QCR Holdings Inc. Q1 2023 Earnings Call
Greetings and welcome to the QC, Our Holdings, Inc. Earnings Conference call for the first quarter of 2023.
Yesterday after market close the company distributed its first quarter earnings press release.
There is anyone on the call who has not received a copy you may access it on the company's website www <unk> com.
With us today from management are Larry Helling, CEO , and Todd Gipple, President COO and CFO .
Management will provide a summary of the financial results 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 management will be provided 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 may 4th 2023.
Starting this afternoon approximately one hour after the completion of this call.
It will also be accessible on the company's website.
I will now turn over the call to Mr. Larry Helling at <unk> Holdings.
Thank you operator welcome everyone.
And thank you for taking the time to join us today.
I will start the call by providing some highlights for the quarter, followed by a discussion about our deposit base liquidity position and capital levels.
As well as a review of our specialty finance business.
Todd will provide additional details on our financial results for the quarter.
We are pleased with our operating performance for the first quarter.
Delighted by increased fee income and carefully manage expenses.
Our already strong capital levels continued to grow and credit quality remained excellent.
Our core deposit base remains strong and we improved our liquidity position significantly in response to the recent events in the banking industry.
Sure.
We delivered net income of $27 2 million for the quarter or $1 50 per diluted share.
Our adjusted net income for the quarter was $28 million and our adjusted EPS was $1 65 per diluted share.
We generated an adjusted ROA of.
1.42% and an adjusted ROE of $14, one 1% for the quarter and believe that both metrics remained at the high end of our peer group.
We have built a strong and diversified deposit franchise over the past 30 years and our first quarter deposit activity was a reflection of the importance of that franchise.
During the first quarter, our core deposits, excluding short term broker deposits grew nearly $20 million or one 4% annualized.
Our core deposit growth in the quarter was notable because we typically experience seasonal deposit outflows in the first quarter as our commercial clients draw down their deposits to pay bonuses shareholder distributions and taxes.
Our core deposits grew $80 million for March 10th through the end of the quarter.
Time, when many banks may have experienced net deposit outflows.
We believe that this is a testament to the relationships that we have built with our clients over the years.
In addition, we intentionally bolstered our on balance sheet liquidity with short term broker deposits during the quarter using the proceeds to pay off our overnight borrowings from the federal home loan bank and add immediate on balance sheet liquidity.
Our level of uninsured and uncollateralized deposits improved by $170 million during the quarter to 23, 8% of total deposits or 26, 2% when excluding broker deposits, which compares favorably to our peers.
We were an early adopter and have actively participated in the Ics Cedars program for nearly 20 years.
Ics Cedars program is a trusted resource that provides expanded FDIC insurance coverage for our clients that maintain larger deposit balances.
We have sufficient Ics theaters capacity to ensure all uninsured or uncollateralized deposits if needed.
More importantly, we have ample on balance sheet and immediately available off balance sheet liquidity.
To operate our business and meet client needs.
At quarter end, our combined excess cash and borrowing capacity from the federal home loan Bank and the Federal Reserve Bank was $1 5 billion.
Which would more than cover our uninsured or uncollateralized deposits.
Now turning to loan growth.
During the quarter, we grew loans three 3% on an annualized basis, driven primarily by our traditional commercial lending and leasing businesses and the continued strength in our low income housing tax credit project lending business we.
We experienced more modest loan demand from our client base as a result of the macro headwinds being created by the Feds sharp increase in rates.
Therefore, given the ongoing economic uncertainty we are now guiding to loan growth in the second quarter in the range of zero to 5% on an annualized basis.
Which is net of the planned loan securitization.
With the growing prominence of our specialty finance group and the interest. It has received from analysts and investors I would like to spend some time discussing the drivers of this high performing business and why we believe that we have an important competitive advantage that sets us apart from our peers.
Our specialty finance team offers low income housing tax credit lending to a select group of developers and investors with whom we have built long standing relationships.
These developers and investors have deep experience long track records and strong expertise in the development and construction of affordable multifamily housing.
These are high quality loans bolstered by strong equity investment from banks and corporate investors.
Industry has an excellent track record with negligible historical default rates.
