Q4 2023 QCR Holdings Inc Earnings Call

January 24, 2024

Thank you.

Yeah.

Greetings and welcome to the QCR Holdings Incorporated Earnings Conference Call for the fourth quarter and full year 2023.

Greetings and welcome to the Q C. Our holdings incorporated earnings conference call for the fourth quarter and full year 2023, yes.

Yesterday, after market close, the company distributed its fourth quarter earnings press release.

Yesterday after market close the company is distributed its fourth quarter earnings press release, if there is anyone on the call who has not received a copy you may access it on the company's website www dot QC, our H dot com.

Speaker Change: If there is anyone on the call who has not received a copy, you may access it on the company's website, www.qcrh.com.

With us today from management are Larry Helling, CEO, and Todd Gipple, President and CFO.

Speaker Change: With us today from management are Larry Helling, CEO, and Todd Gipple, President and CFO.

Management will provide a brief summary of the financial results and then we'll open up the call to questions from analysts.

Speaker Change: Management will provide a brief summary of the financial results, and then we'll open up the call to questions from analysts.

Speaker Change: Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission.

Speaker Change: Before we begin I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities and Exchange Commission.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Additional information on these factors is included in the company's SEC filings, which are available on the company's website.

Information on these factors is included in the company's S. E C filings, which are available on the company's website.

Speaker Change: Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measure.

Speaker Change: Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Speaker Change: 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 measure.

Speaker Change: The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures.

Speaker Change: As a reminder, this conference is being recorded and will be available for replay through January 31, 2024, starting this afternoon, approximately one hour after the completion of this call.

Speaker Change: As a reminder, this conference is being recorded and will be available for replay through January 31st Twenty-twenty for starting this afternoon approximately one hour after the completion of this call.

Speaker Change: It will also be accessible on the company's website.

Speaker Change: At this time, I will now turn the call over to Mr. Larry Helling, CEO. Please go ahead.

Speaker Change: At this time I will now turn the call over to Mr. Larry Helling CEO. Please go ahead.

Speaker Change: Thank you operator welcome everyone.

Larry Helling: Thank you, operator. Welcome, everyone. And thank you for joining us today.

Speaker Change: And thank you for joining us today.

Larry Helling: I will start the call with the high level overview over 2023 performance and the factors that continue to drive our success.

Speaker Change: I will start the call with a high level overview over 2023 performance and the factors that continue to drive our success Todd.

Larry Helling: Todd will follow with additional details on our financial results for the fourth quarter and full year.

Todd will follow with additional details on our financial results for the fourth quarter and full year.

Todd Gipple: We delivered record fourth quarter and full year results, highlighted by significant fee income and robust loan.

Todd Gipple: We delivered record fourth quarter and full year results highlighted by significant fee income and robust loan growth.

Todd Gipple: In addition, for the full year 2023, we completed our first two securitizations of low-income housing tax credit loans.

Todd Gipple: In addition for the full year 2023, we completed our first two securitization of low income housing tax credit loans grew.

Todd Gipple: Group Core Deposits and maintain our strong asset quality.

Todd Gipple: Core deposits and maintain our strong asset quality.

Todd Gipple: We continue to benefit from our diverse revenue sources, which includes capital markets and wealth management.

Todd Gipple: We continue to benefit from our diverse revenue sources, which includes capital markets and wealth management fees.

Todd Gipple: The expansion in our non interest income for the year overpowered the pressure on our net interest income.

Todd Gipple: and our non-interest income for the year overpowered the pressure on our net interest income.

Todd Gipple: We also continue to strengthen our capital levels with exceptional earnings performance.

Todd Gipple: We also continued to strengthen our capital level with exceptional earnings performance.

Todd Gipple: As previously announced on December 12, we successfully closed our first two low income housing tax credit loan Securitizations.

Todd Gipple: previously announced on December 12th, we successfully closed our first two low-income housing tax credit loan securitization.

Todd Gipple: The ability to securitize these loans is an important and effective tool in managing our liquidity and capital.

Todd Gipple: The ability to securitize. These loans is an important and effective tool in managing our liquidity and capital.

Todd Gipple: It also enhances the sustainability and continued growth of our LIHTC lending and the related capital markets revenue.

Todd Gipple: Also enhances the sustainability and continued growth of our <unk>.

Todd Gipple: Hi Tech lending and the related capital markets revenue.

Todd Gipple: Our outstanding performance in 2023 is the result of our differentiated relationship-based community banking model.

Todd Gipple: Our outstanding performance in 2023, as a result of our differentiated relationship based community banking model.

Todd Gipple: Our multi-chartered model enables our local management teams to respond with speed and agility to our client needs.

Todd Gipple: Our multi chartered model enables our local management teams to respond with speed and agility to our clients' needs.

Todd Gipple: This results in a superior client experience that outperforms larger national and regional banking alternatives.

Todd Gipple: Our team of dedicated employees has driven our success.

Todd Gipple: Our team of dedicated employees has driven our success, we have a strong corporate culture throughout our company and our employees are engaged with our clients and heavily involved in our communities.

Todd Gipple: We have a strong corporate culture throughout our company and our employees are engaged with our clients and heavily involved in our community.

Todd Gipple: Recruiting and retaining talented employees is a top priority for us.

Recruiting and retaining talented employees is a top priority for us.

Todd Gipple: Our reputation and culture attract the best bankers in our market.

Todd Gipple: Our reputation and culture attracts the best bankers in our markets.

Todd Gipple: We continue to receive high employee engagement scores, which are measured annually across our company and.

Todd Gipple: We continue to receive high employee engagement scores, which are measured annually across our company.

Todd Gipple: In addition, our local charters have won numerous awards throughout our footprint for being great places to work and do business.

Todd Gipple: In addition, our local charters have won numerous awards throughout our footprint for being great places to work and do business with.

Todd Gipple: We believe that this leads to important outcomes such as low turnover, improved productivity, higher profitability, and enhanced shareholder value.

Todd Gipple: We believe that this leads to important outcomes, such as low turnover improved productivity higher profitability and enhance shareholder value.

Todd Gipple: Finally, we operate in some of the most vibrant midsized markets in the Midwest.

Todd Gipple: Finally, we operate in some of the most vibrant mid-sized markets in the Midwest.

Todd Gipple: Our markets include regional economies with a diverse mix of commercial, industrial, and technology focused activities.

Todd Gipple: Our markets include regional economies with a diverse mix of commercial industrial technology focused activity.

Todd Gipple: These areas attract highly educated workforces, which helps drive steady economic growth, high relative household income, and low unemployment.

Todd Gipple: These areas attract highly educated Workforces, which helps drive steady economic growth high relative household income and low unemployment.

Todd Gipple: In the last five years we have nearly doubled our size outperforming many of our peers.

Todd Gipple: And the last five years, we have nearly double their size outperforming many of our peers.

Todd Gipple: Our total loans have grown at a compounded annual rate of 12% and our deposits at 10%.

Todd Gipple: These results have supported the 17% compounded annual growth in our core diluted earnings per share.

These results have supported a 17% compounded annual growth in our core diluted earnings per share.

Todd Gipple: And the 13% compounded annual growth.

Todd Gipple: and the 13% compounded annual growth in our tangible book value per share over the same period.

Todd Gipple: And our tangible book value per share over the same period.

Todd Gipple: We've grown at a consistent pace, but we've also significantly increased our profitability delivering annual core <unk> of.

Todd Gipple: We've grown at a consistent pace, but we've also significantly increased our profitability.

Todd Gipple: delivering annual core ROAA of 1.59% in 2022 and 1.41% in 2023, which is near the top of our peers.

Todd Gipple: One 9% in 2022 at one point or 1% in 2023, which is near the top of our peers.

Todd Gipple: for the full year 2023.

Todd Gipple: For the full year of 2023.

Todd Gipple: we delivered record net income of $113.6 million or $6.73 per diluted share.

Todd Gipple: We delivered record net income of $113 $6 million or $6 73 per diluted share.

Todd Gipple: After adjusting for non-core items, our adjusted net income for the year was $115.1 million and our adjusted diluted EPS was $6.82.

Todd Gipple: After adjusting for non core items, our adjusted net income for the year was $115 $1 million and our adjusted diluted EPS of $6 82.

Todd Gipple: Total loan and lease growth for the full year was 11% prior to securitizing $265 million of low income housing tax credit loans and 7% on a net basis.

Todd Gipple: Total loan and lease growth for the full year was 11% prior to securitizing $265 million of low-income housing tax credit loans and 7% on a net basis.

Todd Gipple: Our full year loan growth exceeded our guidance range of 8-10% provided at the beginning of the year.

Todd Gipple: Our full year loan growth exceeded our guidance range of 8% to 10% provided at the beginning of the year.

Todd Gipple: The robust loan growth was driven by our LIHTC lending program and solid performance from our traditional lending.

Todd Gipple: The robust loan growth was driven by our life Tech lending program and solid performance from our traditional lending business.

Given our current pipelines and ongoing strength of our markets. We are targeting loan growth of between eight and 10% for 2024 prior to our planned loan Securitizations we.

Todd Gipple: Given our current pipelines and ongoing strength of our markets, we are targeting loan growth of between 8% and 10% for 2024 prior to our planned loan securitization.

Todd Gipple: We are planning our next securitization of LIHTC loans of approximately $200 million in the middle of 2024.

Todd Gipple: We are planning our next securitization of <unk> loans of approximately $200 million in the middle of 2024.

Todd Gipple: We intend to use securitizations to manage our net annual loan growth in the range of 4 to 6%.

Todd Gipple: We intend to use securitizations to manage our net annual loan growth in the range of 4% to 6%.

Todd Gipple: The total deposits for the year grew $530 million, or 9%, as we continued to expand the number of client relationships and grew balances from existing client accounts.

Todd Gipple: Our total deposits for the year grew $530 million or 9% as we continued to expand the number of client relationships and grew balances from existing client accounts.

Todd Gipple: Poor Deposits Excluding Short-Term Broker Deposits increased $346 million or 6% for the year.

Todd Gipple: Core deposits, excluding short term broker deposits increased $346 million or 6% for the year.

Todd Gipple: We have built a strong and diversified deposit franchise over the past 30 years and our full year activity in 2023 reflects the importance of that franchise.

Todd Gipple: Growing core deposits remains a significant focus which we believe will drive long term shareholder value.

Todd Gipple: Growing Core Deposits remains a significant focus, which we believe will drive long-term shareholder value.

Todd Gipple: And accordingly, our bankers are incented to grow both deposits and loans.

Todd Gipple: Accordingly, our bankers, our incentives to grow both deposits and loans.

Todd Gipple: During the year, we grew non interest income by $52 million or 64% driven primarily by the strong growth in our capital markets revenue.

Todd Gipple: During the year, we grew non-interest income by $52 million or 64%, driven primarily by the strong growth in our capital markets revenue.

Todd Gipple: strong fee income overpowered the pressure on net interest income.

Todd Gipple: Strong fee income overpowered the pressure on net interest income.

Todd Gipple: Our asset quality remains excellent as the ratio of nonperforming assets to total assets was 40 basis points at the end of the year.

Todd Gipple: Our asset quality remains excellent as a ratio of non-performing assets to total assets was 40 basis points at the end of the year.

Todd Gipple: We are comfortable with our reserves, which represents 1.33% of total loans and leases held for investors.

Todd Gipple: We are comfortable with our reserves, which represents 133% of total loans and leases held for investment.

Todd Gipple: We remain disciplined with our reserves and continue to diligently monitor asset quality across all of our business lines.

Todd Gipple: While we are mindful of the impact that elevated interest rates may have on the economy, we remain cautiously optimistic about the relative economic resiliency of our markets.

Todd Gipple: While we are mindful of the impact that elevated interest rates may have on the economy, we remain cautiously optimistic about the relative economic resiliency of our market.

Todd Gipple: Additionally, our strong asset quality and consistent credit culture prepares us well to weather potential economic uncertainty.

Todd Gipple: Additionally, our strong asset quality and consistent credit culture.

Todd Gipple: Arizona, well to weather potential economic uncertainty.

Todd Gipple: Our capital levels are strong and we are focused on building upon our capital base in the year ahead.

Todd Gipple: Our capital levels are strong and we are.

Todd Gipple: Our focus on building upon our capital base in the year ahead.

Todd Gipple: We continue to target capital ratios in the top quartile of our peer group.

Todd Gipple: Continue to target capital ratios in the top quartile of our peer group.

Todd Gipple: We believe that our modest dividend strong earnings power and access to the securitization market will allow us to continue to grow capital faster than our peers.

Todd Gipple: We believe that our modest dividend, strong earnings power, and access to the securitization market will allow us to continue to grow capital faster than our peers.

Todd Gipple: In conclusion, I would like to thank our entire QCR Holdings team for their hard work and dedication to outstanding client service and for delivering record financial results.

Speaker Change: In conclusion, I would like to thank our entire QC, our holdings team for their hard work and dedication to outstanding client service.

Speaker Change: And for delivering record financial results our.

Todd Gipple: our employees feel our success and I am very proud of all that we've accomplished together in 2023.

Speaker Change: Our employees fuel our success and I'm very proud of all that we've accomplished together in 2023.

Todd Gipple: With that, I will now turn the call over to Todd to discuss our financial results in more

Speaker Change: With that I will now turn the call over to Todd to discuss our financial results in more detail.

Todd Gipple: Thank you Larry good morning, everyone. Thanks for joining us today.

Todd Gipple: Thank you, Larry. Good morning, everyone. Thanks for joining us today.

Todd Gipple: I'll start my comments with details on our balance sheet performance during the quarter.

Todd Gipple: I will start my comments with details on our balance sheet performance during the quarter.

Todd Gipple: We grew total loans held for investment 13% on an annualized basis in the fourth quarter. This was primarily driven by continued strength in our life Tech lending program and solid contributions from our traditional lending business as.

Todd Gipple: We grew total loans held for investment 13% on an annualized basis in the fourth quarter. This was primarily driven by continued strength in our LIHTC lending program and solid contributions from our traditional lending business.

Todd Gipple: As Larry mentioned, we successfully completed our first two loan securitizations in the fourth quarter, totaling $265 million.

Todd Gipple: As Larry mentioned, we successfully completed our first two loan securitization in the fourth quarter totaling $265 million.

Todd Gipple: The first securitization consisted of $130 million of tax-exempt LIHTC loans and was part of the Freddie Mac-sponsored N-Series.

Todd Gipple: The first securitization consisted of $130 million of tax exempt playtech loans. It was part of the Freddie Mac sponsored M series.

Todd Gipple: The second securitization consisted of $135 million of taxable LIHTC loans and was part of the Freddie Mac sponsored Q-Series.

Todd Gipple: Second securitization consisted of $135 million of taxable life Tech loans. It was part of the Freddie Mac sponsored Q series.

Todd Gipple: Upon closing of the securitizations and selling of these loans, we recognized a net gain on sale of $664,000.

Todd Gipple: Upon closing of the Securitizations and selling of these loans, we recognized a net gain on sale of 664000.

Todd Gipple: More importantly, the securitization strengthened our liquidity by lessening the pressure on higher cost funding, which further stabilized our deposit mix and enhanced our TCE ratio.

Todd Gipple: More importantly, the securitization strengthen our liquidity by lessening the pressure on higher cost funding, which further stabilized our deposit mix and enhanced our TCE ratio.

Todd Gipple: Our securitization strategy will enable us to continue to fund the growth of our life Tech lending business in.

Todd Gipple: Our securitization strategy will enable us to continue to fund the growth of our LIHTC lending business.

Todd Gipple: In addition, securitizations will add to the long-term sustainability of the corresponding capital markets revenue that we've received from this business.

Todd Gipple: In addition, securitizations will add to the long term sustainability of the corresponding capital markets revenue that we received from this business.

Todd Gipple: while maintaining the portfolio within our established concentration level.

Todd Gipple: Maintaining the portfolio within our established concentration levels.

Todd Gipple: Core deposits were relatively stable for the quarter. Our correspondent bank deposit portfolio typically falls temporarily in the fourth quarter as our clients position their balance sheets at year-end.

Todd Gipple: Core deposits were relatively stable for the quarter, our correspondent bank deposit portfolio typically falls temporarily in the fourth quarter as our clients position their balance sheets at year end.

Todd Gipple: Total Correspondent Deposits declined 55 million or 9% at quarter end and have since rebounded significantly, increasing 188 million or 35% by mid-January.

Todd Gipple: Total correspondent deposits declined $55 million or 9% at quarter end and have since rebounded significantly increasing 188 million or <unk>, 35% by mid January.

Todd Gipple: As Larry mentioned, we grew core deposits $346 million or 6% during 2023, which has allowed us to fund our strong loan growth.

Todd Gipple: As Larry mentioned, we grew core deposits 346 million or 6% during 2023, which has allowed us to fund our strong loan growth.

Todd Gipple: We place a high importance on the mix and diversification of our deposit base to provide the most cost-effective path in funding our growth.

Todd Gipple: We place a high importance on the mix and diversification of our deposit base to provide the most cost effective path and funding our growth.

Todd Gipple: We believe that our focus on growing core deposits will generate long-term value for our shareholders.

Todd Gipple: We believe that our focus on growing core deposits will generate long term value for our shareholders.

Todd Gipple: Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits.

Todd Gipple: Our total uninsured and uncollateralized deposits remained very low at 18% of total deposits. In addition, the company maintained approximately $3 1 billion of available liquidity sources at year end, which includes $1 2 billion of immediately available liquidity.

Todd Gipple: In addition, the company maintained approximately $3.1 billion of available liquidity sources at year-end, which includes $1.2 billion of immediately available liquidity.

Todd Gipple: Now turning to our income statement.

Todd Gipple: Now, turning to our income.

Todd Gipple: We delivered record net income of $32 9 million or $1 95 per diluted share for the quarter.

Todd Gipple: We delivered a record net income of $32.9 million, or $1.95 per diluted share for the quarter.

Todd Gipple: Our record results were driven by very strong non-interest income from capital markets revenue.

Todd Gipple: Our record results were driven by very strong noninterest income from capital markets revenue.

Todd Gipple: Our adjusted net income was $33.3 million or $1.97 per diluted share.

Todd Gipple: Our adjusted net income was $33 3 million or $1.97 per diluted share.

Todd Gipple: Net interest income was $55 7 million a modest increase from the prior quarter as we overpowered the securitization and sale of $265 million of loans we.

Todd Gipple: Net interest income was $55.7 million, a modest increase from the prior quarter, as we overpowered the securitization and sale of $265 million of loans.

Todd Gipple: We are pleased that adjusted NIM on a tax-equivalent yield basis improved by one basis point on a linked quarter basis to 3.29%, which was above the midpoint of our guidance range.

Todd Gipple: We are pleased that adjusted NIM on a tax equivalent yield basis improved by one basis point on a linked quarter basis to 3.29%, which was above the midpoint of our guidance range.

Todd Gipple: During the quarter, our loan and investment yields continued to expand and modestly outpaced the increase in our cost of funds.

Todd Gipple: We experienced a lower increase in 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.

Todd Gipple: We experienced a lower increase in 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.

