Q2 2024 QCR Holdings Inc Earnings Call

Operator: Greetings and welcome to the QCR Holdings Incorporated earnings conference call for the second quarter of 2024. Yesterday after the market closed, the company distributed its second quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website at www.qcrh.com.

Greetings and welcome to the Q T. R Holdings incorporated earnings conference call for the second quarter of 2024.

Yesterday after market close the company distributed its second quarter earnings press release, if there is anyone on the call who has not received a copy you may access it on the company's website at Www Dot Q T. R H dotcom.

Operator: With us today from management are Mr. Larry Helling, CEO, and Mr. Todd Gipple, President and CFO. Management will provide a summary of the financial results, and then we'll open up the call for questions from analysts. Before we begin, I would like to remind you, 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 part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, etc., and predictions of the future are forward-looking statements, and actual results could differ materially from those projected.

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

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

Operator: Additionally, information on these factors is included in the company's SEC filings, which is available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Before we begin I would like to remind you everyone that sum up.

The information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities <unk> Securities and Exchange Commission as part of these guidelines any statements made during this call concerning the company's hopes beliefs expectations.

And predictions of the future are our forward looking statements and actual results could differ materially from those projected. Additionally.

Additionally, information on these factors is included in the company's SEC filings, which are there which is available on the company's website.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today.

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 Gap to Non-Gap Measure. As a reminder, this conference is being recorded and will be available for replay through August 1st, 2024, starting this afternoon approximately one hour after the completion of the call. It will also be accessible on the company's website. I would now like to turn the call over to Mr. Larry Helling at QCR Holdings. Please go ahead, sir.

As well as the reconciliation of the GAAP to non-GAAP measures.

As a reminder, this conference is being recorded and will be available for replay through August 1st of 2024, starting this afternoon approximately one hour after the completion of the call.

It will also be accessible on the company's website I would now like to turn the call over to Mr. Larry Helling at Q T. R Holdings. Please go ahead Sir.

Larry J. Helling: Thank you, operator. Welcome, everyone. And thank you for joining us today. I'll start by presenting some of the highlights from our strong performance for the quarter, and we'll conclude by recapping our strategic focus. Todd will then follow with additional details regarding our financial results for the quarter. We delivered outstanding second-quarter results, highlighted by expanded margin and growth in net interest income. We also had another quarter of strong capital markets revenue and well-controlled expenses. Our asset quality remains excellent, and we further strengthened our capital. In the second quarter, we generated net income of $29 million, or $1.72 per diluted share.

Thank you operator welcome everyone.

Thank you for joining us today.

I will start by presenting some of the highlights from our strong performance for the quarter and we'll conclude by recapping our strategic focus.

We will then follow with additional details regarding our financial results for the quarter.

We delivered outstanding second quarter results highlighted by expanded margin and growth in net interest income.

We also had another quarter of strong capital markets revenue and well controlled expenses.

Our asset quality remains excellent and we further strengthened our capital levels.

In the second quarter, we generated net income of $29 million or dollars 72 per diluted share.

Larry J. Helling: This resulted in an ROAA of 1.34% and an ROAE of 12.72%, which we believe is at the high end of our peer quality. Our net interest income increased by nearly 3% in the second quarter, an 11% annualized growth rate, fueled by higher average loan balances and an expanded market. Total unit deposit growth is 8% annual. Our year-to-date total loan growth is 9.5% annually, which is within our annual target range of 8 to 10%. Year-to-date loan growth, net of loans identified for securitization, stands at 2.1% annualized. Our loan growth has been driven by our low-income housing tax credit lending program and our traditional commercial lending. Margin pressure eased during the quarter as deposit costs further stabilized and loan yields increased.

This resulted in an R O a a 1.34%.

And in our O E 12, seven 2%, which we believe at the high end of our peers.

Our net interest income increased by nearly 3% in the second quarter and 11% annualized growth rate.

Fueled by higher average loan balances and an expanded margin.

Total year to date deposit growth is 8% annualized.

Our year to date total loan growth is nine 5% annualized which is within our annual target range of 8% to 10%.

Year to date loan growth net of balls identified for securitization stands at two 1% annualized.

Our loan growth has been driven by our low income housing tax credit lending program.

And our traditional commercial lending business.

Margin pressure ease during the quarter as deposit costs further stabilize and loan yields increased.

Larry J. Helling: As a result, our adjusted NIM expanded by two basis points from the previous quarter. Our fee income remained robust again this quarter, led by our capital markets revenue of $18 million. Furthermore, our wealth management business continues to experience exceptional growth. Our year-to-date assets under management have grown $628 million, or 12%, with nearly 250 new client relationships added in our established market. In addition, we recently expanded with key hires in the Southwest Missouri and Central Iowa markets.

As a result, our adjusted the NIM expanded two basis points from the previous quarter.

Our fee income remained robust again this quarter led by our capital markets revenue of $18 million.

Furthermore, our wealth management business continues to experience exceptional growth.

Our year to date assets under management have grown $628 million or 12% with nearly 250, new client relationships added in our established markets and.

In addition, we recently expanded with key hires in the southwest, Missouri in Central Iowa markets.

Larry J. Helling: Wealth management revenue year to date has increased 26% annualized over the same period in 2023. Over the last 10 years, our compound annual growth rate and assets under management have been a remarkable 12%, driving an 8% compound annual growth rate in non-interest fee income. During the second quarter, we maintained tight control over our operating expenses. Non-interest expenses decreased nearly 2% compared to the previous quarter.

Wealth management revenue year to date has increased 26% annualized over the same period in 2023.

Over the last 10 years, our compound annual growth rate in assets under management.

Been a remarkable 12% driving an 8% compound annual growth rate in non interest fee income.

During the second quarter, we maintained tight control over our operating expenses.

Non interest expenses decreased nearly 2% compared to the previous quarter.

Larry J. Helling: This reduction was achieved through a targeted focus on expenses at the local market level and greater efficiencies in our centralized back-office operations. All of this enabled us to strengthen our capital ratio during the quarter by growing our total risk-based capital and our common equity tier one capital ratio. Our asset quality remains excellent, and our current credit trends are stable. During the quarter, total criticized loans continued to decline for the third consecutive quarter, and net charge-offs also declined.

This reduction was achieved through a targeted focus on expenses at the local market level and greater efficiencies in our centralized back office operations.

All of this enabled us to strengthen our capital ratios during the quarter by growing our total risk based capital and our common equity tier one capital ratios.

Our asset quality remains excellent and our current credit trends are stable.

During the quarter total criticized loans continued to decline for the third consecutive quarter and net charge offs also declined.

Larry J. Helling: Non-performing assets as a percentage of total assets increased slightly, but remains well below our historic level. Our allowance for credit losses as a percentage of total loans held for investment was unchanged for the quarter at 1.33%.

Nonperforming assets as a percentage of total assets increased slightly but remains well below our historical averages.

Our allowance for credit losses, as a percentage of total loans held for investment was unchanged for the quarter at 1.33%.

Larry J. Helling: The increase in the provision for credit losses during the quarter was a result of strong loan growth and the impact of declining GDP on our CECL model factor. We continue to have rigorous underwriting standards, conduct thorough asset quality assessments across all loans, and maintain conservative reserves. We remain optimistic about the economic health of our markets and the financial well-being of our clients. We are not seeing any significant signs of economic softness across our businesses and markets.

The increase in the provision for credit losses. During the quarter was a result strong loan growth and the impact of declining GDP on our seasonal model factors.

We continue to have rigorous underwriting standards.

Thorough asset quality assessments across all loans and maintain conservative reserved.

We remain optimistic about the economic health of our markets and the financial well being of our clients.

We are not seeing any significant signs of economic softness across our businesses and markets.

Larry J. Helling: Commercial office space exposure continues to be modest at 3% of total loans with an average loan size of $898,000. These loans are primarily located in suburban markets and are performing in line with our expectations, with no repayment. We have a strong pipeline of high quality, low income housing tax credit loans. We consider this to be the best asset class in our loan portfolio. The entire light tech industry has a long track record of strong performance.

Commercial office space exposure continues to be modest at 3% of total loans with an average loan size of $898.

These loans are primary located in suburban markets and are performing in line with our expectations with no repayment concerns.

We have a strong pipeline of high quality low income housing tax credit loans.

We consider this to be the best asset class on our loan portfolio.

