of expansion on the high end and five basis points of compression on the low end. 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 $26.9 million for the first quarter, which was down from our record $47.7 million in the fourth quarter of 2023. Our capital markets revenue was $16.5 million in the quarter as our LIHTC 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 million to $60 million. We generated $4.3 million of wealth management revenue in the first quarter, up 16% on an annualized basis from the fourth quarter.

In addition to the expansion of our wealth management business at our guarantee bank charter in 2023, we are pleased to announce the recent launch of our wealth management business in the attractive Des Moines, Iowa 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 first quarter totaled $50.7 million compared to $60.9 million for the fourth quarter. The linked-quarter decrease was primarily due to lower variable employee compensation related to our record fourth quarter and full year performance in 2023. As we look ahead to the second quarter, we expect our non-interest expenses to continue to be in the range of $49 million to $52 million.

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 operations team that supports our multi-charter community banking model. Now shifting to asset quality, which continues to be excellent. During the quarter, NPAs declined by $3 million to $31 million or 36 basis points of total assets. The provision for credit losses was $3 million 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 fourth quarter and remain at historical lows at just five basis points of average loans and leases. Our tangible common equity of the tangible assets ratio increased by 19 basis points to 8.94% at quarter end, up from 8.75% at the end of December.

The first quarter improvement and our TCE ratio was primarily driven by our strong earnings and was only partially offset by a $5.4 million decrease in AOCI. Our total risk-based capital ratio was 14.30% at quarter end and our common equity tier one ratio was 9.91%, improving by one 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. 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 recognized a stronger tax benefit on our stock-based compensation, which tends to be elevated in the first quarter. 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. We continue to expect our effective tax rate to be in a range of 8% to 11% for the full year of 2024. With that added context on our first quarter financial results, let’s open the call for your questions. Operator, we’re ready for our first question.

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Q&A Session

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

Nathan Race: Hi guys, good morning.

Larry Helling: Good morning, Nate.

Nathan Race: Want to start just in terms of kind of thinking about the impact of the upcoming LIHTC 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 securitizations, 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?

Todd Gipple: Sure. Nate, I think I’ll start, let Larry chime in a little bit with our longer term strategy on securizations. But we’ll tell you that 275 million securization, we do expect that to occur in the third quarter, not late here in the second. So for modeling purposes, you can expect that in the third quarter. As we’ve talked, for us, it’s less about ultimate gain or a loss on sale of those securitized loans. 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 third quarter 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 third quarter, because the quarter-posit pricing really in our markets has eased a bit.

And we’re starting to see more core deposit generation in the fours versus fives. So combination of that and the $275 million in liquidity 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.

Larry Helling: Yes, Nate, of this securitization, the next one that we’ll do early in the third quarter is on tax-exempt loans. We’ll likely do a smaller one later in the year. But 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 two securitizations. 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. And then future securitizations, that’s something we would expect to do on an ongoing basis annually or semi-annually. It’ll depend the timing of that on what our liquidity looks like, other loan demand, all those kinds of things as we go forward. So it’s a little hard to tell, but certainly as Todd telegraphed, this first securitization early in the third quarter, likely another smaller one late in the year.

Nathan Race: Okay, great. Very helpful. And then just going back to Todd’s point 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?

Larry Helling: Sure, Nate, thanks for great questions around that. First, I’m going to talk about non-interest bearing. We did see that $79 million reduction in non-interest bearing that really cost us about five basis points of margin this past quarter. We are monitoring these very, very closely in all locations. And I’m pleased to say that so far this quarter we’re down only about $5 million 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 eight 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. 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 fours versus the fives. We actually have CD rates somewhere between 435 and 474 at our four 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. Like 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. So another reason, we’re guiding to a more static NIM in Q2. For example, we have $340 million of CDs repricing. They have a weighted average rate of $472.

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.

Nathan Race: Okay, super helpful. And if I could just ask last one on charge-offs. The last couple of quarters, they’re slowly elevates relative to your historical levels. Just curious kind of what the driver was in the first quarter and how you’re kind of thinking about charge-off levels or if we could maybe assume that there’s some additional normalization going on with charge-offs?