Todd Gipple: We are pleased to see continued stabilization in our deposit mix.

Todd Gipple: In addition, our securitizations help lessen the pressure on higher cost funding, further stabilizing our deposits.

Todd Gipple: In addition, our Securitizations helped lessen the pressure on higher cost funding further stabilizing our deposit mix.

Todd Gipple: Looking ahead, we anticipate a continued pause from the Fed and a yield curve that continues to be partially inverted for the next quarter.

Todd Gipple: Looking ahead, we anticipate a continued pause from the fed and a yield curve that continues to be partially inverted for the next quarter.

Todd Gipple: At this point in the interest rate cycle, we expect that the increase in our average loan and investment yields will generally offset any further increase in our funding

Todd Gipple: At this point in the interest rate cycle, we expect that the increase in our average loan and investment yields will generally offset any further increase our funding costs.

Todd Gipple: As a result, we are guiding to a relatively static adjusted NEM TUI in the first quarter of 2024.

Todd Gipple: As a result, we are guiding to a relatively static adjusted NIM T Y in the first quarter of 2024.

Todd Gipple: with a range of five basis points of expansion on the high end and five basis points of compression on the lower.

Todd Gipple: With a range of five basis points of expansion on the high end and five basis points of compression on the low end.

We do expect that the fed will begin to cut short term interest rates later in the year. During 2023, our balance sheet has shifted from asset sensitive to a more moderate liability sensitive position with the funding mix shift to more higher beta funding.

Todd Gipple: We do expect that the Fed will begin to cut short-term interest rates later in the year. During 2023, our balance sheet has shifted from asset sensitive to a more moderate liability sensitive position, with the funding mix shift to more higher beta funding.

Todd Gipple: As a result, we are well positioned for a rates down scenario, particularly if the yield curve becomes less inverted at the same time.

Todd Gipple: As a result, we are well positioned for rates down scenario, particularly if the yield curve becomes less inverted at the same time.

Todd Gipple: turning to our non-interest income of $47.7 million for the fourth quarter which increased $21.1 million or 80%.

Todd Gipple: Turning to our noninterest income of $47 7 million for the fourth quarter, which increased $21 1 million or 80%.

Todd Gipple: Our capital markets revenue was a record $37 million this quarter, up from $15.6 million in the prior quarter.

Todd Gipple: Our capital markets revenue was a record 37 million this quarter up from $15 6 million in the prior quarter.

Todd Gipple: For the year, our capital markets revenue was $92.1 million, significantly in excess of our $45 to $55 million annualized guidance.

Todd Gipple: For the year, our capital markets revenue was $92 1 million significantly in excess of our $45 million to $55 million annualized guidance range.

Todd Gipple: Capital markets revenue surged late in the fourth quarter and was $37 million for the

Todd Gipple: Capital markets revenue surge late in the fourth quarter, it was $37 million for the quarter.

Todd Gipple: Our clients took advantage of the significant decrease in long-term interest rates late in the quarter to lock in attractive financing.

Todd Gipple: Our clients took advantage of the significant decrease in long term interest rates late in the quarter to lock in attractive financing terms.

Todd Gipple: Capital markets revenue from swap fees continues to benefit from the strong demand for affordable housing.

Todd Gipple: Capital markets revenue from swap fees continues to benefit from the strong demand for affordable

Todd Gipple: Even with our strong results in the fourth quarter, our LIHTC lending and capital markets revenue pipelines remain healthy.

Todd Gipple: Even with our strong results in the fourth quarter, our light tech lending and capital markets revenue pipelines remain healthy.

Todd Gipple: As a result, we are increasing our capital markets revenue guidance for the next 12 months to be in a range of $50 to $60 million.

Todd Gipple: As a result, we are increasing our capital markets revenue guidance for the next 12 months to be in a range of $50 million to $60 million.

Todd Gipple: In addition, we generated $4 $1 million of wealth management revenue in the fourth quarter up 9% from the third quarter.

Todd Gipple: In addition, we generated $4.1 million of wealth management revenue in the fourth quarter, up 9% from the third quarter.

Todd Gipple: For the full year, wealth management revenue was up 1.1 million, or 7%.

Todd Gipple: For the full year wealth management revenue was up $1 1 million or 7%.

Todd Gipple: Our wealth management teams continue to create new relationships, adding 340 new client relationships and $700 million in assets under management this past year.

Todd Gipple: Our wealth management teams continue to create new relationships, adding 340, new client relationships and $700 million in assets under management this past year.

Host: Thank you. Greetings and welcome to the QCR Holdings Incorporated Earnings Conference Call for the fourth quarter and full year 2023. Yesterday, after market close, the company distributed its fourth quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website, www.qcrh.com.

Todd Gipple: We are also pleased with the early results from our new wealth management business in the Southwest Missouri market at our Guaranty Bank chart.

Todd Gipple: We are also pleased with the early results from our new wealth management business in the southwest, Missouri market at our Guaranty Bank charter.

Todd Gipple: We have a highly experienced team in place that is already expanding the reach of our current wealth management business.

Todd Gipple: now turning to our expenses.

Todd Gipple: Now turning to our expenses.

Todd Gipple: Non-interest expense for the fourth quarter totaled $60.9 million compared to $51.1 million for the third quarter.

Noninterest expense for the fourth quarter totaled $60 9 million compared to $51 1 million for the third quarter.

Operator: With us today from management are Larry Helling, CEO, and Todd Gipple, President and CFO. Management will provide a brief summary of the financial results, and then we'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As a result, 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 measure.

Todd Gipple: The length quarter increase was primarily due to higher variable employee compensation based on our strong full-year results.

Todd Gipple: The linked quarter increase was primarily due to higher variable employee compensation based on our strong full year results.

Todd Gipple: After adjusting for the higher variable compensation, our normalized expenses were $51 9 million just above our guidance range.

Todd Gipple: After adjusting for the higher variable compensation, our normalized expenses were $51.9 million, just above our guidance.

Todd Gipple: Looking ahead to the first quarter of 2024, we anticipate that our level of noninterest expense will be in the range of $49 million to $52 million.

Todd Gipple: Looking ahead to the first quarter of 2024, we anticipate that our level of non-interest expense will be in the range of $49 to $52 million.

Todd Gipple: This guidance range reflects our focus on closely managing our recurring non-interest expenses during 2020.

Todd Gipple: This guidance range reflects our focus on closely managing our recurring noninterest expenses during 2024.

Todd Gipple: Now turning to asset quality, which continues to be quite strong.

Todd Gipple: During the quarter, NPAs declined by 500,000 to 34.2 million, or 40 basis points of total

Todd Gipple: During the quarter Npa's declined by 500000 to $34 2 million or 40 basis points of total assets.

Todd Gipple: The provision for credit losses was $5.2 million during the quarter, which included $2.5 million of provision for loans and leases and $2.7 million of provision for unfunded commissions.

Operator: 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 measure. As a reminder, this conference is being recorded and will be available for replay through January 31, 2024, starting this afternoon, approximately one hour after the completion of this call. It will also be accessible on the company's website. At this time, I will now turn the call over to Mr. Larry Helling, CEO. Please go ahead.

Todd Gipple: The provision for credit losses was $5 $2 million during the quarter, which included $2 5 million of provision for loans and leases and $2 7 million of provision for unfunded commitments.

Todd Gipple: The increased provision for credit losses on unfunded commitments was driven by the surge in commitments in our LIHTC lending business.

Todd Gipple: The increased provision for credit losses on unfunded commitments was driven by the surge in commitments and our life Tech lending business.

Todd Gipple: Our allowance for credit losses to total loans held for investment was 133%.

Todd Gipple: Our allowance for credit losses to Total Loans Help for Investment was 1.33%.

Todd Gipple: We expect to continue to maintain strong reserves given the uncertain economic environment.

Todd Gipple: We increased our tangible common equity to tangible assets ratio by 70 basis points to 8.75% at quarter end, up from 8.05% at the end of September.

Larry Helling: Thank you, operator. Welcome, everyone. And thank you for joining us today. I will start the call with a high-level overview of 2023 performance and the factors that continue to drive our success. Todd will follow with additional details on our financial results for the fourth quarter and full year. We delivered record fourth quarter and full year results, highlighted by significant fee income and robust loans. In addition, for the full year 2023, we completed our first two securitizations of low-income housing tax credit loans.

Todd Gipple: We increased our tangible common equity to tangible assets ratio by 70 basis points to 875% at quarter end up from 8.05% at the end of September the <unk>.

Todd Gipple: The fourth quarter improvement in our TCE ratio was driven by a combination of our strong earnings, loan securitizations, and a $25.4 million increase in AOCI.

Todd Gipple: <unk> fourth quarter improvement in our TCE ratio was driven by a combination over a strong earnings loan securitizations.

Todd Gipple: $25 4 million increase in a OCI.

Todd Gipple: The increase in AOCI was the result of growth in the value of our available-for-sale securities portfolio and certain derivatives due to the decline in long-term interest rates.

Todd Gipple: The increase in a OCI was the result of growth in the value of our available for sale securities portfolio and certain derivatives due to the decline in long term interest rates.

Todd Gipple: Our total risk based capital ratio was $14, one 5% at quarter end, a decline of 33 basis points.

Todd Gipple: Our total risk-based capital ratio was 14.15% at quarter end, a decline of 33 basis

Larry Helling: Group Core Deposits and maintain our strong asset quality. We continue to benefit from our diverse revenue sources, which include capital markets and wealth management, and our non-interest income for the year overpowered the pressure on our net interest income. We also continue to strengthen our capital levels with exceptional earnings performance. As previously announced on December 12th, we successfully closed our first two low-income housing tax credit loan securitization. The ability to securitize these loans is an important and effective tool in managing our liquidity and capital.

Todd Gipple: This was a result of the significant increase in total risk-weighted assets due to the growth in unfunded commitments related to our LIHTC lending business.

Todd Gipple: This was a result of the significant increase in total risk weighted assets due to the growth in unfunded commitments related to our life Tech lending business as well as growth in total loans and leases during the quarter.

Todd Gipple: as well as growth in total loans and leases during the course.

Todd Gipple: We are pleased to have increased our tangible book value per share by $3.48 or 35% annualized during the fourth quarter.

Todd Gipple: and 19% for the folio.

Todd Gipple: And 19% for the full year.

Todd Gipple: Finally, our effective tax rate for the quarter was 12% compared to 7% in the prior quarter.

Todd Gipple: The linked quarter increase was due primarily to the significantly higher capital markets revenue we earned during the quarter, increasing the mix of our taxable income as compared to our tax exempt.

Todd Gipple: Linked quarter increase was due primarily to the significantly higher capital markets revenue, we earned during the quarter, increasing the mix of our taxable income as compared to our tax exempt income.

Larry Helling: It also enhances the sustainability and continued growth of our LIHTC lending and related capital markets revenue. Our outstanding performance in 2023 is the result of our differentiated relationship-based community banking model. Our multi-chartered model enables our local management teams to respond with speed and agility to our client needs.

Todd Gipple: For the full year, our effective tax rate was 10%.

Todd Gipple: We continue to benefit from our tax exempt loan and bond portfolio.

Todd Gipple: We continue to benefit from our tax exempt loan and bond portfolios. As a result. This has helped our effective tax rate to remain one of the lowest in our peer group we.

Todd Gipple: As a result, this has helped our effective tax rate to remain one of the lowest in our

Todd Gipple: We expect the effective tax rate to continue to be in a range of 8% to 11% for the full year of 2022.

Todd Gipple: We expect the effective tax rate to continue to be in a range of 8% to 11% for the full year of 2024.

Larry Helling: This results in a superior client experience that outperforms larger national and regional banking alternatives. Our team of dedicated employees has driven our success. We have a strong corporate culture throughout our company, and our employees are engaged with our clients and heavily involved in our community. Recruiting and retaining talented employees is a top priority for us.

Todd Gipple: With that added context on our fourth quarter and full year financial results, let's open up the call for your questions.

Speaker Change: Thank you.

Todd Gipple: We will now begin the question and answer session.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.

Todd Gipple: To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the key.

Larry Helling: Our reputation and culture attract the best bankers in our market. We continue to receive high employee engagement scores, which are measured annually across our company. In addition, our local charters have won numerous awards throughout our footprint for being great places to work and do business.

Todd Gipple: If you are using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: Draw your question. Please press star, then two.

Todd Gipple: To withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

At this time, we will pause momentarily to assemble our roster.

Nathan Race: Our first question is from Nathan race with Piper Sandler. Please go ahead.

Speaker Change: Our first question is from Nathan Race with Piper Sandler. Please go ahead.

Larry Helling: We believe that this leads to important outcomes such as low turnover, improved productivity, higher profitability, and enhanced shareholder value. Finally, we operate in some of the most vibrant mid-sized markets in the Midwest. Our markets include regional economies with a diverse mix of commercial, industrial, and technology-focused activities. These areas attract highly educated workforces, which helps drive steady economic growth, high relative household income, and low unemployment.

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

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

Nathan Race: Hey.

Speaker Change: Appreciate the commentary, Todd, for the kind of static margin and consistent guidance that you provided last quarter there for the first quarter. We're just curious how you're kind of thinking about the margin impact from Fed rate cuts occurring at some point this year. I imagine, you know, with some of the LIHTC securizations that you guys completed in the fourth quarter, that maybe reduces your rate-sensitive assets. But we'll just be curious to kind of get your thoughts on kind of how the rate sensitivity stacks up today in terms of rate-sensitive assets.

Speaker Change: I appreciate the commentary for the kind of static margin and consistent guidance that you provided last quarter. There for the first quarter, just curious how youre kind of thinking about the margin impacts from fed rate cuts occur at some point this year I imagine with some of the latex securitization that you guys completed in the fourth quarter that may be reduces your.

Speaker Change: Rate sensitive assets, but would just be curious to kind of get your thoughts on kind of how the rate sensitivity stacks up today in terms of rate sensitive assets.

Larry Helling: In the last five years, we have nearly doubled our size, outperforming many of our peers. Our total loans have grown at a compounded annual rate of 12%, and our deposits have grown at 10%. These results have supported the 17% compounded annual growth in our core diluted earnings per share and the 13% compounded annual growth in our tangible book value per share over the same period. We've grown at a consistent pace, but we've also significantly increased our profitability, delivering annual core ROAA of 1.59% in 2022 and 1.41% in 2023, which is near the top of our peers. For the full year 2023, we delivered record After adjusting for non-core items, our adjusted net income for the year was $115.1 million, and our adjusted diluted EPS was $6.82.

Speaker Change: and on the other side,

Speaker Change: On the other side.

Speaker Change: have the balance sheet as well.

Speaker Change: Of the balance sheet is sure.

Speaker Change: Sure. Nate, the securitization does impact both sides of the balance sheet, obviously, but really it's a bigger win for us in terms of taking pressure off of funding costs, and that's a big part of the benefit we saw in the fourth quarter with a static NIM and our guide for Q1. I'll get to potential rate cuts here in a moment, but candidly, just to be transparent, we're really expecting static here in the first quarter, and that has a lot to do with, again, the dramatic slowing and the mix shift of our core deposit portfolio, and that's where securitization has really helped us.

Speaker Change: Sure Nate Yeah, the securitization does impact both sides of the balance sheet, obviously, but.

Speaker Change: Really it's a bigger win for us in terms of taking pressure off of our funding cost.

Speaker Change: And that's a big part of the benefit we saw in the fourth quarter with a static NIM and our guide for Q1 I'll get to potential rate cuts here in a moment.

Speaker Change: Candidly just to be transparent, we're really expecting static during the first quarter and that has a lot to do with.

Speaker Change: Again, the dramatic slowing and the mix shift of our core deposit portfolio and that's where securitization has really helped us so.

Speaker Change: I'll just be candid, my notes say relatively static.

Speaker Change: I'll just be candid my my note say relatively static.

Speaker Change: Deposit portfolio. It was actually very static very little movement, and that's really benefited us and we expect that to continue here in the first quarter.

Speaker Change: A deposit portfolio, it was actually very static, very little movement, and that's really benefited us, and we expect that to continue here in the first quarter.

Larry Helling: Total loan and lease growth for the full year was 11% prior to securitizing $265 million of low-income housing tax credit loans and 7% on a net basis. Our full year loan growth exceeded our guidance range of 8-10% provided at the beginning of the year. The robust loan growth was driven by our LIHTC lending program and solid performance from our traditional lending. Given our current pipelines and ongoing strength of our markets, we are targeting loan growth of between 8% and 10% for 2024 prior to our planned loan securitization. We are planning our next securitization of LIHTC loans of approximately $200 million in the middle of 2024. We intend to use securitizations to manage our net annual loan growth in the range of 4 to 6%. The total deposits for the year grew $530 million, or 9%, as we continued to expand the number of client relationships and grew balances from existing client accounts. Deposits Excluding Short-Term Broker Deposits increased $346 million, or 6% for the year.

Speaker Change: So given the thousands of items that impact margin, we think it's prudent to give a collar around that, hence the five up or five down.

Speaker Change: So given the thousands of items that impact margin, we think it's prudent to give a color around that hence the five up or down.

Speaker Change: What makes us feel comfortable with a relatively static NIM though is most of our loan growth in the fourth quarter was very late in the year in December.

Speaker Change: Well it makes us feel comfortable with a relatively static NIM, though is.

Speaker Change: Most of our loan growth in the fourth quarter was very late in the year in December.

Speaker Change: and we guided to another eight to 10% loan growth pace. So good loan growth is coming with some good pricing. So we're starting to get better pricing power on loan yields. That deposit mix I talked about is very static. And when we look at our CD repricing, whether it's core or brokered, we think we can be fairly neutral on repricing rates when we replace those with core deposits.

Speaker Change: And we do.

Speaker Change: We guided to another 8% to 10% loan growth pace. So good loan growth is coming with some good pricing. So we're starting to get.

Speaker Change: Better pricing power on loan yields that deposit mix I talked about is very static.

Speaker Change: And when we look at our CD repricing, whether it's core or brokered we think we can be fairly neutral on repricing.

Speaker Change: Repricing rates when we replace those with core deposits.

So for all those reasons, we're very comfortable.

Speaker Change: So for all those reasons, we're very comfortable really effectively guiding to a static margin. We'll get some better results.

Really effectively guiding to a static margin.

Speaker Change: We'll get some better results if we can claw back a few basis points on some of our higher beta deposits and we expect to do that and.

Speaker Change: if we can claw back a few basis points on some of our higher data deposits and we expect to do that and if we can get even better new loan pricing we may have poorer results than that if we don't get some cost of funds relief

Speaker Change: And if we can get even better new loan pricing. We may have poor results in that if we don't get some cost of funds relief.

Speaker Change: and if we don't see that yield expansion, but we certainly believe that we will.

Speaker Change: And if we don't see that yield expansion expansion, but we certainly believe that we will.