The entire like Tech industry has a long track record of strong performance.

Larry J. Helling: The LIHTC lending program has been critical in providing affordable housing and has been a key strategic focus for our company in recent years. As you know, this program generates significant capital markets revenue, which contributes materially to our strong non-interest income. In addition, LIHTC loans are ideal for securitization due to their solid historical track record and strong investor support. Securitization of LIHTC loans enhances the optionality in our balance sheet by reducing our capital needs, proving liquidity and Enhancing our Net Interest Margin. In addition, it will slow our unvalidated sheet growth as we approach the $10 billion asset threshold.

Our Lakehead lending program has been critical in providing affordable housing and has been a key strategic focus for our company over recent years.

As you know this program generates significant capital markets revenue, which contributed materially to our strong noninterest income.

In addition, like tech loans are ideal for securitization due to their solid historical track record and strong investor demand.

Securitization of Leichhardt loans enhances the optionality in our balance sheet by rich.

Using our capital needs improving.

Improving liquidity and enhancing our net interest margin.

In addition, it will slow our on balance sheet growth as we approach the $10 billion asset threshold.

Larry J. Helling: Ultimately, this ongoing program will allow us to continue to grow our earnings and tangible book value while improving our capital ratio. Our next round of securitization is targeted for mid-August. Our capital levels remain strong and continue to improve; solid and consistent earnings growth in conjunction with our modest dividend enables us to grow capital and strengthen our capital ratios at a pace faster than our peers. Now, turning to our strategic objectives for 2024 and beyond.

Ultimately this ongoing program will allow us to continue to grow our earnings.

<unk> book value, while improving our capital ratios are.

Our next round of securitization is targeted for mid August.

Our capital levels remain strong and continue to improve.

Our solid and consistent earnings growth in conjunction with our modest dividend enables us to grow capital.

Our capital ratios at a pace faster than our peers.

Okay.

Turning to our strategic objectives for 2024 and beyond.

Larry J. Helling: It's our goal to sustain our exceptional performance for our shareholders and our customers. We are committed to achieving industry-leading financial results, including EPS growth, ROAA, and tangible book value per share. In addition, we enhance shareholder value by implementing processes that improve customer experiences, employee well-being, and the communities in which we live and conduct business.

Our goal to sustain our exceptional performance for our shareholders and our customers.

We are committed to achieving industry, leading financial results, including EPS growth.

A tangible book value per share growth.

In addition, we enhance shareholder value by implementing processes that improve customer experiences employee wellbeing and the communities in which we live and conduct business.

Larry J. Helling: In summary, we are dedicated to top-tier financial performance and exceptional client service, which will drive continued shareholder value. I will now turn the call over to Todd to provide further details regarding our second quarter results. Thank you, Larry. Good morning, everyone.

In summary, we are dedicated to top tier financial performance and exceptional client service, which will drive continued shareholder value.

I'll now turn the call over to Todd.

Provide further details regarding our second quarter results.

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

Todd A. Gipple: Thanks for joining us today. I'll start my comments with details on our earnings performance for the quarter. We delivered adjusted net income of $29.3 million, or $1.73 per diluted share for the quarter. Our strong results were driven by higher net interest income, significant non-interest income from capital markets revenue, and well-controlled expenses. Net interest income reached $56 million, a $1.5 million increase from the first quarter. This 3% late-quarter growth in NII was fueled by an expanded margin and strong loan growth.

I'll start my comments with details on our earnings performance for the quarter.

We delivered adjusted net income of $29 3 million or $1 73 per diluted share for the quarter.

Our strong results were driven by higher net interest income significant noninterest income from capital markets revenue and well controlled expenses.

Net interest income reached 56 million, a $1 5 million increase from the first quarter.

This 3% linked quarter growth in NII was fueled by an expanded margin and strong loan growth.

Todd A. Gipple: Our adjusted NIM on a tax-equivalent basis improved by two basis points from the first quarter and was at the upper end of our guidance range. The increase was driven by a combination of improving loan yields and moderating deposit costs. Notably, the shift in our deposit composition has stabilized, as our non-interest-bearing deposits remain static, combined with modest changes in the mix of our interest-bearing and core time deposits. Looking ahead

Our adjusted NIM on a tax equivalent basis improved by two basis points from the first quarter and was at the upper end of our guidance range.

The increase was driven by a combination of improving loan yields and moderating deposit cost.

Notably the shift in our deposit composition has stabilized as our noninterest bearing deposits remained static combined with modest changes in the mix of our interest bearing and core time deposits.

Looking ahead.

Todd A. Gipple: While the inverted yield curve continues to be a challenging environment for margins, we expect to continue to benefit from repricing in our loan portfolio and stabilizing deposits. Additionally, we expect our next securitization during the third quarter to create NIM accretion of approximately two to three basis points on a full quarter basis. Therefore, assuming a stable funding mix, we anticipate continued growth in net interest income and are updating our guidance for adjusted NEM TEY in the third quarter to be in the range of static to up five basis points. Additionally, we continue to be well-positioned for a reach-down scenario.

While the inverted yield curve continues to be a challenging environment for margins.

We expect to continue to benefit from repricing in our loan portfolio and stabilizing deposit mix.

Additionally, we expect our next securitization during the third quarter to create NIM accretion of approximately two to three basis points on a full quarter basis.

Therefore, assuming a stable funding mix we have.

Anticipating continued growth in net interest income and are updating our guidance for adjusted NIM T Y in the third quarter to be in the range of static to up five basis points.

Additionally, we continue to be well positioned for our rates down scenario.

Todd A. Gipple: As we have previously discussed, during the rising rate cycle, our balance sheet has shifted from asset-sensitive to liability-sensitive, which will result in further margin expansion when the Fed begins to ease short-term rates. Turning to our non-interest income of $31 million for the second quarter, which was up from $27 million in the first quarter. Our capital markets revenue was $18 million in the quarter as our LIHTC lending and revenue from swap fees continue to benefit from the strong demand for affordable housing.

As we have previously discussed during the rising rate cycle, our balance sheet has shifted from asset sensitive to liability sensitive.

This will result in further margin expansion when the fed begins to ease short term rates.

Turning to our noninterest income up 31 million for the second quarter, which was up from $27 million in the first quarter.

Our capital markets revenue was $18 million in the quarter as our life Tech lending and revenue from swap fees continues to benefit from the strong demand for affordable housing.

Todd A. Gipple: Our pipeline in this business remains healthy, and therefore, we are reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50 to $60 million. We also generated over $4 million of wealth management revenue in the second quarter, a slight increase from the seasonally strong first quarter.

Our pipeline in this business remains healthy and therefore, we are reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50 million to $60 million.

We also generated over $4 million of wealth management revenue in the second quarter, a slight increase from the seasonally strong first quarter.

Todd A. Gipple: To date, our annualized wealth management revenue has grown by over 26%, driven by increased assets under management, from organic growth in our existing client base, and our expansion of this business into two of our markets. The success of this attractive and growing business is a result of the high-touch value proposition that our highly experienced team of advisors delivers, as well as the strong relationships that we have developed with our clients and a network of trusted legal advisors and other key referral sources. Additionally, non-interest income during the second quarter included income of $2.2 million from bank-owned life insurance policy proceeds.

Year to date, our annualized wealth management revenue has grown by over 26% driven by increased assets under management from organic growth in our existing client base and our expansion of this business into two of our markets.

The success of this attractive and growing business is the result of the high touch value proposition that our highly experienced team of advisors deliver as.

As well as the strong relationships that we have developed with our clients and a network of trusted legal advisors and other key referral sources.

Additionally, noninterest income during the second quarter included income of $2 2 million from bank owned life insurance policy proceeds.

Todd A. Gipple: Now turning to our expense. Interest expense for the second quarter totaled $50 million, an improvement from $51 million for the first quarter and at the lower end of our guidance range. The late-quarter decrease was primarily due to lower salaries and employee benefits and lower loan and lease expenses, partially offset by higher professional and data processing expenses.

Now turning to our expenses.

Noninterest expense for the second quarter totaled $50 million, an improvement from 51 million for the first quarter and at the lower end of our guidance range.

Linked quarter decrease was primarily due to lower salaries and employee benefits and lower loan and lease expenses, partially offset by higher professional and data processing expenses.

