QCR Holdings, Inc. (NASDAQ:QCRH) Q4 2022 Earnings Call Transcript

QCR Holdings, Inc. (NASDAQ:QCRH) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Fourth Quarter of Full-Year 2022. Yesterday, after market close, the company disbursed its fourth 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, www.qcrh.com. With us today from management are Larry Helling, CEO; and Todd Gipple, President, COO, and CFO. Management will provide a brief summary of the financial results, and then we’ll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information 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 the future are forward-looking statements, and actual results could differ materially from those projected. Additional information on these factors is included in the company’s SEC filings, which are available on the company’s website. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. 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 February 1, 2023, starting this afternoon approximately one hour after the completion of this call.

It will also be accessible on the company’s website. At this time, I will now turn the call over to Mr. Larry Helling at QCR Holdings.

Larry Helling: Thank you, operator. Welcome everyone and thank you for taking the time to join us today. I will start the call with a high-level overview of our 2022 performance, a review of our business model, and the factors that drive our success. Todd will follow with additional details on our financial results for the fourth quarter. Our record net income in 2022 was driven by robust loan growth and increased net interest margin and excellent credit quality. Our team accomplished this while successfully closing and integrating our largest acquisition to date where we significantly strengthened our company’s position in the vibrant Southwest Missouri region. Our growth in earnings over the last five years has been exceptional.

This is a result of our differentiated business model and commitment to relationship banking. Our multi-charter model provides our bankers with the agility to serve our clients. We delivered banking at the local level, which creates opportunities to strengthen current relationships and establish new relationships that drive our growth. In the last five years, we have nearly doubled our size, outperforming many of our peers. Our total loans have grown at a compounded annual rate of 15.7% and our deposits at 12.9%. These results support the 20.7% compounded annual growth in our core diluted earnings per share and the 10.2% compounded annual growth rate and our tangible book value per share over the same period. Importantly, while we’ve been able to grow at a consistent pace, we’ve also significantly increased our profitability and our ROAA is now in the top quartile of our peer group.

There are many factors that contribute to our success, including our dedicated employees, our economically vibrant markets, and our differentiated business model. Recruiting and retaining the right employees is critical to our success. We have strong corporate cultures that extend through each of our local charters. Our employees are engaged with our clients and involved in our communities. Our reputation and culture attract the best bankers and clients in our market. This leads to important outcomes such as reduced turnover, improved productivity, higher profitability, and enhanced shareholder value. We continue to receive high employee engagement scores, which are measured annually across our company. Our local charters have won numerous awards throughout our footprint for being a great place to work and do business.

This has resulted in consistent and sustained growth. We operate in some of the most vibrant midsized markets in the Midwest. They are part of regional economies with a diverse mix of commercial, industrial, and technology-focused activity along with highly educated workforces, which helps drive steady economic growth, high relative household income, and low unemployment. Our unique model enables our local management teams to operate with the speed and agility to respond to client needs, which results in a better client experience that outperforms larger national and regional banking alternatives. This has created great outcomes for our employees, our clients, our communities, and our shareholders. Our management teams think and act like owners, which drives shareholder value.

In addition, we have built high performing business lines that provide additional opportunities for growth and profitability. Our Specialty Finance Group provides municipal and tax credit specialty lending, which drives strong growth in bonds and loans, as well as fee income. On the deposit side, our correspondent banking team serves the banking needs of nearly 200 downstream correspondent banks, which generates meaningful core deposits and related fee income. Lastly, we’ve grown our wealth management significantly over the years with assets under management of $4.6 billion. The combination of our traditional banking and our high performance business lines creates a diverse revenue stream, which has helped us outperform in a variety of economic environments.

We support our local charters with centralized group operations teams providing the required operational infrastructure, expertise, and benefits of scale. We aim to be a market leader in each of our markets as this scale improves our efficiency and enables us to attract the best bankers and clients. Relationships build on expertise and trust matter in our markets and that is why we place such importance on high touch client service that is delivered at the local level. Now, a few comments on our full-year 2022 results. We delivered net income of $99.1 million for the year or $5.87 per diluted share. After adjusting for the one-time costs associated with the Guaranty Bank acquisition, our adjusted net income for the year was $114.9 million and our adjusted EPS was $6.80 per diluted share, up 14.8% and 8.5% respectively over our 2021 results.