Larry Helling: We have built a strong and diversified deposit franchise over the past 30 years, and our full year activity in 2023 reflects the importance of that franchise. Growing Core Deposits remains a significant focus, which we believe will drive long-term shareholder value. And accordingly, our bankers are incented to grow both deposits and loans. During the year, we grew non-interest income by $52 million, or 64%, driven primarily by the strong growth in our capital markets revenue. Strong fee income overpowered the pressure on net interest income. Our asset quality remains excellent, as the ratio of non-performing assets to total assets was 40 basis points at the end of the year.

Speaker Change: and then maybe to get to your end question,

Speaker Change: And then maybe to get to your and question.

Speaker Change: Where do we sit in terms of sensitivity now with the change in our deposit mix and the securitization? We do present as slightly liability sensitive.

Speaker Change: Where do we sit in terms of sensitivity now with the.

The change in our deposit mix in the securitization.

Speaker Change: We do present as slightly liability sensitive.

Speaker Change: and not a high degree of precision around this yet but a 25 basis point cut might give us two to three million in NII annually and maybe three to five basis points of NIM accretion so we are situated from a balance sheet perspective to take advantage of rate cuts should they come later in the year.

Speaker Change: And not a high degree of precision around this yet.

Speaker Change: But a 25 basis point cut might give us $2 million to $3 million in NII annually.

And maybe three to five basis points of NIM.

Speaker Change: Accretion so.

Speaker Change: We are situated from a balance sheet perspective to take advantage of rate cuts should they come later in the year.

Speaker Change: Okay, Great and then just within the context of.

Speaker Change: Okay, great. And then just within the context of, you know, the 8 to 10% loan growth guidance for this year, curious how you guys are thinking about core deposit gathering prospects, if that can largely keep pace with loan growth, or do you expect kind of a moderate lag just given the likelihood for an additional securitization or two at some point?

Larry Helling: We are comfortable with our reserves, which represents 1.33% of total loans and leases held for investors. We remain disciplined with our reserves and continue to diligently monitor asset quality across all of our business lines. While we are mindful of the impact that elevated interest rates may have on the economy, we remain cautiously optimistic about the relative economic resiliency of our market. Additionally, our strong asset quality and consistent credit culture prepare us well to weather potential economic uncertainty. Our capital levels are strong, and we are focused on building upon our capital base in the year ahead. We continue to target capital ratios in the top quartile of our peer group. We believe that our modest dividend, strong earnings power, and access to the securitization market will allow us to continue to grow capital faster than our peers.

8% to 10% loan growth guidance for this year curious how you guys are thinking about.

Speaker Change: Core deposit gathering prospects at that cannot keep pace with loan growth or do you expect to kind of a moderate lag just given the likelihood for an additional securitization or two at some point.

Speaker Change: this year.

Speaker Change: This year.

Speaker Change: sure Nate we are incredibly focused on core deposit growth I'll let Larry tag on a little bit here but would just tell you that while our loan to deposit ratio floated up right at quarter end we have seen some nice inflows back in of deposits more seasonally here at the first of the

Speaker Change: Sure Nate we are.

Speaker Change: Credibly focused on core deposit growth.

Speaker Change: I'll, let Larry tag on a little bit.

Larry Helling: Here, but would just tell you that well.

Larry Helling: While our loan to deposit ratio floated up right at quarter end, we have seen some nice inflows backend of deposits more seasonally here at the first of the.

Speaker Change: versus the quarter, and our loan-to-deposit ratio is back down to 97, and we do expect to keep pace with our loan growth with core deposits. I know Larry's got some other comments around that.

Larry Helling: First of the quarter and our loan to deposit ratios back down to 97, and we do expect to keep pace.

Larry Helling: With our loan growth with core deposits I know Larry has got some other comments around that.

Larry Helling: Yeah, what I'd add, Nate, is we're in the middle of resetting incentives for 2024 with

Larry Helling: In conclusion, I would like to thank our entire QCR Holdings team for their hard work and dedication to outstanding client service and for delivering record financial results. Our employees feel our success, and I am very proud of all that we've accomplished together in 2023. With that, I will now turn the call over to Todd to discuss our financial results in more detail. Thank you, Larry. Good morning, everyone.

Yeah, what I'd add Nate as we're in the middle of resetting.

Larry Helling: Incentives for 2024 with.

Larry Helling: both staff and certainly there won't be any dramatic shift in how we look at things but a greater emphasis on deposit generation and incentives for our staff in 2024 to make sure that we keep paying.

Larry Helling: Both staff and certainly.

Larry Helling: There won't be any dramatic shift in how we look at things but.

Larry Helling: Greater emphasis on deposit generation and incentives first half of 2024 to make sure that we keep pace.

Speaker Change: Okay, great. And then just turning to the capital markets revenue, obviously really, really strong quarter here in 4Q. It sounds like the pipeline is still pretty strong just based on the increase in unfunded commitments within the loan provision this quarter. So we'd just be curious to hear if there was any pull through in activity, which again, it doesn't seem like was the case here in 4Q. And obviously you raised guidance, so we'd just love some updated commentary in terms of what you're seeing in terms of opportunities across that asset class today.

Larry Helling: Okay, Great and then just turning to the capital.

Larry Helling: Markets revenue, obviously really really strong quarter here in <unk> and it sounds like the pipeline is still pretty strong just based on the increase in unfunded.

Todd Gipple: Thanks for joining us today. I'll start my comments with details on our balance sheet performance during the quarter. We grew total loans held for investment by 13% on an annualized basis in the fourth quarter. This was primarily driven by continued strength in our LIHTC lending program and solid contributions from our traditional lending business. As Larry mentioned, we successfully completed our first two loan securitizations in the fourth quarter, totaling $265 million. The first securitization consisted of $130 million of tax-exempt LIHTC loans and was part of the Freddie Mac-sponsored N-Series.

Larry Helling: Commitments within the loan provision this quarter. So it would just be curious to hear if there was any pull through and activity, which again it doesn't seem like was the case here in <unk> and obviously.

Larry Helling: Obviously, you raised guidance so would just love some updated commentary in terms of what youre seeing in terms of opportunities across that asset class today.

Speaker Change: Sure I'll give it a crack here first of all.

Speaker Change: Sure, Nate, I'll give a crack here. First of all,

Speaker Change: As you know incredibly strong quarter.

Speaker Change: as you know, incredibly strong quarter.

Speaker Change: and the stars kind of aligned and what really happened is if you look back a little more historically at our

Speaker Change: And the stars kind of aligned.

Speaker Change: And what really happened is if you look back a little more historically at our.

Todd Gipple: The second securitization consisted of $135 million of taxable LIHTC loans and was part of the Freddie Mac-sponsored Q-Series. Upon closing on the securitizations and selling of these loans, we recognized a net gain on sale of $664,000. More importantly, the securitization strengthened our liquidity by lessening the pressure on higher-cost funding, which further stabilized our deposit mix and enhanced our TCE ratio. Our securitization strategy will enable us to continue to fund the growth of our LIHTC lending business. In addition, securitizations will add to the long-term sustainability of the corresponding capital markets revenue that we've received from this business, while maintaining the portfolio within our established concentration level. Core deposits were relatively stable for the quarter.

Speaker Change: ability to produce new business and fees. There was a dip in 2022.

Speaker Change: Our ability to produce new business in fees, there was a dip in 2022.

Speaker Change: and that was really caused by, you know, several factors, inflation,

Speaker Change: And that was really caused by.

Speaker Change: Several factors inflation.

Speaker Change: inability to get materials, availability of labor, and a spike in interest rates back in 2022.

Speaker Change: Ability to get material availability of labor and a spike in interest rates back in 2022.

Speaker Change: And then those variables started to ease in 2023 and we were on track to have a really solid pickup in swap fee income and capital markets revenue.

Speaker Change: And then.

Speaker Change: Those variables started to ease in 2023, and we were on track to have a really solid pickup in.

Speaker Change: Swap fee income and capital markets revenue.

Speaker Change: and then the long-ended yield curve dropped dramatically in the fourth quarter which caused our clients to you know say hey I want to lock in my funding costs as quickly as they could so they were pushing on us they were in our pipeline and now they're going we want to get our uh all of our variables lined up as quickly as we can so we had you know really strong fourth quarter and stronger than we anticipated most of it was a you know the 22 business that got closed in 2023 because of all those other historic variables we talked about

Speaker Change: And then.

Speaker Change: The long end of the yield curve dropped dramatically in the fourth quarter.

Speaker Change: Which caused our clients too.

Speaker Change: Hey, I want to lock in funding costs as quickly as they could so labor push on and they were in our pipeline and another one we want to get our.

Speaker Change: All of our variables wind up as quickly as we can so we had.

Speaker Change: Really strong fourth quarter and stronger than we anticipated most of it was.

Todd Gipple: Our correspondent bank deposit portfolio typically falls temporarily in the fourth quarter as our clients position their balance sheets at year-end. Total Correspondent Deposits declined 55 million, or 9%, at quarter end and have since rebounded significantly, increasing 188 million, or 35%, by mid-January. As Larry mentioned, we grew core deposits by 346 million, or 6%, during 2023, which has allowed us to fund our strong loan growth. We place a high importance on the mix and diversification of our deposit base to provide the most cost-effective path to funding our growth. We believe that our focus on growing core deposits will generate long-term value for our shareholders. Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits.

Speaker Change: The 22 business that got closed in 2023 because of all of those other historic variables we've talked about.

Speaker Change: So, you know, we were confident enough in our overall pipeline to look at it and say, okay, we're going to increase our guidance.

Speaker Change: So we were confident enough in our overall pipeline to look at it and say, okay, we're going to increase our guidance by.

Speaker Change: by $5 million for the year. And there is seasonal variability here, as you know. So I'd encourage you to maybe look back at the swap the income quarter to quarter.

Speaker Change: By $5 million for the year.

Speaker Change: And there is seasonal variability here as you know so I'd encourage you to maybe look back at the.

Speaker Change: Swap fee income.

Speaker Change: For the quarter.

Speaker Change: generally a little bit lighter in the first quarter of the year as

Speaker Change: It's generally a little bit lighter in the first quarter of the year.

Speaker Change: Our clients kind of reset their activities in the LIHTC space.

Speaker Change: Our clients kind of reset their activities.

Speaker Change: And the light Tech space.

Speaker Change: and so

Speaker Change: So.

Speaker Change: you know annually we feel really good about our guides.

Speaker Change: Annually, we feel really good about our guidance.

Speaker Change: and our pipeline of business. But if you look back at the history, the first quarter generally may perform maybe in the lower end of our annual guidance range. But certainly, we feel strongly about the ability to produce the guidance that we've given to you. If you look at the last three year averages in our SWAT business, a little over $60 million, that makes us feel good about that $50 to $60 million guidance number that we're giving.

Speaker Change: Our pipeline of business, but.

Speaker Change: But if you look back at the history.

Speaker Change: First quarter is generally.

Speaker Change: They perform maybe in the lower end of our annual guidance range.

Todd Gipple: In addition, the company maintained approximately $3.1 billion of available liquidity sources at year-end, which included $1.2 billion of immediately available liquidity. Now, turning to our income. We delivered a record net income of $32.9 million, or $1.95 per diluted share, for the quarter. Our record results were driven by very strong non-interest income from capital markets revenue. Our adjusted net income was $33.3 million, or $1.97 per diluted share.

But certainly we feel strongly about the ability to produce the guidance that we've given to you.

Speaker Change: If you look at the last three year averages.

Speaker Change: And our slot business, a little over $60 million.

Speaker Change: That makes us feel good about that $50 million to $60 million guidance number that we're giving you.

Speaker Change: Got it and if I could just ask one more follow up on across this line of business are you seeing any competitors pull back that are maybe more liquidity constrained or don't have the secondary.

Speaker Change: Got it. And if I could just ask one more follow-up across this line of business. Are you seeing any competitors pull back that are maybe more liquidity constrained or don't have the secondary?

Speaker Change: market options that you guys now have on the securitization front to continue to lean into this product, whereas maybe some competitors don't have those opportunities.

Market options are you guys now have on the securitization front to continue to lean into this product, whereas maybe some competitors don't have those opportunities.

Todd Gipple: Net interest income was $55.7 million, a modest increase from the prior quarter, as we overpowered the securitization and sale of $265 million of loans. We are pleased that adjusted NIM on a tax-equivalent yield basis improved by one basis point on a linked quarter basis to 3.29%, which was above the midpoint of our guidance range. During the quarter, our loan and investment yields continued to expand and modestly outpace the increase in our cost of funds. We experienced a lower increase in 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. We are pleased to see continued stabilization in our deposit mix. In addition, our securitizations help lessen the pressure on higher-cost funding, further stabilizing our deposits.

Speaker Change: yeah it certainly could be playing a factor in it it's hard to tell our competitors in this space are all the big national players and our value proposition in this space is really speed of execution and as we've talked previously the securitization gives us a lot of runway to continue to add business at a steady pace here so you know I don't necessarily know if you look at the 10 biggest banks

Speaker Change: Yes, it certainly could be playing a factor in it is starting to tell our competitors in this space are all the big National players.

Speaker Change: And our value proposition in this space is really speed of execution.

Speaker Change: As we've talked previously the securitization gives us a lot of runway to continue to add business at a steady pace here. So.

Speaker Change: I don't necessarily know if you look at the 10 biggest banks.

Speaker Change: It's hard for me to gauge whether they're feathering the throttle here a little bit in their lending in total, but it's really the 10, 15 biggest banks are our primary competitors.

Speaker Change: Hard for me to gauge whether there.

Speaker Change: On the throttle here a little bit.

Speaker Change: They are lending a total but it's really the 15 biggest banks are our primary competitors in this space.

Speaker Change: Okay, got it. And then just one last one for me. I imagine some of what we discussed last quarter on expenses, but I imagine the guidance of the first quarter kind of contemplates the middle end of the next 12-month capital markets revenue guidance. Is that a fair assumption again, Todd?

Speaker Change: Okay got it and then just one last one for me.

Speaker Change: I imagine some of what we discussed last quarter on expenses, but I imagine the guidance for the first quarter kind of contemplates the middle end of the next 12 months capital.

Speaker Change: Revenue guidance is that a fair assumption again Todd.

Todd Gipple: Looking ahead, we anticipate a continued pause from the Fed and a yield curve that continues to be partially inverted for the next quarter. At this point in the interest rate cycle, we expect that the increase in our average loan and investment yields will generally offset any further increase in our funding. As a result, we are guiding to a relatively static adjusted NEM TUI in the first quarter of 2024, with a range of five basis points of expansion on the high end and five basis points of compression on the lower. We do expect that the Fed will begin to cut short-term interest rates later in the year.

Todd Gipple: Yes, it is, Nate. That would be the assumption of somewhere in the middle of that guidance for the first quarter.

Todd Gipple: Yes, it is nate that that would be the assumption of somewhere in the middle of that guidance for the first quarter and where.

Todd Gipple: Candidly very pleased to be able to provide that kind of a guidance on non-adverse expense run rate. Our guide only moved up 2% year over year and testament to the strong team that we have.

Todd Gipple: Candidly very pleased to be able to provide that kind of a guidance on noninterest expense run rate our guide only moved up 2% year over year and.

Todd Gipple: Estimate.

Todd Gipple: The strong team that we have.

Todd Gipple: keeping an eye on expenses and efficiency and being able to produce these kind of results.

Todd Gipple: Keeping an eye on expenses and efficiency and being able to produce these kinds of results. So.

Todd Gipple: Yeah.

Todd Gipple: that really is in a nutshell why we're guiding that for Q1.

Todd Gipple: That really is in a nutshell why were guiding that for Q1.

Todd Gipple: During 2023, our balance sheet has shifted from an asset-sensitive to a more moderate liability-sensitive position, with the funding mix shift to more higher beta funding. As a result, we are well positioned for a rates down scenario, particularly if the yield curve becomes less inverted at the same time. Turning to our non-interest income of $47.7 million for the fourth quarter, which increased $21.1 million or 80%. Our capital markets revenue was a record $37 million this quarter, up from $15.6 million in the prior quarter.

Speaker Change: Okay, great congrats on a great quarter.

Speaker Change: Okay, great. Congrats on a great quarter.

Speaker Change: Thanks, Nathan.

Speaker Change: Thanks Nate.

Speaker Change: The next question is from Damon DelMonte with KBW. Please go ahead.

Speaker Change: The next question is from Damon Delmonte with K B W. Please go ahead.

Damon Delmonte: Hey, good morning, guys. So I hope you guys are doing well today.

Damon Delmonte: Hey, good morning, guys. I hope you guys are doing well today.

Speaker Change: Morning, Dana. Morning, we are.

Speaker Change: Good morning, Dave we are.

Excellent excellent just to follow up on <unk> question. There at the end about the expenses tied to we kind of think about that.

Speaker Change: Excellent, excellent. Just to follow up on Nate's question there at the end about on the expenses. So Todd, do we kind of think about, you know, the guided range in the first quarter of 49 to 52 would reflect kind of a seasonally weaker, slower spot fee income level. So as we go through the year, we're probably going to be growing outside of that range, because you're going to have...

Speaker Change: The guided range in the first quarter of 49 to 52 would reflect kind of a seasonally weaker slower swap fee income.

Speaker Change: A level so as we go through the year, we're probably going to be growing outside of that range, because youre going to have.

Todd Gipple: For the year, our capital markets revenue was $92.1 million, significantly in excess of our $45 to $55 million annualized guidance. Capital markets revenue surged late in the fourth quarter and was $37 million for the year. Our clients took advantage of the significant decrease in long-term interest rates late in the quarter to lock in attractive financing. Capital markets revenue from swap fees continues to benefit from the strong demand for affordable housing. Even with our strong results in the fourth quarter, our LIHTC lending and capital markets revenue pipelines remain healthy. As a result, we are increasing our capital markets revenue guidance for the next 12 months to be in a range of $50 to $60 million. In addition, we generated $4.1 million of wealth management revenue in the fourth quarter, up 9% from the third quarter. For the full year, wealth management revenue was up 1.1 million, or 7%.

Todd Gipple: presumably higher SWOT fees as we go through the year. Is that fair?

Speaker Change: Presumably higher swap fees as we go through the year that there.

Speaker Change: Yeah Damon.

Speaker Change: Yeah, Damon, kind of two-parter there. So as Larry described,

Speaker Change: Kind of a two parter there so.

Speaker Change: As Larry described we.

Speaker Change: we still expect solid results here in the first quarter from capital markets revenue but our expense guide would be based on the midpoint of those goal posts in terms of what we expect for the quarter so say 12 to 14 million and that would fit us within that guide we just gave you 49 to 52.

Speaker Change: We still expect a solid results here in the first quarter from capital markets revenue.

But our expense guide would be based on the midpoint of those goalposts in terms of what we expect for the quarter, So say $12 million to $14 million and that would set us within that guide. We just gave you a 49 to 52.

Speaker Change: What we like about our compensation structure here in Q T. R is a very high percentage of all all of our content is incentivized.

Speaker Change: What we like about our compensation structure here at QCR is a very high percentage of all of our comp is incentivized.

Speaker Change: So we would really only expect that non-interest expense result and guide to go up if we do have really outstanding results in terms of profitability. So in a quarter like we just had here in the fourth quarter, we can see a pretty high percentage of incentive comp jump for outstanding results like that. But we think...