Our programs inception in 2018, we are proud to help finance over 250 projects.
Insisting of nearly 13000 affordable housing units without experiencing any delinquency or default in this portfolio.
The strong track record makes these loans ideal for securitization.
Which we expect to use as an alternative funding source for this lower risk attractive business.
All of these loans are made on a floating rate basis, which has greatly improved our ability to manage interest rate risk.
Due to the long term ownership structure of these projects are borrowers seek to lock in their financing cost over the life of the loan.
As a result, our bankers arrange interest rate swap contracts for the borrowers enabling them to secure the desired fixed rate financing.
This latex business has been a consistent and important component of our noninterest income in all economic cycles.
In addition, as the economy has softened some of the previous headwinds that our clients were experienced in this space have eased.
We saw a nice rebound in capital markets revenue in the first quarter.
As the supply chain constraints and inflationary pressures on labor and raw materials that were impacting some client projects have begun to abate.
Because of the strong underpinnings of this business, we are increasing our capital markets revenue guidance to a range of $40 million to $50 million for the next 12 months.
We have assembled the expertise and built a tax credit lending business over several years.
There are significant barriers to entry in this business that provide us with a significant competitive advantage.
In short this is an extremely valuable business and we believe that it deserves a higher valuation multiple than traditional banking.
Furthermore, based on decades of stability in the industry and our own experience. We believe that this business is countercyclical and will be very resilient and future recessionary environments.
Our asset quality remains excellent as the ratio of nonperforming assets to total assets was two 9% at quarter end.
We are comfortable with our reserve, which represents 143% of total loans and leases held for investment and.
<unk> continues to be at the high end of our peer group.
We remain cautiously optimistic about a relative economic resiliency of our markets and we are not seeing any meaningful signs of weakness across our footprint.
Our capital levels are strong and increased during the quarter.
We remain focused on growing capital throughout the remainder of 2023, we.
We are targeting capital ratios in the top quartile of our peer group.
We believe that our modest dividend and strong earnings power will allow us to grow capital faster than our peers.
With that I will now turn the call over to Todd to provide further detail regarding our first quarter results.
Thank you Larry good morning, everyone. Thanks for joining us today.
I'll start my comments with details on our balance sheet activity during the quarter.
As Larry mentioned, we grew total loans by three 3% annualized during the quarter were $51 million of net growth.
Notably in anticipation of our first planned loan securitization, we have classified $139 2 million of life Tech loans to loans held for sale.
We expect to strategically access the securitization market to help fund the growth of our tax credit lending business improved liquidity and maintain the portfolio within our established concentration levels as needed.
Total deposits grew $517 million in the quarter, driven primarily by a $498 million increase in short term broker deposits.
Substantially increased our on balance sheet liquidity.
We use these deposits to eliminate our reliance on overnight <unk> advances, which totaled 415 billion at December 31.
Our core deposits when excluding broker deposits have strong diversification.
There are separate charters end markets as well as the commercial client base spread across many industries.
Approximately 9% of our deposits are from our 194 correspondent banking partners with an average balance of $2 1 million.
Another 60% represent deposits from our commercial clients with an average balance of 232000.
The remaining 31% consist of consumer deposits with an average balance of 18000.
Our loan to deposit ratio improved to 95, 2% at quarter end down from 102, 6% as of the fourth quarter.
Historically, our long term target for loans held for investment to deposits has been in the range of 95% to 100%.
However, we expect to drive this ratio closer to the range of 90% to 95% in the coming quarters with additional core deposit growth.
At quarter end, our total immediate liquidity was $1 5 billion.
Consisted of $254 million of excess cash.
$992 million of borrowing availability with the <unk> and.
$290 million of borrowing availability at the Federal Reserve Bank.
While we don't expect to need to draw on this liquidity it does more than cover our current level of uninsured and on collateralized deposits.
Our securities portfolio totaled 879 million at quarter end down from $928 million as of the fourth quarter.
We sold approximately $30 million of securities and had paydowns and maturities contributing to the remaining net decline.
The security sold mid quarter or part of a small strategy to delever the balance sheet with a rapid earn back of the modest loss before the end of the calendar year.
