Q3 2023 QCR Holdings Inc Earnings Call
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Greetings and welcome to the Q C. Our Holdings, Inc. Earnings conference call from third quarter of 2023.
Yesterday after market close the company distributed its third 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 Dot Q C. R H dot 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 up the call to questions from analysts.
Before we begin I would like to remind everyone that some of the information management will be providing 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 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 November 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 the call over to Mr. Larry Helling, and actually you see our holdings. Please go ahead. 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.
We will also include a review of our specialty finance business with an update on our loan securitization strategy Todd will provide additional details on our financial results for the quarter.
We delivered solid third quarter results highlighted by a static net interest margin robust loan growth and significant fee income and.
In addition, our deposit base is stable our capital ratios are strong and our app.
Asset quality remains sound.
Our third quarter and year to date results demonstrate the continued strength of our franchise our commitment to relationship banking and the successful execution of our strategic initiatives.
Our net interest income grew three 9% from the second quarter.
The increase was driven by a static net interest margin and strong loan growth.
In the third quarter, we delivered reported net income of $25 $1 million or $1 49 per diluted share.
Our adjusted net income for the quarter was $25 4 million and our adjusted EPS was $1 51 per diluted share.
We generated an adjusted ROA of one 3% and an adjusted ROA E up 12, 2% for the quarter.
And we can.
Target performance near the high end of our peer group.
Loan growth was stronger in the quarter growing 14, 2% on an annualized basis.
Our loan growth was driven by solid activity from our traditional lending business and even stronger contributions from our low income housing tax credit lending program.
During the third quarter, our core deposits, excluding short term broker deposits were relatively stable.
Core deposits declined slightly by $9 million after growing $339 million or 23% on an annualized basis during the second quarter.
Our experienced team of bankers continues to add new relationships to our strong and diversified deposit franchise.
Our uninsured and uncollateralized deposits remained low at 21% of total deposits at quarter end.
Our substantial on balance sheet liquidity combined with available liquidity at the federal home loan bank.
And other upstream and brokerage sources more than cover our uninsured and uncollateralized just deposits.
Our asset quality remains strong as our ratio of nonperforming assets to total assets was 41 basis points at quarter end.
Our reserve for credit losses represents 139% of total loans and leases held for investment.
Continues to be near the upper quartile of our peer group.
Our reserve levels reflect our conservative approach and provide a buffer against potential economic challenges.
While we are cautious given elevated interest rates and economic uncertainty, we remain optimistic about the resilience of our Midwest markets.
Unemployment remains below the national average across our footprint and business activity has continued at a steady pace.
As we mentioned last quarter, our exposure to commercial office billings is very low at just 3% of total loans with an average loan size of $859000.
These properties are predominantly located in suburban locations within or adjacent to our markets.
They are well collateralized and are performing in line with expectations with no significant repayment concerns.
We continue to maintain strong levels of capital that have supported another robust year of growth.
We are focused on further building our capital levels with a modest dividend.
Our earnings and our pending securitization, we continue to target capital ratios in the top quartile of our peer group.
During the quarter, we grew loans 14, 2% on an annualized basis with year to date loan growth being 10, 2% on an annualized basis.
As I noted this was driven primarily by ongoing strength in our low income housing tax credit lending business.
With the growing prominence of our specialty finance group and Mitek lending business I will again spend some time discussing the drivers of this high performing business.
As we have stated in prior quarters, 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 our clients.
We continue to experience strong demand for their projects as the need for affordable multifamily housing or exceeds supply.
The industry has an excellent track record with negligible historical default rates based on decades of stability in the industry and our own experience. These high quality loans are ideal for securitization.
As we have previously discussed our intent is to securitize a portion of our existing light tech loan portfolio with plans to continue this on an ongoing basis.
We view this as an effective tool in managing our liquidity and capital it.
It will also provide ongoing capacity for continued latex production and the corresponding capital markets revenue that we receive from this business.
I am pleased to announce that we are too light tech loan securitizations scheduled to close in the fourth quarter.
A tax exempt pool of $130 million and a taxable pool totaling $135 million.
Both are now scheduled for closing prior to the end of November.
The financial outcome of these first securitization will be approximately breakeven subject to final valuation and transaction costs.
We believe that our life tech lending business is extremely valuable and that it deserves a higher valuation multiple than traditional bank.
While our third quarter loan growth was exceptional we are maintaining our guidance for growth in loans held for investment for the fourth quarter to be in a range of 9% to 12% on an annualized basis as our pipeline continues to be strong.
While economic headwinds remain a risk we have demonstrated excellent historical credit quality robust fee income sources, a valuable core deposit franchise and a strong capital position. In addition, we believe that we have the ability to defend our net interest margin and a higher for longer interest rate.
Operator: Greetings and welcome to the QCR Holdings Inc, earnings conference call for the third quarter of 2023. Yesterday after market closed, the company distributed its third 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 for management, our Larry Helling, CEO, and Todd Gipple, president and CFO.
Environment.
These qualities when combined with our current valuation have positioned our company and shareholders to benefit as we continued to execute on our strategic initiatives.
I will now turn the call over to Todd to provide further detail regarding our second quarter results.
Operator: Management will provide a 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 management will be providing 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.
Thank you Larry good morning, everyone. Thanks for joining us today.
I'll start my comments with details on our balance sheet performance during the quarter.
As Larry mentioned, we grew total loans 14, 2% on an annualized basis during the quarter.
227 million of net growth.
In anticipation of our loan Securitizations as something out of the quarter, we have classified $278 million of life Tech loans as held for sale.
Operator: 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-gap measures, which are intended to supplement but not substitute for the most directly comparable gap 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 gap to non-gap measures.
Our loan Securitizations in the fourth quarter will improve our liquidity and enhance our TCE ratio.
In addition, our long term securitization strategy will enable us to continue to fund the growth of our light tech lending business and a corresponding capital markets revenue that we received from this business, while maintaining the portfolio within our established concentration levels.
Core deposits were relatively stable for the quarter, we have grown core deposits nearly 8% on an annualized basis. During 2023, which has allowed us to fund our strong loan growth.
Operator: As a reminder, this conference is being recorded and will be available for replay through November 2nd, 2023. Starting this afternoon, approximately one hour after the completion of this call. It will also be accessible on the company's website.
We also successfully rolled off from $103 million of broker deposits in the third quarter.
Larry Helling: I will now turn the call over to Mr. Larry Halle and ECCR Holdings. Please go ahead. 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. We will also include a review of our specially financed business with an update on our loans to curitization strategy.
As Larry mentioned, our total uninsured and uncollateralized deposits were at a very low level at quarter end at 21% of total deposits and.
In addition, the company maintained approximately 3 billion of available liquidity sources at quarter end, which includes $1 1 billion of immediately available liquidity.
Larry Helling: Todd will provide additional details on our financial results for the quarter. We delivered solid third quarter results highlighted by a static net interest margin, robust loan growth and significant fee income. In addition, our deposit basis stable, our capital ratios are strong and our asset quality remains sound.
Now turning to our income statement.
We delivered net income of $25 1 million or $1 49 in diluted earnings per share for the quarter driven by higher net interest income and strong noninterest income along with well controlled expenses.
Our adjusted net income was $25 4 million or $1 51 per diluted share.