Our team accomplished this, while successfully closing and integrating our largest acquisition to date as mentioned earlier. Organic loan and lease growth for the full-year was 14.6% when excluding PPP and acquired loans and was driven by strength in our traditional commercial lending, leasing, and specialty finance businesses. Given our current pipelines and relative strength of our markets, we are targeting loan growth of between 8% and 10% for 2023, consistent with our long-term goals, while continuing to be vigilant on maintaining our exceptional credit quality. While our deposits for the year were relatively static when excluding deposits acquired in the Guaranty acquisition, the number of net new accounts continue to grow, which will lead to consistent deposit growth over time.

Core deposits are our long-term focus, which will drive long-term franchise value. bankers are to grow both loans and deposits. During the year, we expanded our tax equivalent yield net interest margin by 24 basis points, driven primarily by our asset sensitive balance sheet in this rising interest rate environment. Our asset quality remains as the ratio of non-performing assets to total assets was 11 basis points at the end of the year. We had modest net charge-offs during the year and are comfortable with our reserves, which represent 1.43% of total loans and leases. We are mindful of recessionary concerns, but remain cautiously optimistic about the relative economic resiliency of our markets. Additionally, our strong asset quality and consistent credit culture prepares us well to weather economic uncertainty.

In conclusion, I would like to thank the entire QCR Holdings team for their engagement and dedication to outstanding client service and for delivering record adjusted earnings for the year. Our employees are the key to our success and I’m immensely proud of all that we have accomplished in 2022. With that, I will now turn the call over to Todd, to discuss our strategy to drive shareholder value and our strong financial results.

Todd Gipple: Thank you, Larry. Good morning, everyone. Thanks for joining us today. When Larry and I began our new roles with the company in early 2019, we developed an initiative to drive our financial results and enhance shareholder value. We call this our 9, 6, 5 strategy, a plan to grow earnings and drive attractive long-term results for shareholders. This strategy includes at a minimum generating organic loan and lease growth of 9% per year funded by core deposits, growing fee-based income by at least 6% per year, and limiting annual operating expense increases to 5% per year. These are long-term targets and not short-term quarterly benchmarks. Our 9, 6, 5 strategy creates a common language across the company that unites our teams and aligns our actions for long-term success.

Photo by Nastuh Abootalebi on Unsplash

We believe that the true measure of our success will be our ability to consistently deliver on our strategic initiatives over time and this will translate into greater shareholder value in the long run. As a result of our performance on our strategic 9, 6, 5 initiatives, combined with our successful acquisition of Guaranty Bank this year, since 2018 we have grown adjusted net income and EPS at a compounded annual growth rate of 25.4% and 21.9% respectively. And we are proud to have achieved top quartile ROAA and NIM within our high performing peer group. While our historical performance has been impressive, we remain focused on the future and expect to continue to perform at the top of our peer group over the long-term. Now, I would like to provide some color regarding our fourth quarter results, starting with net interest income.

Our net interest income on a tax equivalent basis was 70.8 million, an increase of 5.5 million from the third quarter. The increase was primarily due to higher acquisition related net accretion of 4.6 million due to loan renewals, restructurings, and pay-offs from our Guaranty Bank acquisition. And the impact of multiple interest rate hikes on our asset sensitive balance sheet, partially offset by the impact of increased deposit costs. With our strong growth in earning assets and improved loan yields, we significantly grew interest income for the current quarter. However, we also experienced higher interest expense as a result of higher deposit costs, a shift in the mix of our deposits, and the full quarter impact of our recent subordinated debt issuance.