36% of our securities portfolio is classified as available for sale and the remaining 64% is classified as held to maturity.
Over 83% of the total portfolio consists of high quality municipal securities with a large portion from direct private placement transactions.
These private placement municipal securities currently have a tax equivalent yield of five 2%.
The market value of our NFS and HTM bond portfolios improved to 86% and 94% of book value, respectively with the decline in the intermediate and longer term interest rates.
If we were to realize all of the losses in the HTM portfolio the impact on our TCE ratio would only be 32 basis points.
During the quarter, we identified an impairment of 989000 for a subordinated debt investment in one of the recently failed banks.
This was a legacy investment that we acquired as part of the 2022 Guaranty Bank acquisition.
We established a full reserve for the impaired investments.
Our remaining subordinated debt portfolio is $48 million and after a thorough review of the entire portfolio. We believe that it consists of high performing banks with no identified credit weaknesses.
As Larry mentioned, we delivered net income of $27 2 million for the quarter.
Unlike many of our peers, we have been successful in growing our pretax pre provision adjusted income during.
During the quarter, we grew our pretax pre provision adjusted income by $2 million or six 4% when excluding the impact of loan discount accretion.
Our adjusted net interest income on a tax equivalent basis was $62 million down from $65 1 million in the fourth quarter.
Adjusted NIM on a tax equivalent yield basis was 347%.
Which was down 14 basis points from 361% in the prior quarter.
Despite continued loan growth and the ongoing expansion of loan yields we experienced a sharp increase in the cost of funds during the quarter.
Our deposit beta has accelerated more than anticipated this quarter as our mix shifted further from lower beta deposits to higher beta deposits the.
The change in deposit mix has shifted our interest rate risk position from asset sensitive to moderately liability sensitive which has positioned us well to expand our net interest income and margin with potential rate cuts.
As we look to the second quarter, we anticipate continued pressure on margin and net interest income due to a modest liability sensitivity and the dilutive impact of carrying more liquidity on balance sheet.
Assuming another 25 basis point rate hike in May and continued yield curve inversion throughout the second quarter, we are guiding adjusted NIM.
To compress in the range of 10 to 20 basis points.
To our noninterest income, which was $25 8 million for the quarter up significantly from the $21 2 million, we generated in the fourth quarter.
Our capital markets revenue was $17 million, an increase of $5 7 million from the fourth quarter and well ahead of our guidance range.
Our capital markets pipeline remains healthy and many of the headwinds that some of our tax credit lending clients had been experiencing have begun to subside with several previously delayed projects now moving forward.
As Larry mentioned, we are increasing our capital markets revenue guidance for the next 12 months to a range of $40 million to $50 million.
In addition, we generated $3 8 million of wealth management revenue in the first quarter up 6% from the fourth quarter.
Our wealth management team continues to onboard new client relationships, adding 340, new relationships and $585 million of new assets under management over the last 12 months.
Now turning to our expenses.
Noninterest expense for the first quarter totaled $48 8 million compared to $49 7 million for the fourth quarter and below the low end of our guidance range.
The decrease from the prior quarter was primarily due to lower incentive based compensation as we accrued a higher amount in the fourth quarter based on last year's record full year performance.
In addition, we experienced lower professional and data processing fees.
Insurance and regulatory fees and advertising and marketing expenses.
We remain diligent in controlling our expense growth and for the second quarter. We are adjusting our noninterest expense guidance downward to a range of $47 million to $50 million.
Turning to asset quality, which remains excellent with NPA to total assets of two 9%.
We did have a modest increase in the first quarter.
We moved one large credit to non accrual status.
Specific loan involves at newly constructed mixed use property with a local developer experience cost overruns that impacted their ability to fully fund the property.
The property has been completed and is fully leased given the attractiveness of this property, we expect to resolve this credit promptly without any further impairment. We believe this credit is an isolated incident and not an indication of any systemic credit issues.
The provision for credit losses was $3 9 million during the quarter of this amount $2 5 million was added to the loan allowance.
989000 was added to the bond allowance.
481000 was added to the allowance for off balance sheet exposures.
