Q3 2024 QCR Holdings Inc Earnings Call
Greetings and welcome to the Q C. Our Holdings, Inc. Earnings Conference call for the third quarter of 'twenty 'twenty four yesterday after market close the company distributed its third quarter earnings press release.
If there's anyone on the call who has not received a copy you may access it on the company's website www Dot Q C. R H dot com.
With us today from management are Larry Helling, CEO, and Todd Gipple, President and CFO management will provide a summary of the financial results and then we'll open the call to questions from analysts.
Before we begin I would like to remind everyone that some of the information we will be providing today falls under the guidelines of forward looking statements.
Defined by the Securities and Exchange Commission.
As part of these guidelines any statements made during this call concerning the company's hopes beliefs expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected.
Additional information on these factors is included on the company's S. E C filings, which are available on the company's website.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
Speaker Change: As a reminder, this conference is being recorded and will be available for replay through November 1st 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: I will now turn the call over to Mr. Larry Helling at QC Our holdings.
Larry Helling: Thank you operator.
Larry Helling: Welcome everyone.
Larry Helling: Thank you for joining us today.
Larry Helling: I'll start by presenting some highlights of our strong financial performance for the fourth quarter and Todd will follow with additional details.
Larry Helling: We produced exceptional third quarter results highlighted by a significant growth in net interest income and margin expansion.
Larry Helling: Also had another quarter of strong capital markets and wealth management.
Larry Helling: We grew total core deposits and maintained a stable cost of funds.
Larry Helling: Core expenses remained well controlled and our credit quality continues to be excellent.
Larry Helling: All of this led to a significant increase in tangible book value.
Larry Helling: We generated net income of $28 million or $1.64 per diluted share during the quarter.
Larry Helling: Net income on an adjusted basis was $30 million or $1 78 per diluted share.
Larry Helling: This produced an adjusted ROA of 1.35% and adjusted our O E 12, six zero percent, which continues to be at the higher end of our peer.
Larry Helling: Our net interest income increased significantly by nearly $3 $6 million in the third quarter or 6%.
Larry Helling: This was driven by strong growth in loan and investment balances combined with an expanded margin.
Larry Helling: Annualized year to date total loan growth of 6% or 10, 5%, including loans that were securitized in the third quarter.
Larry Helling: This is just above our annual target range of 8% to 10%.
Larry Helling: Our low income housing tax credit lending program and our conventional commercial lending business had been the primary drivers of our loan growth.
Larry Helling: We have funded this loan growth through a combination of deposit growth and liquidity provided from our loan securitizations.
Larry Helling: Total year to date annualized core deposit growth has been a robust eight 5%.
Larry Helling: Stabilizing deposit cost and non interest bearing balances combined with higher loan and investment yields.
Larry Helling: Produced higher margins and drove an eight basis point expansion in adjusted NIM from the prior quarter.
Larry Helling: Our total noninterest income for the third quarter was $27 million.
Larry Helling: Driven primarily by our capital mortgage revenue of $16 million.
Italy, our wealth management business continues to generate outstanding growth in assets under management.
Larry Helling: We have added nearly $1 billion of assets under management year to date or 18% driven by significant new client volumes.
Larry Helling: Our continued strong AUM growth and favorable market conditions drove a 17% annualized increase total wealth management revenues for the quarter and 20% year to date.
Larry Helling: We believe the addition of key personnel in the southwest, Missouri in Central Iowa regions will help support continued growth.
Speaker Change: Uh huh.
Speaker Change: We continue to diligently manage our core operating expenses year to date after adjusting for one time items non interest expenses have increased only 2% annualized.
Speaker Change: During the third quarter.
Speaker Change: Total noninterest expenses increased from the prior quarter.
Speaker Change: Primarily due to the announced changes at our into equipment.
Speaker Change: Eric.
Speaker Change: We incurred a onetime charge of $2 $4 million for restructuring expenses and goodwill impairment.
Speaker Change: We expect to recover these costs over the next few quarters.
Speaker Change: The decision to discontinue providing new loans and leases to our equipment finance business.
Speaker Change: Reinforces our focus on our core banking franchise.