Our NIM on a tax equivalent yield basis improved by 22 basis points during the fourth quarter, driven by the higher loan yields and higher acquisition-related net accretion and partially offset by higher deposit costs. As we have mentioned before, NIM is impacted typically in nonlinear patterns during periods of rapid rate increases. In the first half of 2022, we experienced the benefits of slower and lower deposit betas as we posted a NIM, TEY increase of 24 basis points during that period. However, those deposit betas accelerated as we progress through the second half of the year before additional Fed rate increases. For the first half of the year, our beta on total deposits was 8%. For the third quarter, our beta on total deposits moved to 31%.

And for the fourth quarter, it was 44% as a result of an accelerated shift in our deposit mix for noninterest-bearing to interest-bearing accounts and from demand deposits to CDs. For the full current rate height cycle to date, our beta on total deposits is 27%, which is comparable to our beta from the last period of rising rates that ended in 2019. With robust organic loan growth and NIM expansion for the year, our net interest income has also experienced significant growth, and we have achieved a NIM at or near the top of our peer group. Looking ahead, we project our NIM, excluding the impact of acquisition-related net accretion, to remain fairly static in the first quarter of 2023. Additionally, we expect acquisition-related net accretion to return to a more normalized level of approximately 500,000 per quarter.

Turning to our noninterest income, which was 21.2 million for the quarter, up slightly from the 21.1 million we generated in the third quarter. Notably, our capital markets revenue was 11.3 million, an increase of 800,000 from the third quarter and within our guidance range of 10 million to 12 million. Despite the project delays that some of our clients have been experiencing, our pipeline remains strong. Capital markets revenue has averaged just over 10 million per quarter for the last four quarters, and therefore, we expect this source of fee income to be in a range of 40 million to 48 million for the full-year 2023. In addition, we generated 3.6 million of wealth management revenue in the fourth quarter, up slightly from the third quarter.

Our wealth management team continues to generate meaningful new client relationships and is adding significant new assets under management, adding 340 new clients and 481 million in AUM this past year. This strong growth in new clients helped offset the sharp decline in stock market valuations that occurred in 2022. Now, turning to our expenses. Noninterest expense for the fourth quarter totaled 49.7 million, compared to 47.7 million for the third quarter. The increase from the prior quarter was primarily due to higher incentive-based compensation related to our record full-year performance, partially offset by lower professional and data processing fees due to the completion of the core conversion at Guaranty Bank and other merger cost savings.

Looking ahead to the first quarter of 2023, we anticipate that our level of noninterest expense will be in the range of 49 million to 51 million. This guidance range reflects less than a 5% increase in our fourth quarter noninterest expense run rate after excluding acquisition-related items and is consistent with our strategic 9, 6, 5 initiatives. Turning to asset quality, which improved significantly in the fourth quarter and continues to be quite strong. Nonperforming assets declined by 51% to 8.9 million at the end of the fourth quarter driven by payoffs of several NPAs during the quarter. The ratio of NPAs to total assets was at quarter-end, compared to 0.23% for the prior quarter. In addition, the company’s criticized loans and classified loans to total loans and leases at the end of the fourth quarter were fairly static at 2.68% and 1.08%, respectively, as compared to 2.35% and 1.29% from the prior quarter.

As a result of continued improvements in overall credit quality, the company recorded no provision for credit losses in the fourth quarter. Our allowance for credit losses remained strong at 1.43% of total loans and leases. This allowance represents 10x our nonperforming loans and leases. We strengthened our total risk-based capital ratio during the quarter, posting an improvement of 9 basis points to 14.47%. We also increased our tangible common equity to tangible assets ratio to 7.93% at quarter-end, up from 7.68% at the end of September. Our tangible book value per share increased by 6.8% during the fourth quarter. This was due to both our strong earnings and a $10 million increase in AOCI as a result of an increase in the value of our available-for-sale securities portfolio and certain derivatives due to changes in long-term interest rates during the quarter.