Todd Gipple: 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, you know, $100,000 average kind of charge offs and small deals that, and I think that’s the sector of the economy that’s suffered the most from the pandemic and probably didn’t have the 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 and I go, you see 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 Fraser & Neave [ph] people yesterday. I go, are you seeing anything on valuations and cap rates? 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, you know, 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 the inflation and the higher interest rates, so existing properties have value.

And it’s really, well, that’s a big chunk of our collateral that’s help us avoid significant charge-offs.

Nathan Race: Okay, great. All right. Okay.

Larry Helling: Thanks, Nate.

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

Larry Helling: Morning, Damon.

Damon DelMonte: Sorry about that. I couldn’t figure out how to unmute myself. Good morning, I hope you guys are doing well. First question — excuse me, first question, just with regards to loan growth, I think last quarter, Larry, you had said, you know, kind of going into the year, you thought 4% to 6% growth, excess securitization, and kind of 8% to 10% without it. I’m sorry, 4% to 6% with it, 8% to 10% without it. Has that guidance changed at all? Do you still feel that confident for that kind of growth?

Larry Helling: 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 first three weeks of the quarter here. So more in line with that 8% to 10%, I think the slightly lower loan demand in the first quarter 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.

Damon DelMonte: 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?

Larry Helling: Yes, it certainly depends on what’s — yeah, it certainly depends on the — go ahead, Todd.

Todd Gippel: New loan pricing was 764 for the quarter, Damon, a roll off of 718. So, 46 basis point left there. And that blended, 764 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.

Damon DelMonte: Got it. Okay. It’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?

Larry Helling: Yeah, Damon, it’s really cooked into Q2 now that did cost us $1.1 million in additional interest expense and six 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 million in sub debt that did reprice went from a 538 to a floating of 812. That cost us 200K and one basis point in first quarter. That will lift to a full run rate of 400K per quarter in 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.

Damon DelMonte: Got it. And then just lastly on the provision, credit has been pretty strong. The reserves stayed flat at 133. 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?

Todd Gipple: 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 and keeping that number high, but I think your parameters are in line.

Damon DelMonte: Great. Okay. That’s all that I had. Thank you.

Todd Gipple: Thanks, Damon.

Larry Helling: Thanks, Damon.

Operator: And our next question will come from Jeff Rulis with DA Davidson. Please go ahead.

Jeff Rulis: Thanks. Good morning.

Larry Helling: Good morning, Jeff.

Jeff Rulis: I’m sorry to circle back to the margin. I just want to make sure I got this right. If the tax equivalent was 325, it’s not as if those non-client factors go away. That’s your guide for plus or minus five basis points, hugs the 325. It’s not as if it’s kind of around a 330 with the elimination of the non-client headwinds?

Todd Gipple: Yes, Jeff. Thanks for the clarifying question. Our guide to static is at that 325, 324 tax equivalent NIM. That’s the number we’re pulling in on in terms of static, yes.

Jeff Rulis: 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 winds, it’s kind of a little further outlook seems like a nice, nicely growing business.

Todd Gipple: 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 Guarantee 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 two very experienced folks to lead that effort in Des Moines. 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. So appreciate you asking. We’re very excited about this business.

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 the new AUM crossed all four of the bank charters. So this is a very good business for us. If you think about it, as Larry said, it is opening comments 9-6-5 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.

Jeff Rulis: Just thinking about the timing of Des Moines. What did you see a considerable as you rolled out in Southwest Missouri? Is there a, you know, it’s 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?

Todd Gipple: 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. 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 Guarantee Bank and CSB.

One thing I’d mention is because of our model, it’s only going to take us about 125 to 200 million in AUM in each market to really break even. So it’s not a big lift in terms of those revenue producers that we’ve added. We get to break even pretty quickly.

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

Larry Helling: 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. And until a whole sector gets a little better valuations a lot of the M&A doesn’t make a lot of sense right now.

Jeff Rulis: If I were to kind of think about the growth rate organically that you’ve got and if M&A’s cooling, what are the priorities beyond reinvestment in terms of either the dividend or buyback?

Larry Helling: Yes. Our first priority is building a really strong balance sheet. Given the, I’ll call it the world economic uncertainty, it 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 nine. We’d like to get into the low nines here, which would be kind of top quartile in our peer group. 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. Dividend is down the list after that and then M&A.