Speaker Change: This change will allow us to improve profitability increase liquidity and reallocate capital to business lines that generate higher risk adjusted returns.
Speaker Change: Our asset quality remains excellent and our credit trends improved from last quarter.
Speaker Change: Nonperforming assets as a percent of total assets were static when compared to the prior quarter.
Speaker Change: And remained well below our historical average.
Speaker Change: Total classified loans are meaningfully lower in total criticized loans are also lower having declined for the fourth consecutive quarter.
Speaker Change: Our allowance for credit losses, as a percent of pool of loans held for investment was 130% for the quarter.
Speaker Change: Provision for credit losses was $2 million lower this quarter due to improvements in overall credit quality.
Speaker Change: We are encouraged by the economic stability of our markets and the balance sheet strength of our clients.
Speaker Change: We are not seeing any meaningful indicators of financial stress across our markets.
Speaker Change: We are comfortable with our commercial real estate concentration levels.
Our investment in high quality light tech loans make up roughly half of our exposure to this asset class.
Speaker Change: We believe that this is the best asset class in our loan portfolio.
Speaker Change: The entire light tech industry has a long track record of solid performance for nearly four decades and through several credit cycles.
Speaker Change: Our commercial real estate exposure, excluding light tech loans is 140% of total risk based capital.
Speaker Change: Commercial office space exposure remains low at only 3% of total loans with an average loan size of less than $900000.
Speaker Change: Most of these properties are in suburban markets and are performing consistent with our expectations with no indications of repayment concerns.
Speaker Change: We continue to have a robust pipeline of high quality Y Tec launch.
Speaker Change: Lending program has been a key strategic initiative for our company.
Speaker Change: This program generates significant capital markets revenue, which contributes meaningfully to our noninterest income.
Speaker Change: In addition light tech loans are ideal for securitization due to their strong track record in substantial investor demand.
Speaker Change: Securitization of <unk> loans improves the optionality in our balance sheet improves our TCE increases liquidity and expands our net interest margin.
Speaker Change: Additionally, it moderates our on balance sheet growth as we approach the $10 billion asset level.
Speaker Change: Securitizations will continue to drive the sustainability of our earnings.
Speaker Change: Tangible book value growth.
Speaker Change: Our next securitization is targeted for the fourth quarter.
Speaker Change: Our capital levels are solid and we continue to focus on increasing our regulatory capital.
Speaker Change: Our strong and steady earnings growth combined with our modest dividend allows us to generate capital and increase our TCE ratio more quickly than our peers.
Speaker Change: We are dedicated to delivering top tier financial performance, which includes EPS growth top quartile ROE AA and meaningful tangible book value per share growth.
Speaker Change: We create shareholder value by remaining client focus, creating employee wellbeing and delivering a positive impact in the communities in which we live and work.
Speaker Change: In summary, we are committed to industry, leading results and outstanding client service, which we believe will continue to drive strong operating performance.
Speaker Change: I will now turn the call over to Todd to provide further details regarding our third quarter results.
Todd Gipple: Thank you Larry good morning, everyone. Thanks for joining us today.
Todd Gipple: I'll start my comments with details on our earnings performance for the quarter.
Todd Gipple: We delivered adjusted net income of $30 million or $1 78 per diluted share for the quarter.
Todd Gipple: Our strong financial results were driven by significant growth in net interest income solid noninterest income from capital markets and wealth management revenue combined with well manage core expenses.
Todd Gipple: Net interest income was 60 million a $3 6 million increase from the second quarter.
Todd Gipple: The 6% linked quarter growth in NII was driven by strong growth in loans and investments combined with significant margin expansion.
Todd Gipple: Our adjusted NIM on a tax equivalent yield basis expanded by eight basis points from the second quarter and exceeded the upper end of our guidance the.
Todd Gipple: The increase was fueled by a combination of improving loan and investment yields and stable deposit costs.
Todd Gipple: Looking ahead with our liability sensitive balance sheet, we are well positioned to benefit from the feds decision to lower interest rates in the third quarter.