During the fourth quarter, we purchased and retired 100,000 shares of our common stock at an average price of $50.37 per share, as we executed purchases under the share repurchase plan announced during the second quarter of 2022. Finally, our effective tax rate for the quarter increased to 15.9% and from 14.1% in the third quarter. The rate was higher due to a higher ratio of taxable earnings to tax-exempt revenue in the fourth quarter. Our effective tax rate for the full-year 2022 was 12.8%, an improvement from 18.6% in 2021. This was primarily due to strong growth in tax-exempt revenue, mostly from tax exempt floating rate loans, as well as increased benefit from our tax credit portfolio. We expect the effective tax rate to be in the range of 12% to 14% for the full-year 2023.

With that added context on our fourth quarter financial results, let’s open up the call for your questions.

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Q&A Session

Operator: Our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis: Thanks. Good morning, Larry and Todd.

Larry Helling: Good morning, Jeff.

Todd Gipple: Good morning.

Jeff Rulis: On the nonperformers, kind of the cleanup there, could we get any more color on the payoffs were those credits that you’ve been working on for some time or just, sort of what type of loans were those looking for any, kind of color?

Larry Helling: Yes. The only one, Jeff, that was over 7 figures, was one commercial real estate loan that we had fully reserved for several quarters. And we just thought there’s a dispute between, not us, between the borrower and a contractor, and we decided that it would be best just to charge it off. And so, we would hope to get some recovery in 2023, but because of the dispute, we decided it’s best just to clean it up. The other couple of credits, there were a couple that were 6 figures that we decided just to clean up, and so you saw some really nice improvement in our NPAs. We had one large NPA that just paid-off that was middle 7 figures. It’s been on our list for a long time that we got paid off in the fourth quarter. So, over the last two quarters, we’ve dropped our NPAs by two-thirds down to what a number I didn’t think was possible a few years ago down to 11 basis points. So, our team has done a great job there.

Jeff Rulis: Okay. And were there any associated recoveries of a meaningful amount on some of that cleanup?

Larry Helling: No substantial recoveries. We expect a couple of those in 2023 because of the cleanups here, but just small odds stuff, nothing substantial, Jeff.

Jeff Rulis: Okay. Todd, just to kind of narrow in on the margin, do you have the average in the month of December, what that ?

Todd Gipple: Sure. Jeff, great question. That’s one of the reasons we were guiding to a static margin intra-quarter, we actually saw improvement each month in margin. Our core margin was for the full quarter. It was in October, in November and in December. So, we got some nice run there intra-quarter. Part of that was €“ for the first time, we were really seeing the improvement in new loan yields that we had expected candidly to start in the fourth quarter. It was really more towards the end. Our yields on new loan fundings in December were 80 basis points higher than October. So, part of the run up there towards the end of the quarter.

Jeff Rulis: Okay. And I know that you, kind of gave us a little read on Q1, but thereafter, it’s €“ any expectation would be near at, kind of that level as maybe deposits, kind of chew into earning asset yield improvement or kind of what would be the further around expectation?

Todd Gipple: Sure, Jeff. I think static is going to continue to be the right word for us, whether it’s Q1 or looking a little further into the year. We feel really good about not only the intra-quarter improvement and that traction on fixed rate loan pricing, but part of the challenge we have with margin in the fourth quarter is, we saw a very significant, more than we had forecasted, shift from noninterest-bearing and low beta deposits into higher beta and CDs. We saw a pretty significant runoff in correspondent balances, 55 million in noninterest-bearing, 66 million in money market, but that has reversed already here in January, which gave us significant confidence in talking about a static margin. So, correspondent deposits have started to come back quickly in January.

Noninterest-bearing is up 33 million, money market up 221 million, and we feel really good about the start to the quarter. So, kind of long answer to your short question, Jeff, I think static is really the word not just for Q1, but as we look a little deeper into 2023.

Jeff Rulis: Okay. And just to confirm, we’re talking about core and I’ll take into account your comment about the expectation for accretion to return more to normal levels.

Todd Gipple: Yes, Jeff. Exactly. We wanted to be pretty prescriptive about that given the big jump in the fourth quarter. Actually very pleased by that. The level of restructurings and payoffs in that portfolio with good outcomes. It did accelerate the accretion, but now we’d be back to more like a run rate. So yes, when you’re doing your modeling pull out the in the fourth quarter, replace it with thereafter.