Larry Helling: Our third quarter and year to date results demonstrate the continued strength of our franchise, our commitment to relationship banking and the successful execution of our strategic initiatives. Our net interest income grew 3.9% from the second quarter. The increase was driven by a static net interest margin and strong loan growth. In the third quarter, we delivered reported net income of 25.1 million dollars for a dollar 49 cents per diluted share. Our adjusted net income for the quarter was 25.4 million and our adjusted EPS was a dollar 51 cents per diluted share.
Net interest income was $55 3 million, an increase of three 9% from the prior quarter.
Adjusted NIM on a tax equivalent yield basis remained static on a linked quarter basis at 3.28%, which was at the top end of our guidance range.
During the third quarter, our loan yield expansion accelerated while we experienced a more modest increase on our cost of funds with a slowing in the shift of the composition of our deposits from noninterest and lower beta deposits to higher beta deposits.
We are pleased to see the stabilization in our deposit mix and believe that it will continue to benefit our net interest margin going forward.
Larry Helling: We generated an adjusted ROAA of 1.23% and an adjusted ROAE of 12.12% for the quarter, and we continue to target performance near the high end of our peer groups. Long growth was stronger in the quarter, growing 14.2% on an annualized basis. Our long growth was driven by solid activity from our traditional lending business and even stronger contributions from our low-income housing and tax credit lending program. During the third quarter, or core deposits, excluding short-term broker deposits were relatively stable.
As we look to the fourth quarter, we are anticipating a pause from the fed and a yield curve that continues to be partially inverted.
We expect our loan and deposit betas will continue to increase but more slowly and it offsetting levels.
Our loan Securitizations in the fourth quarter will also help lessen the pressure on higher funding cost and further stabilize our deposit mix.
As a result, we are guiding to a relatively static adjusted NIM T Y in the fourth quarter within a range of five basis points of expansion on the high end and five basis points of compression on the low end.
Larry Helling: Core deposits declined slightly by $9 million after growing $339 million or 23% on an annualized basis during the second quarter. Our experience team of bankers continues to add new relationships to our strong and diversified deposits franchise. Our uninsured and unclateralized deposits remain low at 20.1% of total deposits at quarter end. Our substantial on-balance sheet liquidity combined with available liquidity at the federal home loan bank, Fed and other upstream and brokerage sources more than cover our uninsured and unclateralized deposits.
Turning to our noninterest income, which was $26 6 million in the third quarter.
Our capital markets revenue was $15 6 million this quarter and while down from the outsized performance of $22 5 million in the prior quarter, the $15 6 million of production outperformed our annualized guidance range.
Capital markets revenue from swaps continues to benefit from the strong demand for affordable housing and stabilization in the supply chain and construction costs.
In addition developers have been successful in restructuring their project capital stacks in the current interest rate environment.
Larry Helling: Our asset quality remains strong as a ratio of non-performing assets to total assets was 41 basis points at quarter end. Our reserve for credit losses represents 1.39% of total loans and leases held for investment and continues to be near the upper core tile of our peer group. Our reserve levels reflect our conservative approach and provide a buffer against potential economic challenges. While we are cautious, given elevated interest rates and economic uncertainty, we remain optimistic about the resilience of our Midwest markets.
Capital markets revenue from swap fees has been a consistent and strong source of fee income.
Based on decades of stability in the light tech industry and our own experience. We believe that this business will perform well throughout various economic cycles.
Our light tech lending and capital markets revenue pipeline remains healthy as our clients continue to experience strong demand for new projects.
As a result, we are maintaining our capital markets revenue guidance for the next 12 months and a range of $45 million to $55 million.
Larry Helling: Unemployment remains below the national average across our footprint and business activity has continued at a steady pace. As we mentioned last quarter, our exposure to commercial office buildings is very low at just 3% of total loans with an average loan size of $859,000. These properties are predominantly located in suburban locations within or adjacent to our markets. They are well collateralized and are performing in line with expectations with no significant repayment concerns.
In addition, we generated $3 8 million of wealth management revenue in the third quarter consistent with the second quarter.
On a year to date basis wealth management revenue was up 488000 or nearly 6% on an annualized basis.
Our wealth management team continues to benefit from new relationships, adding 220, new clients and $577 million and assets under management in the first nine months of this year.
Larry Helling: We continue to maintain strong levels of capital that have supported another robust year of growth. We are focused on further building our capital levels. With a modest curitization, we continue to target capital ratios in the top four tile of our peer group. During the quarter, we grew loans 14.2% on an annualized basis with year-to-date loan growth being 10.2% on an annualized basis. As I noted, this was driven primarily by ongoing strength in our low-income housing tax credit lending business.
Our continued growth in new relationships helped offset market volatility during the third quarter.
We are also pleased to announce the start of our new wealth management business in the southwest, Missouri market at our Guaranty Bank charter.
Have a highly experienced team in place that will expand the reach of our current wealth management business.
Now turning to our expenses.
Noninterest expense for the third quarter totaled $51 1 million compared to $49 7 million for the second quarter and at the high end of our guidance range of $48 million to $51 million.
The increase from the prior quarter was primarily due to higher variable employee compensation for year to date performance increased.
Larry Helling: With the growing prominence of our specialty finance group and live tech lending business, I will again spend some time discussing the drivers of this high-performing business. As we have stated in prior quarters, 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. Our clients continue to experience strong demand for their projects as the need for affordable multi-family housing far exceeds supply.
Professional and data processing fees.
And other expenses related to fixed asset disposals.
These increases were partially offset by lower advertising and marketing expenses.
We remain diligent in controlling our expense growth for the fourth quarter. We are reaffirming our noninterest expense guidance again this quarter to be in a range of $48 million to $51 million.
Larry Helling: The industry has an excellent track record with negligible historical fault rates. Based on decades of stability in the industry and our own experience, these high quality loans are a deal for securitization. As we have previously discussed, our intent is to securitize the portion of our existing light tech loan portfolio with plans to continue this on an ongoing basis. We view this as an effective tool in managing our liquidity and capital. It will also provide ongoing capacity for continued light tech production and the corresponding capital markets revenue that we receive from this business.
Our asset quality remained strong during the quarter MPA has increased by $8 6 million to $34 7 million or 41 basis points of total assets.
The majority of the increase was driven primarily by three client relationships from unrelated industries approximately one third of our Npa's consist of one relationship and we believe that this credit will be resolved without a loss.
Our 20 year historical N P. A percentage has averaged approximately 90 basis points on total assets.
We remain significantly below those levels today and believe that we are well positioned given our historical experience and the uncertain economic environment that continues to exist.
Larry Helling: I am pleased to announce that we have two light tech loan securitizations scheduled to close in the fourth quarter. A tax example of $130 million and a taxable pool totaling $135 million. Both are now scheduled for closing prior to the end of November. The financial outcome of these first securitizations will be approximately break even subject to final valuation and transaction costs. We believe that our light tech lending business is extremely valuable and that it deserves a higher valuation multiple than traditional banking.
Classified and criticized loans as a percentage of loans and leases also remained quite low at 1.05% and 2.98% respectively.
Our 20 year historical average of classified and criticized loan percentages are approximately two 7% and four 6%.