Todd Gipple: Assuming a stable funding mix and no additional fed action, we anticipate continued growth in net interest income for the fourth quarter.
Todd Gipple: We are updating our guidance for adjusted NIM T Y in the fourth quarter to increase in the range of between two and seven basis points.
Todd Gipple: Our noninterest income was 27 million for the third quarter supported by continued strong capital markets revenue of $16 million.
Todd Gipple: Our light tech lending and revenue from swap fees continue to be fueled by the steady demand for affordable housing.
Todd Gipple: Our pipeline in this business remains healthy.
Todd Gipple: We are therefore, reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50 million to $60 million.
Todd Gipple: Our wealth management business generated $4 5 million of revenue in the third quarter, a 17% annualized increase for in the second quarter.
Todd Gipple: Year to date, our wealth management assets under management have grown by 1 billion driven by growth in our existing client base and the expansion of this business into two of our markets.
This growth is driven by the high touch value proposition that are extremely knowledgeable team of advisors deliver.
Todd Gipple: The strong relationships, we've built with our clients and a network of trusted legal advisors and key referral sources.
Todd Gipple: During the third quarter, we executed a derivative strategy with a notional value of 410 million.
Todd Gipple: These derivatives are designed to safeguard the company's regulatory capital ratios against the adverse effects of a significant decline in long term interest rates.
Todd Gipple: Would impact the value of our back to back swaps or like tech loan portfolio.
Todd Gipple: These derivatives are unhedged, and our mark to market with gains or losses recorded in noninterest income and reflected as a non core item.
Todd Gipple: If long term interest rates increase we will reflect a reduction in the market value of the derivative capped at the upfront premium.
Todd Gipple: However, should long term interest rates decline, we will record an increase in the market value of the derivative that will help offset the risk to our regulatory capital ratios for.
For the quarter, we recorded a loss on those derivatives of 414000.
Todd Gipple: In addition, we recorded a 473000 loss on the securitization in the third quarter.
This result was better than anticipated due to improved economics and our execution.
Todd Gipple: Now turning to our expenses.
Todd Gipple: Noninterest expense for the third quarter totaled 54 million the increase in expenses for the third quarter included the onetime restructuring and goodwill impairment charges totaling $2 4 million, resulting from our decision to discontinue offering new loans and leases through all of our equipment finance business.
Todd Gipple: Adjusting noninterest expense for those one time charges resulted in core noninterest expenses of $51 million, an increase of approximately $1 million from the prior quarter and within our guidance range of $49 million to $52 million.
Todd Gipple: The linked quarter increase was primarily driven by higher incentive compensation and advertising expenses.
Todd Gipple: Year to date core noninterest expenses remained well controlled having increased only 2% annually.
Todd Gipple: We continue to carefully manage our core operating expenses our approach includes investments in technology and automation.
Todd Gipple: Combined with the best in class operations team.
Todd Gipple: Ports are multi charter community banking model.
Todd Gipple: As we look ahead to the fourth quarter, we expect our noninterest expenses to continue to be in the range of $49 million to $52 million.
Todd Gipple: Turning to our balance sheet.
Todd Gipple: Year to date total loans have grown by $285 million or 6% annualized funded by growth in core deposits of $400 million.
Todd Gipple: Including the $230 million of loans that were securitized during the quarter total loans have grown 10, 5% year to date and just above our guidance range of 8% to 10%.
Todd Gipple: In anticipation of our next loan securitization plan for the fourth quarter, we have designated $166 million of life Tech loans as held for sale.
Todd Gipple: Our long term securitization strategy underscores the continued success over a light tech business and the significant capital markets revenue it generates.
By Securitizing light tech loans, we create capacity for sustained future swap revenue generation.
Todd Gipple: The enhanced liquidity.
Todd Gipple: Reduced funding cost.
Todd Gipple: Strengthened TCE and we maintain our life tech portfolio within established concentration levels.
Todd Gipple: Our upcoming securitization in the fourth quarter will consist of $166 million of stabilized taxable logitech levels are.
Todd Gipple: Our execution has improved since our initial securitization like last year, and we expect improved economics with future securitizations from lower transaction and administrative costs.
