QCR Holdings, Inc. (NASDAQ:QCRH) Q4 2024 Earnings Call Transcript

QCR Holdings, Inc. (NASDAQ:QCRH) Q4 2024 Earnings Call Transcript January 23, 2025

Operator: Greetings, and welcome to the QCR Holdings Incorporated Earnings Conference Call for the Fourth Quarter and Full Year 2024. Yesterday after market closed, the company distributed 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 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 for questions from analysts. Before we begin, I would like to remind everyone that some of this information management will be providing today falls under the guidance 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 our actual results could differ materially from those projected. Additionally, information on these factors is included in the company’s SEC filings, which are available on the company’s website. Additionally, management will — 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 quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through January 30th, 2025.

Starting this afternoon, approximately one hour after the completion of the call, it will be accessible to 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 providing highlights of our 2024 performance and Todd will follow with additional details on our financial results for the fourth quarter. We delivered our strongest results of the year in the fourth quarter, generating record full year results. Our exceptional performance was highlighted by significant growth in net interest income, driven by strong margin expansion and robust loan growth. Additionally, we produced another year of strong capital markets and wealth management revenue. Core operating expenses were well controlled during the year and our credit quality remains excellent. We also successfully executed two additional loan LIHTC securitizations during the year to support our LIHTC lending business.

All of these factors led to a substantial increase in tangible book value. We delivered record net income of $114 million or $6.71 per diluted share for the full year 2024. Net income on an adjusted basis was $119 million or $7.03 per diluted share. This resulted in an adjusted ROAA of 1.35% and an adjusted ROAE of 12.61%, placing us at the higher end of our peer group. Total loan growth for the year was 10% prior to loan securitizations of $387 million of low-income housing tax credit loans and 4% on a net basis. This rate of loan growth is consistent with our target range of 8% to 10% and was driven by our low-income housing tax credit lending program and our conventional commercial lending business. Given our current pipeline and the ongoing strength of our markets, we anticipate gross loan growth of 8% to 10% in 2025.

When factoring in the loan securitization that we have planned and the continuing run-off of m2 Equipment Finance loans, we are targeting net loan growth between 1% and 3% for the year. We intend to continue leveraging securitizations to sustain capital markets revenue, enhance liquidity and manage growth as we approach $10 billion in assets. Total core deposits grew $474 million or 8% for the year, outpacing our net loan growth and increasing immediate liquidity. We expanded market share with significant increases in new client accounts and strengthened relationships with existing clients. Highlighting our 2024 earnings performance was an increase in net interest income of $11 million, representing 5% growth for the year. This significant improvement was fueled by strong increases in loans and investments, as well as higher yields on those assets.

At the same time, deposit costs began to stabilize. Total non-interest income for the year reached $116 million, led by $71 million from capital markets revenue, which included $1 million of net gains from securitization. Our wealth management business saw exceptional growth, with assets under management increasing by $1 billion or 20% from the previous year. This growth was driven by significant new client accounts and favorable market performance, resulting in a significant 15% increase in total wealth management revenue for the year. We are excited about the potential to further expand this business given its consistent and recurring revenue stream. We anticipate continued growth in our wealth management business with the addition of key personnel during 2024 in Southwest Missouri and Central Iowa.

We continue to carefully manage our core operating expenses. For the full year, core non-interest expenses decreased by more than 2%, primarily due to salary and benefit costs. Our asset quality remains strong and better than historical averages. Total criticized loan balances improved $37 million or 19% for the year, while non-performing assets increased $11 million or 33%. During the fourth quarter, we saw a modest increase in total criticized and non-performing assets, primarily due to three loans in discrete industries. These changes are reflective of the credit environment normalizing from historically low level. Non-performing asset ratio stood at 50 basis points of total assets. We have already made significant progress in early 2025 with the pay-off of our largest non-performing asset of $10 million.

Our allowance for credit losses as a percentage of total loans held for investment was 1.32% as of the end of 2024, providing a strong buffer against potential future losses. The provision for credit losses was $17 million for the year, modest increase of $600,000 from the prior year. We maintain a disciplined approach to our reserves and continue to carefully monitor asset quality across all of our business lines. We remain optimistic about the economic stability within our markets and the strong financial position of our clients. Currently, we have not observed any broad-based signs of financial stress across the regions we serve. Our commercial real estate portfolio remains solid, with our LIHTC loans making up approximately half of our exposure to this asset class.

