QCR Holdings, Inc. (NASDAQ:QCRH) Q2 2024 Earnings Call Transcript

QCR Holdings, Inc. (NASDAQ:QCRH) Q2 2024 Earnings Call Transcript July 25, 2024

Operator: Greetings, and welcome to the QCR Holdings Incorporated Earnings Conference Call for the Second Quarter of 2024. Yesterday, after market closed, the company distributed its second 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. 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. 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 1st of 2024, starting this afternoon approximately one 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. Larry Helling at QCR Holdings. Please go ahead, sir.

Larry Helling: 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. 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 million, 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 second quarter, an 11% annualized growth rate, fueled by higher average loan balances and an expanded margin. 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. As a result, our adjusted NIM expanded two basis points from the previous quarter. Our fee income remained robust again this quarter, led by our capital markets revenue of $18 million.

Furthermore, our wealth management business continues to experience exceptional growth. Our year-to-date assets under management have grown $628 million, 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. 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 second 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 ratio during the quarter by growing our total risk-based capital and our common equity tier 1 capital ratios. Our asset quality remains excellent, and our current credit trends are stable. During the quarter, total criticized loans continued to decline for the third 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. 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.

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 LIHTC industry has a long track record of strong performance. The LIHTC 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. In addition, LIHTC loans are ideal for securitization due to their solid historical track record and strong investor demand. Securitization of LIHTC 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 on balance sheet growth as we approach the $10 billion 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. 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 as our peers. Turning to our strategic objectives for 2024 and beyond, it is 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 enhance shareholder value by implementing processes that improve customer experiences, employee well-being, and the communities in which we live and conduct business. 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 second quarter results.

Todd Gipple: 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 $29.3 million, or $1.73 per diluted share for the quarter. 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 million, a $1.5 million increase from the first quarter. 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 first quarter 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. 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 repricing in our loan portfolio and stabilizing deposit mix. Additionally, we expect our next securitization during the third quarter 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 TEY in the third 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. 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 million for the second quarter, which was up from $27 million in the first quarter, our capital markets revenue was $18 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 also generated over $4 million of wealth management revenue in the second quarter, a slight increase from the seasonally strong first quarter. 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 two 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 second quarter included income of $2.2 million from bank-owned life insurance policy proceeds.

Now turning to our expenses, non-interest expense for the second quarter totaled $50 million, an improvement from $51 million for the first quarter, and at the lower end of our guidance range. 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 second 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 third quarter, we expect our non-interest expenses to continue to be in the range of $49 million to $52 million. Now turning to our balance sheet. Our total loans grew by $206 million during the quarter, funded primarily by the strong growth in core deposits of $316 million that we had in the first quarter. Year-to-date loan growth is in line with expectations and in anticipation of our next loan securitization, we have designated $243 million of LIHTC loans as held for sale at the end of the quarter. Our long-term securitization strategy supports the continued success of our LIHTC lending business. Our LIHTC program generates significant capital markets revenue, which enhances our revenue diversification. Our securitization strategy also helps maintain our portfolio within established concentration levels.

Our upcoming securitization in the third quarter will consist of $243 million of stabilized tax-exempt LIHTC 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 LIHTC loans were originated several years ago at tighter spreads when we were beginning our LIHTC 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 LIHTC loans at stronger spreads. 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 LIHTC loans in the fourth quarter. Our portfolio of taxable LIHTC 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 third quarter, which will result in a net gain from our securitization activities in 2024. Now, turning to deposits. Total deposits declined modestly during the quarter, coming off the very strong deposit-gathering performance in the first quarter. 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 the reliance on wholesale or higher-cost funding.

Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits. In addition, the company maintained approximately $3 billion of available liquidity sources at quarter-end which includes over $1 billion 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 three quarters, amounting to a $35 million reduction in balances since September of 2023. NPAs increased by $3.2 million to $34.5 million, or 39 basis points of total assets.

The modest increase was driven primarily by two relationships, while nearly half of our total NPAs consist of just four relationships. We’ve recorded a total provision for credit losses of $5.5 million during the quarter, with $4.3 million related to credit loss expense for loans, and a balance of $1.2 million related to unfunded commitments. Charge-offs were down significantly in the second quarter at $1.8 million, a decrease of $1.8 million, 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 the 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%.