Larry Helling: Jeff, I’d add just a comment. I’m thrilled to see that accelerate because that means that the €“ some of those individual credit marks that we put on what we perceive were some of the higher credits, we were able to get rid of because they either paid off or restructured in a way that we thought was appropriate. So that speaks well and shows up early in our NPA numbers and the tremendous progress we’ve made in the last couple of quarters.

Jeff Rulis: Okay. Thank you.

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

Damon DelMonte: Hey guys, how is it going today?

Larry Helling: Good, Damon.

Damon DelMonte: So, just wanted to, kind of circle back on the credit front. It sounds like things are really strong there, but €“ can you give us a little guidance, Todd, on how we should think about the provision going through 2023? Reserve was pretty healthy at , do you feel you need to maintain that? Is there some room to let that go down a little bit? And just trying to get a little idea on the cadence of the provision over the coming quarters.

Larry Helling: I will take the and then let Todd fill in the gaps here. We think we’re very comfortable with our reserve today when our reserve coverage is 10x our NPAs, but it also seems like the right time to not let that number flow a lot lower. So, as we look through the rest of the year, we’re certainly going to need to start providing a little bit of reserve for the growth that we’ve had. We’ve seen no degradation in credit that’s apparent in the numbers as you see with our classified numbers coming down, our NPA numbers coming down in the quarter, but we all expect at some point for things to start to return to more normal, there’s certainly nothing in the numbers that show that that’s going to happen in the first quarter or two of next year €“ or this year, excuse me, depending on what happens to the economy, certainly, there’s some of that possible later in the year, but it’s not showing up yet.

So, we would expect if we do have reserving, it’s probably going to be a little more back-end loaded during the year because of credits holding up, but we’ll have to reserve a little bit and hope to maintain at above the levels we’re at for the next few quarters.

Damon DelMonte: Got it. Okay. That’s helpful. And then with regards to expenses, Todd, could you just repeat what your guidance was as you look into the first quarter and as kind of as we progress for the remainder of the year?

Todd Gipple: Sure. We’re really looking for a range of 49 million to 51 million. Again, we’re pleased with the outcome on our expense run rate that’s staying under the 5% in our 9, 6, 5. So that would be our guidance, 49 million to 51 million, gives us a little bit room for some increased costs there, but we feel very good about run rate on noninterest expense. We have really accomplished a great deal of the cost saves from the Guaranty Bank acquisition and merger and integration. We did carry a little bit heavier staffing over year-end. We really wanted to make sure we were taking great care of clients and making sure we were doing all the right things from a control environment perspective. It’s a marathon, not a sprint. So, we wanted to make sure we have things well in hand over year-end.

We mentioned some of the incentive-based compensation in a little bit of the in fourth quarter expenses. We also got more fully staffed. One of the things we didn’t really talk about in our opening comments, but you might have noticed that our FTE headcount was up linked quarter. So, we’re doing a lot better job of getting fully staffed and things are going well from a people perspective.

Damon DelMonte: Okay. Great. And then just one quick final question. With respect to like the commercial real estate portfolio, how much office exposure do you guys have? And are you seeing any signs of weakness in that segment?

Larry Helling: Yes, I’ll take a swing at that one, Damon. Our office exposure is about 3% of our portfolio, so we don’t have big exposure there. And as I look at it, we only €“ we have 16 deals that are over $3 million in size. 13 of those are 100% leased, and the others really have pretty good sponsors. And the one €“ we had one struggling deal that we got paid off during the fourth quarter. So that portfolio is performing really well. We have very little what you would think about in big markets where we’ve got office towers, still with multi-tenants. We have very little of that. Our tenants are more likely government-related entities, accounting firms, medical office facilities, those kind of things. And so, ours are holding up really well so far. So, really no issues in that portfolio so far. Again, it’s about 3% or 188 million of our total portfolio.

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

Larry Helling: Thanks, Damon.