We consider LIHTC loans to be the strongest asset class within our portfolio. The LIHTC sector has demonstrated a strong track record of performance over nearly four decades and during multiple credit cycles with negligible credit issues. Excluding LIHTC loans, our commercial real-estate exposure stands at 144% of total risk-based capital. We maintain a strong pipeline of high-quality LIHTC loans, which remains a key strategic initiative for our company. The LIHTC lending program drives significant capital markets revenue, contributing meaningfully to our non-interest income. Additionally, LIHTC loans are well suited for securitization, thanks to their proven performance and robust demand from investors. The securitization of LIHTC loans has enhanced the flexibility of our balance sheet, strengthened our TCE, improved liquidity and increased our net interest margin.

Additionally, it helps manage our on-balance sheet growth as we approach the $10 billion asset milestone. Securitizations play a key role in supporting the long-term sustainability of earnings and the growth of our tangible book value. We are pleased with the growth in our TCE ratio during the year. In addition, we are committed to maintaining strong regulatory capital ratios, and we are pleased with the increases in these ratios during the year. Our strong earnings growth, coupled with a modest dividend, enables us to generate capital and increase our TCE more quickly than our peers. We continuously evaluate opportunities to optimize the mix and the quality of capital as we grow into a larger organization. We are focused on sustaining our exceptional financial performance, including growth in earnings per share, top quartile ROAA and significant growth in tangible book value per share.

We create shareholder value with a client-centric focus, fostering employee well-being and making a positive impact in the communities in which we work and live. Over the past five years, we have consistently outperformed many of our peers. Total loans and deposits have grown at a compound annual rate of 13%. This growth resulted in an increase of 14% in core diluted earnings per share and 12% on our tangible book value on a compound annual basis. I will now turn the call over to Todd to provide further details regarding our fourth 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 fourth quarter. We delivered adjusted net income of $33 million or $1.93 per diluted share in Q4. Our record full year financial results were a result of significant growth in net interest income, driven by margin expansion, combined with strong capital markets and wealth management revenues, along with tightly managed non-interest expenses. Net interest income for the quarter was $61 million, a $1.5 million increase from the third quarter. This linked-quarter growth in net interest income was driven by significant margin expansion, which overpowered the impact of executing our fourth securitization of $155 million of stabilized taxable LIHTC loans in November.

Our fourth quarter adjusted NIM on a tax-equivalent yield basis expanded by 6 basis points from the third quarter, near the upper-end of our guidance. This increase was driven by a significant decrease in our deposit and funding costs. We also experienced an increase in average non-interest-bearing deposit balances during the quarter. We are pleased with our ability to drive down our funding costs, which has contributed meaningfully to our NIM expansion. We have been aggressive in managing our deposit costs as the Federal Reserve began reducing interest rates. Early in the most recent interest rate hiking cycle, beginning in March of ’22, we benefited from those interest rate increases given our asset sensitivity. As the historic interest rate increases continued, our balance sheet shifted to liability sensitive due to the resulting mix shift in our core deposit portfolio, and we are now benefiting from the recent reductions in interest rates.

We are experiencing the benefits of strong deposit betas as we actively manage our deposit costs early in this current rate cutting cycle. Looking forward, our balance sheet remains liability sensitive, positioning us to capitalize on future interest rate cuts, while also benefiting from continued loan repricing under a steepening yield curve. However, we expect some headwinds related to the expiration of certain interest rate caps in the first quarter of 2025. We utilized various derivative instruments to manage our interest rate risk. Although these caps have benefited us over the past few years, their expiration is expected to reduce our NIM by 4 basis points in the first quarter. Despite this, we expect to offset this impact and continue growing our net interest margin in the first quarter of 2025.

We project our adjusted NIM TEY for the first quarter will be in the range from static to an increase of 5 basis points. Our non-interest income was $31 million for the fourth quarter, supported by consistently strong capital markets revenue of $21 million, which included a $1.4 million gain on our fourth LIHTC securitization. The continued strong demand for affordable housing continues to support the sustainability of our LIHTC lending and swap fee revenue. Our pipeline in this business remains robust. As a result, we expect our capital markets revenue from swap fees for the next 12 months to be in the range of $50 million to $60 million. Our wealth management business generated $5 million of revenue in the fourth quarter, a 25% annualized increase from the third quarter.