Speaker Change: So we would really only expect that noninterest expense result, and guide to go up if we do have really outstanding results in terms of profitability. So in a in a quarter like we just had here in the fourth quarter.

Speaker Change: We can see a pretty high percentage of incentive comp jumped four outstanding results like that.

Todd Gipple: Our wealth management teams continue to create new relationships, adding 340 new client relationships and $700 million in assets under management this past year. We are also pleased with the early results from our new wealth management business in the Southwest Missouri market at our Guaranty Bank chart. We have a highly experienced team in place that is already expanding the reach of our current wealth management business. Now turning to our expenses, non-interest expense for the fourth quarter totaled $60.9 million compared to $51.1 million for the third quarter.

Speaker Change: But we think.

Speaker Change: That strong alignment is good for us where we reward our people after we reward shareholders and that's part of our strategy to sustain top quartile peer performance. So really the only outlier to that guidance would be if we're already providing really strong revenue outside of the guidance.

Speaker Change: That strong alignment is good for us where we reward our people after we reward shareholders and that's part of our strategy to sustained top quartile peer performance.

Speaker Change: So really the only outlier to that guidance would be if we're already providing really strong revenue outside of the guidance range.

Speaker Change: Got it. I appreciate that color. And then just to touch on the provision level here, you noted that the 133 reserve, you feel pretty comfortable with that. And this quarter included some allocation for unfunded commitments. How do we kind of think about balancing the traditional loan reserve and the unfunded commitments going forward? I mean, if you're continuing to book these loans, should we start to kind of incorporate a provision that's maybe not as high as this quarter, but maybe indicative of what we saw the first three quarters of 2023?

Got it I appreciate that color.

Speaker Change: And then just to touch on the.

The provision level here you noted that the $1 33 reserve you feel pretty comfortable with that and this quarter included.

Todd Gipple: The length of the quarter increase was primarily due to higher variable employee compensation based on our strong full-year results. After adjusting for the higher variable compensation, our normalized expenses were $51.9 million, just above our guidance. Looking ahead to the first quarter of 2024, we anticipate that our level of non-interest expense will be in the range of $49 to $52 million. This guidance range reflects our focus on closely managing our recurring non-interest expenses during 2020. Now turning to asset quality, which continues to be quite strong. During the quarter, NPAs declined by 500,000 to 34.2 million, or 40 basis points of total. The provision for credit losses was $5.2 million during the quarter, which included $2.5 million of provision for loans and leases and $2.7 million of provision for unfunded commissions. The increased provision for credit losses on unfunded commitments was driven by the surge in commitments in our LIHTC lending business.

Speaker Change: Some allocation for unfunded commitments.

Speaker Change: How do we kind of think about balancing the traditional loan reserve and the unfunded commitments going forward.

Speaker Change: If you're continuing to book these loans should we start to kind of incorporate a provision that's maybe not as high as this quarter, but you know maybe indicative of what we saw in the last three quarters or the first three quarters of 2023.

Speaker Change: Yeah, good question, Damon. As we think about

Speaker Change: Yeah. Good question Damon.

Speaker Change: As we think about her.

Speaker Change: provision expense. It was 18 basis points in 2023.

Speaker Change: Provision expense.

Speaker Change: It was 18 basis points in 2023.

Speaker Change: So if we think longer term,

Speaker Change: So if we think longer term.

Speaker Change: You know, we talked about credit historically on these calls and maybe with you individually, Damon, about things are returning to normal in a credit outlook standpoint, and that probably applies to provision too.

Speaker Change: We talked about credit historically on these calls and maybe with you individually damage to Bob.

Speaker Change: Things are returning to normal.

Speaker Change: On a credit outlook standpoint, and that probably applies a provision too.

Speaker Change: and so unfunded commitments was an outlier and that was a good thing this past quarter because you saw what that produced for us from a fee income standpoint and so that was certainly that level of provision needed for unfunded commitments will certainly come down and probably come back closer to normal as we go through the next few quarters.

Speaker Change: And so unfunded commitments was a outlier that was a good thing this past quarter, because you saw with that produce for us from a fee income standpoint, and so that was certainly that level of provision.

Speaker Change: Provision needed for unfunded commitments will certainly come down and probably come back closer to normal as we go through the next few quarters.

Speaker Change: But as you think about the long-term and credit returning to normal, you know, part of the provision is to replace charge-offs. And so, gee, I think it'd be a reasonable expectation to think that

Speaker Change: But as you think about the long term and credit returning to normal.

Speaker Change: Part of the provision is to replace charge offs.

Todd Gipple: Our allowance for credit losses to Total Loans Help for Investment was 1.33%. We expect to continue to maintain strong reserves given the uncertain economic environment. We increased our tangible common equity to tangible assets ratio by 70 basis points to 8.75% at quarter end, up from 8.05% at the end of September. The fourth quarter improvement in our TCE ratio was driven by a combination of our strong earnings, loan securitizations, and a $25.4 million increase in AOCI. The increase in AOCI was the result of growth in the value of our available-for-sale securities portfolio and certain derivatives due to the decline in long-term interest rates.

Speaker Change: And so.

Speaker Change: I think it would be a reasonable expectation to think that.

Speaker Change: Provision expense would stay steady year over year to a little bit higher as we go into what I think is maybe a more normalized credit environment as we come off a zero interest rates the last three, four years.

Speaker Change: Provision expense would stay steady year over year to a little bit higher as we go into what I think is maybe a more normalized credit environment as we come off of zero interest rates the last three or four years.

Speaker Change: Got it. Okay. That's helpful. That's all that I had. I'll step back. Thank you.

Speaker Change: Got it okay. That's helpful.

Speaker Change: That's all that I had I'll step back thank you.

Speaker Change: Thanks, Damon.

Speaker Change: Thanks Damian.

Speaker Change: The next question is from Brian Martin with Janie Montgomery Scott. Please go ahead.

Speaker Change: The next question is from Brian Martin with Janney Montgomery Scott. Please go ahead hey.

Brian Martin: Hey, good morning, guys. Great quarterback.

Brian Martin: Good morning, guys great quarter.

Brian Martin: Thanks, Brian. I just wanted to, just one follow-up on that provision question, Larry. I guess, was that total credit loss expense, or are you just referring to kind of the provision for loan losses, given kind of the dynamics this quarter with those unfunded commitments?

Brian Martin: Thanks, Brian Brian Hey, just wanted to just one follow up on the provision question. Larry I guess was that total credit loss expense or any I guess, you're just referring to kind of the provision for loan losses, given kind of the the dynamics this quarter with those unfunded commitments.

Larry Helling: Yeah, that was really just, this last quarter was a little unique because of the spike up in unfunded commitments. So the 18 basis points was total provision in 2023. You know, our net charge-offs for the year were 13 basis points.

Larry Helling: Yes that was really just this last quarter was a little unique because of the spike up in unfunded commitments. So the 18 basis points was total provision in 2023 our.

Todd Gipple: Our total risk-based capital ratio was 14.15% at quarter end, a decline of 33 basis points. This was a result of the significant increase in total risk-weighted assets due to the growth in unfunded commitments related to our LIHTC lending business, as well as growth in total loans and leases during the quarter. We are pleased to have increased our tangible book value per share by $3.48, or 35% annualized, during the fourth quarter and 19% for the folio. Finally, our effective tax rate for the quarter was 12% compared to 7% in the prior quarter. The linked quarter increase was due primarily to the significantly higher capital markets revenue we earned during the quarter, increasing the mix of our taxable income as compared to our tax-exempt income. For the full year, our effective tax rate was 10%.

Larry Helling: Net charge offs for the year were 13 basis points.

Larry Helling: that number is really pretty consistent with our last five year average.

Larry Helling: That number is really pretty consistent with our last five year average.

Larry Helling: but a little lower than our 10 year average, if you wanna go back and look at those. And so again, I think that as we expect things to normalize, as we get into a more normal interest rate environment, normal economic environment,

Larry Helling: But a little lower than our.

Larry Helling: 10 year average if you want to go back and look at those and so again I think as we expect things to normalize as we get into a more normal interest rate environment normal economic environment.

Larry Helling: you know, it'll probably move up slowly over time.

It will probably move up slowly over time.

Speaker Change: Gotcha. Okay. Yeah. And just the new loan yields in the quarter, kind of the new production you put on late in the quarter, can you give some color on just kind of what you were seeing there and then just maybe your outlook as far as what...

Speaker Change: Got you, Okay, Yeah and just.

Speaker Change: The new loan yields in the quarter cutting their production you put on late in the quarter can you give some color on just kind of what youre seeing there and then just maybe your outlook as far as what that.

Speaker Change: The production this year, how you're kind of thinking about where those yields are.

Speaker Change: Production this year, how youre kind of thinking about where those those yields are.

Speaker Change: Sure, Brian. Yeah, we actually saw a bigger delta in December between payoff rate and new funding rate than we had previously. So payoff rate

Speaker Change: Sure Brian Yeah, we actually saw a bigger delta in December between pay off rate and new funding rate than we had previously.

So payoff rate.

Speaker Change: 675 new fundings, 751 for 76 basis point delta, that's the highest that we've seen. That's one of the reasons again we feel very good about a more static margin from here on out.

Speaker Change: 675, new fundings of 751 for a 76 basis point Delta that's the highest that we've seen.

Todd Gipple: We continue to benefit from our tax-exempt loan and bond portfolio. As a result, this has helped our effective tax rate to remain one of the lowest in our industry. We expect the effective tax rate to continue to be in a range of 8% to 11% for the full year of 2022. With that added context on our fourth quarter and full year financial results, let's open up the call to your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. Ask your question. Please press the star, then two.

Speaker Change: That's one of the reasons again, we feel very good about a more static margin from here on out.

Speaker Change:

Speaker Change: Fundings on a tax-equivalent yield basis for floating rate loans, and that would be really the LIHTC portfolio, were $819 yield.

Speaker Change: Fundings on a tax equivalent yield basis for floating rate loans and that would be really the light tech portfolio.

Speaker Change: We're 819 yield.

Speaker Change: for December and we had a lot of production and still had a really high outcome there in terms of yield so feel very good about that and certainly we are starting to get more pricing power really all around the footprint of the company so our bankers are doing a great job helping us get paid

Speaker Change: For December and we had a lot of production and still had a really high outcome. There in terms of yields so feel very good about that and certainly we are starting to get more pricing power.

Speaker Change: All around the footprint of the company. So our bankers are doing a great job.

Speaker Change: Helping us get paid.

Speaker Change: Get paid better.

Speaker Change: Get paid better got.

Speaker Change: Gotcha. Okay, that's helpful. And Todd, I think you mentioned that the securitization could help the margin and then, you know, once you got past the first one, it could potentially offer some other benefits. Yeah, I guess as you look at potentially doing another one here mid-year, you know, any thought on how to think about, you know, the benefits that rolled through there or came through on this one as we look forward on that one?

Speaker Change: Got you Okay. That's helpful and Todd I think you mentioned that the securitization can help the margin and then once you get past the first one he could potentially offer some other benefits I guess as you look at potentially doing another one here in mid year any any thought on how to think about the benefits that rolled through there came through on this one as we look forward.

Operator: At this time, we will pause momentarily to assemble our roster. Our first question is from Nathan Race with Piper Sandler. Please go ahead. Hi, guys. Good morning.

Nathan Race: Thanks for taking the questions. Good morning, Nate. Good morning, Nate.

Speaker Change: On that one.

Sure.

Todd Gipple: Sure. We really view it as an incredibly helpful tool for us to help manage the balance sheet more efficiently is probably the right word. We know that when we sell off a couple hundred million dollars of high-quality assets that we're going to impact NII for a bit. And so the great news was we did that in the fourth quarter. We were able to overpower those assets going away and actually improve NII as part of the process. So as Larry has said, over the last several quarters, there's a whole lot of benefit to being able to securitize those assets. But with respect to margin, it really takes the pressure off of that new deposit funding. It really – we can see it. It's really been meaningful in terms of what it's done for us. For our deposit mix and pricing. And just to give you an example of how powerful that is, in the first quarter of this year, our cost of funds increased 53 basis points.

Larry Helling: Appreciate the commentary, Todd, for the kind of static margin and consistent guidance that you provided last quarter for the first quarter. We're just curious how you're thinking about the margin impact from Fed rate cuts occurring at some point this year. I imagine, you know, with some of the LIHTC securiizations that you guys completed in the fourth quarter, that maybe reduces your rate-sensitive assets. But we'll just be curious to kind of get your thoughts on kind of how the rate sensitivity stacks up today in terms of rate-sensitive assets, and on the other side, we have the balance sheet as well. Sure.

Todd Gipple: We really view it as a incredibly helpful tool for us to help manage.

Todd Gipple: The balance sheet more efficiently is probably the right word we know that when we sell off a couple of hundred million dollars of high quality assets that we're gonna impact NII for a bit and so the great News was we did that in the fourth quarter, we were able to overpower those assets going away.

Todd Gipple: And actually improve NII as part of the process. So as Larry has said over the last several quarters, there's a whole lot of benefit to being able to securitize those assets, but with respect to margin. It really takes the pressure off of.

Todd Gipple: Nate, the securitization does impact both sides of the balance sheet, obviously, but really, it's a bigger win for us in terms of taking pressure off of funding costs, and that's a big part of the benefit we saw in the fourth quarter with a static NIM and our guide for Q1. I'll get to potential rate cuts here in a moment, but candidly, just to be transparent, we're really expecting static here in the first quarter, and that has a lot to do with, again, the dramatic slowing and the mix shift of our core deposit portfolio. And that's where securitization has really helped us. I'll just be candid; my notes say it is relatively static.

Todd Gipple: That new deposit funding it really we can see it it's really been meaningful in terms of what it's done for our deposit mix and pricing and just to give you. An example of how powerful that is in.

Todd Gipple: In the first quarter of this year, our cost of funds increased 53 basis points.

Todd Gipple: In the second quarter was 43 basis points in the third quarter was 33 basis points kind of interesting symmetry. There the last last quarter in the fourth quarter. When we did the securitization our cost of funds only went up 14 basis points.

Todd Gipple: In the second quarter, it was 43 basis points. In the third quarter, it was 33 basis points. Kind of interesting symmetry there. The last quarter, in the fourth quarter, when we did the securitization, our cost of funds only went up 14 basis points.

Todd Gipple: So it's a very powerful tool for us to help manage a more effective balance sheet and efficient balance.

Todd Gipple: So it's a very powerful tool for us to help manage a more effective balance sheet.

Todd Gipple: The deposit portfolio was actually very static, with very little movement, and that's really benefited us, and we expect that to continue here in the first quarter. So given the thousands of items that impact margin, we think it's prudent to give a collar around that, hence the five up or five down. What makes us feel comfortable with a relatively static NIM, though, is most of our loan growth in the fourth quarter was very late in the year, in December, and we guided to another eight to 10% loan growth pace. So, good loan growth is coming with some good pricing. So we're starting to get better pricing power on loan yields. But that deposit mix I talked about is very static.

Todd Gipple: <unk> balance sheet.

Speaker Change: yeah and the cost of funds the increase oh go ahead Larry I'm sorry oh I'm sorry Brian the thing I would add maybe is if you're thinking about gains on securitization sales

Todd Gipple: And the cost of funds increase.

Go ahead, Larry I'm sorry.

Larry Helling: I'm sorry, Brian the thing I would add maybe as if youre thinking about gains on securitization sales.

Speaker Change: uh you know we learned a lot doing our first two securitizations we haven't learned everything yet so we probably don't expect

Larry Helling: We learned a lot due on our first two securitizations, we haven't learned everything yet so we probably don't expect.

Speaker Change: you know only modest you know income statement impact on the next couple securitizations we can continue to learn about the right way to securitize and the timing of the quarter and you know we're pushing on the expense structure of our securitizations now it may take us a few more to get all that ironed out eventually there will be some gains but it might take us 2024 to get through a couple more securitizations to learn the right scaling and economies of scale and right expense structures because we're pushing on our providers to be more efficient there but it might be 2025 before we sort through lots of that

Larry Helling: Only modest.

Larry Helling: No.

Larry Helling: Income statement impact on the next couple of Securitizations, we can continue to learn about the right way to securitize in the timing of the quarter.

Larry Helling: We're pushing on the expense structure of our Securitizations now.

Larry Helling: Take us a few more to get all that ironed out eventually there will be some gain.

Larry Helling: Gains, but it might take us 2024 to get through a couple of more securitizations I learned the rate scaling and economies of scale.

Todd Gipple: And when we look at our CD repricing, whether it's core or brokered, we think we can be fairly neutral on repricing rates when we replace those with core deposits. So for all those reasons, we're very comfortable really effectively guiding to a static margin. We'll get some better results, if we can claw back a few basis points on some of our higher data deposits and we expect to do that and if we can get even better new loan pricing we may have poorer results than that if we don't get some cost of funds relief and if we don't see that yield expansion, but we certainly believe that we will, and then maybe to get to your end question, Where do we sit in terms of sensitivity now with the change in our deposit mix and the securitization?

Larry Helling: Right expense structures, because we're pushing on our providers to be more efficient there.

Larry Helling: It might be 2025 equal resort through lots of that.

Speaker Change: Gotcha. Okay. And the, Todd, the cost of funds exiting December is for the month of December. How did that look relative to the quarter?

Speaker Change: Gotcha, Okay and then.

Speaker Change: The cost of funds exiting December was for the month of December how does that look relative to the quarter.

Speaker Change: All right is it does it get mixed up with the securitization, where its maybe not a fair question or not appropriate.

Todd Gipple: Does it get mixed up with the securitization where it's maybe not a fair question or not appropriate?

Todd Gipple: No, I think it's certainly appropriate. It really didn't have much of any impact on cost of funds.

Speaker Change: No I think it's certainly appropriate it really it didn't have much of any impact on.

Cost of funds and.

Todd Gipple: We do present as slightly liability sensitive, and not a high degree of precision around this yet, but a 25 basis point cut might give us two to three million in NII annually and maybe three to five basis points of NIM accretion, so we are situated from a balance sheet perspective to take advantage of rate cuts should they come later in the year. Okay, great.

Todd Gipple: net interest margin. Our margin intra quarter was 327 in October, 329 in November, and 329 in December. And we reported 329. So again, we saw a very good outcome in terms of almost no mix change during the quarter. And again, that 14 basis point increase in cost of funds was the best since the tightening cycle started.

Speaker Change: Net interest margin our margin intra quarter was $3 27 in October $3 29 in November and $3 29 in December and we reported 329 so.

Speaker Change: Again, we saw a very good outcome in terms of.

Speaker Change: Almost no mix change during the quarter and again that 14 basis point increase in cost of funds was the best since.

Larry Helling: And then just within the context of, you know, the 8 to 10% loan growth guidance for this year, curious how you guys are thinking about core deposit gathering prospects, if that can largely keep pace with loan growth, or do you expect kind of a moderate lag just given the likelihood of an additional securitization or two at some point? This year, Sure Nate, we are incredibly focused on core deposit growth. I'll let Larry tag on a little bit here but would just tell you that while our loan-to-deposit ratio floated up right at quarter end, we have seen some nice inflows back in of deposits more seasonally here at the first of the year versus the quarter, and our loan-to-deposit ratio is back down to 97, and we do I know Larry's got some other comments around that.