Operator: Our next question comes from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Thanks for the question. Good morning, everybody.

Larry Helling: Good morning.

Daniel Tamayo: Maybe we just start €“ I know you gave the outlook on the swap fee income. And it does feel like we’ve hit a pretty stable run rate for that line item. What would you expect to be, kind of the lever for that run rate to, kind of increase back to levels that you saw in prior years. It’s €“ beyond 2023, I guess, is how I’m thinking about this.

Larry Helling: Yes. Our first focus is certainly trying to produce consistent results like we have in the last couple of quarters. What will help that longer-term as we’ve been talking about the headwinds for a couple of years now when we had tremendous inflation, which slowed down the project construction because of and the inflationary cost of the materials. That was one factor. The other was higher interest rates had some impact on the cash flow on projects because the debt service is higher with long rates, kind of topping out and coming back a little bit. So that has started to help. And so, I would say the factors here that it would really increase that over time would be a continued reduction in long-term interest rates, and kind of inflation getting under control so that the certainty of the cost of projects are easier to get to because they’ve got to put their capital stacks together, and getting back to a normal inflationary environment on building materials would certainly help.

Daniel Tamayo: Yes. That makes sense. And do you have an outlook for the remainder of the fee income this year or in the first quarter, excluding the swaps?

Todd Gipple: Yes. Danny, probably the biggest bucket of that would be wealth management. And you heard our comments in the open €“ with respect to new clients and new AUM. So, in keeping with 9, 6, 5, we would expect to see wealth management in other parts of our fee income business to grow at 6% annual.

Daniel Tamayo: Okay. Terrific. And then just lastly, you talked a lot about the margin here and funding loan growth, but I think in the past, we’ve asked about the loan deposit ratio of it around 103% now. How comfortable are you or how high are you comfortable letting that ratio go? And then what’s the strategy for funding loan growth if it is more difficult than expected to bring in core deposit growth?

Todd Gipple: Sure. So Daniel, I was hoping someone would ask about loan-to-deposit ratio. Yes, it was over 100 right at quarter-end, year-end, it’s floated back down into the 90s now with some of the return of that funding I mentioned with correspondent banking. So, we will run that in the upper 90s, we prefer to keep it under 100, but it’s likely going to be in that 95 to 100 range. We do expect all of our bankers to find the funding we need to continue to grow loans at the guidance rate that we gave you. So, we don’t expect that to float any higher. One point of color is, we’ve historically run at this rate on loan-to-deposits. We ended 2018 at 101 and 12/31/19 was 98%. So this isn’t a new phenomenon for our company. We’ve always had a very strong loan growth engine keeping pace with that with funding has always been a key priority for us.

But it’s part of the reason that we perform at a high level with respect to margin and ROAA. The left side of our balance sheet is fairly heavily to loans. And so, we’re pretty comfortable operating in that upper 90s. It’s historically a normal range for us.

Larry Helling: So Danny, the other thing I would say is, we’ve talked about this for a few quarters now, and we are on track to do a securitization of a portion of our LIHTC portfolio in the second quarter. Our first tranche, just to get the first ones done is likely in the $150 million range. We’re working on the details of that as we speak, but we do expect to do a securitization, which will take some of the pressure off the funding in the second quarter. And longer-term, that’s a lever we’ll be able to pull over time, create additional liquidity if we need to.

Daniel Tamayo: Okay, terrific. All very helpful. Thanks for answering my questions guys.

Todd Gipple: Thanks Danny.

Larry Helling: Thank you.

Operator: Our next question comes from Brian Martin with Janney Montgomery. Please go ahead.

Brian Martin: Hey, good morning guys.

Larry Helling: Good morning, Brian.

Brian Martin: One of mine was just answered or answered on the LIHTC and on the deposit. Other one, just on, Todd on the portfolio, just kind of the pipelines or Larry, just kind of the pipelines today that are €“ it sounds like they’re pretty healthy if you’re kind of thinking about your guidance along with maintaining the credit quality, but just where are the pipeline is today? Is it specifically in the, kind of the traditional commercial and the specialty finance or is that kind of what’s driving it, or just geographically, just maybe give a little color on where the pipelines are at?