Todd Gipple: Total deposits increased $220 million or 13% annualized during the quarter.
Todd Gipple: Year to date total core deposits have increased $400 million or 9% on an annualized basis.
Todd Gipple: Deposit growth remains a core focus for our company.
Todd Gipple: And in combination with our Securitizations helps us decrease reliance on wholesale or higher cost funding.
Todd Gipple: Our total uninsured and uncollateralized deposits remained quite low at 21% of total deposits.
Todd Gipple: Additionally, the company had approximately 3 billion of available liquidity at quarter end, which includes $1 4 billion of instantly accessible liquidity.
Todd Gipple: Turning to our asset quality, which remains excellent.
Todd Gipple: During the quarter total criticized loans decreased 21 basis points to 220% of total loans and leases. This marks the fourth consecutive quarter of improvement.
Todd Gipple: <unk> 50 million reduction in total criticized balances.
Todd Gipple: NPA has increased by 1 million to $36 million or 39 basis points of total assets, which is static to the prior quarter.
Todd Gipple: Two relationships drove this moderate increase in NPA.
Todd Gipple: Additionally, approximately 45% of our total npa's are comprised of just four relationships.
Todd Gipple: Yeah.
Todd Gipple: We recorded a total provision for credit losses of $3 5 million during the quarter, representing a decline of $2 million from the prior quarter reduction.
Todd Gipple: The reduction in the provision for credit losses during the quarter was primarily due to the overall credit quality improvements.
Net charge offs were $3 4 million for the third quarter, an increase of $1 8 million from the prior quarter.
Todd Gipple: The increase in net charge offs, primarily included smaller loans and leases at M. Two.
Todd Gipple: The allowance for credit losses to total loans held for investment decreased to 130% from 133% as of the prior quarter.
Todd Gipple: Our tangible common equity to tangible assets ratio increased by 24 basis points to nine 4% at quarter end up from 9% at the end of June.
Todd Gipple: The improvement in TCE was driven by very strong earnings and an increase in a OCI.
Todd Gipple: Our total risk based capital ratio decreased to 13, 87% at quarter end and our common equity tier one ratio decreased to $9 seven 9% due to sizeable loan and investment growth, partially offset by stronger earnings.
Todd Gipple: We remain focused on growing our regulatory capital and targeting TCE in the top quartile of our peer group.
Todd Gipple: We saw another significant increase in our tangible book value per share, which grew by $2 35.
Todd Gipple: Representing a 20% annualized growth for the quarter.
Todd Gipple: Over the past five years, our <unk> has grown by more than 12% on a compound annual basis, highlighting our strong financial performance and commitment to building long term shareholder value.
Finally, our effective tax rate for the quarter was 7% just under the low end of our guidance our high yielding tax exempt loan and bond portfolios have consistently preserved a low tax obligation and benefited our shareholders.
Todd Gipple: We continue to expect our effective tax rate to be in a range of 8% to 10% in the fourth quarter.
Todd Gipple: With that added context on our third quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: Is that any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from Damon Delmonte with <unk> W. Please go ahead.
Damon Delmonte: Hey, good morning, guys hope, you're all doing well today.
Damon Delmonte: First question I just wanted to see.
Damon Delmonte: Circle back on the margin commentary Todd I think you had said you know your guidance is for two years to seven basis points of expansion here in the fourth quarter absent any changes in rates is that the the way you characterize that.
Todd Gipple: Yes, David Thanks for the NIM question.
Todd Gipple: Yes, the two to seven basis points guide does not include an additional cut.
Todd Gipple: If we were to get that action in early November.
Todd Gipple: Could add one or two basis points to that range.
David: Got it okay.
Speaker Change: So wanted to two basis points for every 25 basis point Scott.
Speaker Change: Yes, correct. Okay. Thanks, and can you could you remind us the amount of the <unk>.
Speaker Change: Deposits that are kind of tied to an index that reprice I think it is immediately could you just remind us exactly.
Speaker Change: Sure Damon I'd be happy to do that that's one of the reasons, we had such good performance in the back half of the third quarter.