Speaker Change:

Speaker Change: Tightening cycle started.

Speaker Change: And.

Todd Gipple: I would tell you we expect more of the same in the future in terms of helping us manage cost of funds.

Speaker Change: Hi.

Speaker Change: I'd tell you we expect more of the same in the future in terms of helping us manage cost of funds.

Speaker Change: Gotcha. Okay. And the last one for me was just on capital, really building it here. Just kind of wondering what your thoughts are on just utilization of capital this year. And does the buyback become a bit more part of the narrative or not really with the growth, given strong growth outlook you still have? Just trying to understand how you're thinking about that with continuing to want to build it.

Speaker Change: Got you, Okay, and then last one for me was just on capital.

Speaker Change: Really building it here just kind of wondering how you thought what your thoughts are on.

Speaker Change: Utilization of capital this year and does the buyback become.

Speaker Change: A bit more on the part of the narrative or not really with the growth given strong growth out like you still have just trying to understand how youre thinking about that would continue to want to build it.

Speaker Change: Yeah, Brian, good question. As we think about 24,

Speaker Change: Yes, Brian Good question as we think about 'twenty four.

Speaker Change:

Speaker Change: Thank you.

Speaker Change: I'd say it's too early to declare victory over the economy here yet. So we're going to be cautious going forward for a bit.

Brian Martin: I'd say, it's too early to declare victory over the economy here, yet so we're going to be cautious going forward for a bit.

Speaker Change: you know six weeks ago we thought we were going to have interest rates higher for longer and we're going to have a recession and now we've all changed our minds in the last six weeks so I'm hoping that the world is right but sometimes they're not and so you know it seems prudent for us to continue to hold on to capital for a while and so our focus is to really get our TCE into the top quartile of our peer group and build that fortress balance sheet and when we arrive there and think the other factors

Brian Martin: Six weeks ago, we thought we were going to have interest rates higher for longer and we're going to have a recession now we've all changed our minds in the last six weeks, so I'm, hoping that the world is right, but sometimes theyre not.

Larry Helling: Yeah, what I'd add, Nate, is we're in the middle of resetting incentives for 2024 with both staff, and certainly, there won't be any dramatic shift in how we look at things but a greater emphasis on deposit generation and incentives for our staff in 2024 to make sure that we keep paying. Okay, great. And then just turning to the capital markets revenue, obviously, a really, really strong quarter here in 4Q. It sounds like the pipeline is still pretty strong just based on the increase in unfunded commitments within the loan provision this quarter. So we'd just be curious to hear if there was any pull-through in activity, which again, doesn't seem like was the case here in 4Q. And obviously, you raised guidance, so we'd just love some updated commentary in terms of what you're seeing in terms of opportunities across that asset class today. Sure, Nate, I'll give it a crack here.

Brian Martin: So it seems prudent for us to continue to hold onto capital for a while and so our focus is to really get our TCE into the top quartile of our peer group and build a fortress balance sheet.

Brian Martin: And when we arrive there and I think the other factors.

Brian Martin: <unk>.

Our appropriations approved in time, we do want to be in a position to do buybacks, but it's probably certainly several quarters down the road.

Speaker Change: are appropriate and it's a prudent time. We do want to be in a position to do buybacks, but it's probably certainly several quarters down the road.

Speaker Change: Okay, that's all I had, guys. I appreciate it, and keep up the good work.

Speaker Change: Okay. That's that's all I had guys I appreciate it and keep up the good work.

Speaker Change: Thank you. Thanks, Brian.

Speaker Change: Thank you thanks, Brian.

Speaker Change: The next question is from Jeff <unk> with D. A Davidson. Please go ahead.

Speaker Change: The next question is from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeffrey Allen Rulis: Thanks. Good morning. Pretty good color on the margin discussion and the slight liability-sensitive position. I guess it's safe to say you'd be more confident in NII growth than margin expansion at this point. I don't want to put words in your mouth, but it sounds as if kind of the way you've positioned it

Jeff: Thanks, Good morning.

Jeff: Pretty good color on the <unk>.

Jeff: Margin discussion and the slight liability sensitive position.

Jeff: I guess, it's safe to say you'd be more confident in.

Todd Gipple: First of all, as you know, incredibly strong quarter, and the stars kind of aligned and what really happened is if you look back a little more historically at our ability to produce new business and fees. There was a dip in 2022, and that was really caused by, you know, several factors, inflation, inability to get materials, availability of labor, and a spike in interest rates back in 2022. And then those variables started to ease in 2023 and we were on track to have a really solid pickup in swap fee income and capital markets revenue, and then the long-ended yield curve dropped dramatically in the fourth quarter which caused our clients to you know say hey I want to lock in my funding costs as quickly as they could so they were pushing on us they were in our pipeline and now they're going we want to get our uh all of our variables lined up as quickly as we can so we had you know really strong fourth quarter and stronger than we anticipated most of it was a you know the 22 business that got closed in 2023 because of all those other historic variables we talked about, So, you know, we were confident enough in our overall pipeline to look at it and say, okay, we're going to increase our guidance, by $5 million for the year. And there is seasonal variability here, as you know.

Jeff: NII growth than margin expansion at this point I don't want to put words in your mouth, but it sounds as if kind of the way you positioned it.

Jeff: The confidence is might be bigger on on growing NII. Then then maybe margins is that fair.

Jeffrey Allen Rulis: The confidence might be bigger on growing NII than maybe margin. Is that fair?

Speaker Change: Yeah, Jeff, I think that is fair.

Speaker Change: Yeah, Jeff I think that is fair.

Speaker Change: We are trying to build a more efficient balance sheet and securitization that helps us with that. We feel very confident that the mixed change in terms of cost of funds and the mix of core deposits has really

Speaker Change: We are trying to build a more efficient balance sheet and securitization that helps us with that we feel very confident that the mix change in terms of cost of funds and the mix of core deposits has really.

Speaker Change: almost come to a halt. So now we're looking forward to that loan growth guide providing expanded NII and treading water here on margin would actually be a pretty good result considering the backdrop. So we feel very good about that.

Speaker Change: Almost come to a halt.

Speaker Change: So now we're looking forward to that.

Speaker Change: Loan growth guide, providing expanded NII and.

Treading water here on margin would actually be a pretty good result, considering the backdrop. So we feel very good about that.

Speaker Change: Okay.

Speaker Change: and then back to credit.

Speaker Change: And then.

Speaker Change: Back to credit.

Speaker Change: can we get a sense for the net charge offs picked up a little bit in the quarter and what was that and maybe

Speaker Change: Can we get a sense for the net charge offs picked up a little bit in the quarter.

Speaker Change: What was that and maybe any broad comments from a credit perspective, both of what's flowing through.

Speaker Change: broad comments from a credit perspective of what's flowing through.

Speaker Change: Jeff, I'll start with broad comments first and then probably try and, you know, peel it down to the net charge-offs a bit. Certainly, if you look at the underlying credit metrics,

Yeah, Jeff I'll start with broad comments version, and then probably trying to Peel it down to the net charge offs of bad.

Speaker Change: Certainly if you look at the underlying credit metrics.

Speaker Change: almost all of our measurements were slightly improved if you look at criticized classified MPAs and I think we continue to move toward a normalized environment which is

Speaker Change: Almost all of our measurements were slightly improved if you look at your criticized classified NPS.

Todd Gipple: So I'd encourage you to maybe look back at the swap income quarter to quarter, generally a little bit lighter in the first quarter of the year as our clients kind of reset their activities in the LIHTC space, and so you know, annually we feel really good about our guides and our pipeline of business. But if you look back at history, the first quarter generally may perform, maybe in the lower end of our annual guidance range. But certainly, we feel strongly about the ability to produce the guidance that we've given to you. If you look at the last three-year averages in our SWAT business, a little over $60 million, that makes us feel good about that $50 to $60 million guidance number that we're giving. I got it.

Speaker Change: And I think we continue to move toward a normalized environment, which is as.

Speaker Change: as I've talked about more for a couple of years now, normal is gonna feel bad because we've got, we're in this zero interest rate environment where nobody had any losses. Now I think we're moving toward normal. So, you know, we might've had a little bit of,

Speaker Change: As I've talked about more for a couple of years now normal is going to feel bad because we've got this zero interest rate environment, where nobody had any losses.

Speaker Change: I think we're moving towards normal.

Speaker Change: So.

Speaker Change: We might have had a little bit.

Speaker Change: There's a natural tendency in the fourth quarter to do a little cleanup, so I don't think there were any significant trends in movement. It was just our normal cleanup. Our net charge-offs for the year were 13 basis points.

Speaker Change: There's a natural tendency in the fourth quarter to do a little clean up. So I don't think there are any significant trends and movement. It was just.

Speaker Change: Our normal cleanup.

Speaker Change: Net charge offs for the year were 13 basis points.

Speaker Change: If you look over the last five years, our net charge-offs were 12 basis points, so it's really right on top of what we experienced over the last five years.

Speaker Change: Look over the last five years.

Speaker Change: Net charge offs were 12 basis points. So it's really right on top of what we experienced over the last five years.

Speaker Change: over the last 10 years our net charge-offs have been 17 basis points so gee over time I expect us to move back to kind of that normal and I think the industry number that everybody's talking about is 20 basis points of charge-off. Over time I think we'll move that way there certainly aren't any indications in our underlying credit quality metrics that point to that but it seems prudent that that's where we would kind of expect things to go over time.

Speaker Change: Over the last 10 years, our net charge offs have been 17 basis points. So over time, I expect us to move back to kind of abnormal.

Speaker Change: And I think the industry number that everybody is talking about is 20 basis points of charge offs.

Todd Gipple: And if I could just ask one more follow-up across this line of business. Are you seeing any competitors pull back that are maybe more liquidity constrained or don't have the secondary? market options that you guys now have on the securitization front to continue to lean into this product, whereas maybe some competitors don't have those opportunities, yeah it certainly could be playing a factor in it it's hard to tell our competitors in this space are all the big national players and our value proposition in this space is really speed of execution and as we've talked previously the securitization gives us a lot of runway to continue to add business at a steady pace here so you know I don't necessarily know if you look at the 10 biggest banks, It's hard for me to gauge whether they're feathering the throttle here a little bit in their lending in total, but it's really the 10, 15 biggest banks are our primary competitors. Okay, got it. And then just one last one for me. I imagine some of what we discussed last quarter on expenses, but I imagine the guidance of the first quarter kind of contemplates the middle end of the next 12-month capital markets revenue guidance. Is that a fair assumption again, Todd?

Speaker Change: Over time, I think we will move that way there certainly aren't any indications and our underlying credit quality metrics that point to that but it seems prudent that thats, where we would kind of expect things to go over time.

Speaker Change: Okay. So.

Speaker Change: Okay. So on the net charge, the charge offs this quarter, maybe some cleanup in Q4. It wasn't necessarily segment focused. It was chasing down a few things.

Speaker Change: On the net charge the charge offs this quarter, maybe some clean up in Q4 it wasn't necessarily.

Speaker Change: <unk> focused it was chasing.

Speaker Change: Chasing down a few things.

Speaker Change: Yeah, nothing significant that should impact the trends going forward.

Speaker Change: Yes, nothing nothing significant that should impact the trends going forward.

Speaker Change: Okay.

Speaker Change: Maybe the last one, just on kind of the growth and expectations for the coming year, pretty specific.

Speaker Change: Maybe last one just on kind of the growth.

Speaker Change: Expectations for the coming year.

Speaker Change: Pretty specific but.

Speaker Change: Geography or segment, any thoughts on where you see maybe some momentum in the footprint or within a certain line of business?

Speaker Change: Geography or segment any any thoughts on where you're seeing maybe some momentum.

Speaker Change: In the footprint or or within a.

Speaker Change: Certain line of business.

Speaker Change: Yeah, I would start Jeff with.

Speaker Change: Yeah, I'd start, Jeff, with...

Speaker Change: the thing that surprised me about 2023

Speaker Change: The thing that surprised me about 2023.

Speaker Change: was our traditional lending business, normal C&I and commercial real estate was actually fairly strong, up 5% to 6% for the year.

Speaker Change: Whereas our traditional lending business normal C&I and commercial real estate was actually fairly strong up 5% to 6% for the year.

Speaker Change: And then we've got this unique LIHTC business that, you know, provided some outsized growth.

Speaker Change: And then we've got this unique light tech business that provided some outsized growth.

Todd Gipple: Yes, it is, Nate. That would be the assumption of being somewhere in the middle of that guidance for the first quarter. Candidly, very pleased to be able to provide that kind of guidance on non-adverse expense run rate. Our guide only moved up 2% year over year, and this is testament to the strong team that we have, keeping an eye on expenses and efficiency and being able to produce these kind of results. That really is, in a nutshell, why we're guiding that for Q1. Okay, great. Congratulations on a great quarter. Thanks, Nathan. The next question is from Damon DelMonte with KBW. Please go ahead.

Speaker Change: You know, the thing that surprised me on the traditional business

The thing that surprised me on the traditional business.

Speaker Change: I don't think it's because the activity was that strong, but because some of our competitors

Speaker Change: I don't think thats, because the activity was that strong, but because some of our competitors.

Speaker Change: because of capital constraints, because of liquidity constraints, decided to kind of slow down their activity. So it's allowed us to grab market share in the markets we're in. And so that's a good thing because, you know, I know there's some names that we've worked on for a decade where we got business in 2023 because of the tone that was getting set with them by some other banks.

Speaker Change: Because of capital constraints because of liquidity constraints decided to kind of slow down their activity.

Speaker Change: It's allowed us to grab market share in the markets we're in.

Speaker Change: And so that's a good thing because I know there are some names that we've worked on for a decade, where we've got business in 2023.

Speaker Change: Does the tone that we're getting set with them by some other banks.

Speaker Change: um so you know I kind of expect that to continue about the way it was in 2024 but again because of the securitization tool we can do that without putting too much pressure on our funding

Speaker Change: So.

I kind of expect that to continue about the way it was in 2024.

Speaker Change: But again because of the securitization tool, we can do that without putting too much pressure on our funding.

Speaker Change: and we think we can certainly grow comfortably in that four to six percent range as we look for the next year.

Speaker Change: And we think we can certainly grow comfortably in that 4% to 6% range as we look for the next year.

Speaker Change: Mhm.

Damon Delmonte: Hey, good morning, guys. I hope you guys are doing well today. Good morning, Dana.

Speaker Change: Okay, thank you.

Speaker Change: Okay. Thank you.

Speaker Change: Thanks, Jeff.

Speaker Change: Thank you. Excuse me. The next question is from Daniel Tomeo with Raymond James. Please go ahead.

Speaker Change: Thank you excuse me. The next question is from Daniel Tamayo with Raymond James. Please go ahead.

Larry Helling: Morning, we are. Excellent, excellent. Just to follow up on Nate's question there at the end about the expenses. So Todd, do we kind of think about, you know, the guided range in the first quarter of 49 to 52 would reflect kind of a seasonally weaker, slower spot fee income level? So as we go through the year, we're probably going to be growing outside of that range because you're going to have... presumably higher SWOT fees as we go through the year. Is that fair?

Daniel Tomeo: Hey, good morning, guys.

Daniel Tamayo: Hey, good morning, guys.

Daniel Tomeo: Good morning. Good morning, Dave.

Speaker Change: Good morning.

Daniel Tomeo: Just a couple of follow-up questions. First, just on the NII benefit that you think you'll get from rate cuts that you talked about, Todd, just curious the immediacy of that in your budgeting in terms of how much lag you're expecting in funding costs or whatever the lag, if there is any, built into when the rate cuts come through versus when that actually hits the bottom

Daniel Tamayo: Just a couple of follow up questions.

Daniel Tamayo: First just on the NII.

Daniel Tamayo: NII benefit that you think you'll get from them.

Daniel Tamayo: Rate cuts that you you talked about Todd just curious.

Daniel Tamayo: The immediacy of that in your budgeting in terms of how many how.

Daniel Tamayo: How much lag you are expecting in our funding costs or whatever the the lag. If there is any built into when you get when the rate cuts come through versus one that actually hits the bottom line. Thanks.

Todd Gipple: Yeah, Damon, kind of a two-parter there. So, as Larry described, we still expect solid results here in the first quarter from capital markets revenue, but our expense guide would be based on the midpoint of those goal posts in terms of what we expect for the quarter, so say 12 to 14 million, and that would fit us within that guide we just gave you 49 to 52. What we like about our compensation structure here at QCR is that a very high percentage of all of our comp is incentivized. So we would really only expect that non-interest expense result and guide to go up if we do have really outstanding results in terms of profitability. So in a quarter like we just had here in the fourth quarter, we can see a pretty high percentage of incentive comp jump for outstanding results like that. But we think... That strong alignment is good for us where we reward our people after we reward shareholders, and that's part of our strategy to sustain top quartile peer performance. So really, the only outlier to that guidance would be if we're already providing really strong revenue outside of the guidance. Got it. I appreciate that color.

Todd Gipple: Yeah, sure, Danny. Good clarifying question there. They would be fairly immediate in terms of the NII and NIM impact.

Speaker Change: Yeah sure Danny good good clarification, good clarifying question there.

Speaker Change: They would be fairly immediate in terms of the NII and NIM impact.

Todd Gipple: Part of the significant increase in cost of funds, of course, has been the mix shift coming out of non-interest bearing and lower beta deposits and those that have gone into higher beta deposits. We think that we would have the ability to claw back those costs of funds very quickly with a rate cut, so nearly immediately. Don't think there would be much lag there if the Fed starts cutting.

Speaker Change: Part of the significant increase in cost of funds of course has been the mix shift coming.

Unnamed Speaker: new relationships, adding 340 new client relationships and 700 million in assets under management this past year. We are also pleased with the early results from our new wealth management business in the Southwest Missouri market at our Guarantee Bank Chart. We have a highly experienced team in place that is already expanding the reach of our current wealth management business. Now, turning to our expenses. Non-interest expense for the fourth quarter totaled $60.9 million, compared to $51.1 million for the third quarter.

Speaker Change: Coming out of noninterest bearing and low lower beta deposits and those that have gone in the higher beta deposits.

Speaker Change: We think that we would be ability would have the ability to claw back.

Speaker Change: Those cost of funds.

Speaker Change: Quickly with a rate cut so nearly immediately don't think there'd be much lag there.

Speaker Change: The fed starts cutting.

Speaker Change: Okay, great. Thanks, and then.

Speaker Change: Okay, great. Thanks. And then, secondly, just on the swap revenue, obviously, so, I mean, kind of looking across the year, it was a strong year, a very strong year, $92 million.

Speaker Change: Secondly, just on the the swap revenue.