Our wealth management assets under management have grown by $1 billion in 2024, driven by the expansion of our client base and market performance as we increase our market share. This growth is driven by the personalized value proposition provided by our highly skilled team of advisors, the strong relationships we have cultivated with our clients and a reliable network of trusted legal professionals and key referral partners. We are focused on growing this business given the reliable and recurring revenue stream it provides. As we discussed last quarter, we executed a derivative strategy with a notional value of $410 million during the third quarter. These derivatives are structured to protect the company’s regulatory capital ratios from the adverse effects of a significant decline in long-term interest rates.

These derivatives are mark-to-market each quarter, with gains or losses recorded in non-interest income and reflected as a non-core item. If long-term interest rates increase, we will reflect a reduction in the market value or a loss, which is capped at the upfront premium. If long-term interest rates decline, we will record an increase in the market value or gain that will help offset the risk to our regulatory capital ratios. We view this derivative as a prudent way to protect our regulatory capital ratios. For the fourth quarter, we recorded a loss on these derivatives of $3 million due to the increase in long-term interest rates from the prior quarter. Additionally, and partially offsetting this loss was a $1.5 million gain booked from the increased in the value of our floating rate trading securities or the retained BPs of our securitizations as long-term interest rates increased.

Now turning to our expenses. Non-interest expense for the fourth quarter totaled $53.5 million, which was static from the previous quarter. Having achieved our strongest quarterly results of the year, our highly incentivized compensation structure rewards our employees after our shareholders are rewarded. Consequently, we experienced higher incentive-based compensation this quarter due to the very strong quarterly and record full year results. Professional and data processing fees increased during the quarter, due to core system conversion-related expenses related to our investments in our digital transformation. Despite these increases, our full-year core non-interest expenses remain well controlled, decreasing by $5 million or 2% from the prior year and supporting meaningful improvement in our adjusted efficiency ratio to 58.4% for the year.

We remain focused on effectively managing our core operating expenses. This includes strategic investments in technology and automation, along with a top-tier operations team that underpins our multi-charter community banking model. Looking forward to the first quarter of 2025, we expect our non-interest expenses to be in the range of $52 million to $55 million, a growth rate of 4% which aligns with our 9/6/5 strategic model. Over the past five years, this approach has consistently delivered record bottom-line results. The general increase in our expenses in 2025 are primarily from significant investments in our digital transformation, while continuing to invest in the people that drive our exceptional performance. Moving to our balance sheet.

Including the $387 million of loans that were securitized during the year, our total loans grew by $628 million or 10% from the prior year, which was at the upper end of our guidance range of 8% to 10%. Loans held for investment grew $121 million or 7% annualized during the fourth quarter. Our long-term securitization strategy supports the ongoing success of our LIHTC business and the substantial capital markets revenue it drives. Through the securitization of LIHTC loans, we create sustainability of continued swap revenue generation, improve our liquidity, reduce our funding cost, strengthen our TCE and ensure our LIHTC portfolio remains within our internal concentration limits. Since our initial securitizations began in 2023, our execution has improved, leading to better financial results due to reduced transaction and administrative costs.

Looking ahead to 2025, we are planning to execute a single securitization of stabilized tax-exempt LIHTC loans in the latter part of the year. We are targeting a deal size of approximately $350 million, consistent with the average of the securitizations we have closed over the past two years. Total core deposits increased $76 million or 5% annualized during the quarter. For the year, total core deposits have increased $474 million or 8% from the prior year, outpacing our net loan growth, increasing liquidity and reducing our loan-to-deposit ratio. Deposit growth remains a primary focus for our company. And when combined with our securitizations, it reduces our reliance on wholesale or higher-cost funding sources. Our total uninsured and uncollateralized deposits of $1.3 billion remain quite low at 19% of total deposits.

Additionally, the company had approximately $4 billion of available liquidity at quarter-end, which includes $1.7 billion of instantly accessible liquidity. Turning to our asset quality, which remains strong. During the quarter, total criticized loans increased 14 basis points to 2.34% of total loans and leases. However, we are pleased with the reduction in total criticized loans for the year, which is down 65 basis points from the prior year. NPAs increased by $10 million to $46 million or 50 basis points of total assets from the prior quarter due to three specific loans. As Larry mentioned, these issues are reflective of a normalizing credit environment from historically low levels. Additionally, approximately 43% of our total NPAs are comprised of just four relationships.