Larry Helling: Yes. I’ll start, Brian, and let Todd fill in if he’s got some other thoughts. Certainly, I would say, I looked at our pipeline trends this morning, again, they are very consistent over the last couple of quarters for new business and new transactions that we’re working on. What’s changed, as you know, we and others had really frothy growth earlier in the year in that 14%, 15% range really because of the liquidity coming out of the system and clients starting to use their lines of credit and those kind of things. Our line of credit usage for clients is back close to pre-pandemic levels now. So that big push on liquidity and loan increases is, kind of done, we could get a little bit more uses there, but it’s pretty much €“ the excess liquidity seems to be, kind of pushed out.

And so both the Specialty Finance Group and the core business pipelines look solid. So, we’d expect consistent growth from both of those and get us more back in what we’ve done over the long run, which is kind of numbers in that 8%, 9%, 10% range is what we’ve done over years. And so, it won’t be easy. We’ll have to work hard to achieve at those levels, but that’s something we’ve done over a long period of time.

Brian Martin: Got you. Okay. No, that’s helpful. Thanks Larry. And just the LIHTC portfolio today are just kind of the specialty finance pipeline, if you think about the securitization, how big is that portfolio today when you think about taking something off the table there with securitization?

Larry Helling: So yes, I mean, the stabilized LIHTC portfolio is around $750 million, which we believe to be probably the highest quality asset we have on our lending balance sheet. The first tranche, we could theoretically securitize all of that. That’s not likely because we like it on our books, but we’re going to pull the first $150 million off in the securitization as we discussed just to have that tool available because we’ve got consistent growth in that market. And so, if we want to take the top off the growth there and create a little extra additional liquidity, we want to make sure we’ve got that lever completely figured out, so that it’s there when we need it in the future.

Brian Martin: Got you. Okay. So, that’s the LIHTC piece, the whole piece of Specialty Finance loans, how big is that the portfolio today?

Larry Helling: There’s another $700 million roughly in between municipal lending that we’ve done and some like that construction. So, it’s a big piece of our business. But again, we think some of the very highest quality stuff that we have.

Brian Martin: Yes. No, understood. So, I just want to get a frame of how big it is. So, okay, that’s helpful. And maybe just on the capital front, given kind of the build here and just the look on AOCI. Have you €“ how does your look on the buyback? I mean, I know there’s still uncertainty out there with rates economically, but just trying to balance that or just understand how you guys are thinking about it.

Larry Helling: So, great question, Brian. First, I would say, we feel really good about where our capital levels are at today. Given the awareness in the AOCI environment and the economic uncertainty, our priority going forward is growing TCE and total risk-based capital. As you know, our operating performance is certainly top quartile in our peer group now, and we expect to keep that there. What we’re driving to now longer term is to get our capital ratios, we’re kind of middle of the peer group right now in our capital ratios. We’d like to push those to the top quartile because the shareholders, we think, will be well served in a possibly tougher economic environment. If we’ve got top quartile earnings and top quartile capital, we think we are well-positioned to weather the storm that might be in front of us, but shown up yet.

Brian Martin: Got you. So, maybe not quite as active on the buyback in the near term, just given, kind of your commentary. Is that fair?

Larry Helling: I think that’s fair. Yes, our priority is building capital.

Brian Martin: Yes. Got you. Okay. And then maybe just last one for Todd. Just on the margin Todd, I think normally, you’ll give the RSAs, just kind of where those are at, but just in general, as you look to €“ it sounds like the funding base, just kind of your assumptions on the stability in the margin, it sounds like it’s just maintained the deposit. You’ve talked about the kind of changes in mix and funding and whatnot. But your outlook for some stability, is that assuming that the deposit mix and the borrowings €“ level of borrowings today are consistent or down or just kind of how you’re thinking about that?