Jeff Rulis: Appreciate it. Thank you.

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

Daniel Tamayo: Thank you. Good morning, everyone.

Larry Helling: Morning, Danny.

Daniel Tamayo: Yes, first, just curious on the expense impact of the swaps. So assuming your expense guidance for $49 million to $52 million in the second quarter is aligned with the $50 million to $60 million of swaps. If the swaps end up kind of higher end of that range toward the $60 million number, what kind of impact would that have on the expense guidance?

Todd Gippel: 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 million. So we’d still be within that strike zone.

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

Todd Gippel: 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 right now. The repricing on the existing sub-debt of $65 million, that’s happened now. And so that reprices three months with SOFR. So SOFR right now at 530 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 ’24 other than if we choose to do something, but nothing baked into our derivatives right now. But in ’25, we will have another 20 million tranche of sub-debt repricing in July. And so that’ll go from a fixed rate of five and a quarter to a floating rate that will be quite high, actually a little over 10%.

That’s mid-year next year. And then we’re out into the third quarter of next year. We have another 50 million 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, so nothing in ’24.

Daniel Tamayo: Got it. Thanks for going into ’25 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?

Todd Gippel: Danny could you say that again. I’m cut out just for a second. The impact of rate cuts?

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

Todd Gippel: 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 than actually could happen here. So, I think we’re reasonably well positioned. We think we can navigate higher for longer. We’re also well positioned. We’ll pick up some additional margin if rates do go down.

Daniel Tamayo: Okay. All right. Thanks for taking my questions.

Todd Gipple: Thanks, Danny.

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

Brian Martin: Hey, good morning, guys.

Larry Helling: Good morning, Brian.

Brian Martin: Just one question, just with the strong deposit growth, this quarter Todd or Larry, just as far as kind of, you know, we talked 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, you know, loan to deposit ratio kind of expect them to cut off pace load growth there. I guess. How are you thinking about this especially given the pricing appears to be a little bit better here, you know, ablaze?

Todd Gipple: 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 two down in the 90% loan to deposit ratio range. And yes, 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, you know, concerns of a year ago have kind of become a memory and everybody’s 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. So, I saw a medium seven figure deposit that went out to the market, a bid from a municipality in our market to get price sub five year in the last week.

So, and that’s when the market, everybody’s working at the chance to buy. So I believe that that’s going to help us as we go forward.

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

Todd Gipple: Yes.

Brian Martin: Yes. Okay. And then, just on the — the buyback for a moment just because, you know, conversations on M&A are not percolating sounds like, but the, you know, given that you’re going to be at that 9% level relatively quickly, I guess, is it something you could think about the share of purchases in the back half of the year or just kind of the, you know, maybe the kind of change in rate outlook here kind of higher for longer with some incremental credit concerns. Is that something that weighs on potential share repurchase activity as you kind of look in the second half of the year?

Larry Helling: 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 be appropriate because you’re right. You know, we did into the nines here on TCE fairly quickly here, given expected continued good earnings and the 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’ll 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 cause. It doesn’t mean that we’ll be the same way six months from now. But certainly today, if the variables all come in the same, that’s certainly possible.

Brian Martin: Got you. Okay. And then maybe just one for Todd, just on the margin, Todd, I know you talked about the securitization maybe, you know, giving a little bit of benefit to the margin. Can you talk — can you just remind us in terms of how much impact you saw from the recent securitization? So maybe just if that parallels not what you think may occur in, you know, the one in September here, the one in third quarter?

Todd Gippel: Sure, Brian. I think last time we got about a three basis point margin left 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 four handle now versus a five. So, three 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.

Brian Martin: Got you. And then just one more housekeeping, Todd, it’s small. Just on the — you talked about the accretion a bit earlier, being a little bit down this quarter, just that hasn’t flowed a little bit. But kind of in that general zip code is kind of where may shake out here in the coming quarters?

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

Brian Martin: Got you. Okay. Perfect. That’s all I had. Thanks for taking the questions.

Todd Gippel: Thanks, Brian.

Larry Helling: Thanks, Brian.

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.

Larry Helling: 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. Thanks.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.