Speaker Change: We actually had $2 2 billion of immediately repriced core deposits, we took those down 50 basis points. The day after the fed cut.
Speaker Change: We had another $685 million.
Speaker Change: High beta not directly index like the two point too, but we took that 685 down somewhere in the range of 10 to as much as 60 basis points since the fed action.
Speaker Change: So those are two big buckets of our ourselves our total ourselves or right around $3 8 billion. Our assays are three two so we continue to have a nice delta on ourselves and over.
Speaker Change: Overpowering the rate reductions, we're not seeing.
Speaker Change: That really impacting loan EOG at as you saw Q3 loan yields were up even in the face of rate cuts. So very pleased to have that level of ourselves to reprice immediately.
Speaker Change: Got it okay, great. Thank you and then just secondly on <unk>.
Speaker Change: The outlook for expenses, you've kind of reiterated the $49 million to $52 million quarterly level with this quarter kind of on the upper half end of that.
Speaker Change: What gives you confidence that you could kind of keep that.
Speaker Change: You know.
Speaker Change: We're not getting over that $52 million range was there some items here in the third quarter that might be going away in the fourth quarter or kind of how are you looking at the expenses.
Speaker Change: Yeah. So two things one we will benefit from a.
Speaker Change: Roughly 900, K have reduced expenses with the M. Two decision we had those upfront charges in the third quarter, but we're going to recover that over the next two quarters Q4, and Q1 next year. So that's helping.
Speaker Change: Then probably the only thing that might cause us to really bump up against the 52 million would be I think good things and that would be if we continue to have a lot of success.
Speaker Change: Growing earnings growing NII growing earnings per share, we may see some higher incentives for performance kicking in in the fourth quarter.
Speaker Change: Still think we can bring it in in that.
Speaker Change: High end of the range or below with those two moving parts and as you know.
Speaker Change: We're a big fan of incentive comp.
Speaker Change: So far this year about 23% of our compensation is incentivized, we like that approach.
Speaker Change: We like to have.
Speaker Change: Shareholders get rewarded first and then our employees with those incentives. So that's that's what's given us confidence we can hold it within the range.
Speaker Change: Got it that's very helpful. That's all that I had for now I'll step back. Thank you.
Speaker Change: Thanks Amy.
Damon Delmonte: Thanks Damon.
Speaker Change: Our next question comes from Nathan race with Piper Sandler. Please go ahead hey.
Nathan Race: Guys. Good morning, Thanks for taking my question.
Nathan Race: Just going back to the margin discussion I'm curious how much of the expansion that you're expecting in <unk> is a function of just further deleveraging the balance sheet with the next planned securitization of <unk> versus just what you have repricing on the.
Nathan Race: On the right side of the balance sheet versus in terms of loans as well.
Speaker Change: Sure no. Thanks, Nate for the clarifying question on that of that 2% to seven or maybe three to eight is we get a 25 basis point cut in early November.
Speaker Change: I'd say about half of that is is really the benefit of repricing deposits.
Speaker Change: Holding on to loan yield really I guess I would say the more client based.
Speaker Change: Accretion of margin, so so let's say <unk>.
Speaker Change: Half of that and maybe the other half would be the benefit from the Securitizations accomplished in Q3 and the one we have on deck here for middle of the fourth quarter, so probably about half and half.
Yes.
Speaker Change: And have you seen any improvement in the economics on these securitizations as youre getting more of these out the door lately yeah.
Yes, absolutely are thanks.
Speaker Change: Thanks for asking about that Nate. So in Q3, we did about $230 million of tax ex loans and actually had a very good outcome. There. We did have a modest loss of 473 K, but.
Speaker Change: That was less than half of our expectation initially in our guidance I think we guided last quarter that might be $1 million loss, so continued better and better execution on those.
Speaker Change: Taxable one that we'll be doing here in the fourth quarter of $166 million.
Speaker Change: We're going to reaffirm our guidance there that we indicated last quarter that we expect a $2 million to $3 million gain on that execution. So.
Speaker Change: Probably in that one five to $2 5 million gain for the full year on doing around $400 million of securitization.