Our tangible common equity to tangible assets ratio increased by 6 basis points to 9% at quarter end, up from 8.94% at the end of March. The second quarter improvement in our TCE ratio was primarily driven by our strong earnings, as the change in AOCI this quarter was negligible. Our total risk-based capital ratio increased to 14.33% 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 earnings. 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. Over the past five 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. With that added context on our financial results, let’s open the call for your questions. Operator, we’re ready for our first question.

Q&A Session

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

Damon DelMonte : 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?

Todd Gipple : Sure, Damon. Thanks for the question. We actually have about $3.3 billion in RSAs, but RSLs, which you asked about, right now is $4.2 billion, so about $900 million 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, so that’s about $2.2 million in annual NII run rate, again for every 25 basis points, and that $2.2 million of expanded NII annually is worth about $0.11 in EPS.

Damon DelMonte: Great. Okay, that’s helpful. Thanks for that color. And then with regard to the outlook for loan growth, the full-year guide with the two securitizations, is that still kind of in that I think it was 2% to 4% for the year? Does that still hold?

Larry Helling: Yeah, Damon, that’s still true. Net-a-securitization, that’s kind of what we’re guiding toward. That still looks appropriate going forward.

Damon DelMonte: Great. Okay. And then just lastly, on the wealth management side, you mentioned some hires in the Southwest Missouri market and 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, or are those individual advisors that might not have as large of a book tied to them?

Todd Gipple: Damon, thanks very much for asking about wealth management. So, they were lift-outs of the 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. So, we now have people in those markets in the 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. I will tell you that in Des Moines, we already have about $210 million in AUM, about $50 million in Southwest Missouri and growing. So very pleased to have added that capability in those two markets.

Damon DelMonte: Great. Appreciate all the color. That’s all that I had. Thank you.

Todd Gipple: Thanks, Damon.

Larry Helling: Thank you.

Operator: The next question will come from Nathan Race with Piper Sandler. Please go ahead. Mr. Race your line is open. Our next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey, good morning, guys.

Todd Gipple: Good morning Danny.

Daniel Tamayo: 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?

Todd Gipple: Yeah, Danny, thanks for the question on sub-debt. Yeah, we did have a fairly significant tranche, $65 million reprice in February and that impacted the Q1 margin and we’ve overpowered that now. Next up would be September of next year, September of ’25. So that’s out of the ways. We’ve got a $50 million and another $20 million tranche flipping to a floating rate at that point. 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. We’ve got some time. The good news is the market seems to be coming around a bit and others are starting to wade into that space and it seems like that’s where the 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.

Daniel Tamayo: 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 third quarter. Just curious the loan yield is starting to expand. You think the deposit makeshift 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? Just thinking about maybe like the base case or the other scenario, right, if we have a hire for longer, like where the margin could move to.

Todd Gipple: 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. But our most expensive deposits, we’ve got about $2.6 billion that we would call 100 beta. Those actually cost us $5.27 in Q1, and that was $5.26 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. So, our loan payoffs in the second quarter were at a 690, and our new loan production in second quarter was 777. 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 683 and new fundings were 795, so almost 8%, and that’s 112 basis point delta. So again, what gives us confidence that we’re going to be able to expand margin even without Fed cuts would really be those two things, stable mix and deposits and fairly stabilized cost of deposits and new loan production really ramping up and giving us some nice yields.

Daniel Tamayo: That’s helpful. Do you have an internal budget or thoughts on what that number may be? Is it a similar number, the zero to 5 per quarter absent cuts for a while out, or is it slower than that, do you think?

Todd Gipple: 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. That would accelerate it.

Daniel Tamayo: Okay. All right. Thanks for all the color, Todd. Appreciate it.

Todd Gipple: Thanks, Danny.

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

Brian Martin: Hey, good morning, guys.

Todd Gipple: Morning, Brian.

Larry Helling: Morning, Brian.

Brian Martin: Hey, 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 quarters or the next 12 months? And kind of what’s the pickup on those loans?

Todd Gipple: Yeah, 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 million, but the new production was $600 million and about $400 million of payoffs. So that’s $600 million of new coming on at 777, $400 million leaving at 690. Somewhere in that $600 million or so of new production each quarter and $300 million or $400 million rolling off at lower yields, that’s really how that churn will continue to happen in benefit margin. So that’s really, I would say, the notional dollar amount of impact each quarter, if that makes sense.

Brian Martin: Yeah, no, that’s super helpful. Okay, and just one on the — last one on margin, Todd. Just the — I know you talked about the better efficiency on the securitization. In fourth quarter, that probably holds as well and the one you do in the fourth quarter you should get some, if you’re talking zero to 5, if that’s kind of the range, not putting words in your mouth, but it would be an added piece to that if you did a securitization and got some pickup there as well.