Similar to our M. P. As we remain well below historical averages in these categories and they have remained relatively stable over the course of 2023.
Larry Helling: While our third quarter loan growth was exceptional, we are maintaining our guidance for growth and loans, health and investment for the fourth quarter to be in a range of nine to twelve percent on an annualized basis as our pipeline continues to be strong. While economic headwinds remain at risk, we have demonstrated excellent historical credit quality, robust fee income sources, a valuable core deposit franchise and a strong capital position. In addition, we believe that we have the ability to bend our net interest margin in a higher for longer interest rate environment. These qualities when combined with our current valuation have positioned our company and shareholders to benefit as we continue to execute on our strategic initiatives.
The provision for credit losses was $3 8 million during the quarter, which included $3 3 million of provision for loans and leases, primarily driven by the loan growth during the quarter.
We expect to continue to maintain strong reserves given the economic environment.
Our reserves to loans held for investment was fairly static at 1.39% and continues to be at the higher end of our peer group.
We continue to maintain solid levels of capital that have supported another robust year of growth.
Our total risk based capital ratio declined by 29 basis points to 14, 4% due to the very strong loan growth during the quarter.
Our tangible common equity to tangible assets ratio declined 23 basis points to 8.05% that.
Todd Gipple: I will now turn the call over to Todd to provide further detail regarding our second quarter's results. Thank you, Larry.
The decline in the TCE ratio was due to the rise in interest rates during the quarter and the resulting negative impact on a OCI related to our securities and derivative portfolios.
Todd Gipple: Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our balance sheet performance during the quarter. As Larry mentioned, we grew total loans 14.2 percent on an annualized basis during the quarter or 227 million of net growth. In anticipation of our loan securitizations, as of the you know the quarter, we have classified 278 million of light tech loans as help for sale. Our loan securitizations in the fourth quarter will improve our liquidity and enhance our TCE ratio.
With continued strong earnings coupled with our modest dividend our tangible book value per share increased by 34 cents during the third quarter.
The decline in a OCI, partially offset the growth in our tangible book value.
Our capital allocation priorities remain focused on growing our capital and targeting capital levels in the top quartile of our peer group.
Finally, our effective tax rate for the quarter was six 8% compared to 12, 2% in the second quarter.
Todd Gipple: In addition, our long-term securitization strategy will enable us to continue to fund the growth of our light tech lending business and the corresponding capital markets revenue that we received from this business, while maintaining the portfolio within our established concentration levels. Quarter deposits were relatively stable for the quarter. We have grown quarter deposits nearly 8 percent on an annualized basis during 2023, which has allowed us to fund our strong loan growth. We also successfully rolled off 103 million of broker deposits in the third quarter.
We benefited this quarter from a full quarter of strong growth in our tax exempt loan and bond portfolios that was added during the late portion of the second quarter and throughout the third quarter.
As a result, this has helped drive our effective tax rate, even lower and remains one of the lowest in our peer group.
We expect the effective tax rate to be in a range of 8% to 11% for the fourth quarter.
With that added context on our third quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.
Todd Gipple: As Larry mentioned, our total uninsured and uncollateralized deposits were at a very low level at quarter end at 20.1% of total deposits. In addition, the company maintained approximately 3 billion of available liquidity sources at quarter end, which includes 1.1 billion of immediately available liquidity. Now turning to our income statement, we delivered net income of 25.1 million or $1.49 in deluded earnings per share for the quarter, driven by higher net interest income and strong non-interesting income, along with well controlled expenses.
Thank you and as a reminder, if you'd like to ask a question. Please press Star then one on your Touchtone phone.
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Today's first question comes from Damon Delmonte with VW. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
Just wanted to watch.
Just wanted to start off on the margin commentary Pat I think you had said it in your remarks that you're anticipating the margin can be plus or minus five basis points here in the fourth quarter.
Todd Gipple: Our adjusted net income was 25.4 million or $1.51 per deluded share. The net interest income was 55.3 million and increased of 3.9% from the prior quarter. Adjusted name on a tax equivalent yield basis remained static on a link quarter basis at 3.28%, which was at the top end of our guidance range. During the third quarter, our loan yield expansion accelerated, while we experienced a more modest increase on our cost of funds, with a slowing in the shift of the composition of our deposits from non-interest and lower beta deposits to higher beta deposits.
Just kind of wondering under what scenarios.
Are you expecting that to change achy Theres, nothing I know the deposit mix side, which could could have a bigger impact on which direction that the margin goes.
Sure Dana and thanks for the question.
Our base assumptions on static would be no fed hikes in November or December the loan growth of that nine to 12 that we've guided to having the loans sold of 265 roll off in November as we've guided to.
Securitization will give us a couple basis points of lift in the fourth quarter.
But the big assumption around deposit mix is that it's going to remain fairly static we did see a real.
Todd Gipple: We are pleased to see this stabilization in our deposit next and believe that it will continue to benefit our net interest margin going forward. As we look to the fourth quarter, we are anticipating a pause from the Fed in a yield curve that continues to be partially inverted. We expect our loan and deposit betas will continue to increase, but more slowly and at offsetting levels. Our loan securitizations in the fourth quarter will also help less than the pressure on higher funding cost and further stabilize our deposit next.
Positive slow down in terms of mix shift in the third quarter and candidly. That's continued here in October our noninterest bearing it actually up $20 million, thus far in the quarter.
So with all of that we're feeling very optimistic about a static margin.
The reason for the goalposts on both sides of that up and down would be just how effectively we're going to continue to get some.
Our loan yield pop we are starting to see some really nice loan yields on new loans and.
Todd Gipple: As a result, we are counting to a relatively static adjusted NIM-TEY in the fourth quarter, within a range of five basis points of expansion on the high end, and five basis points of compression on the low end. Turning to our non-interest income, which was 26.6 million in the third quarter. Our capital markets revenue was 15.6 million this quarter, and while down from the outsized performance of 22.5 million in the prior quarter, the 15.6 million of production outperformed our annualized guidance range.
To the extent, we can continue that and also hold on to a more static mix of deposits and then we're a little more optimistic.
Ahead of that static guy.
I hope that gives you enough color around what our assumptions are.
Yes.
That's helpful. Thank you.
And do you happen to have like what.
And I'm, sorry, if I missed this but what new production new loans coming on the books are generally are coming out what kind of yields.
Sure Yeah. Thanks for that question to David So in the third quarter, our average new fundings were 747.
Todd Gipple: Capital markets revenue from swaps continues to benefit from the strong demand for affordable housing and stabilization in the supply chain and construction costs. In addition, developers have been successful in restructuring their project capital stacks in the current interest rate environment. Capital markets revenue from swap fees has been a consistent and strong source of fee income. Based on decades of stability in the light tech industry and our own experience, we believe that this business will perform well throughout various economic cycles.
But that's actually also accelerated intra quarter and in September alone those were up to $7 56.
Floating rate loans, which most of well actually all of our latex production would be in that category.
That was 810 yield for the third quarter and that also was ramping up during the quarter.
Had a terminal rate of 819 in September. So we are starting to see some real nice lift in new loan production and as I said in terms of the NIM guidance, that's a big part of us being able to hold onto them.