Speaker Change: If you recall, we did our first ones late last year around that same volume of 400, and we only had about a $600000 gain on that level of activity. So I. Appreciate you asking Nate we do continue to see better economics.
Speaker Change: Stronger execution as we perfect. This.
Speaker Change: Gotcha.
Nathan Race: That's great to hear.
Speaker Change: And then just switching to capital markets revenue you guys have obviously exceeded the midpoint of kind of the quarterly average that you've provided for the.
Speaker Change: Next month guidance over the last several quarters now so just curious why you guys are still kind of remaining fairly conservative on.
Speaker Change: That front is just a function of.
Speaker Change: The pipeline or just some of the increase that we see in the 10 and five year part of the curve more recently or just any updated thoughts on kind of what youre seeing there.
Speaker Change: Ross that vertical.
Speaker Change: Yes, Nate I'll take this one as you know there are some inherent variability quarter to quarter in these businesses. So we've tended to be conservative in how we guided for SaaS.
Speaker Change: The performance this last quarter was right on top of our two year average for these numbers.
Speaker Change: So the pipeline continues to be strong.
Speaker Change: So we don't see a change in the pipeline.
Speaker Change: What we've been after is trying to create as much consistency as possible in this business.
Speaker Change: And we could potentially certainly grow with us faster over time once we get a baseline and here I'm just kind of consistent level that takes people because we've got to do transactions that do it but right now we like where we're at we'd like the pipeline.
Speaker Change: The outlook remains positive in this space.
Speaker Change: Okay very helpful and maybe one last one for me while I have you Larry I'm curious to get your updated thoughts on excess capital.
Speaker Change: Management going forward, you guys, absolutely build TCE pretty nicely in the quarter and that will likely continue if not increase.
Speaker Change: Over the course of next year as the margin improvement continues to play out. So just curious how youre thinking about managing <unk>.
TCE just in order to try to optimize our return on tangible.
Speaker Change: Yeah.
Speaker Change: Really a lot of.
I'll, let variability in the economy and outwork.
Speaker Change: Interest rates and all of those things right now so.
Speaker Change: We're certainly not in a rush to get rid of capital.
Speaker Change: We're certainly going to have our TCE and a thought where that's an option for us to do some things next year.
Speaker Change: First of all we want to make sure we've got enough capital to support our growth, which is our growth has been uniquely good compared to most of our peers.
Speaker Change: One capital to support that.
Speaker Change: Secondly, we're going to look at some of our sub debt.
Speaker Change: Okay.
Speaker Change: Retire a portion of that next year, we think that might be the next right place to go when some of that becomes callable.
Speaker Change: Then we'd look at some buybacks later in the year.
Speaker Change: Lastly, M&A probably not.
Speaker Change: On our per view right now is just not a priority for us we've got such good momentum.
Hum.
Speaker Change: An M&A transaction would be distracting and we probably don't want to get distracted and we're executing right.
Speaker Change: Got it that's great color.
Speaker Change: I appreciate all the insights thanks guys.
Speaker Change: Thanks.
Speaker Change: Our next question comes from Jeff <unk> with D. A Davidson. Please go ahead.
Speaker Change: Thanks, Good morning, I wanted to circle back on the margin.
Speaker Change: I appreciate the guide into the fourth quarter.
Speaker Change: So how do you think thats that relationship.
Speaker Change: One to two per 25 basis point cut.
Speaker Change: You've got holds into 25, certainly sounds positive to close the year and I would imagine.
Speaker Change: Tail wind.
Speaker Change: Into next year, but understanding.
Speaker Change: Other components could change, but just wanted to get your general feel for 'twenty fives.
Speaker Change: And direction.
Speaker Change: Sure Jeff So I appreciate you asking.
Speaker Change: Would expect that kind of margin accretion to continue if the fed were to continue cutting rates.
Speaker Change: One to two.
Speaker Change: Million of half $2 million in annual NII improvement for every quarter of fed cuts so it won't be perfectly linear.
Speaker Change: Thank you were actually saying that that there's a lot of other things that go into and to that end.