We expect to continue to maintain strong reserves given the economic uncertainty.
Our reserves to loans held for investment remained strong at 143% and continues to be at the high end of our peer group.
Our total loan ACL balance experienced a net decline during the quarter as a result of removing $1 7 million of the loan reserves related to the loans held for sale associated with our planned securitization.
We strengthened our total risk based capital ratio during the quarter generating an improvement of 22 basis points to 14 five zero percent.
We also increased our tangible common equity to tangible assets ratio to eight 1% up from 793% at the end of December .
Our TCE ratio grew 28 basis points or 4% to eight 1%.
And our tangible book value per share increased by nearly $2 or 5% during the first quarter.
This was due to both our solid earnings and the $9 3 million increase in OCI.
Andrew will book value has increased by 12, 5% since the end of the second quarter of 2022, following our acquisition of Guaranty Bank.
During the first quarter, we purchased and retired 152500 shares of our common stock at an average price of $50 61 per share as we continue to execute purchases under the share repurchase plan announced last year.
In addition, many members of our senior leadership and board of Directors have recently purchase shares in the open market, which is a demonstration of their strong belief in the future of our company.
Our capital allocation priorities are focused on growing our capital to further enhance our already strong levels.
We believe that we can accrete approximately 20 basis points of TCE each quarter with earnings at this level and assuming a static LCI growing capital at a faster rate than many of our peers due to our earnings power and our low dividend level.
Finally, our effective tax rate for the quarter improved to nine 3% from 15, 9% in the fourth quarter.
The rate was lower due to a higher ratio of tax exempt revenue to taxable earnings in the first quarter.
Merrily due to strong growth in tax exempt floating rate loans as well as increased benefit from our tax credit portfolio.
In addition, we recognized a stronger tax benefit on our stock based compensation, which tends to be elevated in the first quarter.
We continue to benefit from our strong portfolio of tax exempt investments and loans, which has helped our effective tax rate remained one of the lowest in our peer group.
We expect the effective tax rate to be in a range of 11% to 14% for the remainder of 2023.
With that added context on our first quarter financial results, let's open up the call for your questions.
Operator, we're ready for our first question.
We will now begin the question and answer session.
To ask a question with Star then one your telephone keypad.
If you're using a speakerphone please pick up your answer before pressing the keys.
To withdraw your question. Please press star two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Damon Delmonte with <unk> you May now go ahead.
Hey, good morning, guys and thanks for taking my questions. This morning.
Wanted to start off with the margin outlook, Todd I think you said youre expecting additional pressure.
During the second quarter of around 10 to 20 basis points do you feel that.
The margin will likely bottom after that or do you feel that accelerating betas throughout the remainder of the year, we'll add a little bit more pressure as we go through.
Yes, Thanks Damon yes.
Yes, we are guiding to that.
10 to 20 basis points of compression here in Q2.
It really depends on the fed's action for slightly liability sensitive if the fed doesn't in fact do.
95 basis point increase here and then stop.
Would expect to see a more static margin for the back half of the year. So we do see some optimism around margin a lot of the.
Higher beta a lot of the shift is it really happened for us and we think it would stabilize and be more static the back half of the year.
Got it okay.
So I think youre cumulative deposit betas cycle. The data is for total deposits around 38%.
<unk>.
Do you kind of see the full cycle going.
We get to the end of the year.
Yes, I think it will be right in that high 30, <unk> low 40 range I don't expect it to jump significantly most of the challenge that we've had with data has not been the underlying product.
It's been more about the mix shift so for example.
The all other deposits that we don't consider high beta or 100 beta are.
Beta cycle today, it is only 17% on those and that's $2 4 billion of funding for us, but that portion has dropped about $300 billion. During the cycle. So it's really been more about the mix shift and less about the underlying data is the high beta stuff 100 beta.
Is about $1 8 billion for us and it's at 91 data. So it is very high and that has jumped over $500 billion. During the cycle. So Damian it's been that mix shift that's really contributed to the higher beta and.
And we do anticipate that to start slowing here.
The fed slows its actions.
Got it Okay, and then with regards to the securitization that will occur during the second quarter here and then can you just talk a little bit about maybe some of the balance sheet dynamics after that.