Our largest NPA of $10 million was recently paid-off in mid-January. This successful outcome reduces our NPAs to $36 million or 40 basis points of total assets on a pro forma basis, consistent with our NPA ratio at the end of 2023. We recorded a total provision for credit losses of $5 million during the quarter, representing an increase of $2 million from the prior quarter. The increase in the provision for credit losses during the quarter was primarily due to strong loan growth and the increase in total criticized balances. Net charge-offs were $3 million for the fourth quarter, which was consistent from the prior quarter. The allowance for credit losses to total loans held for investment increased to 1.32% from 1.30% as of the prior quarter.

We continue to diligently monitor the asset quality of all our lines of business and remain committed to our strong credit culture. Our tangible common equity to tangible assets ratio increased by 31 basis points to 9.55% at quarter-end. The improvement in TCE was driven by strong earnings, partially offset by a decrease in AOCI as longer rates increased. We also saw a nice improvement in our regulatory capital ratios during the quarter. Our total risk-based capital ratio increased 23 basis points to 14.10% at quarter-end and our Common Equity Tier 1 ratio increased by 24 basis points to 10.03%, driven by strong earnings growth and a smaller increase in total risk-weighted assets. We remain committed to growing our regulatory capital, including maintaining our CET1 ratio above 10%.

We continuously review our capital mix to support our business model and growth needs, while being mindful of our relative position to our peers. Over time, we will continue to focus on the quality of our capital as we continue to expand into a larger organization. We saw another significant increase in our tangible book value per share, which grew by $1.21, representing 10% annualized growth for the quarter. Over the past five years, our TBV has grown by more than 12% on a compound annual basis, emphasizing our strong financial performance and commitment to building long-term value for our shareholders. Finally, our effective tax rate for the quarter was 9% and within our guidance. Our tax-exempt loan and bond portfolios have consistently helped maintain our low tax liability, benefiting our shareholders.

We continue to expect our effective tax rate to be in the range of 8% to 10% for the first quarter of 2025. With that added context on our fourth quarter and full-year financial results, let’s open the call for your questions. Operator, we’re ready for our first question.

Q&A Session

Operator: [Operator Instructions] And the first question will come from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte: Hey, good morning, guys, and thanks for taking my questions. First one, just wanted to touch on the outlook for the swap fee income. I appreciate the guidance of $50 million to $60 million here in 2025. Just — and I know it’s a — it’s not an easy thing to kind of talk to, but just wondering on like the cadence that we can maybe look towards kind of based on the pipeline at year-end and kind of going into ’25, do you think that you’re going to still start-off pretty strong and then maybe have a little bit of a rebuild as we go through the middle part of the year? Just kind of looking for a little guidance on that.

Larry Helling: Yeah, Damon, I’ll take the first crack at that one. Certainly, you knew all from following us for a long time, there’s some inherent variability because we have to do transactions to generate those swap fees. So, the pipeline remains robust, I’d say, consistent with historical level. The one headwind right now, this probably affects all commercial real estate, including the LIHTC business is higher long-term rates, could change the psychology of putting projects together of any kind. This one a little bit. There’s certainly tremendous demand for the product that’s getting produced here, but higher interest rates can cause things to slow a bit. So, due to the variability quarter-over-quarter, we’ve tried to be conservative in our estimates compared to what we’ve done and we certainly want to maintain our, say, high do ratio.

If you look historically, the first quarter is typically a little bit lighter than the other three quarters of the year. Our focus is to make it as consistent as we can, so that the market will fill in the valuation that we think we deserve there, but I’d say the pipeline is good, higher interest rates could slow things just a little bit in the first quarter, but our fourth quarter guidance we think is real solid.

Damon DelMonte: Got it. Okay. I appreciate that color. And then, just a question on the margin. Todd, I think you guided the static up 5 basis points, inclusive of the 4 basis point hit on the interest rate caps, which are expiring. So, if those weren’t expiring, then you are kind of looking for, call it, 5 basis points to 10 basis points almost of improvement quarter-over-quarter. How do we think about like the second quarter and kind of the back part of the year? Do you think you’re still in a position to see a lift on the margin?