Todd A. Gipple: This created positive operating leverage and contributed to a 500 basis point reduction in our efficiency ratio, which improved to 57% in the second quarter. We continue to diligently manage our operating expenses, both at the local market level and through back office operational efficiencies at the corporate level. We continue to benefit from our investments in technology and building a best-in-class group operations team that supports our multi-charter community banking model. As we look ahead to the third quarter, we expect our non-interest expenses to continue to be in the range of $49 to $52 million. Now turning to our balance sheet. Our total loans grew by $206 million during the quarter, funded primarily by the strong growth in core deposits of $316 million that we had in the first quarter.

This created positive operating leverage and contributed to a 500 basis point reduction in our efficiency ratio, which improved to 57% in the second quarter.

We continue to diligently manage our operating expenses, both at the local market level and through back office operational efficiencies at the corporate level.

We continue to benefit from our investments in technology and building a best in class group operations team that supports our multi charter community banking model.

As we look ahead to the third quarter, we expect our noninterest expenses to continue to be in the range of $49 million to $52 million.

Now turning to our balance sheet.

Our total loans grew by 206 million during the quarter funded primarily by the strong growth in core deposits of $316 million that we had in the first quarter.

Todd A. Gipple: Year-to-date loan growth is in line with expectations, and in anticipation of our next loan securitization, we have designated $243 million of LIHTC loans as held for sale at the end of the quarter. Our long-term securitization strategy supports the continued success of our LIHTC lending business. Our LIHTC program generates significant capital markets revenue, which enhances our revenue diversification. Our securitization strategy also helps maintain our portfolio within established concentration levels. Our upcoming securitization in the third quarter will consist of $243 million of stabilized tax-exempt LIHTC loans.

Year to date loan growth is in line with expectations and in anticipation of our next loan securitization, we have designated $243 million of light Tech loans as held for sale at the end of the quarter.

Our long term securitization strategy supports the continued success of our life Tech lending business.

Our light Tech program generates significant capital markets revenue, which enhances our revenue diversification.

Our securitization strategy also helps maintain our portfolio within established concentration levels.

Our upcoming securitization in the third quarter will consist of $243 million of stabilized tax exempt latex loans.

Todd A. Gipple: We've improved our efficiency of execution since our initial securitizations late last year and expect better economics in this securitization through lower transaction costs. However, this pool of stabilized tax-exempt LIHTC loans originated several years ago at Titor Spreads when we were beginning our LIHTC lending program.

We've improved our efficiency of execution since our initial securitization late last year and expect better economics in this securitization through lower transaction costs.

However, this pool of stabilized tax exempt like tech loans were originated several years ago, a tighter spreads when we were beginning our life Tech lending program.

Todd A. Gipple: As a result, we do expect a modest loss on this securitization next quarter. Importantly, in recent years, we have been originating new tax-exemplified tech loans at a stronger spread. As these loans stabilize and are available for securitization, we will recognize further improvements in that economy. Finally, we do anticipate a securitization of taxable LIHTC loans in the fourth quarter.

As a result, we do expect a modest loss on this securitization next quarter.

Importantly in recent years, we have been originating new tax exempt life tech loans at stronger spreads as.

As these loans stabilized and are available for securitization, we will recognize further improvements in net economics.

Finally, we do anticipate a securitization of taxable life tech loans in the fourth quarter.

Todd A. Gipple: Our portfolio of taxable LIHTC loans that are stabilized and ready for securitization has been consistently priced at wider spreads, which help drive stronger economics. This will more than offset the modest loss from the tax-exempt securitization in the third quarter, which will result in a net gain from our securitization activities in 2020. Now, turning to the podcast. Total deposits declined modestly during the quarter, coming off a very strong deposit-gathering performance in the first quarter.

Our portfolio of taxable light tech loans that are stabilized and ready for securitization.

I've been consistently priced at wider spreads.

Helped drive stronger economics.

This will more than offset the modest loss from the tax exempt securitization in the third quarter, which will result in a net gain from our securitization activities in 2024.

Now turning to deposits.

Total deposits declined modestly during the quarter coming off the very strong deposit gathering performance in the first quarter.

Todd A. Gipple: Year-to-date, total deposits have increased 8% on an annualized basis. Expanding our core deposits remains a top priority. This strategic focus enables us to sustain our future loan growth and, when combined with our securitizations, helps us reduce our reliance on wholesale or higher-cost funding. Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits.

Year to date total deposits have increased 8% on an annualized basis.

Expanding our core deposits remains a top priority this strategic.

<unk> focus enables us to sustain our future loan growth and when combined with our Securitizations helps us reduce our reliance on wholesale or higher cost funding.

Our total uninsured and uncollateralized deposits remained very low at 18% of total deposits. In addition, the company maintained approximately 3 billion of available liquidity sources at quarter end, which includes over 1 billion of immediately available liquidity.

Todd A. Gipple: In addition, the company maintained approximately $3 billion of available liquidity sources at quarter end, which included over $1 billion of immediately available liquidity now shifting to asset quality, which continues to be strong. During the quarter, our total criticized loans continued to show improving trends, declining 34 basis points as a percentage of total loans and leases to 2.41%. We are pleased to report the sequential improvement in total career-size loans over the past three quarters, amounting to a $35 million reduction in balances since September of 2020.

Now shifting to asset quality, which continues to be strong.

During the quarter. Our total criticized loans continued to show improving trends declining 34 basis points as a percentage of total loans and leases to 2.41%.

We are pleased to report the sequential improvement in total criticized loans over the past three quarters.

Turning to a $35 million reduction imbalances since September of 2023.

Todd A. Gipple: NPAs increased by 3.2 million to 34.5 million, or 39 basis points of total assets. The modest increase was driven primarily by two relationships, while nearly half of our total NPAs consist of just four relationships. We recorded a total provision for credit losses of $5.5 million during the quarter, with $4.3 million related to credit loss expense for loans and a balance of $1.2 million related to unfunded commitments.

NPA has increased by $3 2 million to $34 5 million or 39 basis points of total assets.

The modest increase was driven primarily by two relationships.

Nearly half of our total npa's consist of just four relationships.

We recorded a total provision for credit losses of $5 5 million during the quarter with $4 3 million related to credit loss expense for loans and the balance of $1 2 million related to unfunded commitments.

Todd A. Gipple: Charge-offs were down significantly in the second quarter at $1.8 million, a decrease of $1.8 million or 50% from the prior quarter. The increased provision was due to the strong loan growth and the impact of declining GDP on our CECL model. This provision, combined with a sharp reduction in charge-offs, resulted in an allowance for credit losses to total loans held for investment that was static quarter-over-quarter at 1.33%. Our Tangible Common Equity to Tangible Assets ratio increased by 6 basis points to 9% at quarter end, up from 8.94% at the end of March.

Charge offs were down significantly in the second quarter at $1 8 million.

A decrease of $1 8 million or 50% from the prior quarter.

The increased provision was due to the strong loan growth and the impact of declining GDP on our seasonal model inputs.

This provision combined with the sharp reduction in charge offs resulted in an allowance for credit losses to total loans held for investment there was static quarter over quarter at 133%.

Our tangible common equity to tangible assets ratio increased by six basis points to 9% at quarter end up from $8, 94% at the end of March.

Todd A. Gipple: The second quarter improvement in our TCE ratio was primarily driven by our strong earnings, as the change in AOSAI this quarter was negligible. Our total risk-based capital ratio increased to 14.33% at quarter end, and our common equity tier one ratio increased to 10%, improving by three basis points and nine basis points, respectively, on a linked quarter basis. The improvement in both capital ratios was due to our strong earnings. We are also pleased to report another meaningful increase in our tangible book value per share.

Our second quarter improvement in our TCE ratio was primarily driven by our strong earnings as the change in a Oh say high this quarter was negligible.

Our total risk based capital ratio increased to $14 three 3% at quarter end and our common equity tier one ratio increased to 10% improving by three basis points and 90 basis points, respectively on a linked quarter basis.

The improvement in both capital ratios was due to our strong earnings.

We are also pleased to report another meaningful increase in our tangible book value per share. It grew by $1.72, representing just over 15% annualized growth during the quarter.

Todd A. Gipple: It grew by $1.72, representing just over 15% annualized growth during the quarter. Additionally, over the past five years, our tangible book value per share has increased by nearly 12% on a compound annual basis, reflecting the results of our top-tier financial performance and our focus on creating long-term shareholder value. Finally, our effective tax rate for the quarter was 8% and at the low end of our guidance. We continue to benefit from our high-yielding tax-exempt loan and bond portfolio. As a result, this has helped our effective tax rate to remain one of the lowest in our period.