Yes sure.
One.
Yes.
I'll start with that and then you can jump in after that.
Yes, we've got planned date.
Freddie Mac to securitize late in the second quarter.
As we talked previously we don't expect.
Really gain or loss on that first securitization because there's a lot of front end costs to do the first one.
After that we do expect to have some gains.
But it's a little premature for us to telegraph, what we think those will be.
We do expect to do a second securitization later in the year.
That one may be more likely in the $200 million range.
The other comment I would make.
It is.
Given.
Liquidity environment, if that stays static we probably don't change that.
We have roughly.
Roughly an additional $700 million.
Of assets, we could securitize quickly if we needed to.
So that's a nice liquidity lever that most of our peers wouldn't have.
All of a sudden the liquidity environment.
Increasingly challenging for some reason.
Certainly we feel good about where we're at today, but that gives us some.
Optionality that others do not have.
Got it okay.
And then I guess, just lastly, one more for me on the expense outlook.
Thank you said Todd the guidance kind of 47.
$50 million.
Was that kind of is that going to hold for the remainder of the year or is that just for your second quarter outlook.
Yes, great clarification, Damon that would really be our guidance for the remainder of the year certainly subject to some adjustment. After we do get through Q2 in the first half of the year, but we're having a lot of success with efficiency and automation, while improving client service at the same time really proud of.
Sure.
Bankers really proud of our operations staff, gaining some efficiency and automation.
The second quarter post Guaranty bank conversion and the integration.
That went really well thanks to 120 folks that did a great job of that project and we actually got a little bit better efficiency.
The result of that good work, so I would say, 47% to 50 for the.
The remainder of the calendar year.
Subject to clarification in July after Q2.
Okay, that's all going to happen now thank you.
Thanks, Dan Thanks, David.
Our next question will come from Nathan race with Piper Sandler.
You May now go ahead.
Yes, hi, guys good morning.
Good morning, good morning, Nate.
Going back to David's question around some of those.
Balance sheet dynamics.
The expectation with the securitization occurring youre likely the second quarter.
But there is the.
Opportunity that maybe reduce some of the brokered Cds that were added in the quarter, particularly just given some of the softer loan growth outlook for <unk>.
Yes.
Yes, I'll start there.
Yeah.
Sorry, I'll start and certainly Thats one of the.
Ways that we'll use that securitization is the lowered the brokered reliant.
The other thing I would tell you Nathan.
We are probably have the largest deposit pipeline of activity is seen in our company's history.
And I'm trying to figure out exactly what's causing that number one it's our focus on trying to grow core deposits part of it is.
Interest rates movement away from zero and its.
Created more activity and people willing to talk to us about.
About moving deposit relationships.
So we think we also over time can make some meaningful headway just moving core deposit relationships into our company.
And that activity is moving.
Moving at a strong level right now so we certainly between securitization and just growing our core funding things, we can move the needle on that.
So Nate.
He did a great job telling you the how.
We did it intentionally set up these brokered as a very short ladder.
Of the $525 million all of the $25 million actually mature during this calendar year and much of that is front loaded in the first half.
But the.
Second and third quarter of the remaining calendar year. So we were intentional about having a short ladder. There. It has a weighted average rate of $4 88 on those brokered and again some of the higher rates are in Q2 and Q3. So we're going to use that really strong pipeline that Larry talked about.
To.
Bringing those core deposits on and let these broker roll off that's our plan.
Okay. So it sounds like these broker Cds are.
Our excuse me our callable.
No Theyre, just a very short.
Yes, there is just a very short ladder.
In terms of duration, so 369 months flattered.
Gotcha.
And then.
Margin guidance for the back half of the year does that contemplate one more fed rate hike in May and then further.
Fed on hold.
Through June <unk>.
Correct me that that would be the assumption that rates would be helped steady by the fed.
In our in our opening comments, we talked about our balance sheet moving to slightly liability sensitive. So it does set us up.
To perform better when rates start coming down, but I think it's far too early to speculate when that might be but if the fed is done here in may and pauses.
I think we'd be feeling better about something more static the back half of the year on margin.