Speaker Change: We expect to have a more detailed guidance on 'twenty five in January with full year 'twenty four results, but I do think it's reasonable to expect that we're going to continue to see some some nice lift in NIM percentage NII dollars. If the fed does can continue to cut.
Speaker Change: So I think that's fair to assume that.
Speaker Change: Okay.
Speaker Change: If I wanted to hop into credit for a minute.
Speaker Change: I think you mentioned a bulk of that net charge offs were two related does that is that also the case in the in the drop in criticized was that also.
Speaker Change: <unk> do.
Speaker Change: Due to data and to.
Speaker Change: Yes, the drop is a combination of several factors several upgrades.
Speaker Change: Some charge offs that were a little bit elevated.
Speaker Change: Where we're seeing the credit stress is really on the small business.
Speaker Change: I guess I would call, maybe micro business sector, which some of the MTI business Suzanne.
Speaker Change: And some of our other portfolios.
Speaker Change: It's really the micro businesses they are the ones that are.
Speaker Change: Really struggled to deal with inflation pressures on their cost structures.
Speaker Change: So.
Speaker Change: It's really a combination of all those factors.
Speaker Change: We look.
Speaker Change: Forward looking to our criticized and classified.
Speaker Change: Those numbers.
Speaker Change: <unk> R.
Speaker Change: Surprisingly good to me.
Speaker Change: I would say there.
Speaker Change: We're kind of we're kind of close to our 20 year.
Speaker Change: <unk> and criticizing classified that's it seems like crazy in this environment that they are that good.
Speaker Change: But that's kind of the forward looking.
Speaker Change: Perspective, right now we certainly got a couple of NPA is as we indicated just a handful, but we got to work through we've got one NPA, we've talked about in the past.
Speaker Change: 30% of our Npa's one deal I would tell you that's still not resolved this quarter.
Speaker Change: Order closer to being resolved and we've made some progress and hopefully in the next few quarters, we can just get that.
Speaker Change: Off the books, because we've already taken the reserve where it needs to be to handle that.
Speaker Change: So the the credit outlook is really strong right now.
Speaker Change:
Speaker Change: Given what we know today now given the volatility of the <unk>.
Economy, and interest rates and all those things going on who knows what it looked like two quarters, but today.
Speaker Change: It looks pretty rosy.
Speaker Change: Got it thanks Larry.
Speaker Change: Last one.
Speaker Change: Adjusted in more of a alone.
Speaker Change: Demand question.
Speaker Change: I guess two parts to that as one of your scene I was sort of customer behavior. If at all changed post the fed cut in and then two if you could touch on just the competitive.
Speaker Change: Landscape, how that's evolved as well I guess im speaking more in the last couple of months.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: I would say.
Speaker Change: I'll start with the backend first our pricing power.
Speaker Change: It's still good.
Speaker Change: I think there is we feel like we've got pricing power and have been able to expand.
Speaker Change: Yeah.
Speaker Change: Our pricing over maybe historical norms, a little bit when we're looking at margins compared to the yield curve and those kind of things.
Speaker Change: <unk>.
Speaker Change: Loan demand standpoint, we've got this unique like tech business, which continues.
Speaker Change: Grow 10% to 12% a year, that's a steady pipeline of growth in business I would say our commercial traditional pipeline is.
Speaker Change: He is improving a bit we've seen utilization of credit lines.
Speaker Change: Part of the way back toward normal we're not back to pre pandemic levels yet.
Speaker Change: Your line of credit utilization, but may be moved halfway back.
Speaker Change: And I would say loan demand is.
Speaker Change: Improving modestly certainly low single digits yet.
Speaker Change: But I think traditional commercial growth.
Speaker Change: People are getting accustomed to the interest rates.
Speaker Change: That we're kind of a shock to them when they first went up but now I think they believe that this is just kind of normal. So I think our businesses are kind of adjusted.
Speaker Change: As we said the one sector feels still feeling some pain is really those micro businesses.
Speaker Change: Deal with.
Speaker Change: Labor costs going from 15 Bucks 20 Bucks an hour but.
But it's really that's not where the bulk of our dollars around.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo: Thank you good morning, guys.