Todd Gipple: Our light tech lending and capital markets revenue pipeline remains healthy, as our clients continue to experience strong demand for new projects. As a result, we are maintaining our capital markets revenue guidance for the next 12 months in a range of 45 to 55 million. In addition, we generated 3.8 million of wealth management revenue in the third quarter, consistent with the second quarter. On a year-to-date basis, wealth management revenue is up 488,000 or nearly 6% on an annual lifespaces.
Got it that's great. That's helpful. Thank you.
And then I guess.
With regards to the credit and those those three relationships that that kind of came onto the books. This quarter was one of those are part of the so.
One third of the.
Overall N P or no.
No Dana and there were.
Todd Gipple: Our wealth management team continues to benefit from new relationships, adding 220 new clients and 577 million in assets under management in the first nine months of this year. Our continued growth and new relationships helped offset market volatility during the third quarter. We are also pleased to announce a start of our new wealth management business and the Southwest Missouri market at our Guarantee Bank Charter. We have a highly experienced team in place that will expand the reach of our current wealth management business.
Three new ones that came on.
The one <unk> been working on for a couple of quarters.
Three new deals.
It came on.
Totally different industries, one in the hospitality space once.
One small homebuilder, one was actually a daycare.
<unk>.
What would you step back and look at it.
We're moving toward what I consider slowing toward a normalization of credit.
Which was absent the last couple of years because of all the PPP money and those kind of things. So if there are management issues.
Todd Gipple: Now turning to our expenses. Non-interesting expense for the third quarter told us 51.1 million compared to 49.7 million for the second quarter, and at the high end of our guidance range of 48 to 51 million. The increase from the prior quarter was primarily due to higher variable employee compensation for year-to-date performance, increased professional and data processing fees, and other expenses related to fixed asset disposal. These increases were partially offset by lower advertising and marketing expenses.
Got it.
Covered up by excess liquidity that borrowers had that's kind of gone now for most people, especially is a really small businesses.
So we don't see any broad based trends, but hey management decisions are showing up a little bit more than they did two years ago.
Got it.
Okay. That's helpful. That's all I had I'll step back for now thanks a lot.
Thanks Damon.
And our next question comes from Nathan race with Piper Sandler. Please go ahead.
Great Hey, guys good morning.
Todd Gipple: We remain diligent in controlling our expense growth, for the fourth quarter we are reaffirming our non-interesting expense guidance again this quarter to be in a range of 48 to 51 million. Our asset quality remains strong. During the quarter, MPAs increased by 8.6 million to 34.7 million, or 41 basis points of total assets. The majority of the increase was driven primarily by three client relationships from unrelated industries. Approximately one-third of our MPAs consist of one relationship, and we believe that this credit will be resolved without a loss.
Good morning Nate.
Going back to the margin discussion and just kind of thinking about some of the dynamics on the right side of the balance sheet that factor into the guidance for <unk>.
Just curious to what extent you guys plan to run off some of the brokerage Cds.
First quarter and obviously the overnight borrowings are up versus the second quarter, but I imagine those can come down with the securitization in the fourth quarter as well. So just trying to think about how we should think about the overall size of the right side of the balance sheet and kind of what you guys are seeing in terms of.
Additional core deposit growth opportunities going forward.
Sure Nate Yeah, you're spot on with your opening comment on what you were seeing and that is.
Todd Gipple: Our 20-year historical NPA percentage has averaged approximately 90 basis points on total assets. We remain significantly below those levels today, and believe that we are well positioned given our historical experience and the uncertain economic environment that continues to exist. Classified and criticized loans has a percentage of loans and leases also remain quite low. At 1.05% and 2.98% respectively. Our 20-year historical average of classified and criticized loan percentages are approximately 2.7% and 4.6%.
That $295 million of overnight was really a placeholder for the securitization and our liquidity, we're going to free up here in the fourth quarter. So we did that.
It really is a placeholder for funding until we are able to.
Cause those securitizations. So we would see that going away, we actually rolled off a $103 million of the brokered and this most recent quarter and that had a $4 80 and average handle so we felt really good about seeing that roll off and replacing it with core deposits.
When you look at our core deposits I mean, they were essentially static quarter to quarter.
Todd Gipple: Similar to our MPAs, we remain well below historical averages in these categories, and they have remained relatively stable over the course of 2023. The provision for credit losses was 3.8 million during the quarter, which included 3.3 million of provision for loans and leases primarily driven by the loan growth during the quarter. We expect to continue to maintain strong reserves given the economic environment. Our reserves to loans held for investment was fairly static at 1.39 percent and continues to be at the higher end of our peer group.
We liked it that way that was somewhat intentional.
Trying to take some of the staying out of <unk>.
New deposit generation costs.
Again, that's a.
Another big lift from the securitization and that gives us the ability to be a little bit more patient with deposit growth.
But maybe the punch line for you in terms of the right side of the balance sheet, we would expect to fund any and all new loan growth going forward with core deposits not with overnight.
Not with brokered and so that leaves us.
Todd Gipple: We continue to maintain solid levels of capital that have supported another robust year of growth. Our total risk-based capital ratio declined by 29 basis points to 14.4 percent due to the very strong loan growth during the quarter. Our tangible common equity to tangible assets ratio declined 23 basis points to 8.05 percent. The decline in the TCE ratio was due to the rise in interest rate during the quarter and the resulting negative impact on AOCI related to our securities and derivative portfolios.
With roughly $200 million of brokered that's going to mature.
During 2024, and we would expect to keep rolling that off and not replace it with anything but core deposits.
And as the replacement cost.
Broker Cds that marginally lower than what you guys are seeing in terms of.
Pricing.
New core deposits today.
Well new core deposits are still very pricy of course, and so some of the big chunks come with a five handle or a five plus handle but we're really fortunate to have such strong bank.
Todd Gipple: With continued strong earnings coupled with our modest dividend, our tangible book value per share increased by 34 cents during the third quarter. The decline in AOCI partially offset the growth in our tangible book value. Our capital allocation priorities remain focused on growing our capital and targeting capital levels in the top quartile of our peer group. Finally, our effective tax rate for the quarter was 6.8 percent compared to 12.2 percent in the second quarter.
Bankers and very good Treasury management people and platforms. So we do continue to pick up actual core relationships and so those blended rates when they come in.
When we pick up a new Treasury management client, we're going to get some noninterest bearing we're gonna get some money market that might be in the twos and then of course, so we're probably going to have to pay a little bit higher.
Or some of their.
Todd Gipple: We benefited this quarter from a full quarter of strong growth in our tax exempt loan and bond portfolios that was added during the late portion of the second quarter and throughout the third quarter. As a result, this has helped drive our effective tax rate even lower and remains one of the lowest on our peer group. We expect the effective tax rate to be in a range of 8 to 11 percent for the fourth quarter.
Excess cash but.
Blended all in we're really looking to try to keep that coming on.
On a blended rate somewhere close to those brokers, which again would be in the mid to upper fours. So really just swapping.
Lapping those out from a cost of funds perspective.
Got it that's very helpful and just maybe thinking about expenses for next year and I know, it's a fluid situation at this point in the year in terms of thinking about next year and then I. Appreciate that you guys had a fairly variable cost structure relative to overall revenue, but just any guidepost in terms of how you guys are thinking about expense growth for next year I think the.