Todd Gipple: Sure. Thanks for the great question, Damon. Yeah, maybe to reiterate a little detail around Q1 first and then give you some longer-term thoughts for ’25. Correct, our guidance is static to up 5 basis points. As we mentioned in our opening comments, we do have that interest rate cap expiring here in the first quarter. That cap benefited our NIM and NII the past several years. The maturity of that cap is going to cost us 4 basis points of margin. Someone maybe thinking is that partially factored into Q1 and there’s going to be more of that coming. Actually, the cap expired on January 1. So, that full impact is baked into the first quarter guide. We do expect to overpower that with core margin expansion between 4 basis points and 9 basis points, hence the guide to static to up 5 basis points, considering the impact of the cap.

We expect that margin expansion to come from further benefit from the November 25 basis-point cut. Certainly, that’s not fully baked into our run rate just yet. The late November securitization continues to help us a bit with pricing on the right side of the balance sheet. And which will get me to the longer-term thoughts on ’25. Our deposit betas continue to outperform loan betas pretty significantly on the way down, and our new loan yields are still greater than our roll-off rates. So, that’s how we got to the guide of 4 basis points to 9 basis points of improvement, netting out the cap getting down to static to 5 basis points. And in terms of thoughts into Q2 and beyond, we are optimistic we can continue to further improve NIM organically without any further rate cuts.

Certainly, the expectation of more Fed action has eased here over the last 60 days. I would say our continued expansion would be modest, a few basis points here and there, but continued to trend up. We expect that to happen through continued strong focus on managing cost of funds down. We’re having a lot of success with that, pretty significant beta performance on cutting rates. Probably the biggest thing and this why — this is why our guidance is not real precise for the back-half of the year is what’s going to happen with the yield curve. At the end of ’23, the three-month to five-year was inverted 156 basis points. It was essentially flat at the end of calendar ’24, and it’s now got a bit of slope to it. So, I really think, Damon, our optimism about beyond first quarter ’25 is really going to depend on the level of slope to the curve.

I think that will help us. I think that will help the entire industry. That may have more to do with future margin and even the Fed action. So, long answer to your short question, but that’s kind of how we feel about NIM longer-term.

Damon DelMonte: Got it. I appreciate that color. That’s helpful. That’s great. That’s all that I have for now. I’ll step back. Thank you.

Todd Gipple: Thanks, Damon.

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

Nathan Race: Hey, guys, good morning. Thanks for taking the questions. Hope you’re doing well.

Todd Gipple: Yeah. Good morning, Nate.

Nathan Race: Appreciate the guidance around 8% to 10% loan growth for this year. So, within that context, curious how you’re planning on funding that loan growth within how much cash will have come off the bond portfolio this year and also kind of what your deposit-gathering aspirations are as well?

Todd Gipple: Yeah. Thanks for the question, Nate. On how we’re expecting to fund that growth, we continue to have core deposit growth and managing the cost of funds as our primary focus around our entire company. We expect to fund that with core deposits. We expect to continue to drive down our loan-to-deposit ratio. We made some nice headway on that this year. Our strong core deposit growth in ’24 overpowered our net loan growth. It’s another reason that securitizations are helpful to us. It does help with liquidity and margin and driving down loan-to-deposit ratio. Our aspiration, our expectation is to get loan-to-deposit ratio down into the low ’90s. And so, to do that, we’re going to have to continue to fund this loan growth with core deposits. That’s certainly our expectation. And at the same time, we want to exhibit strong betas on the way down to really positively impact the cost of that funding.

Nathan Race: Okay. Got it. And then in the event that we do get a Fed rate cut in July perhaps, can you just remind us kind of the static impact from each 25 basis point cut on NIM?

Todd Gipple: Sure. Thanks, Nate. For every 25 basis points, we continue to expect about a 2 basis point to 3 basis point lift in NIM, roughly $1.5 million to $2 million of NII on an annual basis. So, that will continue to benefit us. We remain liability sensitive right now. That’s helping us. And again, the beta on our deposits is outperforming loan beta on the way down. So, we’re very pleased with that.

Nathan Race: Okay. Great. And just in terms of the expense guidance that you provided, I think it was $53 million to $55 million for the first quarter. Do you see it kind of holding in that range over the course of this year, assuming capital markets revenue kind of is within the guidance range?