Unnamed Speaker: The length quarter increase was primarily due to higher variable employee compensation based on our strong full year results. After adjusting for the higher variable compensation, our normalized expenses were $51.9 million, just above our guidance. Looking ahead to the first quarter of 2024, we anticipate that our level of non-interest expense will be in the range of $49 to $52 million. This guidance range reflects our focus on closely managing our recurring non-interest expenses during 2020. Now turning to asset quality, which continues to be quite strong. During the quarter, NPAs declined by 500,000 to 34.2 million, or 40 basis points of total activity.

Speaker Change: Obviously, so kind of looking across the year. It was it was a strong year, a very strong year and $92 million.

Speaker Change: in

Speaker Change: In.

Speaker Change: Probably a difficult environment with with rates going up.

Speaker Change: probably a difficult environment with rates going up. You obviously had the big result at the end of the quarter, but the annual guidance, $50 million to $60 million for 2024 is still quite a bit below that. I'm just curious how you think,

Speaker Change: Obviously, you had the big result at the end of the quarter, but you know the the annual guidance $50 million to $60 million for 2024 is still quite a bit below that I'm just curious how you think.

Todd Gipple: And then just to touch on the provision level here, you noted that the 133 reserve you feel pretty comfortable with that. And this quarter included some allocation for unfunded commitments. How do we kind of think about balancing the traditional loan reserve and the unfunded commitments going forward? I mean, if you're continuing to book these loans, should we start to kind of incorporate a provision that's maybe not as high as this quarter but maybe indicative of what we saw in the first three quarters of 2023? Yeah, a good question, Damon.

Speaker Change: You know, was there something about the end of the year, you know, lower rates that you don't think would continue to apply to the way that your clients react to lower rates in 2024? Or is there a possibility that, you know, if we do continue to get lower rates, that swap activity could be higher than your guidance?

Speaker Change: Was there something about the end of the year.

Speaker Change: Lower rates.

Speaker Change: That you don't think wood wood.

Speaker Change: We continue to apply it to the way that your clients react to lower rates in 2020 for or is there a possibility that if if.

Speaker Change: We do continue to get lower rates that that swap activity could be.

Speaker Change: Higher than your guidance.

Speaker Change: Yeah.

Unnamed Speaker: The provision for credit losses was $5.2 million during the quarter, which included $2.5 million of provision for loans and leases and $2.7 million of provision for unfunded commissions. The increased provision for credit losses on unfunded commitments was driven by the surge in commitments in our LIHTC lending business. Our allowance for credit losses to total loans held for investment was 1.33%. We expect to continue to maintain strong reserves given the uncertain economic environment. We increased our Tangible Common Equity to Tangible Assets Ratio by 70 basis points to 8.75% at quarter end, up from 8.05% at the end of September. The fourth quarter improvement in our TCE ratio was driven by a combination of our strong earnings, loan securitizations, and a $25.4 million increase in AOCI. The increase in AOCI was the result of growth in the value of our available-for-sale securities portfolio and certain derivatives due to the decline in long-term interest rates. Our total risk-based capital ratio was 14.15% at quarter end, a decline of 33 basis points.

Speaker Change: Danny, I'd say it's what happened in the fourth quarter was

Speaker Change: Danny I'd say it's.

Speaker Change: What happened in the fourth quarter was.

Speaker Change: you know a lot driven by

Speaker Change: A lot driven by.

Speaker Change: sharp drop in the long end of the yield curve and the lower rates. I mean, so that had a big factor in clients wanting to lock in rates as quickly as they could.

Speaker Change: The sharp drop in the long end of the yield curve and the lower rates.

Speaker Change: They had a big factor clients wanting to lock in rates as quickly as they could.

Todd Gipple: As we think about provision expense, it was 18 basis points in 2023. So if we think longer term, You know, we talked about credit historically on these calls and maybe with you individually, Damon, about things are returning to normal in a credit outlook standpoint, and that probably applies to provision too, and so unfunded commitments was an outlier, and that was a good thing this past quarter because you saw what that produced for us from a fee income standpoint, and so that level of provision needed for unfunded commitments will certainly come And so, gee, I think it'd be a reasonable expectation to think that provision expense would stay steady year over year to a little bit higher as we go into what I think is maybe a more normalized credit environment as we come off a zero interest rate environment for the last three, four years. Got it.

Speaker Change: And so there's, you know, maybe a little bit of the activity in 2024 got committed a little bit earlier than normal because that drop in rates and the client sense of urgency. But, you know, bigger part of it was really 2022 deals that got stalled into 2023 waiting for lower rates and for inflation to normalize.

Speaker Change: And so there is.

Speaker Change: Maybe a little bit of the activity in 2020 for GAAP.

Speaker Change: Got committed a little bit earlier than normal because of that drop in rates in the clients' sense of urgency.

Speaker Change: But a bigger part of it was really 2022 deals that got stalled into 2023 waiting for lower rates and for inflation and normalized.

Speaker Change: so you know it's hard to tell exactly how much of those is which

Speaker Change: So it's hard to tell exactly how much of those is which.

Speaker Change: but you know if you look over the long term

Speaker Change: But if you look over the long term.

Speaker Change: are normalized as more in that $50 to $60 million range, and we think we've got the capacity to do that through thick and thin. If you told me we're going to have another 100 basis point drop in the long end of the yield curve, okay, we could get another flurry of activity because clients clamoring to lock-in deals. That doesn't appear to be in the cards right now. Given what we have from an interest rate prospect, which is kind of steady throughout the year here, maybe a short end of the curve dropping a bit, we think this is a pretty reasonable guidance level.

Speaker Change: Our normalized is more in that $50 to $60 million range and we think we've got the capacity to do that kind of through thick and thin.

Speaker Change: If you told me we're going to have another 100 basis point drop in the long end of the yield curve. Okay. We could get another flurry of activity because clients clamoring to lock in deals that doesn't appear to be in the cards right now.

Speaker Change: But so given what we have from our interest rate prospect, which is kind of steady throughout the year here maybe <unk>.

Unnamed Speaker: This was a result of the significant increase in total risk-weighted assets due to the growth in unfunded commitments related to our LIHTC lending business, as well as growth in total loans and leases during the quarter. We are pleased to have increased our tangible book value per share by $3.48, or 35% annualized, during the fourth quarter. Finally, our effective tax rate for the quarter was 12%, compared to 7% in the prior quarter. The length of the quarter increase was due primarily to the significantly higher capital markets revenue we earned during the quarter, increasing the mix of our taxable income as compared to our tax-exempt income for the full year. Our effective tax rate was 10%.

Speaker Change: Short end of the curve dropping a bit.

Speaker Change: We think thats, a pretty reasonable guidance level.

Larry Helling: Okay. That's helpful. That's all that I had.

Speaker Change: Okay.

Speaker Change: Okay, and is the amount of, I mean, so by average the last two years, you're still over $130 million, so $65 million a year, so still above the guidance for 2024. I mean, are you expecting volume to be similar in 2024 from what you've done over the last couple of years, or is there some kind of rate impact in there that's capturing the difference?

Speaker Change: And as the amount of I mean, so if I average the last two years youre still over $130 million. So 65 million a year. So still above the guidance for 2020 for me is are you expecting.

Damon Delmonte: I'll step back. Thank you. Thanks, Damon. The next question is from Brian Martin with Janie Montgomery Scott. Please go ahead. Hey, good morning, guys. Great quarterback.

Brian Martin: Thanks, Brian. I just wanted to follow-up on that provision question, Larry. I guess, was that total credit loss expense, or are you just referring to kind of the provision for loan losses, given kind of the dynamics this quarter with those unfunded commitments? Yeah, that was really just this last quarter was a little unique because of the spike up in unfunded commitments. So the 18 basis points was total provision in 2023. You know, our net charge-offs for the year were 13 basis points. That number is really pretty consistent with our last five-year average, but a little lower than our 10 year average, if you wanna go back and look at those. And so again, I think that as we expect things to normalize, as we get into a more normal interest rate environment, a normal economic environment, you know, it'll probably move up slowly over time. Gotcha. Okay. Yeah.

Speaker Change: <unk> volume to be similar in 2024 from what you've done over the last couple of years or is there some kind of rate impact in there that.

Speaker Change: That's capturing the difference.

Speaker Change: Yes, I mean, a little bit we pulled some deals from 'twenty four into 'twenty three that probably the borrowers if we hadn't had that drop in rates would have waited.

Speaker Change: Yeah, I mean, a little bit, we pulled some deals from 24 into 23 that probably the borrowers, if we hadn't had that drop in rates, we would have waited a lot of their rates until, you know, first or second quarters or a little bit of that happened probably. And so that's part of the guidance there.

Speaker Change: And until first or second quarters are a little bit of that happen, probably and so thats part of the guidance there.

Operator: We continue to benefit from our Tax-Exempt Loan and Bond Portfolio. As a result, this has helped our effective tax rate to remain one of the lowest in our country. We expect the affected tax rate to continue to be in a range of 8% to 11% for the full year 2020. With that added context on our fourth quarter and full year financial results, let's open up the call to your questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: You know, part of it's just trying to make sure we give you a number that we can hit on an annual basis because we don't like disappointing you guys.

Speaker Change: Part of it is just trying to make sure. We give you a number that we could hit on an annual basis, because we don't like disappoint you guys.

Speaker Change: and so I think it's just

Speaker Change: And so I think it's just.

Speaker Change: The industry, there's still a tremendous backlog of need for affordable housing.

Speaker Change: The developers are finding it easier now to put the capital stacks together since theres been a tick down in the long term interest rates.

Speaker Change: the developers are finding it easier now to put the capital stacks together since there's been a tick down in the long-term interest rates. And if I knew what was gonna happen on rates, I could probably give you a little clearer view, but we're certainly trying to just give you a rational number that we think we can get.

Speaker Change: And.

Speaker Change: If I knew what was going to happen on rates I could probably give you a little clearer view.

Speaker Change: But we're certainly trying to just give you a rational number that we think we can get and I'd probably.

Larry Helling: And just the new loan yields in the quarter, kind of the new production you put on late in the quarter, can you give some color on just kind of what you were seeing there and then maybe your outlook as far as what... the production this year, how you're kind of thinking about where those yields are. Sure, Brian.

Speaker Change: You know, look back at the last four or five years of what we think normal is in our SWOT fees to give you some sense for why we think 50 to 60 is the reasonable guidance for today.

Look back at the last four or five years of what we think normalizes.

Operator: To draw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Nathan Race with Piper Sandler. Please go ahead.

Speaker Change: In our swap fees to give you some sense for why we think 50 to 60 is the reason guidance for today.

Speaker Change: That's great and I appreciate all the color I'm not trying to stick you with a higher a higher number just.

Speaker Change: That's great. I appreciate all the color. I'm not trying to stick you with a higher number. I'm just trying to understand the drivers here. I appreciate all that.

Speaker Change: Trying to understand the drivers here I appreciate all that.

Nathan Race: Hi guys, good morning. Thanks for taking the questions. Good morning, Nate.

Speaker Change: Thank you.

Todd Gipple: Yeah, we actually saw a bigger delta in December between payoff rate and new funding rate than we had previously. So payoff rate, 675 new fundings, 751 for a 76 basis point delta; that's the highest that we've seen. That's one of the reasons again we feel very good about a more static margin from here on out. Funding on a tax-equivalent yield basis for floating rate loans, and that would be really the LIHTC portfolio, were $819 per diluted share for December, and we had a lot of production and still had a really high outcome there in terms of yield, so I feel very good about that, and certainly we are starting to get more pricing Gotcha. Okay, that's helpful.

Speaker Change: The next question is a follow up from Nathan race with Piper Sandler. Please go ahead.

Speaker Change: The next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead.

Unnamed Speaker: I appreciate the commentary, Todd, for the kind of static margin and consistent guidance that you provided last quarter for the first quarter. We're just curious how you're thinking about the margin impact from Fed rate cuts occurring at some point this year. I imagine, you know, with some of the light tech securitizations that you guys completed in the fourth quarter, that maybe reduces your rate-sensitive assets, but we'll just be curious to kind of get your thoughts on kind of how the rate sensitivity stacks up today in terms of rate-sensitive assets and, on the other side, of the balance sheet as well.

Nathan Race: Yes, I appreciate you guys, taking the follow ups, just said one wealth management revenue a nice step up and it seems like you guys are still adding.

Nathan Race: Yep, I appreciate you guys taking the follow ups. Just said one on wealth management revenue, you know, a nice step up and it seems like you guys are still adding new clients there. So we're just be curious to get an update on how growth in that line of business is trending in southwest Missouri. And then also, I believe you guys are making a push into Des Moines as well.

Nathan Race: New clients.

Speaker Change: So were just be curious to get an update on how.

Speaker Change: Growth in that line of business is trending in southwest, Missouri, and then also I believe you guys are making a push into <unk>.

Speaker Change: <unk> as well.

Speaker Change: Good memory, Nate. We're very pleased with the start we have in southwest Missouri at the Guarantee Bank Charter. A couple of very experienced folks have gotten that off to a fast start. One of the reasons we're able to do that fairly efficiently is we don't need to recreate the back office structure for those folks. They can worry about serving clients and bringing in new AUM, and we can lean on the existing infrastructure that we already have created and wealth management really out of our Quad City Bank initial charter. So off to a good start there. We are continuing to pursue another start like this in the Des Moines Metro, and we're excited about that. We expect to have some news sometime this year on that front. But very proud of that wealth management team creating another 340 relationships this year and 760-some million in brand-new AUM. And the vast majority of that is in our higher leverage, higher profitability trust segment. So 700 million of that close to was in trust, which is the ultimate relationship business. So appreciate you asking about that, Nate.

Speaker Change: Yeah, good memory, Nate we're very pleased with the start we have in southwest, Missouri with the Guaranty Bank charter a couple of very experienced folks have gotten that off to a fast start.

Unnamed Speaker: Nate, you know, the securitization does impact both sides of the balance sheet, obviously, but really, it's a bigger win for us in terms of taking pressure off of funding costs. And that's a big part of the benefit we saw in the fourth quarter with a static NIM and our guide for Q1. I'll get to potential rate cuts here in a moment. But candidly, just to be transparent, we're really expecting static here in the first quarter, and that has a lot to do with, again, the dramatic slowing and the mixed shift of our core deposit portfolio. And that's where securitization has really helped us. So,

Speaker Change: One of the reasons, we're able to do that fairly efficiently is we don't need to recreate the back office structure for those folks they can worry about serving clients and bringing in new new AUM and we can lean on the existing infrastructure.

We already have created a wealth management really out of our Quad City Bank.

Todd Gipple: And Todd, I think you mentioned that the securitization could help the margin and then, you know, once you got past the first one, it could potentially offer some other benefits. Yeah, I guess as you look at potentially doing another one here mid-year, you know, any thoughts on how to think about the benefits that rolled through there or came through on this one as we look forward to that one? Sure.

Speaker Change: Initial charter.

Speaker Change: So off to a good start there we are continuing to pursue.

Speaker Change: Another start like this in the des Moines Metro and we're excited about that we expect to have some news.

Speaker Change: This year on that front.

Speaker Change: But very proud of that wealth management team.

Unnamed Speaker: I'll just be candid, my notes say relatively stable, a deposit portfolio. It was actually very static, very little movement, and that's really benefited us, and we expect that to continue here in the first quarter. So given the thousands of items that impact margin, we think it's prudent to give a collar around that, hence the five up or five down. What makes us feel comfortable with a relatively static NIM, though, is most of our loan growth in the fourth quarter was very late in the year, in December, and we guide it to another eight to ten percent loan growth pace, so good loan growth is coming with some good pricing, so we're starting to get better pricing power on loan yields. And when we look at our CD repricing, whether it's core or brokered, we think we can We'll get some better results.

Speaker Change: Creating another 340 relationships this year end.

Speaker Change: $767 million in brand new.

Todd Gipple: We really view it as an incredibly helpful tool for us to help manage the balance sheet more efficiently is probably the right word. We know that when we sell off a couple hundred million dollars of high-quality assets, we're going to impact NII for a bit. And so the great news was we did that in the fourth quarter.

Speaker Change: And the vast majority of that is in our higher leverage higher profitability Trust segment, so $700 million of that close to was entrust.

Which is the ultimate relationship business. So I appreciate you asking about that.

Todd Gipple: We were able to overcome those assets going away and actually improve NII as part of the process. So, as Larry has said, over the last several quarters, there's a whole lot of benefit to being able to securitize those assets. But with respect to margin, it really takes the pressure off of that new deposit funding. It really – we can see it.

Nate: Great. And then just on the tax rate going forward, I think last quarter we were talking between 9% and 10%. Is that still a good level to use going forward?

Speaker Change: Okay, Great and then just on the tax rate going forward I think last quarter talk in between 9%, 10% is that still a good number to use going forward.

Speaker Change: Yes, our guide was 8 to 11, still feel pretty good in that range. The only thing that would really fluctuate there would be an outsized capital markets quarter where all of a sudden taxable revenues spike up a bit more than tax-exempt, but feel very good about that effective tax rate. I'm proud to have that be one of the lowest in our peer group and, again, really helps us provide good earnings per share.

Speaker Change: Yes.

Speaker Change: Guide was eight to 11.

Todd Gipple: It's really been meaningful in terms of what it's done for us, for our deposit mix and pricing. And just to give you an example of how powerful that is, in the first quarter of this year, our cost of funds increased 53 basis points. In the second quarter, it was 43 basis points. In the third quarter, it was 33 basis points. Kind of interesting symmetry there.

Speaker Change: Still feel pretty good in that range. The only thing that would really fluctuate there would be.

Speaker Change: And outsized capital markets quarter, where all of a sudden taxable revenues spike up a bit more than tax exempt, but feel very good about that effective tax rate I'm proud to have that be one of the lowest in our in our peer group and again really helps us to provide good earnings.

Todd Gipple: The last quarter, in the fourth quarter, when we did the securitization, our cost of funds only went up 14 basis points. So it's a very powerful tool for us to help manage a more effective balance sheet and efficient balance, yeah and the cost of funds the increase oh go ahead Larry I'm sorry oh I'm sorry Brian the thing I would add maybe is if you're thinking about gains on securitization sales uh you know we learned a lot doing our first two securitizations we haven't learned everything yet so we probably don't expect you know only modest you know income statement impact on the next couple securitizations we can continue to learn about the right way to securitize and the timing of the quarter and you know we're pushing on the expense structure of our securitizations now it may take us a few more to get all that ironed out eventually there will be some gains but it might take us 2024 to get through a couple more securitizations to learn the right scaling and economies of scale and right expense structures because we're pushing on our providers to be more efficient there but it might be 2025 before we sort through lots of that, Gotcha. Okay. And the, Todd, the cost of funds exiting December is for the month of December. How did that look relative to the quarter? Does it get mixed up with the securitization where it's maybe not a fair question or not appropriate? No, I think it's certainly appropriate.

Speaker Change: For sure.

Speaker Change: gotcha and then maybe one last one for Larry I'm just curious to get your latest thoughts on the M&A environment obviously you guys are in a pretty advantageous position with your excess capital and your currency so just curious if you're any more or less optimistic on acquisitions occurring at some point this year or into next year

Speaker Change: Got you and then maybe one last one for Larry just curious to get your latest thoughts on the M&A environment. Obviously, you guys are in a pretty advantageous position with your excess capital and your currency.