Okay, Great and then just within the capital markets and swap revenue in the <unk>.
Quarter was there any kind of pull through and activity in <unk> and I guess, just how that pipeline look.
Entering the second quarter and as you guys kind of look out through June <unk> of this year as well.
Yes.
Thanks Nate.
Yes, generally increase our guidance a bit in that space.
I'd say the pipeline starting to <unk>.
You bet.
The pipeline there of activity continues to be strong and actually built a little bit during the last quarter.
And some of the things that are slow those projects down have started to thaw.
The most material one is probably.
Cost of materials.
And supply chain issues that has started to ease.
Labor costs have and he's much yet, but we expect that to have some impact too over the next few quarters. So.
That's what's helping getting some of these projects across the finish line and why we've had solid increased activity.
Over the last four quarters our average.
Fee income in that space I think it's been $12 $5 million Im looking right.
And so that would be towards the top end of our range.
Certainly why we feel we can continue to perform at those levels.
Okay, Great very helpful. And then maybe just one last one on credit quality dynamics.
Yes.
Apologize if you touched on it in your prepared comments, but just in terms of the driver or the issue that occurred with that one relationship.
Move to nonaccrual in the quarter and just generally do you guys see any loss content. There. How are you guys kind of thinking about charge offs.
Need to provide for.
Or the need to provide for somewhat slower loan growth I guess at least since <unk>.
Yes, certainly.
The one project.
We put on non accrual.
It's a pretty simple explanation.
Cost went up they did manage the project right and they ran out of cash and we were unwilling to loan more money into the space. So we decided we were better job move forward with.
Foreclose on the property.
That's what we're doing we've already reserved for what we think the total loss will be if there is one so we've been conservative like we always would be once we've got a project at that spot.
And so.
Our focus on reserves.
I believe for the rest of the year is to continue to maintain our reserves at what we think are top quartile conservative levels.
Because we just think thats prudent going into this.
The more uncertain environment.
Don't see any broad base degradation.
People have been talking about.
Likely that will happen.
And the phrase that I've used with our employees and with you guys and with our board in the past.
Eventually, we'll move back to normal and normal will feel bad because it's.
Our credit experience and everybody's credit experience has been so good in the last two years that normal will feel weird, but it's likely we'll move back toward normal over the next year or two.
Got it.
Very helpful. I appreciate all the color guys. Thank you.
Thanks Nate.
Our next question will come from Brian Martin with Janney Montgomery.
You May now go ahead.
Hey, good morning, guys.
Good morning, Brian Brian Hey, just a couple of things for me just on the on the loan growth kind of the guidance and just kind of the outlook, maybe just a little conversation about what youre hearing kind of beyond what youre thinking beyond next quarter.
This quarter it seems definitely more cautious on the on the loan growth front.
Certainly understandable with the market, but just trying to understand how you guys are thinking about that the pipeline beyond the next quarter.
Yes, Brian .
<unk>.
Sometimes we are framed by recency of conversation. So yesterday morning, I just talked to one of our very successful apartment developers.
Who's got a portfolio of very nice cash flowing performing properties and they had planned.
We do in addition to one of their apartment projects a meaningful one probably at 10.
10.
$12 million addition to an apartment project.
I saw him yesterday morning goes yes, we're just putting that on all of US It doesn't really work at these interest rates because they did the first piece of it.
Three 5% that they locked in for a long time and so theyre gone.
Pause so certainly the project kind of.
Lending that we would normally see for.
New anything in.
Non owner occupied that's certainly slower because it's just harder to make projects work. So that's why we think zero five probably throughout the rest of this year makes sense.
Our C&I clients.
I would say.
Probably still plowing ahead their numbers look good and Theyre still building buildings and growing capacity and buying companies and those kinds of things, but it's more of the investor real estate that is likely going to the activity is just going to slow down there in that space.
Got you and just utilization rates have a.
Any change there.
Line utilization is kind of in the middle.
So we're getting closer back to normal at the peak our line utilization would be in the 40% range.
When all the PPP money came out it got into the low twenty's.
Back on the kind of the mid thirties again here on line utilization, so there's probably a little more utilization to come out, but it's starting to move toward normal.