Over the past five years, our tangible book value per share has increased by nearly 12% on a compound annual basis, reflecting the results of our top tier financial performance and our focus on creating long term shareholder value.

Finally, our effective tax rate for the quarter, it was 8% and at the low end of our guidance range.

We continue to benefit from our high yielding 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.

Operator: We continue to expect our effective tax rate to be in the range of 8 to 10 percent for the full year 2020. With that added context on our financial results, let's open the call for your questions. Operator, we're ready for our first question. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.

We continue to expect our effective tax rate to be in the range of 8% to 10% for the full year 2024.

With that added context on our financial results, let's open the call for your questions. Operator, we're ready for our first question. Thank.

Thank you we will now begin the question and answer session.

Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.

Operator: If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered, and you would like to withdraw your question, please press star, then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Damon DelMonte with KBW. Please go ahead. Hey, good morning, guys. Hope you're doing well.

Speaker Change: If you're using a speakerphone please pick up your handset before pressing the keys. If anytime. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

Speaker Change: And the first question first question will come from Damon Delmonte with K B W. Please go ahead.

Damon Paul DelMonte: Hey, good morning, guys hope, you're doing well and thanks for taking my questions.

Damon Paul DelMonte: And thanks for taking my questions. First question: just wanted to start off on the margin. Todd, can you just remind us the amount of rate-sensitive liabilities you guys have that would reprice immediately when the Fed decides to cut rates? Sir, Damon, thanks for the questions.

Damon Paul DelMonte: First question just wanted to start off on the margin and Todd can you just remind us the amount of rate sensitive liabilities you guys have that would reprice immediately.

Speaker Change: When the fed decides to cut rates.

Todd A. Gipple: We actually have about $3.3 billion in RSAs, but RSLs, which you asked about, right now it's 4.2 billion, so about 900 million of positive RSLs, and so that would give us roughly three basis points of margin expansion for every 25 basis point cut. That's our modeling right now is three BIPs. That's about 2.2 million in annual NII run rate, again, for every 25 basis points, and that $2.2 million of expanded NII annually is worth about 11 cents in EPS. Great. Okay, that's helpful. Thanks for that, Collar.

Stephen: Third Stephen Thanks for the questions, we actually have about $3 3 billion in RSA, but ourselves, which you're active asked about.

Speaker Change: Right now, it's $4 2 billion, so about 900 million of positive ourselves and so that would give us.

Speaker Change: Roughly three basis points of margin expansion for every 25 basis point cut.

Speaker Change: That's our modeling right now is three bps. So that's about $2 2 million.

Stephen: In annual NII run rate again for every 25 basis points.

Speaker Change: And that $2 2 million of expanded NII annually is worth about <unk> 11 in EPS.

Speaker Change: Great. Okay. That's that's helpful. Thanks for that color.

Damon Paul DelMonte: And then with regard to the outlook for loan growth, you know, the full-year guide with the two securitizations, is that still kind of in that, I think it was 2% to 4% for the year? Does that still hold? Yeah, Damon, Damon, that's still true.

Speaker Change: And then with regards to the outlook for loan growth.

Speaker Change: The the full year guide with the with the the two securitization does that still kind of in that.

Speaker Change: It was 2% to 4% for the year does that still hold.

Speaker Change: Yes.

Speaker Change: Damon that's still true net a securitization that's kind of what we're guiding towards that still looks appropriate going forward.

Todd A. Gipple: Meta-securitization, that's kind of what we're guiding toward. That still looks appropriate going forward. And then, just lastly, on the wealth management side, you mentioned, you know, some hires in the southwest Missouri market and particular other areas within Iowa. Can you kind of quantify the potential AUM that could come from those new hires? Are those teams that got lifted out that have books of business that they could bring over? Or are those individual advisors that might not have as large of a book tied to them?

Speaker Change: Great. Okay, and then just lastly on the wealth management side, you mentioned some hires in the southwest, Missouri market and in.

Speaker Change: Particularly other areas within Iowa.

Can you kind of quantify the potential.

Speaker Change: And that could come over from from those new hires.

Speaker Change: Teams that get got lifted out that have books of business that they can bring over or those individual advisors that.

Speaker Change: Might not have as large of a book tied to them.

Todd A. Gipple: Damon, thanks. Thanks very much for asking about wealth management. So they were left out of established organizations.

Speaker Change: David Thanks, Thanks, very much for asking about wealth management. So they were left out of the established.

Todd A. Gipple: We're very pleased to have added them to the team, and they are bringing clients over. In addition... It's a significant relationship-based business, as you would expect, probably the ultimate in relationships. And so many of the new AUM dollars are coming from established commercial and private banking clients. So we now have people in those markets in the Des Moines metro and in southwest Missouri to handle those referrals in-house as well. So really, three things: bringing over existing relationships that they would have had in their past life, and taking advantage of some strong referrals from our bankers within the market. And then we really develop strong relationships with some of the best legal minds and some of the other centers of influence in this space.

Speaker Change: Organizations, we're very pleased to have added them to the team.

Speaker Change: They are bringing clients over in.

Speaker Change: In addition.

Speaker Change: It is.

Speaker Change: Significant relationship based business as you would expect probably the ultimate in relationships and so many of the new a O M dollars are coming from established commercial and private banking clients. So we now have people in those markets and the des Moines Metro and in southwest.

Speaker Change: Missouri to handle those referrals are in house as well so.

Speaker Change: So really three things, bringing over existing relationships that they would've had in their past lives.

Speaker Change: Taking advantage of some strong referrals from our bankers within the market and then we.

Speaker Change: We really developed strong relationships with some of the best legal mines in some of the other centers of influence in this space and so we're getting those teams out to meet those people and those referral sources become very important over time.

Damon Paul DelMonte: And so we're getting those teams out to meet those people, and those referral sources will become very important over time. I will tell you that in Des Moines, we already have about 210 million in AUM, about 50 million in Southwest Missouri, and growing. So, very pleased to have added that capability in those two markets. Great. Appreciate all the color.

Speaker Change: I'll tell you that in the morning, we already have about $210 million in a U N about $50 million in southwest, Missouri and growing so.

Speaker Change: Pleased to have added that capability in those two markets.

Damon Paul DelMonte: That's all that I had. Thank you. Thanks, Damon. Thank you. The next question will come from Nathan Rice, excuse me, Nathan Race with Piper Sandler.

Speaker Change: Great I appreciate all the color that's all that I had thank you.

David: Thanks, David Thank you.

Speaker Change: Our next question will come from Nathan Rice, excuse me Nathan race with Piper Sandler. Please go ahead.

Nathan James Race: In terms of the NII, we're in a pretty stable position. Your line is open. Our next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Speaker Change: Sure.

Speaker Change: <unk>.

Speaker Change: Okay.

Speaker Change: Your line is open.

Speaker Change: Our next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey, good morning, guys. All right, Danny. Maybe just a follow up on the margin for you, Todd, you've got some subdebt left there, which I think is repricing somewhat soon here. Just curious what your updated thoughts on that piece of subdebt, those pieces of subdebt are if you're planning to refinance those or get rid of them, and if there's any opportunity to see expanded margin from that. Yeah, Danny, thanks for the question on sub-debt.

Daniel Tamayo: Hey, good morning, guys.

Speaker Change: Alright.

Daniel Tamayo: Maybe just a follow up on on the margin for you Todd.

Speaker Change: You've got some some sub debt left there, which I think is is repricing.

Speaker Change: Somewhat soon here just curious what your updated thoughts on.

Speaker Change: That piece of upsell that those pieces of of sub debt or if you're planning to refinance those or get rid of them and if there is any opportunity there to see expanded margin from that.

Speaker Change: Yeah, Dan Thanks for the question on sub debt Yeah, we did have.

Daniel Tamayo: Yeah, we did have a fairly significant tranche, $65 million repriced in February, and that impacted Q1 margin, and we've overpowered that now. Next up would be September of next year, September of 2025, so that's a ways out.

Speaker Change: A fairly significant tranche $65 million a.

Speaker Change: Reprice in February and that impacted our Q1 margin.

Speaker Change: We've overpowered that now next up would be September of next year September of 25, So that's out of ways.