Todd Gipple: 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 fourth quarter? You’re spot on. We’ll get a little lift from the securitization. It’ll be a bit smaller in the fourth quarter, but it might help us a couple basis points.

Brian Martin: 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.

Larry Helling: Yeah, Brian, I’ll tackle that one. Our perspective on capital, and we’ve talked about this before is that given the uncertainty in the economy, two wars in the world, the craziest election in my lifetime, gee, 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.

Brian Martin: 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&A versus the buyback, I guess is there, I mean, is there any update on M&A, anything given your 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…?

Larry Helling: Yeah, it’s really just not our focus at the moment, M&A. We’re really focused on just funding our organic growth, and as you see from this quarter’s results, our momentum of 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.

Brian Martin: Yeah, I know you guys have done a great job. So 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, there’s a little bit of a couple things into this quarter, but the current level seems fair to go with going forward in the short term, next couple of quarters?

Todd Gipple: Yeah. 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 two, but we do focus very hard on operating leverage and watching our non-interest expenses. 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, and we do have a lot of internal focus on best-in-class initiatives to do things better, faster, stronger. 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.

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

Larry Helling: Thanks, Brian.

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

Jeff Rulis: 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 fourth quarter, what the amount would be initially?

Todd Gipple: Yeah, Jeff, thanks for the questions, because we did not give a number in the fourth quarter, and I can share that with everyone. The third quarter 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 two fall out of that, so that will get pulled back into our portfolio. And then likely those will get included in the next securitization. So just a couple 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 million 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, 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 third quarter. Expectations would be a million or less. Your question about the fourth quarter that would be a taxable LIHTC loan portfolio. Those deals tend to have better spreads. They’re smaller deals but better spreads. We expect that to be around $150 million later in the fourth quarter, and we do expect a gain on that securitization of $2 million to $3 million. So, our net outcome for the year on securitization should be somewhere in the range of $1 million to $2 million 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.

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 fourth quarter.

Jeff Rulis: 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 nonaccruals. What was added? Do you have kind of loan type? I think you said a couple 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.

Larry Helling: Yeah, 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 a 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. 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 holes, and they’ve managed their expenses. Those companies are doing better than the really micro small business stuff. On the credit side, I would say credit is kind of normal. I’ve 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 one, we’re downgrading one, we’re sliding one down to risk rating, we’re charging one off, we’re collecting one. That’s kind of what’s going on. 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 but one $3 million deal, and everything else was kind of normal movements.

Jeff Rulis: Okay. Thanks, Larry.

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

Nathan Race: Hi, guys. Good morning. Thanks for taking the question.

Larry Helling: Morning, Nate.

Todd Gipple: Morning, Nate.

Nathan Race: So, just want 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 securizations 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 we get one Fed cut in the back half of the year and get a few next year. Are you thinking kind of low double digits to that end?

Todd Gipple: Nate, I’ll take that one. Yeah, we do, even with securitizing off the 243 in the third quarter, we expect to grow NII by 1.5 million next quarter. We rarely give NII dollar guidance, but I do think because of the big puts and takes in the third quarter, it makes sense for us to share that. So, we do expect to grow NII even with that securitization. We also expect to do that in the fourth quarter when we have the 150 million of LIHTC 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 first quarter, and with this expansion of margin here in Q2 and our guidance and our modeling for Q3 and Q4, 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.

So, we’re optimistic about strong NII growth in the last half of this year and into 2025. 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.

Nathan Race: Okay. Great. And then I apologize if you touched on this earlier, but just any expectations in terms of core deposit growth over the 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?

Todd Gipple: Sure. Yeah, 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 first quarter of growing core deposits. They were fairly static here in Q2. Part of that’s just the nonlinear fashion of bringing on core deposits. Part of it is we knew we were freeing up a couple hundred million 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. 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 ramped back up a little bit here to 97. Larry and I want to operate that between 90 and 95. So I would expect the back half of the year for that to get down into that range.

Nathan Race: 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 permit share repurchase activities?

Larry Helling: Yeah, 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 yeah, 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.

Nathan Race: Okay. Understandable. I appreciate all the color. Thanks, guys.

Todd Gipple: Thanks, Nate.

Larry Helling: Thanks, Nate. 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.

Larry Helling: 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 is now concluded. Thank you for attending today’s presentation. You may now disconnect.