Todd Gipple: Sure, Brian. Yes, we feel pretty good about where we’re sitting today, still being slightly asset-sensitive. And our guidance to static margin, yes, does assume that the big mix shift that we’ve seen lately has really come to a conclusion. We feel very good about that considering how we started the year here in January. We’ve been able to pay down borrowings pretty significantly as correspondent and other deposits have flown back in or flowed back in. So, we’ve been paying down overnight borrowings getting some margin benefit from that, feeling better about loan to deposits being in the 90s instead of over 100. So, all those things are €“ yes, that’s what we’re assuming in that guidance.

Brian Martin: Got you. Okay. And then the RSAs, what was the other piece of it?

Todd Gipple: Sure. So, RSAs are still 2.4 billion and still continue to see some nice lift there. I think that has been a very positive trend throughout the rate up cycle, of course. But probably the biggest thing that we saw late in the fourth quarter, as I mentioned earlier, was we’re really finally starting to see that traction on new loan yields, on fixed rate deals, and that jumped 80 basis points from October to December. So that gives us some more confidence about being able to help us with margin.

Brian Martin: Got you. Okay. Perfect. Thanks for taking the questions.

Todd Gipple: Yes, thanks Brian.

Larry Helling: Thanks Brian.

Operator: Next question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race: Hi, guys good morning. Appreciate you taking the question.

Larry Helling: Good morning, Nate.

Nathan Race: Just wanted to zoom-out on the margin outlook. We contemplate maybe a couple of Fed rate hikes in the back half of this year. Do you guys believe that just the higher pricing that you’re seeing on new loan production today can offset just some of the variable rate loans repricing lower? Within that context, obviously, you’ll have some index deposits that will also reprice lower. So, I guess I’m just kind of curious how you guys are thinking about, kind of protecting margin if we do get some Fed cuts later this year?

Todd Gipple: Sure. Nate, actually, as I think you know well, the right side of our balance sheet is a bit more of a challenge for us with the ratio of commercial deposits to retail deposits. And that’s really been our struggle in terms of margin and holding on the margin. That does give us a very good outlook if the Fed was to cut rates later in the year. If they were to do that, I think we’d likely outperform many in terms of our ability to bring cost of funding down quite quickly. We would be able to take those rate-sensitive liabilities down pretty sharply. They have performed that bucket that we would call like our 100 beta bucket of deposits. So far, it’s been 91% over the cycle. And so, we think it would perform well in rates down and give us some relief on cost of funds quite quickly.

Nathan Race: Okay. Great. And then just one clarifying question to Larry’s point earlier, on just the reserve. Larry, were you describing a kind of a stable reserve on an absolute dollar basis or stable in terms of just as a percentage of loans?

Larry Helling: Yes, thanks for that clarification. Yes, probably stable as a percentage of loans. We’re in a €“ we’re still pretty high particularly given 11 basis points of NPAs, but that €“ we’d like to hold in that low 140s range for now, possibly build it if we see economic headwinds, but certainly hold it there so that we’ve got some powder in our reserve if we do see some degradation later in the year.

Nathan Race: Got you. And then just maybe lastly, just in terms of the M&A outlook, are you guys still kind of less interested in opportunities these days, just given the macro environment and interest rate fair value marks and so forth, how are you guys kind of thinking about and seeing kind of the flow of those opportunities develop these days.

Larry Helling: Yes. Nate, good question again. Certainly, it kind of goes in-line with stock buyback questions earlier in the call. Our focus is on building capital right now. And the M&A environment is given all the uncertainty going on, certainly less likely. So, long-term, certainly, we’d be open to things, but in the near term, certainly, we don’t see anything and our focus is on build on a balance sheet that will stand the test of time here if we do see economic uncertainty.

Nathan Race: Okay. Great. I appreciate you guys taking the questions and all the color.

Larry Helling: Thanks, Nate.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry Helling for any closing remarks.

Larry Helling: Thank you, operator. I’d like to thank all of you for joining us on our call today. We hope everyone remains healthy and safe during the new year. Have a great day. I look forward to speaking with you all again soon.

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