Todd A. Gipple: We've got a $50 million and another $20 million tranche flipping to a floating rate at that point. We're actually starting that work right now, as you might guess. We're taking a look at the sub-debt market. We're taking a look at our cash position and our cash flows. And my guess is it might be a combination of some refinancing and perhaps some pay-down of some of the sub-debt. There is no real clarity there yet. We've got some time.

Speaker Change: We've got a 50 million and another 20 million tranche.

Speaker Change: Flipping to a floating rate at that point.

Speaker Change: We're actually starting that work right now as you might guess, we're taking a look at the sub.

Speaker Change: So if that market were taking a look at our cash position and our cash flows and my guess is it might be a combination of some refinancing and perhaps some paid out of some of the sub debt.

Todd A. Gipple: The good news is the market seems to be coming around a bit, and others are starting to wade into that space, and it seems like that capital will be there for us. But right now, we're evaluating the alternatives, and my guess is we'll have some color for you probably in January with full year results.

Speaker Change: No real clarity there yet we've got some time the good news is the market seems to be coming around a bit and others are starting to wait into that space and it seems like.

Speaker Change: That's worth the capital will be there for us, but right now were evaluating the alternatives.

Speaker Change: My guess is we'll have some color for you probably.

Speaker Change: In January with.

Speaker Change: Full year results, we might be talking a little bit about 25 plants.

Daniel Tamayo: We might be talking a little bit about 25 plans. Okay, thank you. And then I guess just more on the core side of the margin. So you talked about the benefit from rate cuts, you talked about what you're expecting in the third quarter. Just curious. You know, the loan yield is starting to expand. You think the deposit mix shift has stabilized? I'm just curious how much, you know, upside to the margin you see from here absent rate cuts from, you know, repricing of that loan book going forward as, you know, just thinking about, maybe like, the base case or the other scenario, right? If we have a hire for longer, like where the margin could move to. Sure, Danny. I'm really glad you asked that.

Speaker Change: Okay. Thank you.

Speaker Change: And then I guess just more on the on the core side of the margin. So you you talked about.

Speaker Change: The benefit from rate cuts you talked about what you're expecting in the third quarter just curious.

Speaker Change: The loan yield starting to expand do you think the.

Speaker Change: The deposit mix shift is stabilized.

Speaker Change: I'm just curious how much how much upside to the margin you see from here absent.

Speaker Change: Rate cuts.

Speaker Change: From repricing of that of that loan book going forward as I was just thinking about may.

Speaker Change: Maybe like Oh.

Speaker Change: And the base case or the other scenario right. If we if we have a higher for longer like where the margin could move to.

Todd A. Gipple: Ray Cuts would, of course, help and accelerate that margin expansion, but we're really well positioned right now. We believe that the core deposit mix is very static, very, very reduced pressure on the highest beta financing that we have. I'll give you an example of that, and then I'll flip over to lending. But for our most expensive deposits, we've got about $2.6 billion that we would call 100 beta. These actually cost us $527 in Q1, and that was $526 in Q2.

Speaker Change: Sure Danny I'm really glad you asked that.

Speaker Change: Rate cuts would of course help and accelerate that margin expansion, but we're really well positioned right now.

Speaker Change: We believe that.

Speaker Change: Core deposit mix.

Speaker Change: Very static Barry.

Speaker Change: Barry.

Speaker Change: <unk> reduced pressure on the highest beta.

Speaker Change:

Speaker Change: Financing that we have.

Speaker Change: Give you an example on that and then I'll flip over to lending, but our most expensive deposits. We've got about $2 6 billion that we would call 100 beta those actually cost us $5 27 in Q1 and that was 526 in Q2, so our most expensive our highest day to funding has really.

Todd A. Gipple: So our most expensive, our highest beta funding has really become very static in terms of both mix and cost. On the loan side, that's where I think we're going to be in good shape if it is, in fact, higher for longer and we don't see cuts. As you would guess, the loan betas are lagging deposit betas, but they are really coming on strong for us right now. So our loan payoffs in the second quarter were to 690, and our new loan production in the second quarter was 777. So that's an 87 basis point improvement. That positive delta in the prior quarter, Q1, was only 45 basis points.

Speaker Change: Become very static in terms of both mix and cost on the loan side, that's where I think we're going to be in good shape. If it is in fact higher for longer and we don't see cuts.

As you would guess the loan betas are lagging deposit betas, but they are really coming on strong for US right now so our loan pay offs in the second quarter were $6 90, and our new loan production in second quarter was 777. So that's an 87 basis point improvement.

Speaker Change: That positive Delta in the prior quarter Q1 was only 45 basis points. So we're really starting to see a nice ramp.

Todd A. Gipple: So we're really starting to see a nice ramp in new loan production and rates there. And, in fact, in June... loan payoffs were $683, and new fundings were $795, so almost 8%, and that's a 112 basis point delta. So again, what gives us confidence that we're going to be able to expand margin even without Fed cuts would really be those two things. Stable mix and deposits, and a fairly stabilized cost of deposits, and new loan production really ramping up and giving us some nice yields.

Speaker Change: In new loan production and reach there and in fact.

Speaker Change: In June.

Speaker Change:

Speaker Change: Loan payoffs were 683.

Speaker Change: And new fundings were 795, so almost 8% and that's a 112 basis point Delta. So again, what gives us confidence that we're.

Speaker Change: I'm going to be able to expand margin even without fed cuts would really be those two things.

Speaker Change: Stable mix in deposits and fairly stabilized cost of deposits.

And new loan production really ramping up in and giving us some nice yields.

Todd A. Gipple: That's helpful. I mean, do you have an internal budget or thoughts on what that number may be? Is it a similar number, the zero to five per quarter absent cuts for a while out, or is it slower than that? Yeah, I think that's a fair question, Danny. I would expect us to be able to be somewhere between static and 5, even in Q4, absent, absent rate cuts, and that would accelerate it. Alright, thanks for all the color.

Speaker Change: That's helpful. I mean do you do you have a.

Speaker Change: And internal budget or or thoughts on on what that.

Speaker Change: That number may be as it is it a similar number of the zero to five per quarter absent cuts.

Speaker Change: For a while out or is it slower than that do you think.

Speaker Change: Yeah, I think that's a fair question, Danny I I would expect us to be able to do.

Danny: Somewhere between static and five even in Q4 absent.

Danny: Absent rate cuts that would accelerate it.

Danny: Okay.

Danny: Alright, thanks for all the color I appreciate it.

Dan: Thanks, Dan.

Daniel Tamayo: Todd, I appreciate it. Thanks, Damon. The next question will come from Brian Martin with Janney, Montgomery. Please go ahead. Hey, good morning, guys. Good morning, Brian. Good morning, Brian.

Dan: The next question will come from Brian Martin with Janney Montgomery. Please go ahead.

Brian Joseph Martin: Hey, good morning, guys.

Speaker Change: Good morning, Brian Good morning, Brian.

Brian Joseph Martin: Hey, Todd, just one question. You talked about the loans that are still repricing. How much in the way of loans do you have, I mean, if you stick with that hire for longer environment, how much in the way of loans do you have for kind of repricing, whether the next couple quarters or next 12 months? And kind of, you know, what's the pickup on those loans? Yeah, that's a fair question, Brian, in terms of how quickly that mix will shift for us. I'd probably answer that this way:

Speaker Change: Todd just one question you talked about the <unk>.

Speaker Change: Loans that are still repricing how.

How much do we have loans do you have that may if you stick with that higher for longer environment, how much in the way of loans do you have kind of repricing weather.

Speaker Change: The next couple of quarters or next 12 months.

Speaker Change: And kind of what's the pick up on on those loans.

Speaker Change: Yeah. That's a fair question, Brian in terms of how quickly that mix will shift for us I'd probably answer that this way. So in Q2, we had net loan growth.

Todd A. Gipple: So in Q2, we had net loan growth of around 200 million, but new production was 600, and about 400 in payoffs. So that's 600 new units coming on at 777, 400 leaving at 690. You know, somewhere in that, 600 million or so of new production each year, or, I'm sorry, each quarter, and, you know, 300 or 400 rolling off at lower yields. That's really how that churn will continue to happen in benefit margins, so that's really. I would say the notional dollar amount of impact each quarter, if that makes sense. Yeah. No, that's super helpful.

Speaker Change: Around 200 million, but the new production was 600 and about 400 of pay offs. So that 600 of new coming on at 777 400, leaving at 690.