Operator: With that added context on our third quarter financial results, let's open the call for your questions. Operator, we are ready for our first question. Thank you. And as a reminder, if you would like to ask a question, please press star than 100 pp on phone. If you are using the speaker phone, we ask you please pick up your handset before pressing the keys. To withdraw your question, please press star than two.
Historical grill.
Excuse me historical go always to limit expense growth of 5%.
Is that a reasonable expectation assuming you guys.
Midpoint of capital.
Damon Delmonte: Today's first question comes from Damien Dumonti with KBW. Please go ahead. Hey, good morning, guys. Hope everybody's doing well today. Just wanted to start off on the margin commentary. Pat, I think you had said in your remarks that you're anticipating the margin could be plus or minus five basis points here in the fourth quarter. Just wondering under which scenarios are you expecting that to change? Is there something enough of the positive side, which could have a bigger impact on which direction that the margin goes?
Markets revenue for the.
The next 12 months.
Sure Nate that that would be spot on.
Our 5% noninterest expense, our guidance or our strategy and our 96 five strategy is what we'd be holding ourselves accountable to next year.
We still feel good about our guide for Q4, and the 48 to 51 range.
If you're out modeling 'twenty four.
Of that 5% would be a good thing.
To us because it does tie in to our 96 five strategy it certainly would.
Damon Delmonte: Sure, Damien. Thanks for the question. So our basis assumptions on static would be no Fed hikes in November or December. The loan growth of that 9-12 that we've guided to having the loan sold of 265 roll off in November as we've guided to. Securitization will give us a couple basis points of lift in the fourth quarter. But the big assumption around the posit mix is that it's going to remain fairly static.
Everyone in our company understands is the is the.
And so we're in the middle of the budgeting as you would expect right now and that's certainly the expectation that Larry and I would have for next year as noninterest expense, 5% or better.
Okay, Great and then just going back to credit quality I think we've been talking about that one third.
Portion of Mbas that you guys expect to resolve without a loss for a couple of quarters now.
Damon Delmonte: We did see a real positive slowdown in terms of mixed shift in the third quarter. And candidly, that's continued here in October. Our non interest bearing it actually up 20 million thus far in the quarter. So with all of that, we're feeling very optimistic about a static margin. The reason for the goal post on both sides of that up and down would be just how effectively we're going to continue to get some loan yield pop.
Any sense on just the timing of when that resolution.
This is expected to occur.
Yeah, I mean, it's certainly hard to tell when you get into these kind of situations I talked to.
Workout guys handled that yesterday, and it's probably the middle of next year before we get some clarity when you start going through the legal channel.
We're going through the legal process.
It's still a really good quality asset that is very valuable.
Damon Delmonte: We are starting to see some really nice loan yields on new loans. And to the extent we can continue that and also hold on to a more static mix of deposits. Then we're a little more optimistic ahead of that static guide. I hope that gives you enough color around what our assumptions are. Yeah, that was helpful. Thank you. And do you happen to have like what, like, and I'm sorry if I missed this, but what new production, some new loans coming on the books, generally are coming out, what kind of yields?
So.
Back half of next year, but probably before we could expect that one to get resolved.
We have some smaller ones that between now and then we would expect to be resolved.
Okay great.
Just one last housekeeping question Bully income was up.
<unk>.
About a million dollars quarter over quarter was that more onetime in nature or did you guys kind of a.
Reevaluate, our new plan asset in the quarter and is that kind of level sustainable going forward.
Yes, Nate that did catch that as a onetime event.
Damon Delmonte: Sure, yeah, thanks for that question too, Damon. So in the third quarter are average new fundings were 747, but that's actually also accelerated into a quarter and in September alone, those were up to 756. Floating rate loans, which most of well actually all of our live tech production would be in that category. That was 810 yield for the third quarter and that also was ramping up during the quarter had a terminal rate of 819 in September.
So going back to the second quarter number would be a more normalized run rate.
Okay, Great and then just lastly, any thoughts on the tax rate going forward I apologize. If you described in your prepared remarks.
Yeah, we.
No not a problem at all we did get give some guidance on that and right now our expectation is that that's going to be somewhere in that 8% to 11% for the fourth quarter, a little bit up from.
This quarter.
That would be.
Be a little more normal.
Damon Delmonte: So we are starting to see some real nice left in new loan production. And as I said in terms of the name guidance, that's a big part of us being able to hold on to them. Got it. That's great. That's helpful. Thank you. And then I guess with regard to the credit in those those three relationships that that kind of came onto the books this quarter was one of those part of the one third of the overall NPAs or no.
In terms of what we would expect for.
The guidance that we've given all of you.
We hit those guidance numbers, we're probably going to be in that eight to 11 range.
Okay, Great I appreciate all the color and congrats on a great quarter. Thanks, guys. Thanks Nate.
And our next question comes from Brian Martin with Janney. Please go ahead.
Hey, good morning, guys.
Good morning, Brian and a nice quarter I, just a couple of things that weren't asked here just maybe from a.
I guess, the new wealth team.
Damon Delmonte: No, Damon, there were three new ones that came on the one third ones once we've been working on for a couple quarters, the three new deals that came on totally different industries, one in the hospitality space, one small home builder, one was actually a daycare. And what would you step back and look at it, you know, we're moving toward what I consider slowly toward a normalization of credit, which was absent the last couple years because of all the PPP money and those kind of things.
Just quickly on the tax rate the thought for next year is that 811 still kind of a book and a good good range for next year, given what we know today.
Yes, I think Brian for now I'd I'd go with that we will likely have some more clarity around that for full year 'twenty four when we talked to all of you in late January for Q4, but for now that's probably a good place to start.
Damon Delmonte: So if there were management issues, it got, you know, covered up by excess liquidity that borrowers had. That's kind of gone now for most people, especially the really small businesses. So, you know, we don't see any broad based trends, but hey, management decisions are showing up a little bit more than they did two years ago. Got it. Okay, that's helpful. That's all that I had. I'll step back for now. Thanks a lot. Thanks, Damon.
Okay, Alright, and then just you mentioned just one last one on the margin Todd I guess, you talked about maybe Larry talked about it just being maybe feeling a bit more confidence to defend the margin and a higher for longer environment. I mean anything else you Havent I mean, I guess as far as just kind of supporting that statement just as far as you look out a couple of quarters.
I guess kind of what gives you a bit more confidence today is anything over and above you've already talked about.
Sure I think the biggest thing Brian that gives us a lot of confidence that we're going to be at this more static margin.
Even into 2024 is whats happened on the right side of the balance sheet the deposit base really settling in settling down certainly did so in Q3. That's why we had we had guided static to maybe down 10 basis points and we came in at static and what really.
Nathan Race: And our next question comes from Nathan Ray. Hi, for Sam. Please go ahead. Yeah, great. Hey, guys. Good morning. Morning, Nate. Hi, Nate.
Nathan Race: Going back to the margin discussion and just kind of thinking about some of the dynamics on the right side of the balance sheet that factor into the guidance for 4Q. You know, just curious to what extent you guys plan to run off some of the broker to these are in the first quarter. And obviously the overnight bar ends are up versus the second quarter, but imagine those can come down with the securizations in the fourth quarter as well.
Allowed us to show that nice outcome was the deposit base stabilizing.