Todd Gipple: Yeah. Nate, thanks for asking. While that is — guidance is just for Q1, I would tell you that our expectation is for that to remain fairly static throughout the year, yes.

Nathan Race: Okay. Great. And then maybe I’ll just ask one more on credit. We’ve seen charge-offs in the 20 basis point range the last couple of quarters, and we saw some increase in criticized and non-performing loans, but it sounds like there’s some near-term resolutions coming on that front. So, just curious how you guys are kind of thinking about an acceptable or expected charge-off range for 2025 and beyond?

Larry Helling: Yeah, Nate, maybe just a little bit of history to kind of put us on the same wavelength here. Post-pandemic and post-PPP, credit wasn’t acting normal. And movement between upgrades, downgrades, charge-offs, additions to the lift, all that didn’t happen the way it did historically. And I’d say now we slowly move to kind of normal territory on the movement of credit up and down, upgrading, charging off, those kind of things. So, I think this last year was more indicative of what we should kind of be thinking about going forward. We — two weeks into the year, we had our largest NPA pay-off. So, basically our NPAs and criticized, we’re basically back to the third quarter levels two weeks after the end of the year.

And so, I think we can expect just kind of normal chopping around at these kind of relative levels of NPAs and criticized going forward. As I look at it, NPAs and criticized are about half of our 20-year average. So, we certainly still feel good about our credit quality, but the normal movement is kind of back. So — and that’s because I think during — when we have PPP, bad management decisions didn’t show up in our client base. And now that’s kind of in the rearview mirror, if management of one of our companies that we bank makes a couple of bad decisions, it can show up and we’ve got to criticized asset. So, I think we’re kind of back to normal in the movement sector on credit.

Nathan Race: Okay. That’s really helpful. I appreciate all the color. Thanks, guys.

Larry Helling: Thank you.

Todd Gipple: Thanks, Nate.

Operator: [Operator Instructions] Our next question will come from Daniel Tamayo — excuse me. Next question will come from Brian Martin with Janney Montgomery. Please go ahead.

Brian Martin: Hey, good morning, guys.

Larry Helling: Hi, Brian.

Todd Gipple: Good morning, Brian.

Brian Martin: Hey, guys. I was — can you give a little thought on just kind of how you’re thinking about capital here and any changes to kind of your outlook there, whether it be on the — I know where you’re heading in terms of the capital levels, but in terms of buyback, M&A and just funding kind of organic growth kind of just priorities?

Larry Helling: Yeah, I’ll take that one, Brian. Certainly, there’s a fair amount of uncertainty in the world right now between interest rate movements, trying to figure out where inflation is going, a new administration in Washington and global uncertainty. If you add all those up, the prudent things to us seems right now that we should continue to hold on to capital in the near-term. And you saw us build capital ratios nicely during the past year. We expect to continue to hold on to our capital and probably not be at these relative stock prices, probably not active in the buyback sector, and M&A is certainly not a priority for us right now. We’ve got really good organic growth prospects compared to almost everyone else. So, M&A is not really a priority, and I think our shareholders would be reported, if we’re holding on to capital and just continue to grow organically.

Brian Martin: Got you. Okay. That’s helpful. And then just, Todd, maybe just on the margin on the — can you just remind us on the delta on the rate sensitive assets and rate sensitive liabilities today, and then just kind of the betas that you’re kind of expecting here in the near-term?

Todd Gipple: Absolutely. Thanks, Brian. First off, RSA, RSLs, we’ve got about $3.2 billion in RSAs, about $3.8 billion in RSLs. So, we’ve got about $600 million of liability sensitivity on the balance sheet. So, that’s where we stand. We continue to remain liability-sensitive. In terms of betas, cycle-to-date on the cutting cycle, so since September, on the 100 basis points of cuts, our earning asset yields about a 13 beta and cost of funds are a little more than double that 28. Those accelerated a bit in Q4. We saw some very strong beta in the fourth quarter on cost of funds, 58%. So, again, being liability-sensitive is helping. But in addition to that, the beta performance is certainly much stronger in terms of cost of funds down. So, we’re very pleased to have been able to manage those costs down that quickly.

Brian Martin: Got you. Okay. I think that takes care of most of my things. If I need to — I’ll jump back in the queue. Thanks, guys.