Gotcha, Okay, and then maybe just for Todd on the on the margin on those deposits pattern and the ones that go off on the broker gave us the right to sell loans coming on at you anticipate coming on where do you see that the.
The replacement if you will coming on on the core deposit front.
Yes, Brian Great question, what are we going to replace it with and those rates are going to be nearly right on top of the brokerage rates. So okay.
We're really simply converting.
Brokered Cds to what we really want of course long term would be core deposits as Larry indicated the pipeline there the initiatives we have underway for doing that are very robust.
We're not really going to make any headway in terms of cost it's going to be right on top of these brokered as these roll off and and again just to clarify.
These arent callable that we did these were just very short duration brokered Cds that we intentionally ladder in short.
Be able to unwind them, let them roll off during this calendar year.
Got you that's helpful and.
How about just on just to the margin for one moment that was do you anticipate when you look at where the March margin was Todd Ware.
Or does that shake out versus where you ended the quarter versus where you were for the average for the quarter.
Sure.
<unk> was down a bit for <unk>.
From the average for the quarter and that of course would have been impacted by.
A fair amount of excess liquidity that we put on the back half of the month.
<unk> seen in our financials, we were carrying a couple of hundred million dollars of excess cash in the last half of the month and Thats part of the.
Margin compression guidance that we provided we intend to continue to carry some excess liquidity. So thats, maybe a third of that compression would be carrying that excess liquidity. We think it's just prudent to do that here for a bit.
Okay.
Do you have the margin the margin I guess, a good representative of how to think about where to start <unk>.
Is it not worth having you provided are you able to provide that what it was for mark.
I don't think its really going to help you or anyone else.
Try to model Q2, I think it's probably better to.
Look at our guidance on both loan growth and the margin compression and probably model off that.
March is not a very accurate representation of go forward considering all the moving parts in the back half of the month.
Understood and then.
Thinking on when deposits actually peak.
What what are you thinking there if the fed does pause et cetera.
Late third quarter fourth quarter event.
Yes, again, I think if the fed was too.
I think 80% now likely.
Five basis points here in May and then pause.
I think we're optimistic that sometime in the third quarter, we would like to think that our deposit mix has done changing in our deposits.
Betas would flatten out and things would settle down from a.
Cost of funds perspective.
Gotcha, Okay, and then last one was just simple.
Assuming that much change on the buyback I need a few shares this quarter, but still the focus is on building the capital to getting to where you guys are Angola is but it sounds like it's still going to grow pretty rapidly here.
Next couple of quarters.
So just kind of wondering if so I'm just going to be a balanced, particularly where the valuation is in the stock today.
Yes, Thanks, Brian .
Yes, our first focus is to make sure we're growing capital every quarter.
So <unk> would be our primary focus.
We'd like to move that up roughly.
20 basis points a quarter.
That would get us probably in the top quartile in our peer group by the end of the year, where you had really strong levels, but GE.
Given the uncertainty and the prospect for some kind of recession.
That could have some impact we think building some capital is the right thing.
You are right the valuation makes it or not to buy more but we.
We will likely be still kind of a net modest buyback phase until we get capital built a little bit further.
And after we get through that.
Top quartile of our peer group that might give us some more opportunities to be.
More aggressive given.
What we know today, but there's a lot of things will happen between now and then.
Got you okay. Thanks.
Thank you for taking the questions guys I appreciate it.
Thanks, Brian .
Our next question will come from Daniel Tamayo with Raymond James You May now go ahead.
Hey, good morning, guys good morning.
Good morning, my questions have been answered at this point, but just a quick clarification I.
I apologize if I missed it but.
Outside of the capital markets revenue in terms of fee income it seemed to be.
Relatively in line with what we were looking for at least what I was looking for but just curious if you had any.
Comments on the rest of fee income and where that Youre outlook wise.
Yeah. The other thing we did mentioned Danny was wealth management had a really nice first quarter, 6% up from Q4.
Continued great job by our wealth management folks in terms of growing numbers of clients in <unk>.
So.
We're optimistic optimistic about wealth management continuing to grow we gave.