Unnamed Speaker: If we can claw back a few basis points on some of our higher data deposits, and we expect to do that, and if we can get even better new loan pricing, we may have poorer results than that if we don't get some cost of funds relief and if we don't see that yield expansion, but we certainly believe that we will. And then maybe to get to your end question. Where do we sit in terms of sensitivity now with the change in our deposit mix and securitization? We do present this as slightly liability sensitive, and there is not a high degree of precision around this yet, but a 25 basis point cut might give us two to three million in NII annually and maybe three to five basis points of NIM accretion. So, from a balance sheet perspective, we are positioned to take advantage of rate cuts should they come later in the year. Okay, great.

Just curious if you're any more or less often mistaken.

Speaker Change: Acquisitions occurring at some point this year or into next year.

Speaker Change: Uh...

Speaker Change: Uh huh.

Larry Helling: Yeah, I think our first priority, Nate, is making sure we got

Speaker Change: Yeah, I think our first priority is making sure we get.

Nate: a Fortress balance sheet to basically support what's been really solid growth for us.

Speaker Change: A fortress balance sheet.

Speaker Change: It's basically support what's been really solid growth for us.

Nate: and we've got really good momentum so we don't want to do anything that messes that up.

Speaker Change: And we've got really good momentum. So we don't want to do anything that message that up.

Nate: you know longer term certainly we may have some appetite for M&A our stock you know if it start trading a little bit higher some of the economics might start to make sense in some M&A transactions

Speaker Change: Longer term certainly we may have some appetite for M&A.

Speaker Change: Our stock.

Speaker Change: Is it start trading a little bit higher some of the economics might start to make sense and some M&A transactions.

Nate: but we're going to be cautious for a bit yet because again as

Speaker Change: But we're going to be cautious for a bit yet because again.

Nate: I commented earlier we're not declaring victory over the economy yet because everybody's kind of changed their mind in the last 45 or 60 days on what's going to happen and I think we'll just be cautious for a bit yet and you know we still certainly continue to have

Speaker Change: I commented earlier, we're not declaring victory over the economy, yet because everybody has kind of changed your mind in the last 45 or 60 days on what's been happening I think we'll just be cautious for a bit yet.

Unnamed Speaker: And then just within the context of, you know, the eight to 10% loan growth guidance for this year. Curious how you guys are thinking about core deposit gathering prospects if that can largely keep pace with loan growth? Or do you expect kind of a moderate lag just given the likelihood of an additional securization or two at some point this year?

Speaker Change: We certainly continue to have.

Nate: ongoing discussions with things that we think might be a strategic fit long term. Probably nothing in the, you know, foreseeable future.

Speaker Change: Ongoing discussions with things that we think might be a repeat strategic debt long term probably nothing in the foreseeable future at all.

Speaker Change: Got it. Makes sense. I appreciate all the color. Thank you, guys.

Speaker Change: Got it makes sense.

Speaker Change: I appreciate all the color.

Speaker Change: Thank you guys.

Speaker Change: Thanks, Nate. Thanks, Nate.

Speaker Change: Thanks, Nick Thanks Nate.

Unnamed Speaker: Sure. Nate, we are incredibly focused on core deposit growth. I'll let Larry tag on a little bit here, but we'll just tell you that while our loan-to-deposit ratio floated up right at quarter end, we have seen some nice inflows back in of deposits more seasonally here at the first of the year versus the quarter, and our loan-to-deposit ratio is back down to 97, and we do expect to keep pace with our loan growth with core deposits. I know Larry's got some other comments around that.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Helling for any closing remarks.

Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Helling for any closing remarks.

Todd Gipple: It really didn't have much of an impact on cost of funds, or net interest margin. Our margin intra-quarter was 327 in October, 329 in November, and 329 in December, and we reported 329.

Larry Helling: Thank you for joining our call today, and we hope everyone remains healthy and safe during the new year have a great day, we look forward to speaking with you all again soon.

Larry Helling: Thanks for joining our call today. We hope everyone remains healthy and safe during the new year. Have a great day. We look forward to speaking with you all again soon.

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

Larry Helling: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Todd Gipple: So again, we saw a very good outcome in terms of almost no mix change during the quarter. And again, that 14 basis point increase in cost of funds was the best since the tightening cycle started. I would tell you we expect more of the same in the future in terms of helping us manage cost of funds. Gotcha. Okay. And the last one for me was just on capital, really building it here.

Larry Helling: Yes.

Larry Helling: Yeah.

Speaker Change: Thank you.

Larry Helling: [music].

Speaker Change: Thank you for watching!

Speaker Change: Thanks for watching!

Unnamed Speaker: Yeah, what I'd add, Nate, is we're in the middle of resetting incentives for 2024 with full staff, and certainly, it won't be a dramatic shift in how we look at things but a greater emphasis on deposit generation and incentives for our staff in 2024 to make sure that we keep pace. Okay, great. And then just turning the capital.

Speaker Change: Thanks for watching!

Speaker Change: Thank you for watching!

Larry Helling: Just kind of wondering what your thoughts are on just utilization of capital this year. And does the buyback become a bit more part of the narrative or not really with the growth, given the strong growth outlook you still have? Just trying to understand how you're thinking about that with continuing to want to build it. Yeah, Brian, good question. As we think about 24, thank you.

Speaker Change: Thank you for watching!

Speaker Change: Thank you for watching.

Unnamed Speaker: Markets revenue, obviously, was a really, really strong quarter here in 4Q. It sounds like the pipeline is still pretty strong just based on the increase in unfunded commitments within the loan provision this quarter, so we'll just be curious to hear if there was any pull through in activity, which again, it doesn't seem like was the case here in 4Q, and obviously, you raised guidance, so we would love to know some updated commentary in terms of what you're seeing in terms of opportunities across that asset class today. Sure, Nate, I'll give it a crack here.

Larry Helling: I'd say it's too early to declare victory over the economy here yet. So we're going to be cautious going forward for a bit, you know six weeks ago we thought we were going to have interest rates higher for longer and we're going to have a recession and now we've all changed our minds in the last six weeks so I'm hoping that the world is right but sometimes they're not and so you know it seems prudent for us to continue to hold on to capital for a while and so our focus is to really get our TCE into the top quartile of our peer group and build that fortress balance sheet and when we arrive there and think the other factors are appropriate and it's a prudent time. We do want to be in a position to do buybacks, but it's probably certainly several quarters down the road. Okay, that's all I had, guys.

Unnamed Speaker: First of all, as you know, an incredibly strong quarter, and the stars kind of aligned. And what really happened is, if you look back a little more historically at our ability to produce new business and fees, there was a dip in 2022. And that was really caused by, you know, several factors inflation, the inability to get materials, the availability of labor, and a spike in interest rates back in 2022, and then those variables started to ease in 2023, and we were on track to have a really solid pickup in swap fee income and capital markets revenue. But then the long end of the yield curve dropped dramatically in the fourth quarter, which caused our clients to say, hey, I want to lock So they were pushing on us.

Larry Helling: Okay.

Speaker Change: Thank you for watching!

Larry Helling: [music].

Larry Helling: Yeah.

Brian Martin: I appreciate it, and keep up the good work. Thank you. Thanks, Brian. The next question is from Jeff Rulis with D.A. Davidson.

Larry Helling: Okay.

Jeffrey Allen Rulis: Please go ahead. Thanks. Good morning.

Larry Helling: Yes.

Larry Helling: Pretty good color on the margin discussion and the slight liability-sensitive position. I guess it's safe to say you'd be more confident in NII growth than margin expansion at this point. I don't want to put words in your mouth, but it sounds as if, kind of the way you've positioned it, your confidence might be bigger on growing NII than maybe on margin. Is that fair?

Larry Helling: Yes.

Unnamed Speaker: They were in our pipeline, and now they're going, we want to get all of our variables lined up as quickly as we can. So we had a really strong fourth quarter and stronger than we anticipated. Most of it was the 22 businesses that got closed in 2023 because of all those other historic variables we talked about. So, you know, we were confident enough in our overall pipeline to look at it and say, okay, we're going to increase our guidance by $5 million for the year. And there is seasonal variability here, as you know.

Todd Gipple: Yeah, Jeff, I think that is fair. We are trying to build a more efficient balance sheet, and securitization that helps us with that. We feel very confident that the mixed change in terms of the cost of funds and the mix of core deposits has really, almost come to a halt. So now we're looking forward to that loan growth guide providing expanded NII, and treading water here on margin would actually be a pretty good result considering the backdrop. So we feel very good about that, and then back to credit, can we get a sense for the net charge-offs picked up a little bit in the quarter, and what that was, and maybe broad comments from a credit perspective on what's flowing through.

Unnamed Speaker: So I'd encourage you to maybe look back at the swap fee income quarter to quarter, generally a little bit lighter in the first quarter of the year as our clients kind of reset their activities in the LIHTC space, and so. You know, annually, we feel really good about our guys and our pipeline of business, but if you look back at history, the first quarter generally may perform maybe in the lower end of our annual guidance range, but certainly, we feel strongly about the ability to meet the guidance that we've given to you. If you look at the last three-year averages in our SWOT business of a little over 60 million dollars, that makes us feel good about that 50 to 60 million dollars in guidance number that we're giving. I got it.

Todd Gipple: Jeff, I'll start with broad comments first and then probably try and, you know, peel it down to the net charge-offs a bit. Certainly, if you look at the underlying credit metrics, almost all of our measurements were slightly improved if you look at criticized classified MPAs, and I think we continue to move toward a normalized environment, which is, as I've talked about more for a couple of years now, normal is gonna feel bad because we've got, we're in this zero interest rate environment where nobody had any losses. Now I think we're moving toward normal. So, you know, we might've had a little bit of a natural tendency in the fourth quarter to do a little cleanup, so I don't think there were any significant trends in movement. It was just our normal cleanup. Our net charge-offs for the year were 13 basis points.

Unnamed Speaker: If I could just ask one more question across this line of business. Are you seeing any competitors pull back that are maybe more liquidity constrained or don't have the secondary market options as you guys now have on the securitization front to, you know, continue leaning into this product, whereas maybe some competitors don't have those opportunities? Yeah, it certainly could be playing a factor in it. It's hard to tell, though, because our competitors in this space are all the big national players.

Unnamed Speaker: And our value proposition in this space is really speed of execution. And as we've talked previously, the securitization gives us a lot of runway to continue to add business at a steady pace. So, you know, I don't necessarily know if you look at the 10 biggest banks. It's hard for me to gauge whether they're, you know, feathering the throttle here a little bit, and they're lending in total, but it's really the 10, 15 biggest banks that are our primary competitors. Okay, got it. And then just one last one for me.

Larry Helling: If you look over the last five years, our net charge-offs were 12 basis points, so it's really right on top of what we experienced over the last five years. Over the last 10 years, our net charge-offs have been 17 basis points, so gee, over time, I expect us to move back to kind of that normal, and I think the industry number that everybody's talking about is 20 basis points of charge-off. Over time, I think we'll move that way. There certainly aren't any indications in our underlying credit quality metrics that point to that, but it seems prudent that that's where we would kind of expect things to go over time. Okay. So on the net charge, the charge-offs this quarter, maybe some cleanup in Q4. It wasn't necessarily segment focused. It was chasing down a few things.

Unnamed Speaker: Similar to what we discussed last quarter on expenses, I imagine the guidance for the first quarter kind of contemplates the middle end of the next 12-month capital markets revenue guidance. Is that a fair assumption again, Todd? Yes, it is, Nate. That would be the assumption of somewhere in the middle of that guidance for the first quarter, and we're, candidly, very pleased to be able to provide that kind of guidance on non-interest expense run rate. Our guide only moved up 2% year over year, and that's testament to the strong team that we have, keeping an eye on expenses and efficiency and being able to produce these kinds of results. That really is, in a nutshell, why we're guiding that for Q1. Okay, great, congrats on a great quarter. Thank you. The next question is from Damon DelMonte with KBW. Please go ahead.

Larry Helling: Yeah, nothing significant that should impact the trends going forward. Maybe the last one, just on kind of the growth and expectations for the coming year, pretty specific. Geography or segment, any thoughts on where you see maybe some momentum in the footprint or within a certain line of business? Yeah, I'd start, Jeff, with... the thing that surprised me about 2023 was our traditional lending business, normal C&I, and commercial real estate was actually fairly strong, up 5% to 6% for the year. And then we've got this unique LIHTC business that, you know, provided some outsized growth. But the thing that surprised me about the traditional business, I don't think it was because the activity was that strong, but because some of our competitors, because of capital constraints, because of liquidity constraints, decided to kind of slow down their activity.

Damon Delmonte: Hey, good morning guys. I hope you guys are doing well today. Good morning, Amanda.

Unnamed Speaker: Excellent, excellent. Just to follow up on Nate's question there at the end about the expenses. So Todd, do we kind of think about the guided range in the first quarter of 49 to 52 would reflect kind of a seasonally weaker, slower spot fee income level? So as we go through the year, we're probably going to be growing outside of that range because you're going to have, presumably, higher swap fees as we go through the year. Is that fair?

Unnamed Speaker: Yeah, Damon, kind of a two-parter there. As Larry described, we still expect solid results here in the first quarter from capital markets revenue, but our expense guide would be based on the midpoint of those goal posts in terms of what we expect for the quarter, so say $12 to $14 million, and that would fit us within that guide we just gave you of $49 to $52. What we like about our compensation structure here at QCR is that a very high percentage of all of our comp is incentivized. So we would really only expect that non-interest expense result and guide to go up if we do have really outstanding results in terms of profitability. So in a quarter like we just had here in the fourth quarter, we can see a pretty high percentage of incentive comp jump for outstanding results like that. But we think

Larry Helling: So it's allowed us to grab market share in the markets we're in. And so that's a good thing because, you know, I know there are some names that we've worked on for a decade where we got business in 2023 because of the tone that was being set with them by some other banks, um, so you know I kind of expect that to continue about the way it was in 2024, but again, because of the securitization tool, we can do that without putting too much pressure on our funding, and Okay, thank you.

Jeffrey Allen Rulis: Thanks, Jeff. Thank you. Excuse me.

Operator: The next question is from Daniel Tomeo with Raymond James. Please go ahead. Hey, good morning, guys. Good morning. Good morning, Dave.

Unnamed Speaker: That strong alignment is good for us, where we reward our people after we reward shareholders. And that's part of our strategy to sustain top quartile peer performance. So really, the only outlier to that guidance would be if we're already providing really strong revenue outside of the guidance. Got it. I appreciate that color.

Daniel Tomeo: Just a couple of follow-up questions. First, just on the NII benefit that you think you'll get from the rate cuts that you talked about, Todd, just curious about the immediacy of that in your budgeting in terms of how much lag you're expecting in funding costs or whatever the lag, if there is any, built into when the rate cuts come through versus when that actually hits the bottom. Yeah, sure, Danny. Good clarifying question there. It would be fairly immediate in terms of the NII and NIM impact. Part of the significant increase in the cost of funds, of course, has been the mix shift coming out of non-interest bearing and lower beta deposits and those that have gone into higher beta deposits.

Unnamed Speaker: And then just to touch on the provision level here, you noted that the 133 reserve you feel pretty comfortable with that, and this quarter included some allocations for unfunded commitments. How do we kind of think about balancing the traditional loan reserve and the unfunded commitments going forward? I mean, if you're continuing to book these loans, should we start to kind of incorporate a provision that's maybe not as high as this quarter but, you know, maybe indicative of what we saw the last three quarters of or the first three quarters of 2023? Yeah, good question, Damon.

Todd Gipple: We think that we would have the ability to claw back those costs of funds very quickly with a rate cut, so nearly immediately. I don't think there would be much lag there if the Fed starts cutting. Okay, great. Thanks. And then, secondly, just on the swap revenue, obviously, so, kind of looking across the year, it was a strong year, a very strong year, $92 million, in probably a difficult environment with rates going up. You obviously had the big result at the end of the quarter, but the annual guidance, $50 million to $60 million for 2024, is still quite a bit below that. I'm just curious how you think. Was there something about the end of the year, you know, lower rates that you don't think would continue to apply to the way your clients react to lower rates in 2024?

Unnamed Speaker: As we think about provision expense, it was 18 basis points in 2023. So if we think longer term, um, you know we talked about credit historically on these calls and maybe with you individually Damon about things are returning to normal in a credit outlook standpoint, and that probably applies to provision too. And so, unfunded commitments were an outlier, and that was a good thing this past quarter because you saw what that produced for us from a fee income standpoint. And so, that level of provision needed for unfunded commitments will certainly come down and probably come back closer to normal as we go through the next few quarters. But as you think about the long term and credit returning to normal, you know, part of the provision is to replace charge-offs.

Todd Gipple: Or is there a possibility that, you know, if we do continue to get lower rates, that swap activity could be higher than your guidance? Yeah. Danny, I'd say what happened in the fourth quarter was, you know, a lot driven by the sharp drop in the long end of the yield curve and lower rates. I mean, that had a big factor in clients wanting to lock in rates as quickly as they could.

Unnamed Speaker: And so, gee, I think it'd be a reasonable expectation to think that provision expense would stay steady year over year to a little bit higher as we go into what I think is maybe a more normalized credit environment as we come off of zero interest rates for the last three, four years. Thanks, Damon. The next question is from Brian Martin with Janie Montgomery Scott. Please go ahead.

Larry Helling: And so there's, you know, maybe a little bit of the activity in 2024 got committed a little bit earlier than normal because of that drop in rates and the client sense of urgency. But, you know, the bigger part of it was really 2022 deals that got stalled into 2023 waiting for lower rates and for inflation to normalize, so you know it's hard to tell exactly how much of those are which, but you know if you look over the long term, they're normalized as more in that $50 to $60 million range, and we think we've got the capacity to do that through thick and thin. If you told me we're going to have another 100 basis points drop in the long end of the yield curve, okay, we could get another flurry of activity because clients are clamoring to lock in deals. That doesn't appear to be in the cards right now, though.

Brian Martin: Hey, good morning, guys. Great quarter. Thanks, Brian. Thanks, Brian.

Unnamed Speaker: I just wanted to, just one follow-up on that provision question, Larry. I guess, was that total credit loss expense, or are you just referring to kind of the provision for loan losses given kind of the dynamics this quarter with those unfunded commitments? Yeah, that was really just this last quarter was a little unique because of the spike up in unfunded commitments. So the 18 basis points was total provision in 2023, and you know, our net charge-off for the year was 13 basis points. That number is really pretty consistent with our last five-year average, but a little lower than our 10-year average, if you want to go back and look at those. And so again, I think that as we expect things to normalize, as we get into a more normal interest rate environment, a normal economic environment, you know, it'll probably move up solely over time. Gotcha. Okay.