Speaker Change: You know somewhere in that.

Speaker Change: 600 million or so new production, each year or I'm, sorry, each quarter and.

Speaker Change: Three or 400 rolling off at lower.

Speaker Change: Lower yields that's really how that churn will continue to happen and benefit margin. So.

Speaker Change: That's really.

Speaker Change: I would say the notional dollar amount of impact each quarter, if that makes sense yeah. No. That's super helpful. Okay, and just one on the last one on the margin I just see I know you talked about the better efficiency on the securitization in the fourth quarter that probably holds as well on the on the one you do in the fourth quarter you should get some.

Brian Joseph Martin: Okay. And just one on the – last one on the margin, Todd, just the – I know you talked about better efficiency in securitization. In the fourth quarter, that probably holds as well on the one you do in the fourth quarter where you should get some – you know, if you're talking zero to five, if that's kind of the range – I'm not putting words in your mouth, but you'd get – there would be an added piece to that if you did a securitization and got some pickup there as well.

Speaker Change: If youre talking zero to five if that's kind of the range I'm not putting words in your mouth.

Speaker Change: It would be an added piece to that if you didn't execute did a securitization get some pick up there as well.

Todd A. Gipple: That's why when Danny asked the question about if the Fed doesn't cut, do we still feel competent in that static to five in the fourth quarter? You're spot on. We'll get a little lift from the securitization. It'll be a bit smaller in the fourth quarter. It might help us a couple of bases.

Speaker Change: Exactly Brian.

Dan: That's why when Dan He asked the question about if the fed doesn't cut do we still feel confident in that and that static to five in the fourth quarter.

Speaker Change: You're spot on we will get a little lift from the securitization it'll be a bit smaller in the fourth quarter. It might help us a couple a couple of basis points.

Brian Joseph Martin: Gotcha. Okay. And then just the cap, the capital build. I know you guys have talked about that. Just your thoughts on, you know, any change as far as the use of capital going forward, just given that you are building it very quickly here, and it looks like that trend is going to continue in the near term, given the outlook. Brian, I'll tackle that one. Our perspective on capital, and we've talked about this before, is given the uncertainty in the economy. [inaudible] Two wars in the world, and the craziest election in my lifetime.

Speaker Change: Got you, Okay, and then just the cat the capital build I know you guys had talked about it just your thoughts on you know any.

Speaker Change: Any change as far as the use of capital going forward just given.

Speaker Change: Do you are building a very quickly here.

Speaker Change: It looks like that that's a trend going to continue in the near term given the outlook.

Speaker Change: Yes, Brian I'll tackle that one.

Speaker Change: Our perspective on capital and we've talked about this before us.

Speaker Change: Given the uncertainty.

Speaker Change: Yeah on the economy.

Speaker Change: Two wars in the World.

Speaker Change: Previous election in my lifetime.

Larry J. Helling: Gene, we're planning to hold on to capital, certainly in the near term, and continue to build what we believe is the appropriate fortress balance sheet to make sure that we're positioned to deal with uncertainty until we get better clarity on those conditions that we just talked about. And given kind of the run in the sector at the moment, I mean, I guess when you think about balancing the potential for M&A versus, you know, the buyback, you know, I guess, is there any update on M&A, anything, you know, given your organic growth seems great, you know, so not steering away from that, but just, are you seeing more opportunities? Is that something you're kind of reviewing today, given Yeah, it's really just not our focus at the moment, MIA.

Speaker Change: <unk>.

Speaker Change: To hold onto capital certainly in the near term.

Speaker Change: And continue to build what we believe is.

Speaker Change: Newport appropriate fortress balance sheet to make sure that we're.

Speaker Change: We're positioned to deal with uncertainty until we get better clarity on those conditions that we just talked about.

Speaker Change: Gotcha, and given kind of the run in the sector at the moment I mean, I guess is.

Speaker Change: When you think about balancing the potential for M&A versus the.

Speaker Change: The buyback you know I guess is there I mean is there any update on M&A anything you know given your organic growth seems great.

Speaker Change: Steering away from that but just are you seeing more opportunities is that something you're kind of reviewing today given given current market conditions are.

Speaker Change: Yeah, it's really just not our focus at the moment M&A, we're really focused on just one in our organic growth.

Larry J. Helling: We're really focused on just funding our organic growth. And as you see from this quarter's results, our momentum of things we're doing and controlling every day is so good right now, we really don't want to distract ourselves in the short term with something else. So in the near term, focus on our core business, work on our execution. Watching our expenses, and driving our profitability is what we're focused on. Yeah, no, you guys have done a great job.

Speaker Change: If you see from this quarter's results our momentum the things we're doing in control everyday are so good right now.

We really don't want to distract ourselves in the short term short term.

Speaker Change: Something else so in the near term.

Speaker Change: <unk> focus on our core business working on our execution.

Speaker Change: Watching our expenses driving our profitability is what we're focused on.

Brian Joseph Martin: So in just the last one, Todd, you mentioned the efficiency ratio. I know there's some puts and takes in there in the quarter, but just as far as kind of where you operate on the efficiency side going forward, you know, is the current level sustainable in your view? I mean, given the, you know, the upside, I know, there's a little bit of, like I said, a little bit, a couple things into this quarter, but the current level seems fair to go forward in the short term, next couple quarters. Yeah, Brian, I'm glad you asked the question about the efficiency ratio.

Speaker Change: I know you guys have done a great job so in the.

Speaker Change: Just the last one Todd you mentioned the efficiency ratio I know, there's some puts and takes in there in the quarter, but just as far as kind of where you operate on the efficiency side going forward.

Speaker Change: Is the current level is sustainable and you are in your view I mean, given the the upside I know, there's a little bit like I said, it's a little bit a couple of things in there this quarter, but the current level seems fair to go with going forward in the short term next couple of quarters.

Speaker Change: Yeah, Brian I'm glad you asked the question about efficiency ratio certainly getting down to 57.

Todd A. Gipple: Certainly getting down to 57 this quarter was a combination of a little bit of chop on both sides, but I'd like to think that we could be in the higher 50s or lower 60s here in the next year or two. But we do focus very hard on operating leverage and watching our non-interest expenses. As we're able to grow NIM and NII dollars, that will provide more operating leverage. And we'll keep an eye on expenses along the way.

Speaker Change: This quarter was a combination of.

Speaker Change: A little bit of chop.

Speaker Change: On both sides, but.

Speaker Change: I'd like to think that we could be a higher fifty's lower sixty's here in the next year or two but we do focus very hard on operating leverage and watching.

Speaker Change: Our noninterest expenses as we're able to grow NIM and NII dollars that will provide more operating leverage we'll keep an eye on expenses along the way.

Todd A. Gipple: Longer term, I think we have an outlook where we're going to become more and more efficient over time. We are investing in technology. We're investing in some of the best people in the space, and we do have a lot of internal focus on best-in-class initiatives to do things better, faster, stronger. So we're very focused on operating leverage, and I don't know that I can tell anyone that it's going to be in the 57 range, but we certainly expect it over time to get to that range. Gotcha.

Speaker Change: Longer longer term I think we have an outlook, where we're going to become more and more efficient over time, we are investing in technology, we're investing in.

Speaker Change: Some of the best people in the space.

Speaker Change: And we do have a lot of internal focus on best in class initiatives to do.

Do things better faster stronger so we're very focused on operating leverage.

Speaker Change: I don't know that I can tell any ones that it's going to be in the.

Speaker Change: 57 range, but we certainly expect over.

Speaker Change: Over time to get to that range.

Brian Joseph Martin: I appreciate that. Thanks, Todd, and a great quarter, you guys. Thanks for taking my question. Thanks, Brian. The next question will come from Jeff Rulis with DA Davidson. Please go ahead. Thanks. Good morning.

Speaker Change: Got you I appreciate that thanks, Todd and a great quarter you guys. Thanks for taking my questions.

Jeffrey Allen Rulis: I wanted to focus on the securitized loans and the balances there. It feels like the Q3 number was a little lighter than what you had originally indicated. That and then did you put a number on the fourth quarter; what was the amount initially? Jeff, thanks for the questions because we did not give a number on the fourth quarter, and I can share that with everyone. The third quarter number did lighten up a little bit.

Brian Joseph Martin: Thanks, Brian.

Speaker Change: The next question will come from Jeff ruling with D. A Davidson. Please go ahead.