Some numbers in the opening comments in terms of full year additions to clients and AUM, but just in this past quarter alone, we had nearly 100, new clients and $185 million.
New AUM, so optimistic about wealth management continuing to grow for US in addition to capital markets.
Danny I, just talked to one of the leaders of our wealth management business. This morning.
And.
The interest rate activity, that's been going on has actually created.
More willingness to talk their people are thinking about buying bonds for the first time in a long time.
So I think thats wind in our sails.
In our wealth management business their business continues to be really good and we're getting some at vas with clients and potential clients that we've been working with for a long time.
So we think that business is going to continue to grow nicely.
Okay.
And I guess.
Along those lines of the wealth management growth and then the big increase that you saw on the swaps in the first quarter.
How are those two line items would play into the $47 $50 million.
Expense guidance.
I think we've talked about this before but just remind us if you could have any lag impacts on the expenses from.
The swap fees as well.
Sure Danny.
Those really for the most part are within the same quarter, when we see capital markets revenue and have a good quarter, we're going to see the related compensation get booked in that very quarter no lag there the guidance range that we gave.
Would really.
Would really take care of the incentives and other compensation impact related to.
Capital markets being in our guidance range. So you Shouldnt expect us to blow through the top end of that noninterest expense range.
Unless we really were to outperform our guidance on swaps. So so both of those.
Items of guidance or really.
Put together in terms of our expectation.
So you shouldn't you shouldn't expect any surprise later from good results in capital markets.
Okay great.
That's all I had thanks guys.
Thanks, Dan.
Our next question will come from Jeff <unk> with da Davidson.
You May now go ahead.
Yes.
Good morning, Jeff Andrew.
Hey, good morning.
Jeffrey Andrea on prior Jeff today, and just a quick question on the deposit side I see excluding those brokered deposits.
Deposits were up over the quarter.
Just curious if you guys have seen anything unusual.
Put the deposit flows in April or just more recently.
Okay.
No no surprise there.
Oh, Im sorry, I would say nothing unusual.
The concerns.
Money was going to flow to the big banks did not happen for us.
So we had no unusual activity other than our deposits were.
Held up better because normally we would see deposits from our commercial clients in the first quarter because of.
Bonuses and distributions and tax payments and all those things that happened in the first quarter.
Our deposits since quarter end and continues to grow so.
We feel better than we even did a couple of weeks ago quarter and about our ability to continue to grow deposits.
As I said earlier in the Q&A.
We're looking at this.
Temporary dislocation or disruption in the banking space.
Create many deposit opportunities for us so we're excited.
We're going to say the glass is half full does that mean, there are challenges, but theres going to be an opportunity for us to build relationships.
At a faster pace here as we go forward.
Got it that's great to hear and then just on the loan side.
I might have missed this but just wondering what the current exposure is to office commercial real estate.
Yes, I'll take that one.
Office.
It's not a big exposure for us.
And I checked with our Chief Credit Officer couple of days ago, we've talked through potential questions that would come up.
First of all our total exposure is 3%.
The non owner occupied.
High twos.
Percent.
And I'm just going to talk about the deals. We don't we don't have an office building thats higher than three stories.
So that will give you some sense for its different than what people are thinking about in the major metropolitan areas, where you've got multi storey large office billings that are happy again, we just don't experience that and we have very little those kind of buildings in our markets.
So if you look at we've got 15 deals that are greater than $3 million.
2014 of those are 100% leased.
So those are working just fine and the tenants are.
Things like a government agency, a major accounting firm a major brokerage firm.
A major insurance company.
So we have just not seen the kinds of issues that others are starting to experience in that space and don't expect to.
And in total.
In that space.
We have less than $1 million that would be on our watch list are worse. So that portfolio is really looking strong for us and we've seen no issues in that space.
Okay.
That's great detail. Thank you.
That's all I had today, so ill step away. Thank you.
Thank you Andrew.
This concludes our question and answer session.
Ill turn the conference back over to Larry Helling for any closing remarks.
Thanks to all of you for joining our call today. We appreciate your interest in few CRH ever Great day, and we look forward to connecting with many of you in the coming months.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.