Larry Helling: Given what we have from an interest rate prospect, which is kind of steady throughout the year here, maybe a short end of the curve dropping a bit, we think this is a pretty reasonable guidance level. Okay, and the amount of, I mean, so by average for the last two years, you're still over $130 million, so $65 million a year, so still above the guidance for 2024. I mean, are you expecting volume to be similar in 2024 from what you've done over the last couple of years, or is there some kind of rate impact in there that's capturing the difference? Yeah, I mean, a little bit. We pulled some deals from 24 into 23 that probably the borrowers would have waited a lot on their rates until, you know, first or second quarters or a little bit of that happened probably.

Unnamed Speaker: Yeah. And just the new loan yields in the quarter, kind of the new production you put on late in the quarter, can you give some color on just kind of what you were seeing there and then maybe your outlook as far as what production this year, how you're kind of thinking about where those yields are. Sure Brian, we actually saw a bigger delta in December between the payoff rate and the new funding rate than we had previously. So payoff rate, 675; new funding, 751 for a 76 basis point delta. That's the highest number that we've seen.

Larry Helling: And so that's part of the guidance there. You know, part of it's just trying to make sure we give you a number that we can hit on an annual basis because we don't like disappointing you guys, and so I think it's just the industry. There's still a tremendous backlog of need for affordable housing, and developers are finding it easier now to put the capital stacks together since there's been a tick down in the long-term interest rates. And if I knew what was gonna happen with rates, I could probably give you a little clearer view, but we're certainly trying to just give you a rational number that we think we can get. You know, look back at the last four or five years of what we think normal is in our SWOT fees to give you some sense of why we think 50 to 60 is the reasonable guidance for today. That's great! I appreciate all the color. I'm not trying to stick you with a higher number. I'm just trying to understand the drivers here.

Unnamed Speaker: That's one of the reasons, again, we feel very good about a more static margin from here on out. Funding on a tax-equivalent yield basis for floating rate loans, and that would be really the LIHTC portfolio, were $819 per yuan, and we had a lot of production and still had a really high outcome there in terms of yield, so we feel very good about that. And certainly, we are starting to get more pricing power really all around the footprint of the company. So our bankers are doing a great job helping us get paid, and get paid better. I've got you.

Unnamed Speaker: Okay, that's helpful. And Todd, I think you mentioned that securitization could help the margin, and then, you know, once you get past the first one, it could potentially offer some other benefits. Yeah, I guess as you look at potentially doing another one here in midyear, you know, any thoughts on how to think about, you know, the benefits that roll through there came through on this one, as we look forward to that one. Sure.

Daniel Tomeo: I appreciate all that. Thank you. The next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead.

Unnamed Speaker: We really view it as an incredibly helpful tool for us to help manage the balance sheet more efficiently is probably the right word. We know that when we sell off a couple hundred million dollars of high-quality assets, we're going to impact NII for a bit. And so the great news was we did that in the fourth quarter.

Nathan Race: Yep, I appreciate you guys taking the follow-ups. I just said one on wealth management revenue, you know, a nice step up, and it seems like you guys are still adding new clients there. So we're just curious to get an update on how growth in that line of business is trending in southwest Missouri. And then also, I believe you guys are making a push into Des Moines as well.

Unnamed Speaker: We were able to overpower those assets going away and actually improve NII as part of the process. So, as Larry has said over the last several quarters, there's a whole lot of benefit to being able to securitize those assets. But with respect to margin, it really takes the pressure off of that new deposit funding. We can see that it's really been meaningful in terms of what it's done for our deposit mix and pricing. And just to give you an example of how powerful that is, in the first quarter of this year, our cost of funds increased 53 basis points. In the second quarter, it was 43 basis points. In the third quarter, it was 33 basis points. There is kind of an interesting symmetry there.

Todd Gipple: Good memory, Nate. We're very pleased with the start we have in southwest Missouri at the Guarantee Bank Charter. A couple of very experienced folks have gotten that off to a fast start. One of the reasons we're able to do that fairly efficiently is we don't need to recreate the back office structure for those folks.

Todd Gipple: They can worry about serving clients and bringing in new AUM, and we can lean on the existing infrastructure that we already have created and wealth management really out of our Quad City Bank initial charter. So, off to a good start there. We are continuing to pursue another start like this in the Des Moines Metro, and we're excited about that. We expect to have some news sometime this year on that front. But I'm very proud of that wealth management team creating another 340 relationships this year and 760-some million in brand-new AUM. And the vast majority of that is in our higher leverage, higher profitability trust segment. So 700 million of that close to was in trust, which is the ultimate relationship business.

Unnamed Speaker: The last quarter, in the fourth quarter, when we did the securitization, our cost of funds only went up 14 basis points. So it's a very powerful tool for us to help manage a more effective balance sheet and efficient balance. Yeah, and the cost of funds, the increase, go ahead, Larry. I'm sorry. Well, I'm sorry, Brian.

Unnamed Speaker: The thing I would add maybe is if you're thinking about gains on securitization sales, uh, we learned a lot doing our first two securitizations. We haven't learned everything yet, so we probably don't expect, only a modest, you know, income statement impact on the next couple of securitizations. We can continue to learn about the right way to securitize and the timing of the quarter And, you know, we're pushing on the expense structure of our securitizations. Now, it may take us a few more to get all that ironed out. Eventually, there will be some gains, but it might take us 2024 to get through a couple more securitizations to learn the right scaling and economies of scale and right expense structures because we're pushing our providers to be more efficient there. But it might be 2025 before we sort through lots of that. Gotcha. Okay. Todd, the cost of funds exiting December is for the month of December. How did that look relative to the quarter? Or does it get mixed up with securitization, where it's maybe not a fair question or not appropriate? No, I think it's certainly appropriate.

Todd Gipple: I so appreciate you asking about that, Nate. Great. And then just on the tax rate going forward. I think last quarter we were talking between 9% and 10%. Is that still a good level to use going forward? Yes, our guide was 8 to 11, and I still feel pretty good in that range. The only thing that would really fluctuate there would be an outsized capital markets quarter where all of a sudden taxable revenues spike up a bit more than tax-exempt, but I feel very good about that effective tax rate.

Todd Gipple: I'm proud to have that be one of the lowest in our peer group and, again, really helps us provide good earnings per share, gotcha and then maybe one last one for Larry I'm just curious to get your latest thoughts on the M&A environment obviously you guys are in a pretty advantageous position with your excess capital and your currency so just curious if you're any more or less optimistic on acquisitions occurring at some point this year or into next year, Uh... Yeah, I think our first priority, Nate, is making sure we got, a Fortress balance sheet to basically support what's been really solid growth for us, and we've got really good momentum so we don't want to do anything that messes that up, you know longer term certainly we may have some appetite for M&A our stock you know if it start trading a little bit higher some of the economics might start to make sense in some M&A transactions but we're going to be cautious for a bit yet because again as I commented earlier we're not declaring victory over the economy yet because everybody's kind of changed their mind in the last 45 or 60 days on what's going to happen and I think we'll just be cautious for a bit yet and you know we still certainly continue to have, ongoing discussions with things that we think might be a strategic fit long term. Probably nothing in the, you know, foreseeable future.

Unnamed Speaker: It really didn't have much of an impact on the cost of funds and the Net Interest Margin. Our margin intra-quarter was $3.27 in October, $3.29 in November, and $3.29 in December. And we reported $3.29.

Unnamed Speaker: So again, we saw a very good outcome in terms of almost no mixed change during the quarter. And again, that 14 basis point increase in cost of funds was the best since the tightening cycle started. And I would tell you we expect more of the same in the future in terms of helping us manage costs. Gotcha.

Unnamed Speaker: Okay, and the last one for me was just on capital, really building it here. Just kind of wondering what your thoughts are on just utilization of capital this year and whether the buyback becomes, you know, a bit more part of the narrative or not really with the growth, you know, given the strong growth outlook you still have. Just trying to understand how you're thinking about that and continuing to want to build it. Yeah Brian, good question. As we think about 24. Um...

Todd Gipple: Got it. It makes sense. I appreciate all the color. Thank you, guys. Thanks, Nate. Thanks, Nate. This concludes our question and answer session. I would like to turn the conference back over to Mr. Helling for any closing remarks. Thanks for joining us on our call today. We hope everyone remains healthy and safe during the new year. Have a great day. We look forward to speaking with you all again soon. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Unnamed Speaker: I'd say it's too early to declare victory over the economy here yet, so we're going to be cautious going forward for a bit. Six weeks ago, we thought we were gonna have interest rates higher for longer, and we're gonna have a recession. And now we've all changed our minds in the last six weeks. So I'm hoping that the world is right, but sometimes it isn't.

Unnamed Speaker: And so it seems prudent for us to continue to hold on to capital for a while. And so our focus is to really get our TCE into the top quartile of our peer group and build that forker's balance sheet. And when we arrive there and think the other factors are appropriate, it's a prudent time.

Unnamed Speaker: We do want to be in a position to do buybacks, but it's probably certainly several quarters down the road. Okay, that's all I had, guys. I appreciate it, and keep up the good work. Thank you.

Larry Helling: Thank you. Thank you for watching! Thank you for watching! Thank you for watching! Thank you for watching! transcript Emily Beynon transcript Emily Beynon, Thank you for watching! transcript Emily Beynon

Unnamed Speaker: Thanks, Brian. The next question is from Jeff Rulis with DA Davidson. Please go ahead. Thanks. Good morning.

Jeffrey Allen Rulis: Pretty good color on the margin discussion and the slight liability-sensitive position. I guess it's safe to say you'd be more confident in NII growth than margin expansion at this point. I don't want to put words in your mouth, but it sounds as if, kind of, the way you've positioned it, the confidence might be bigger on growing NII than maybe margin, is that fair? Yeah, Jeff, I think that is fair.

Unnamed Speaker: We are trying to build a more efficient balance sheet, and securitization that helps us with that. We feel very confident that the mixed change in terms of the cost of funds and the mix of core deposits has really almost come to a halt. So now we're looking forward to that loan growth guide, providing expanded NII and treading water here on margin would actually be a pretty good result considering the backdrop. So we feel very good about that. And then back to credit.

Unnamed Speaker: Can we get a sense for the net charge-offs picked up a little bit in the quarter? And what was that, and maybe some broad comments from a credit perspective of what's flowing through. And Jeff, I'll start with broad comments first, and then probably try and, you know, peel it down to the net charge-offs a bit.

Unnamed Speaker: Certainly, if you look at the underlying credit metric, almost all of our measurements were slightly improved if you look at criticized classified NPAs. And I think we continue to move toward a normalized environment, which is, as I've talked about more for a couple of years now, normal is going to feel bad because we've got, we're in this zero interest rate environment where nobody has had any losses. Now, I think we're moving toward normal. So, you know, we might've had a little bit of that. Oh, there's a natural tendency in the fourth quarter to do a little cleanup, so I don't think there were any significant trends in movement.

Unnamed Speaker: It was just our normal cleanup, you know; our net charge-off for the year was 13 basis points. If you look over the last five years, our net charge-off for 12 basis points, so it's really right on top of what we experienced over the last five years. Over the last 10 years, our net charge-offs have been 17 basis points.

Unnamed Speaker: So, gee, over time, I expect us to move back to kind of that normal, and I think the industry number that everybody's talking about is 20 basis points of charge-off. Over time, I think we'll move that way. There certainly aren't any indications in our underlying credit quality metrics that point to that, but it seems prudent that that's where we would kind of expect things to go over time. Okay, so on the net charge, the charge ops this quarter may need some cleanup in Q4. It wasn't necessarily segment focused; it was chasing down a few things.

Unnamed Speaker: Yeah, nothing that's significant that should impact the trends going forward. Maybe the last one, just on kind of the growth and expectations for the coming year, pretty specific. Geography or segment?

Unnamed Speaker: Any thoughts on where you're seeing maybe some momentum in the footprint or within a certain line of business? Yeah, I'd start Jeff with, The thing that surprised me about 2023 was our traditional lending business. Normal C&I and commercial real estate were actually fairly strong, up 5% to 6% for the year.

Unnamed Speaker: Um, and then we've got this unique light tech business that, you know, provided some outsized growth. So, um, You know, the thing that surprised me on the traditional business I don't think it's because the activity was that strong, but because some of our competitors, uh... because of capital constraints because of liquidity constraints decided to kind of slow down their activity so it's allowed us to grab market share in the markets we're in and so that's a good thing because you know i know there's some names that we've worked on for a decade where we got business in twenty twenty three because of the tone that was getting set with them by some other banks, So, you know, I kind of expect that to continue about the way it was in 2024, but again, because of the securitization tool, we can do that without putting too much pressure on our funding, and we think we can certainly grow comfortably in that 4% to 6% range as we look for the next year. Okay, thank you. Thanks, Jeff. The next question is from Daniel Tomeo with Raymond James. Please go ahead. Hey, good morning guys. Good morning.

Unnamed Speaker: Good, good, good, clarifying questions there. They would be fairly immediate in terms of the NII and NIM impact. Part of the significant increase in cost of funds, of course, has been the mix shift coming out of non-interest bearing and lower beta deposits, and those have gone into higher beta deposits. We think that we would have the ability to claw back those costs of funds very quickly with a rate cut, so nearly immediately. Don't think there'd be much lag there if the Fed starts cutting. Okay, great.

Unnamed Speaker: And then, secondly, just on the swap revenue, obviously, so I mean, kind of looking across the year, it was a strong year, a very strong year, $92 million, in probably a difficult environment with rates going up. You obviously had a big result at the end of the quarter, but, you know, the annual guidance, 50 to 60 million for 2024, is still quite a bit below that. I'm just curious how you think, you know, was there something about the end of the year, you know, lower rates that you don't think would continue to apply to the way that your clients react to lower rates in 2024? Or is there a possibility that, you know, if we do continue to get lower rates, that swap activity could be higher than your guidance? Yeah.

Unnamed Speaker: Danny, I'd say what happened in the fourth quarter was a lot driven by the sharp drop in the long end of the yield curve and lower rates. I mean, that had a big factor in clients wanting to lock in rates as quickly as they could. And so maybe a little bit of the activity in 2024 got recommitted, you know, got committed a little bit earlier than normal because of that drop in rates and the client's sense of urgency. But, you know, a bigger part of it was really 2022 deals that got stalled into 2023, waiting for lower rates and for inflation to normalize. So, you know, it's hard to tell exactly how much of each is which.

Unnamed Speaker: But, you know, if you look over the long term, they're normalized as more in that, you know, 50 to $60 million range. And we think we've got the capacity to do that kind of through thick and thin. You know, if you told me we're gonna have another 100 basis points drop in the long end of the yield curve, okay, we could get another flurry of activity because clients are clamoring to lock in deals. But that doesn't appear to be in the cards right now.

Unnamed Speaker: But so, you know, given what we have from an interest rate prospect, which is kind of steady throughout the year here, maybe a short end of the curve dropping a bit, we think this is a pretty reasonable guidance level. Okay, and the amount of, I mean, so if I average the last two years, you're still over 130 million, so 55 million a year. So still above the guidance for 2024. I mean, are you expecting volume to be similar in 2024 from what you've done over the last couple of years, or is there some kind of rate impact in there that's capturing the difference? Yeah, I mean, a little bit. We pulled some deals from 24 into 23 that probably the borrowers, if we hadn't had that drop in rates, would have waited to lock their rates in until, you know, the first or second quarters or a little bit of that happened.

Unnamed Speaker: And so that's part of the guidance there. Um, you know, part of it's just trying to make sure we give you a number that we can hit on an annual basis because we don't like disappointing you guys. Uh, and so I think it's just, uh, the industry, there's still a tremendous backlog of need for affordable housing.

Unnamed Speaker: The developers are finding it easier now to put the capital stacks together since there's been a tick down in the long-term interest rates. And, you know, if I knew what was going to happen with rates, I could probably give you a little clearer view. But you know, we're certainly trying to just give you a rational number that we think we can get, and I'd probably, You know, look back at the last four or five years of what we think normal is in our SWOT fees to give you some sense for why we think 50 to 60 is the reasonable guidance for today. That's great. I appreciate all the color. I'm not trying to stick you with a higher number. I'm just trying to understand the drivers here.

Unnamed Speaker: I appreciate all that. Yeah, thank you. The next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead.

Unnamed Speaker: We're very pleased with the start we have in southwest Missouri at the Guarantee Bank Charter. A couple of very experienced folks have gotten that off to a fast start. One of the reasons we're able to do that fairly efficiently is we don't need to recreate the back office structure for those folks.

Unnamed Speaker: They can worry about serving clients and bringing in new AUM, and we can lean on the existing infrastructure that we already have created and wealth management really out of our Quad City Bank initial charter. So off to a good start there. We are continuing to pursue another start like this in the Des Moines metro, and we're excited about that.

Unnamed Speaker: We expect to have some news sometime this year on that front, but we're very proud of that wealth management team creating another 340 relationships this year and 760-some million in brand-new AUM. And the vast majority of that is in our higher leverage, higher profitability trust segment. So 700 million of that, close to, was in trust, which is the ultimate relationship business.

Unnamed Speaker: So appreciate you asking about that, Nate. Great. And then just on the tax rate going forward, I think last quarter we were talking between 9 and 10 percent. Is that still a good level to use going forward? Yes, our guide was 8 to 11. I still feel pretty good in that range.

Unnamed Speaker: The only thing that would really fluctuate there would be an outsized capital markets quarter, where all of a sudden taxable revenues spike up a bit more than tax exempt. But I feel very good about that effective tax rate. Proud to have that be one of the lowest in our peer group.

Unnamed Speaker: And again, it really helps us provide good earnings per share. Gotcha, and then maybe one last one for Larry. I'm just curious to get your latest thoughts on the M&A environment. Obviously, you guys are in a pretty advantageous position with your excess capital and your currency, so I'm just curious if you're any more or less optimistic about acquisitions occurring at some point this year or into next year. Uh... Yeah, I think our, you know, first priority, Nate, is making sure we have the Fortress Balance Sheet to basically support what's been really solid growth for us. And we've got really good momentum, so we don't want to do anything that messes that up. Long term, certainly, we may have some appetite for M&A. Our stock, you know, if it starts trading a little bit higher, some of the economics might start to make sense in some M&A transactions.

Unnamed Speaker: But we're going to be cautious for a bit yet because, again, as... I commented early, we're not declared victory over the economy yet because everybody's kind of changed their mind in the last 45 or 60 days about what's going to happen, and I think we'll just be cautious for a bit yet and, you know, we certainly continue to have ongoing discussions with things that we think might be a strategic fit long term. Probably nothing in the, you know, foreseeable future, though.

Unnamed Speaker: Got it. It makes sense. I appreciate all the color. Thank you, guys. Thanks, Nate. This concludes our question and answer session. I would like to turn the conference back over to Mr. Helling for any closing remarks. Thanks for joining us on our call today. We hope everyone remains healthy and safe during the new year. Have a great day! We look forward to speaking with you all again soon. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Christian Johannsen, Francoise Kitt, Ben Lennon, Music Robert Parsons, Michael Keech, Sidney Strauss, Stacey Ray McCarter, algorithm Narrated. Lowerktom Addis, Hummel Germany, Padfelstaad, 1906 prehistoric, BF-WATCH TV 2021

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