Speaker Change: Good morning.
Daniel Tamayo: Maybe a quick question on the on the deposit side. Thank.
Speaker Change: You've talked about wanting to get the loan to deposit ratio down into the 90% to 95% range.
Speaker Change: You're basically there at the top end of that range just curious.
Speaker Change: If that feels good to you guys, where you want to kind of.
Speaker Change: Bring deposit growth back into the similar range is loan growth going forward, if you're still looking to bring that down closer to the midpoint.
Yes, Danny Thanks for asking we are very pleased with the deposit growth that we had here in this quarter and certainly this full year, we are committed to continuing to fund.
Speaker Change: All asset growth with core deposits and then so we do want to continue to drive that loan to deposit.
Speaker Change: Ratio down.
Speaker Change: We know that's going to take a while we know that's going to take.
Speaker Change: Huge focus across the entire footprint, but we do have that level of focus I would just tell you that.
Larry Helling: If larry or I or both of US were in a meeting it doesn't matter much what the subject is we will find a way to talk about deposits.
Speaker Change: Just visit with Larry yesterday, he was in a credit meeting and found a way to talk about deposits.
Larry Helling: I was with a big team of our operating folks here in the Springfield market.
Larry Helling: Two days ago, and we found a way to talk about deposit so well.
Larry Helling: We're very focused on core deposit growth.
Larry Helling: And we're not going to let our foot off the gas in that regard. So we want to continue to run more illiquid.
Larry Helling: We want to continue to focus on net new accounts.
Core deposit growth in many of our strategies and all four banks are really focused on that.
Larry Helling: Okay great.
Larry Helling: And then.
Speaker Change: Second question kind of related to the capital discussion, we're having earlier, but.
Speaker Change: You mentioned you know certainly the Securitizations are allowing you guys to stay below 10 billion for a longer period, but.
Speaker Change: Just curious if you have a thought on when you guys might actually cross $10 billion in.
Speaker Change: Can you just remind us what the durbin impact would be for you.
Speaker Change: Yes.
Speaker Change: Pleased that we have securitization, that's going to help us by a little bit more time to get ready for it.
Speaker Change: Yeah.
Speaker Change: Going over the $10 billion is probably.
Two years from now, we're probably going to be over as we probably can't manage it much after that.
Speaker Change: For us because we are heavily commercial.
Speaker Change: The Durbin impact is not nearly as big for us.
Speaker Change: And it's basically as we've talked about this historically, we probably already have a $1 million in our expense run rate getting ready to be over $10 billion and we.
Speaker Change: We'll probably build another million of expense in our run rate this year to get ready for 10 billion.
And then a year after another million or two and so for US I think the total impact is.
Speaker Change: $506 million a year run rate may be three years from now.
Speaker Change: And.
Speaker Change: What we are focused on is pulling all the other levers so that as we go through $10 billion you don't notice.
Speaker Change: And we've got plans in place to basically manage our expense structures on our revenue so that we.
We can power our way through that.
Speaker Change: And because our situation is much different than you.
Speaker Change: Hi, retail bank that could happen.
Speaker Change: Huge durbin impact.
Speaker Change: So we feel pretty good about where we're at today.
The regulators will have increased expectation, which will increase on costs, we've already got part of that built in.
Speaker Change: To be gradual.
Speaker Change: More than a cliff.
Speaker Change: The way, we fall off on the expense side, though so we feel good about where we're at.
Speaker Change: Hopefully, we can do and the way you don't even notice.
Speaker Change: Yeah.
Speaker Change: Okay. So the revenue impact as it was negligible basically so what you're saying.
Speaker Change: It might be a.
Speaker Change: Couple of million dollars, a year, but we've already got plans in place on.
Speaker Change: Other places to try and save that so that.
Speaker Change: As well over the next couple of years, we can overpower that.
Speaker Change: Understood Okay, well. Thank you for all the color I appreciate it.
Thanks, Dan.
Speaker Change: This concludes our question and answer session I.
Speaker Change: I would like to turn the conference back over to Larry Helling for any closing remarks.
Larry 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 each of you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.