Jeffrey Allen Rulis: Thanks, Good morning, I wanted to focus on the securities.

Speaker Change: Securitized loans the balances there I E.

Speaker Change: It feels like the Q3 number or was that a little lighter than what you had originally indicated.

Speaker Change: That and then did you put a number to the fourth quarter.

Speaker Change: What the amount would be initially.

Speaker Change: Yes, Jeff Thanks for the questions because we we did not give a number in the fourth quarter and I can share that with everyone.

Speaker Change: The third quarter number did lighten up a little bit our original pool of held for sale was a little larger than that as we work with Freddie to get things fit in side. The securitization box occasionally we will have a deal or two fall out of that.

Todd A. Gipple: Our original pool of help for sale was a little larger than that, and as we work with Freddie to get things to fit inside the securitization box, occasionally we'll have a deal or two fall out of that. So that will get pulled back into our portfolio, and then, likely, those will get included in the next securitization. So just a couple things to clean up to get them back in the securitization bucket. Maybe I will just give everyone a high-level overview of securitization.

Speaker Change: So that'll get pulled back into.

Speaker Change: Our portfolio and then likely those will get included in the next securitization. So just a couple of things to clean up to get them back in the securitization bucket.

Speaker Change: Maybe just give everyone a high level overview of our securitization.

Todd A. Gipple: I know we mentioned in our opening comments that what we're securitizing here, the $243 million in loans in August, would be some of our earlier production in our tax exempt LIHTC loan portfolio. The economics on those are not as great as some of our other loans. But we think it's prudent for us to be securitizing the lower-yielding things first, and so we did that last year and again this year. And so we do expect a modest loss in the third quarter. Expectations would be for a million or less.

Speaker Change: Hi.

Speaker Change: I know we mentioned in our opening comments that what we're securitizing here the $243 million of loans in August that would be some of our earlier production and our tax exempt playtech loan portfolio.

Speaker Change: Economic on those are not as great as some of our other loans, but we think it's prudent for us to be securitizing, the lower yielding things first and so we've done that last year and again this year.

Speaker Change: So we do expect.

Speaker Change: A modest loss in the third quarter.

Speaker Change: Expectations would be a million or less.

Todd A. Gipple: Your question about the fourth quarter: that would be a taxable LIHTC loan portfolio. Those deals tend to have better spreads. They're smaller deals, but they have better spreads.

Speaker Change: Question about the fourth quarter that would be a taxable flight tech loan portfolio. Those deals tend to have better spreads there are smaller deals, but better spreads.

Todd A. Gipple: We expect that to be around $150 million later in the fourth quarter, and we do expect a gain on that securitization of $2 to $3 million. So our net outcome for the year on securitization should be somewhere in the range of $1 to $2 million in gains, and that compares to last year, when all the securitization activities were in the same quarter, and we had about a $600,000 gain. So, economics is getting better for us. We're getting better at this.

Speaker Change: We expect that to be around $150 million later in the fourth quarter.

Speaker Change: And we do expect a gain on that securitization of $2 million to $3 million. So our net outcome for the year on securitization should be somewhere in the range of $1 million to $2 million in games and that compares to last year, where.

Speaker Change: All the securitization activities, we're in the same quarter and we had about a $600000 game. So economics are getting better for us we're getting better at this the costs are getting smaller.

Todd A. Gipple: The costs are getting better and smaller, so we're very pleased to have this program underway. But Jeff, thanks for asking for more detail on the fourth. That's helpful.

Speaker Change: So we're we're very pleased to have this program underway, but Jeff thanks for asking for more detail on the fourth quarter.

Jeff: Okay. That's helpful. Thanks for that and then.

Jeffrey Allen Rulis: Thanks for that. On the credit side, and we're talking about small balances, but just wanted to... Ask about the increase in non-accruals. What was added?

Speaker Change: On the credit side, and we're talking about small balances, but just wanted to.

Larry J. Helling: Do you have any kind of loan type? I think you said a couple relationships, but the loan type on that and even the charge-offs were pretty minimal, but just wanted to see what sector the charge-offs came in as well. Yeah, Jeff, let's talk about charge-offs first, maybe. The charge-offs that we're seeing are really in our, predominantly in our really small business sector. Those are the ones that are having a more difficult time adjusting to inflation pressures and wage pressures with their employees and those kinds of things. So those are the ones that are probably having a tougher time adjusting.

Speaker Change: Ask about the increase in non accruals.

Speaker Change: What was added you had kind of loan type I think you said a couple of relationships, but loan type on that and even the charge offs were pretty minimal, but just wanted to see what what sector that the charge offs came in as well.

Yes, Jeff.

Jeff: Let's talk about charge offs first maybe that the charge offs that we're seeing are really in our predominantly in are really small business sectors.

Speaker Change: Those are the ones that are.

Speaker Change: Having a more difficult time adjusting to inflation pressures.

Jeff: Wage pressures with their employees and those kinds of things. So those are the ones that are.

Jeff: Are we having a tougher time adjusting.

Speaker Change: I talked to one of our.

Speaker Change: Got it.

Larry J. Helling: I talked to one of our senior lenders here just yesterday, and he basically gave me a cross-section of our bigger clients that are manufacturers, distribution, assemblers, and some of the best private companies in eastern Iowa. And their outlook is really pretty strong from an operating standpoint. Sales are good, maybe flat, but not better than the post-pandemic numbers, but margins are holding. They've managed their expenses. Those companies are doing better than the really micro, small businesses.

Senior lenders here.

Speaker Change: Yesterday, you basically gave me a cross section of our bigger clients that are now.

Speaker Change: Manufacturers distribution.

Speaker Change: Assemblers and some of the best private companies in Eastern Iowa.

Speaker Change: Yeah.

Speaker Change: Their outlook is really pretty strong.

Speaker Change: Operating standpoint.

Speaker Change: Sales are good maybe flat, but not better than post pandemic numbers, but margins are holding they've managed their expenses those companies are doing better than that.

Speaker Change: Really micro small business stuff.

Larry J. Helling: On the credit side, I would say credit is kind of normal. I talked to a couple of our credit people in the last 24 hours, and what I'd say is we're seeing normal movement around, up and down and around. We're upgrading one, we're downgrading one, we're sliding one down to risk grade, we're charging one off, we're collecting one. That's kind of what's going on. The movement inside of the NPAs this quarter was mostly driven by one deal that was a medical building where there was a dispute between the landlord and the tenant, and we don't think we've got any loss in it, but until they get that dispute resolved, we may have to work our way through it. So almost all but one three million dollar deal, and everything else was kind of normal.

Speaker Change: On the credit side.

Speaker Change: I would say credit is kind of normal.

Speaker Change: Our credit people in the last 24 hours.

Speaker Change: What I'd say is we're seeing normal movement around up and down and around work.

Speaker Change: Great and one were downgraded one were slight markdown risk rating recharging.

Speaker Change: Kind of what's going on the movement inside of the NPA this quarter.

Speaker Change: The majority was driven by one deal Thats, a medical building, where the dispute between the landlord.

Speaker Change: And we.

Speaker Change: We don't think we've got the loss in it but.

Speaker Change: I totally get that dispute resolved, we may have to work our way through it so almost all of that one 3 million dollar deal.

Speaker Change: Everything else was kind of normal movements.

Nathan James Race: Okay. Thanks, Larry. The next question will come from Nathan Race with Piper Sandler. Please go ahead.

Larry: Okay. Thanks, Larry.

Speaker Change #100: The next question will come from Nathan race with Piper Sandler. Please go ahead.

Nathan James Race: Hi guys, good morning. Thanks for taking the question. I just want to kind of clarify and piece together kind of the NII outlook for this year and next based on the guidance around, Margin, at least for the next couple quarters, you know, just trying to think about the impact of the securizations in the back half of the year in terms of the NII trajectory and I'm curious if you're thinking kind of mid-single-digit growth in NII this year, assuming we get one Fed cut in the back half of the year and if we get a few next year, are you thinking kind of low double digits to that end?

Nathan James Race: Hi, guys. Good morning, Thanks for taking the question already made.

Speaker Change #100: Okay.

Speaker Change #102: Just wanted to kind of.

Nathan James Race: Clarifying piece together kind of the outlook for this year and next based on the guidance around.

Nathan James Race: Margin in the next couple of quarters.