We've seen that continue here, thus far in the fourth quarter through the month of October.
And that really is what has been what has impacted our margin. The most during this hiking cycle of course has been the right side of the balance sheet. So it's starting to settle in the mix shift has really stopped not just slowed but for the most part stopped.
Nathan Race: So just trying to think about, you know, how we should think about the overall size of the right side of the balance sheet and kind of what you guys have seen in terms of additional quarter positive growth opportunities going forward. Sure, Nate. Yeah, you're spot on with your opening comment on what you were seeing. And that is that 295 million overnight was really a placeholder for the securization and the liquidity. We're going to free up here in the fourth quarter.
And our beta <unk>.
Results have actually been quite good on the deposit side, our betas have outperformed our modeling it's just the mix shifts that really caught us.
Coffee industry of course, so that's the thing that I would really point to Brian that gives us confidence about a more static margin.
Nathan Race: So we did that really as a placeholder for funding until we are able to close those securizations. So we would see that going away. We actually rolled off 103 million of the broker in this most recent quarter and that had a 480 and average handle. So we felt really good about seeing that roll off and replacing it with core deposits. We need to look at our core deposits. I mean, they were essentially static quarter to quarter.
If we're in this rate environment for longer we feel like we're not going to.
We're not going to continue to bleed margin, we're going to be able to hang onto it.
Okay and is it worth I.
I guess the spot margin tied in September where that was at.
Sure Yeah.
So in.
July it was $3 27 in August it was $3 29, and then September was 330 and.
Nathan Race: We liked it that way. That was someone intentional. We're trying to take some of the staying out of new deposit generation costs. Again, that's another big left from the securitization that gives us the ability to be a little bit more patient with deposit growth, but maybe the punchline for you in terms of the right side of the balance sheet, we would expect to fund any and all new long growth going forward with core deposits, not with overnight, not with brokered.
That again bodes well for the go forward because our full year was $3 28. So we saw a nice ramp during Q3 and.
That gives us some real confidence going forward.
Got you Okay. That's helpful and just last two for me.
On the housekeeping the accretion I know you talked last quarter pretty close to where it was that does that kind of a good level to think about here in the next couple of quarters.
It is.
Nathan Race: And so that leaves us with roughly 200 million of brokered that's going to mature during 2024, and we would expect to keep rolling that off and not replace it with anything but core deposits. And is the replacement cost on those broker CDs that marginally lower than what you guys have seen in terms of pricing on new core deposits today? Well, new core deposits are still very pricey, of course, and so some of the big chunks come with a five handle or a five plus handle, but we're really fortunate to have such strong bankers and very good treasury management people and platforms.
So it was at 500, which is much more normal.
Than prior quarters.
And really our accretion.
Accretion model would show it being close to that 500, great in Q4.
And that leaves us with roughly $4 million of accretion left.
And if youre looking at 'twenty four I would say again continue that 500 per quarter, so roughly $2 million for.
2024, gotcha and with the securitization on that on the light Tech.
Nathan Race: So we do continue to pick up actual core relationships, and so those blended rates when they come in, when we pick up a new treasury management client, we're going to get some non interest bearing, we're going to get some money market that might be in the twos, and then of course we're probably going to have to pay a little bit higher for some of their excess cash, but blended all in. And we're really looking to try to keep that coming on on a blended rate, somewhere close to those brokers, which again would be in the mid upper fours, so really just swapping, swapping those out from a cost of funds perspective. Got it.
Where is your concentration limit kind of where you're targeting that to be now.
As you kind of utilize it the securitization I mean, what would you like that portfolio to be.
Yes.
Yes, how we'd look at that one.
Brian is a little bit.
As a percent of our capital.
We'd probably like to maintain it around the percent of capital that we have today and so as we grow capital we'd be comfortable continuing to grow that.
More.
If you step back and look at the loan growth that we've had over a long period of time.
Our total loan growth has been.
10% roughly over a long period of time.
But we're going to do on balance sheet now.
We're going to do.
Securitizations going forward.
Really grow the on balance sheet or the loans held for investment more like 5%.
Nathan Race: That's very helpful and just maybe thinking about expenses for next year, and I know it's a fluid situation at the point of the year in terms of thinking about next year, and I appreciate you guys have a fairly variable cost structure relative to overall revenue, but just any guide post in terms of how you guys are thinking about expense growth for next year, I think the historical growth would, excuse me, historical goal goal is to limit expense growth to 5%. That a reasonable expectation, assuming you guys as kind of the mid point of capital markets revenue for the next 12 months.
That's going to.
Provide a great funding mechanism better pricing power on the deposit side for us that will flow through into our NIM eventually.
So we're going to grow those but at a more slow pace and we have over the last couple of years.
Got you Okay that makes sense. Thank you Larry and last one was just on the it sounds like you brought a new team on maybe you can elaborate a little bit.
How that changes the dynamics on the wealth side I know you guys have been looking at that for a while so congrats on that but any commentary on that you could provide.
Nathan Race: Sure, Nate, that that would be spot on our 5% non interest expense guidance or strategy in our 965 strategy is what we'd be holding ourselves accountable to next year. We still feel good about our guide for Q4 and the 48 to 51 range. If you're out modeling 24, you know, that 5% would be a good thing to use because it does tie in to our 965 strategy. It's certainly what everyone in our company understands is the is the guideline. And so we're in the middle of budgeting as you would expect right now, and that's certainly the expectation that Larry and I would have for next year's non interest expense 5% or better. Okay, great.
Sure Brian No. We're very excited about getting it started and southwest, Missouri Guaranty Bank.
Is.
He has got a great deposit base and this community in southwest, Missouri is a great place for us to.
Wealth management. So we're very pleased to have that started we actually have two individuals.
Tired and didn't have hit the ground running and bringing in new clients already.
Already integrating them with our bankers here to make sure we're getting all the right faces in front of them. So we have very high expectations for that to grow nicely and quickly here in southwest Missouri.
<unk> of our model is we're not having to stand up an entire trust operations, we use the operations at our Quad City Bank charter, our first charter and where all of our operational folks for trust reside and so that wealth management group can really just focus on bringing in clients and giving them.
Larry Helling: And then just going back to credit quality, I think we've been talking about, you know, that one third proportion of MBAs that you guys expect to resolve without a loss for a couple of quarters now. So Larry, any sense on just the timing of when that resolution, is expected to occur? Yeah, I mean, it's certainly hard to tell when you get into these kind of situations. I talked to a workout guy that handled that yesterday, and it's probably the middle of the next year before we get some clarity when you start going through the legal channels.
Great service and they don't need to worry about learning the back office, we don't need to stand up the back office.
This is a very very long sales cycle in a very long process to grow wealth management, so youre not going to see it.
Big shifts in our.
Larry Helling: We're going to the legal process. It's still a really good quality asset that is very valuable. And so, you know, it's back half a next year, probably before we could expect that one to get resolved. But, you know, we have some smaller ones that between now and then that we would expect to be resolved.
Revenue numbers quickly, but the sooner we get started the sooner we're going to build hundreds of millions of dollars in AUM in this market. So we're pleased to be started we'll just tell you were very active in our des Moines Metro looking to do the same thing. So we hope to have an announcement in des Moines sometime next.