Todd Gipple: Thanks, Brian.

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

Tim DeLacey: Hey, good morning, guys. This is Tim DeLacey on for Danny. Hope you’re doing well. Just a couple of quick questions from me. I appreciate the guidance here for 2025 on the loan growth, but was curious, in that guidance, how much of the m2 Equipment Finance run-off is being contemplated in there? Seeing about $630 million in the portfolio currently. So, just curious on any thoughts there.

Larry Helling: Yeah, the size of the m2 portfolio is about $340 million. And so, as we run that off, about 40% of that will run off, about $120 million should run off during the next 12 months. And so, over time, that will kind of bleed in, but we continue to run that off. And over the next couple of years, we’ll make that a smaller portion of our credit portfolio.

Tim DeLacey: Understood. Thanks for that, Larry, and sorry for the bad math there. Just a follow-up for me here. I was just curious, nice to see the gain on the securitization in this portfolio. But do you guys see any levers or any dynamics where you could drive any better dynamics on future securitizations or does this kind of represents a fair market performance for you guys this quarter?

Todd Gipple: Yeah, Tim, we had guided to have a bit stronger gain here in the fourth quarter on the securitization we just did. We candidly underperformed that a bit. We had a $1.4 million gain. We’re hoping for a floor of around $2 million. So, a slight underperformance there, really had to do with the pricing we received when that went to market. But really to get to your question about the future, we do know that there is significant added leverage and financial performance to do a single larger deal. And so, that’s why we are going to pivot to that approach instead of two per year, we’re going to do one large one late in ’25. As we said in our opening comments, we expect that to be around $350 million instead of the smaller bite sizes we’ve been doing.

We do know that will drive better execution, better financial results. As we get closer to Q4 and that starts to come together and we have those loans in the queue and are further along the path on securitization, we’ll probably provide a bit more guidance in terms of the financial outcome. But I will tell you, we would expect it to be better. We are getting improved economics in terms of costs, but really the leverage you get with one single larger deal is going to help us with performance there.

Tim DeLacey: Okay. Great. Well, thanks for the color there, guys. I’ll step back in the queue.

Todd Gipple: Thanks, Tim.

Operator: [Operator Instructions] Our next question is a follow-up from Brian Martin with Janney Montgomery. Please go ahead.

Brian Martin: Hey, guys. Just one follow-up for me. I think you guys talked about the LIHTC portfolio and the outlook, but just in terms of the legacy footprint, in terms of loan growth, can you just give a little update on kind of where that’s at, what you’re hearing from your customers there and the kind of expectations on that front? And then, Todd, your comment about the loan-to-deposit ratio and kind of focus there. Do you have any kind of guidepost as far as where you think you can get to that long-term target you’re thinking about or maybe kind of end of this year, end of next year, kind of where you’re trending to?

Larry Helling: Yeah, Brian, I’ll start, and if Todd’s got some additional comments, he can add those on here. With our client base, I think there’s so much noise in the world going right now. I would say sentiment from, when I talk to our commercial bankers, is our clients are cautious. Certainly, consumer spending is holding up better than certainly I imagine given the uncertainty and everything going on. But higher long-term rates, concerns about inflation, global economy, all those kinds of things I think are making people kind of pause for a second. So, I’d expect our core base will grow in the 2% to 5% range basically our core commercial and that’s probably all the faster we can grow that portion of the business without taking undue risk.

And so, certainly, we think there’s growth there, but it’s not that robust, I think, because of people’s general concerns. And the performance of our clients continues to be strong, but they’ve just got a little question in the back of their head about what the future looks like. And I think that could change quickly if things just settle in a bit here. But there’s been so many changes the last 90 and 180 days that everybody is kind of paused and I think to make big capital investments. With regard to loan-to-deposit ratio, Todd talked about that a little bit earlier, certainly, we’d like to get to the low-90s here over the next couple of years to do it quickly, as you know, cost earnings, we’re going to try and do it gradually, work on our core funding and we’ve made core funding and deposits a significant part of the incentive comp for all the officers in our company.

So, we have their focus.

Brian Martin: Got you. Okay. I appreciate it. Thanks, guys.

Todd Gipple: Thanks, Brian.

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. We look forward to connecting with you again very soon.

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