Speaker Change #104: Just trying to think about the impact of the securitizations in the back half of the year in terms of the NII trajectory in Q.

Speaker Change #103: Curious, if you're thinking kind of mid single digit growth.

Speaker Change #108: NII this year, assuming we get one fed cut in the back half of the year and get a few next year do you think you can kind of low double digits to that end.

Speaker Change #103: Yeah.

Nathan James Race: Even with securitizing off 243 in the third quarter, we expect to grow NII by $1.5 million next quarter. We rarely give NII dollar guidance, but I do think because of the big puts and takes in the third quarter, it makes sense for us to share that.

Speaker Change #103: Nate I'll take that one yeah, we do even with securitizing off the 243 in the third quarter, we expect to grow NII.

Speaker Change #105: By $1 5 million next quarter, we don't we don't.

Speaker Change #106: We rarely give NII dollar guidance, but I do think because of the.

Nate: The big puts and takes in the third quarter. It makes sense for us to share of that so we do expect to grow NII, even with that securitization.

Todd A. Gipple: So we do expect to grow NII even with that securitization. We also expect to do that in the fourth quarter when we have the $150 million in LIHTC loans securitized. So we're very optimistic that we're now going to be in a pattern of growing NII. We feel like margin floored in the first quarter, and with this expansion of margin here in Q2 and our guidance and our modeling for Qs 3 and 4, we're very optimistic that margin expansion combined with our very strong loan production, that's one of the things that has been a hallmark of QCR forever, is we really are good at growing loans, good ones.

Nate: We also expect to do that in the fourth quarter. When we have the $150 million of latex loans securitize. So.

Nate: We are very optimistic that we're now going to be in a pattern of growing NII.

We feel like margin, Florida in the first quarter and with this.

Nate: With this expansion of margin here in Q2, and our guidance in our modeling for Qs three and four.

Nate: We're very optimistic that margin expansion combined with our very strong loan production. That's one of the things that is.

Nate: Has been.

Nate: A hallmark of Q T. R forever as we we really are good at are growing.

Nate: Growing loans and good ones.

Nate: So we're optimistic about strong NII growth in the last half of this year and into 2025, the what the fed does or doesn't do could accelerate that if they do.

Todd A. Gipple: So we're optimistic about strong NII growth in the last half of this year and into 2025. What the Fed does or doesn't do could accelerate that if they do start cutting rates, and we'll add a little bit more to NII dollars alongside of that. Okay, great.

Speaker Change #109: You start cutting rates and will add a little bit more.

Speaker Change #109: Two NII dollars alongside of that.

Todd A. Gipple: And then I apologize if you touched on this earlier, but any expectations in terms of core deposit growth for the next couple quarters took a little step back here in one cube, but just curious how you guys are seeing the core deposit gathering. This would be a much different business if core deposit growth was as linear as lending growth, particularly for us. It's not, but we made great strides in the first quarter growing core deposits. However, they were fairly static here in Q2.

Speaker Change #110: Okay, Great and then.

Speaker Change #113: Joseph you touched on this earlier, but just any expectations in terms of core deposit growth.

Speaker Change #110: Okay.

Speaker Change #110: Yes.

Speaker Change #111: Next couple of quarters took a little step back here.

Speaker Change #112: <unk>, but just curious how you guys are seeing the core deposit gathering.

Speaker Change #112: Joining us today.

Nate: Sure Yeah. Thanks Nate.

Speaker Change #114: No. This is this would be a much different business is.

Speaker Change #115: Core deposit growth was as linear as lending growth, particularly for us.

Speaker Change #115: It's not but we made.

Speaker Change #115: We made great strides in the first quarter, our growing core deposits.

Speaker Change #115: We're fairly static here in Q2.

Todd A. Gipple: Part of that's just the nonlinear fashion of bringing in core deposits. We knew we were freeing up a couple hundred million with the securitization in Q3, so we knew we had that liquidity coming right here, later this month. So... We are focused on growing core deposits all the time. We are really focused on it across the entire company.

Speaker Change #115: Part of that's just the nonlinear fashion of bringing on core deposits part of it is we knew we were freeing up.

Speaker Change #115: A couple of hundred million with the securitization in Q3, so we knew we had that liquidity coming right here.

Speaker Change #115: Later this month so.

Speaker Change #115: We are focused on growing core deposits all the time.

Speaker Change #115: We are really focused on it across the entire company we've.

Todd A. Gipple: We've improved and increased incentives for all of our bankers and all of our employees, focused on net new relationships and net new deposits, so it's a huge focus for us. So I expect us to get back to growing deposits in the back half of the year, even with some liquidity from these two securitizations. We want to keep growing core deposits. The loan-to-deposit ratio ramped back up a little bit here to 97. Larry and I want to operate that between 90 and 95. So I would expect the back half of the year for that to get down into that range.

Speaker Change #115: We've been improved and increased incentives for all of our bankers in all of our employees are focused on net new relationships in that new deposits. So it's a huge focus for us.

Speaker Change #115: So I expect us to get back to growing deposits in the back half of the year, even with some liquor.

Speaker Change #115: Liquidity from these two securitizations, we want to keep growing core deposits are.

Speaker Change #115: Loan to deposit ratio ramp back up a little bit.

Speaker Change #116: Here to 97.

Speaker Change #116: Larry and I want to operate that between 90 and 95, So I would expect the back half of the year for that to get down into that range.

Nathan James Race: Okay, great. And then just to clarify on the potential for share repurchases, it sounds like Larry, you just want to see greater clarity from a macro perspective. You have some point going forward before maybe reengaging? Or is there any other kind of governors that you're keeping in mind that would?

Speaker Change #116: Okay, Great and then just to clarify on the potential for share repurchases. It sounds like Larry you just want to see greater clarity from our.

Speaker Change #117: Macro perspective.

Speaker Change #118: I guess some point going forward before maybe re engaging or is there any other kind of governors that youre keeping in mind that with share.

Larry J. Helling: share repurchase activities. Yeah, I think you've summarized it really well, Nate. We're likely going to pause for a bit here until we have some clarity on those macro factors. And we certainly are getting our capital in the ranges where it's possible to do that. But, yeah. The feeling that something's going to go wrong in the back of my mind because of all this weirdness in the world is probably making us pause and make sure we have appropriate capital to get through any uncertainty for the next few quarters.

Speaker Change #117: Activities.

Larry: Yes, I think you've summarized it really well Nate we're likely going to pause for a bit here until.

Speaker Change #119: We have some clarity on those that pay on those macro factors and we certainly are getting our capital in the ranges, where it's possible to do that but.

Operator: Yeah, the something's going to go wrong in the back of my mind because of all this weirdness in the world is probably making us cause and making sure we got appropriate capital to get through any uncertainty for the next few quarters.

Larry: Yes.

Larry: The total is going to go wrong in tobacco my mind because of all this weirdness in the world is probably make us pause and making sure we've got appropriate capital to get through any uncertainty for the next few quarters.

Nathan James Race: Okay, understandable. I appreciate all the color. Thanks, guys. Thanks, Nate. This concludes our question and answer session. I would like to turn the conference back over to Mr. Larry Helling for any closing remarks. Please go ahead, sir.

Speaker Change #120: Okay understandable.

Operator: I appreciate all the color.

Speaker Change #121: I appreciate all the color thanks, guys.

Operator: Thanks, guys.

Nate: Thanks Nate.

Operator: This concludes our question and answer session.

Speaker Change #122: This concludes.

Speaker Change #123: Our question and answer session I would like to turn the conference back over to Mr. Larry Helling for any closing remarks. Please go ahead Sir.

Larry Helling: I would like to turn the conference back over to Mr. Larry Helling for any closing remarks. Please go ahead, sir.

Larry Helling: Thanks, all of you for joining our call today. We appreciate your interest in our company.

Larry J. Helling: Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day, and we look forward to connecting with you all again soon. Thanks. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. BF-WATCH TV 2021, Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.

Larry J. Helling: Thanks to all of you for joining our call today. We appreciate your interest in our company have a great day, and we look forward to connecting with you all again soon.

Larry Helling: Have a great day, and we look forward to connecting with you all again soon.

Larry J. Helling: Yes.

Operator: The conference has now concluded. Thank you for attending today's presentation.

Speaker Change #125: The conference has now concluded.

Speaker Change #126: You for attending today's presentation you may now disconnect.

Operator: You may now disconnect.

Speaker Change #126: [music].