Year that.
We've gotten wealth management often running in.
Damon Delmonte: Okay, great. And just one last housekeeping question. Bullying income was up. About a million dollars quarter of a quarter. Is that more one time in nature, or did you guys kind of re-evaluate a new plan asset in the quarter? And is that kind of level sustainable going forward? Yeah, I made that good catch. That is a one time event. So going back to the second quarter number would be a more normalized run rate. Okay, great.
That last market in des Moines.
Perfect. Thank you for the color and congrats on the quarter and the hires and thank you.
Thanks, Brian.
And our next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys. Good morning, good morning.
Most of my.
Most of my questions have been answered at this point, but just.
Just one question on the on the pipeline you.
You mentioned the kind of resiliency of.
Nathan Race: And then just lastly, any thoughts on the tax rate going forward? I apologize if you described that in your prepared remarks. I missed it. Yeah, we know not a problem at all. We did give some guidance on that. And right now our expectation is that that's going to be somewhere in eight to 11% for the fourth quarter a little bit up from this quarter. That would be a little more normal in terms of what we would expect for the guidance that we have given all of you. So we hit those guide numbers. We're probably going to be in that eight to 11 range. Okay, great. I appreciate your calling. Grass on a great quarter. Thanks guys. Thanks. Thank you.
The pipeline, but curious if that has started to slow at all through the quarter, particularly in the non latex business and then.
I guess I'll ask a follow up on the Y Tec business separately.
Yes, certainly.
The light tech pipeline remains vibrant.
Given the demand for affordable housing so that's really been fairly consistent.
The demand for the core commercial business.
Actually slowed a couple quarters ago as rates started to decline because any of the investor developer kind of stuff.
Got stressed by them.
I actually had.
I think people kind of.
Clients starting to get their head around dealing with interest rates in the 8% range.
Brian Martin: And the next question comes from Brian Martin with Janney. Please go ahead. Hey, good morning guys. Morning, Brian. Hey, nice quarter. I just a couple of things that weren't asked here just maybe from a, you know, I guess the new wealth team will just tied just quickly on the tax rate. The thought for next year is that eight to 11 still kind of a book end good, good range for next year given what we know today.
There is certainly a slowdown and developer business, but some of our core commercial manufacturing owner occupied business.
That appears to actually be bouncing back just a little bit.
Not at that 8% to 10% pace that maybe we've grown historically, but modest growth in our core commercial and.
So it's kind of a mixed bag right now depending on which sector yearend, but.
We think we can continue to grow assets at the pace we are.
Outlined in their comments.
Brian Martin: Yeah, I think Brian, for now, I'd go with that. We'll likely have some more clarity around that for a full year 24 when we talk to all of you in late January for two four. But for now, that's probably a good place to start. Okay, all right. And then just you mentioned just one last one on the margin, Todd. I guess you talked about or maybe Larry talked about it, just being maybe feeling a bit more confident to defend the margin in a higher for longer environment.
Yes.
Okay, Great and then I guess.
Follow up on the latex business is.
Have you found there was any kind of cyclicality to credit within light tech it you've talked about the the credit history of that asset class being very strong, but just curious if the loans being added.
At this point in the cycle have any any different kind of credit attached.
Attached to them in your opinion.
Brian Martin: I mean anything else you haven't, I guess as far as just, you know, kind of supporting that statement, just as far as you look out a couple quarters. You know, kind of what gives you a bit more confidence today is anything over and above you've already talked about. Sure, I think the biggest thing, Brian, that gives us a lot of confidence that we're going to be at this more static margin, even into 2024 is what's happened on the right side of the balance sheet, the deposit base really settling in, settling down, certainly did so in Q3.
No what I'd say is almost none.
These are.
Continued I believe to be the highest quality loan assets, we have on our books.
We have no past dues.
We have no none of the light tech loans that are criticized or classified.
None of them with the issues of stabilization because the demand for affordable housing is so great.
And so.
Over the last 30 years. This has been a very steady performer from an asset quality standpoint, and just a reminder, we are.
Brian Martin: That's why, you know, we had we had guided static to maybe down 10 basis points and we came in at static and what really allowed us to show that nice outcome was the deposit base stabilizing. We've seen that continue here thus far in the fourth quarter through the month of October. And that really has been what has impacted our margin the most during this hiking cycle, of course, has been the right side of the balance sheet.
Low loan to values with lots of capital into these deals.
Pending on whether they're tax like tax exempt theres two different structures, but there is a lot of cash in these and a lot of strong underpinnings that have made these very stable from a credit standpoint.
Yeah.
Okay. That's all I had thanks for answering my questions.
Thank you.
And our next question today comes from Jeff Lewis with D. A Davidson. Please go ahead.
Brian Martin: So it's starting to settle in. The mixed shift has really stopped. Not just slowed, but the most part stopped. And our beta results have actually been quite good on the deposit side. Our beta has outperformed our modeling. It's just the mixed shift that really caught us. And caught the industry, of course. So that's the thing that I would really point to, Brian, that gives us confidence about a more static margin. If we're in this rate environment for longer, we feel like we're not going to we're not going to continue to believe margin.
Hi, good morning, good morning, Chad.
Just a question apologies if I missed it but.
What's the appetite for latex Securitizations in 2024, and then I guess just indirectly also asking for total loan growth expectations in 2024.
So yes, let me talk about the securitization a little bit more broadly again, we've historically kind of grown our loan portfolio with a 10% clip over a long period of time.
And if you cut it down to simple methodology, what we're probably going to do is.
Brian Martin: We're going to be able to hang on to it. Okay. And did it worth my guess the spot margin, Todd in September, where that was at? Sure. Yeah. So in July, it was 327 in August, it was 329. And in September, it was 330. And that again, boats well for the go forward, because our full year was 328. So we saw a nice ramp during Q3. And that gives us some real confidence going forward.
Manage our loan.
Book to maybe more of a 5% growth using the securitization.
I think that will provide better operating results over time now that we've got a book to bill.
So we will plan through several securitizations during next year.
To give more guidance on that after our fourth quarter call, we're going to learn a lot as we get the first two tranches of the securitization done here in the next few weeks and so that will give us some clarity on our end.
Allow us to give you a better strategy as we go forward so.
Brian Martin: Gotcha. Okay. That's helpful. Just last two for me, just on the just housekeeping, the accretion. I know you talked last quarter pretty close to where it was at. Is that kind of a good level to think about here the next couple of quarters? It is. So it was at 500, which is much more normal than prior quarters. And really our accretion model would show it being close to that 500 in Q4.
Loan growth, we expect to still be meaningful.
Meaningful next year, but we're going to take the top off at using the securitization.
Got it that's great color. Thank you and then just kind of hopping over to the capital side here.
Capital seems healthier than peers, if you look at regulatory or TCE, given the lack of <unk> headwinds.
Brian Martin: And that leaves us with roughly 4 million of accretion left. And if you're looking at 24, I would say again, continue that 500 per quarter. So roughly 2 million for 2024. Gotcha. And with the securitization on the light tech, you know, where is your concentration limit? Kind of where are you targeting that to be now? You know, as you kind of utilize the securitization. I mean, where would you like that portfolio to be?
Just wanted to get a sense of where the buyback sits on your capital priority.
Yes in the near term.
Given the.
Certainly that's going on in the world and the economic climate, we're going to be very cautious on buyback for the next quarter or two.
Joe we have some clarity on interest rates.
Probably on the economic environment, we're going to probably hold onto capital one focus on building TCE, we certainly have plenty of regulatory capital and don't feel any pressure there.
But it just seemed like it's prudent right now and to hold on to capital and then ultimately once we.
Brian Martin: Yeah, as a. Yeah, how we look at that one. Brian is a little bit as a percent of our capital. We'd probably like to maintain it around the percent of capital that we have today. And so as we grow capital, we'd be comfortable continuing to grow that. You know, more as you know, if you step back and look at the loan growth that we've had over a long period of time, our total loan growth has been, you know, 10% roughly over a long period of time.
Kind of get our TCE, probably to the top quartile of the peer group.
And we're not that far from it.
Sometime during next year, we'd likely look at being more aggressive on buybacks.
Yeah.
Got it.
So all I had thanks for taking the questions and congrats on the quarter.
Thank you.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.
Brian Martin: What we're going to do on balance sheet now, because we're going to do, you know, securitization is going forward. Is it really grow the on balance sheet or the loans help for investment more like 5%. We think that's going to provide, you know, a great funding mechanism, better pricing power on the deposit side for us that will flow through and earn them eventually. And so we're going to grow those, but at a more slow pace than we have, last couple of years. Got you. Okay, that makes sense.
Okay.
I would like to thank all of you for joining our call today. We appreciate your interest in our company. We look forward to talking to you again soon.
Larry Helling: Thank you, Larry.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect. Your lines will have a wonderful day.
Larry Helling: And last one was just on the, it sounds like you brought a new team on maybe just going to elaborate a little bit on just how that changes the dynamics on the wall side. And you guys have been looking at that for a while, so congrats on that. But any commentary on that you could provide?
Larry Helling: Sure, Brian. No, we're very excited about getting it started in Southwest Missouri, Guarantee Bank. It's got a great deposit base in this community in Southwest Missouri is a great place for us to have wealth management. So we're very pleased to have that started. We actually have two individuals hired and have hit the ground running and bringing in new clients already. We're already integrating them with our bankers here to make sure we're getting all the right faces in front of them.
Larry Helling: So we have very high expectations for that to grow nicely and quickly here in Southwest Missouri. The beauty of our model is we're not having to stand up an entire trust operations. We use the operations at our Quad City bank charter, our first charter, and we're all of our operational folks for trust reside. And bringing in clients and giving them great service. And they don't need to worry about learning the back office.
Larry Helling: We don't need to stand up the back office. So this is a very, very long sales cycle and a very long process to grow up management. So you're not going to see big shifts in our revenue numbers quickly. But the sooner we get started, the sooner we're going to build hundreds of millions of dollars in AUM in this market. So we're pleased to be started.
Larry Helling: We'll just tell you we're very active in our Des Moines Metro looking to do the same thing. So we hope to have an announcement in Des Moines sometime next year that we've gotten wealth management off and running in that last market in Des Moines. Perfect.
Larry Helling: Thank you for the color congrats on the quarter and the hires. Thank you. Thanks, Brian.
Daniel Tamayo: And our next question comes from Daniel Tameo with Raymond James. Please go ahead. Good morning, guys. Most of my questions have been answered at this point. But just one question on the on the pipeline, you mentioned the kind of resiliency of the pipeline. But curious if that has started to slow it all through the quarter, particularly in the non-Litec business.
Larry Helling: And then I guess I'll ask the follow-up on the Leitec business separately. Yeah, certainly the the Leitec pipeline remains vibrant given the demand for affordable housing. So that's really been fairly consistent. The demand for the core commercial business actually slowed a couple quarters ago as rates started to climb because any of the investor developer kind of stuff and I got stressed by that. We've actually had I think people kind of you know clients starting to get their head around dealing with interest rates in the 8% range.
Larry Helling: There's certainly a slowdown in developer business but some of our core commercial manufacturing owner-occupied business that appears to actually be bouncing back just a little bit. So not at that 8% to 10% pace that maybe we've grown historically but modest growth in our core commercial. And so it's kind of a mixed bag right now depending on which sector you're in. But you know we think we can continue to grow assets at the pace we outlined in there to come. Okay, great.
Larry Helling: And then, I guess, so the follow-up on the LITECH business is, have you found there's any kind of cyclicality to credit within LITECH? You've talked about the credit history of that asset class being very strong, but just curious if the loans being added, at this point in the cycle have any different kind of credit attached to them in your opinion. No, what I'd say is almost none. These are continued, I believe, to be the highest quality loan assets we have on our books.
Larry Helling: We have no past dues. We have none of the LITECH loans that are criticized or classified. We've got none of them with issues of stabilization because the demand for affordable housing is so great. And so over the last 30 years, this has been a very steady performer from an asset quality standpoint. And just a reminder, we are low loan to values with lots of capital into these deals, depending on whether taxable like tax exempt, there's two different structures, but there's a lot of cash in these and a lot of strong underpinnings that have made these very stable from a credit standpoint. Okay, that's all I had. Thanks for answering my questions. Thank you.
Jeff Lewis: And our next question today comes from Jeff Lewis with the A Davidson. Please go ahead. Hi, good morning. This is a morning for Jeff. Just a question apologies if I missed it, but what's the appetite for LITECH's securitization in 2024? And then I guess just indirectly also asking for total loan growth expectations in 2024. So yeah, let me talk about the securitization a little bit more broadly. Again, we've historically kind of grown our loan portfolio at the 10% clip over a long period of time.
Jeff Lewis: And if you cut it down to a simple methodology, what we're probably going to do is manage our loan book to maybe more of a 5% growth using the securitization. We think that will provide better operating results over time now that we've got the book built. And so we will plan into several securitizations during next year. We'll probably give more guidance on that after our fourth quarter call. We're going to learn a lot as we get these first two trunks of securitization done here in the next few weeks.
Jeff Lewis: And so that'll give us some clarity on our and allow us to give you a better strategy as we go forward. So loan growth, we expect to still be meaningful next year, but we're going to take the top off at using the securitization. Got it. That's great color. Thank you.
Larry Helling: And then just kind of pop it over to the capital side here. Capital seems healthier than peers. If you look at regulatory or TCE, given the lack of AOCI headwinds, just wanted to get a sense of where the buybacks on your capital priority. Yeah, in the near term, given the uncertainty that's going on in the world and the economic climate, we're going to be very cautious on buyback, you know, for the next quarter or two.
Larry Helling: Until we have some clarity on interest rates and probably in the economic environment, we're going to probably hold on to capital and focus on building TCE. We certainly have funding of regulatory capital and don't feel any pressure there, but it just seems like it's prudent right now and to hold on to capital. And then ultimately, once we kind of get our TCE probably to the top quartile of the peer group and we're not that far from it, you know, sometime during next year, we'd likely look at being more aggressive on buyback.
Larry Helling: I would like to thank all of you for joining our call today. We appreciate your interest in our company.
Operator: We look forward to talking to you again soon. Thank you. This includes today's conference call. We thank you all for attending today's presentation. You may not have touched your lines, but have a wonderful day.