Q4 2024 QCR Holdings Inc Earnings Call
Speaker Change: Greetings and welcome to the QCR Holdings Incorporated Earnings Conference Call for the fourth quarter and full year 2024.
Speaker Change: Yesterday, after market closed, the company distributed its fourth quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website at www.qcrh.com.
Speaker Change: 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 for questions from analysts.
Speaker Change: Before we begin, I would like to remind everyone that some of this information management will be providing today falls under the guidance of forward-looking statements as defined by the Securities and Exchange Commission.
Speaker Change: As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements and actual results could differ materially from those projected.
Speaker Change: Additionally, information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAP measures, which are intended to supplement but not substitute for the most directly comparable GAP measures.
Speaker Change: The press release available on the website contains the financial and 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 call is being recorded and will be available for replay through January 30th, 2025.
Speaker Change: Starting this afternoon, approximately one hour after the completion of the call, it will be accessible to the company's website. I would now like to turn the call over to Mr. Larry Helling at QCR Holdings. Please go ahead, sir. Thank you, operator. Welcome, everyone. Welcome, everyone.
Speaker Change: And thank you for joining us today. I'll start by providing highlights of our 2024 performance, and Todd will follow with additional details on our financial results for the fourth quarter.
Speaker Change: We delivered our strongest results of the year in the fourth quarter, generating record full-year results.
Speaker Change: Our exceptional performance was highlighted by significant growth in net interest income driven by strong margin expansion and robust loan growth.
Speaker Change: Additionally, we produced another year of strong capital markets and wealth management revenue.
Speaker Change: Our operating expenses were well controlled during the year and our credit quality remains excellent.
Speaker Change: We also successfully executed two additional LIHTC loan securitizations during the year to support our LIHTC lending business.
Speaker Change: All of these factors led to a substantial increase in tangible book value.
Speaker Change: We delivered record net income of 114 million dollars or six dollars and 71 cents per diluted chair for the full year 2024.
Speaker Change: Net income on an adjusted basis was $119 million, or $7.03 per diluted share.
Speaker Change: This resulted in an adjusted ROAA of 1.35% and an adjusted ROAE of 12.61%, placing us at the higher end of our peer group.
Speaker Change: Total loan growth for the year was 10% prior to loan securitizations of $387 million of low-income housing tax credit loans, and 4% on a net basis.
Speaker Change: This rate of loan growth is consistent with our target range of 8 to 10 percent and was driven by our low-income housing tax credit lending program and our conventional commercial lending business.
Speaker Change: Given our current pipeline and the ongoing strength of our markets, we anticipate gross loan growth of 8 to 10 percent in 2025.
Speaker Change: When factoring in the loan securitization that we have planned and the continuing runoff of M2 equipment finance loans, we are targeting net loan growth between 1 and 3 percent for the year.
Speaker Change: We intend to continue leveraging securitizations to sustain capital markets revenue, enhance liquidity, and manage growth as we approach $10 billion in assets.
Speaker Change: Total core deposits grew $474 million, or 8% for the year, outpacing our net loan growth and increasing immediate liquidity.
Speaker Change: We expanded market share with significant increases in new client accounts and strengthened relationships with existing clients.
Speaker Change: Highlighting our 2024 earnings performance was an increase in net interest income of $11 million, representing 5% growth for the year. This significant improvement was fueled by strong increases in loans and investments, as well as higher yields on those assets.
At the same time, deposit costs began to stabilize.
Speaker Change: Total non-interest income for the year reached $116 million, led by $71 million from capital markets revenue, which included $1 million of net gains from securitization.
Speaker Change: Our wealth management business saw exceptional growth, with assets under management increasing by $1 billion, or 20% for the previous year.
Speaker Change: This growth was driven by significant new client accounts and favorable market performance, resulting in a significant 15% increase in total wealth management revenue for the year.
Speaker Change: We are excited about the potential to further expand this business, given its consistent and recurring revenue stream. We anticipate continued growth in our wealth management business with the addition of key personnel during 2020-24 in Southwest Missouri and Central Iowa.
Speaker Change: We continue to carefully manage our core operating expenses. For the full year, core non-interest expenses decreased by more than 2 percent, primarily due to salary and benefit costs.
Our asset quality remains strong and better than historical averages.
Speaker Change: Total criticized loan balances improved $37 million or 19% for the year while non-performing assets increased $11 million or 33%.
Speaker Change: During the fourth quarter, we saw a modest increase in total criticized and non-performing assets, primarily due to three loans in discrete industries.
Speaker Change: These changes are reflective of the credit environment normalizing from historically low level.
Speaker Change: We have already made significant progress in early 2025 with the payoff of our largest non-performing asset of ten million dollars.
Speaker Change: Our allowance for credit losses as a percentage of total loans held for investment was 1.32% as of the end of 2024, providing a strong buffer against potential future losses.
Speaker Change: The provision for credit losses was $17 million for the year, a modest increase of $600,000 in the prior year.
Speaker Change: We maintain a disciplined approach to our reserves and continue to carefully monitor asset quality across all of our business lines.
For more information visit www.FEMA.gov
Speaker Change: We remain optimistic about the economic stability within our markets and the strong financial position of our clients.
Speaker Change: Currently, we have not observed any broad-based signs of financial stress across the regions we serve.
Speaker Change: Our commercial real estate portfolio remains solid, with our LIHTC loans making up approximately half of our exposure to this asset class.
Speaker Change: We consider LIHTC loans to be the strongest asset class within our portfolio. The LIHTC sector has demonstrated a strong track record of performance over nearly four decades, enduring multiple credit cycles with negligible credit issues.
Speaker Change: Excluding LIHTC loans, our commercial real estate exposure stands at 144% of total risk-based capital.
Speaker Change: We maintain a strong pipeline of high quality LIHTC loans, which remains a key strategic initiative for our company.
Speaker Change: The LIHTC lending program drives significant capital markets revenue, contributing meaningfully to our non-interest income.
Speaker Change: Additionally, LIHTC loans are well suited for securitization thanks to their proven performance and robust demand from investors.
Speaker Change: The securitization of LIHTC loans has enhanced the flexibility of our balance sheet, strengthened our TCE, improved liquidity, and increased our net interest margin.
Speaker Change: Additionally, it helps manage our on balance sheet growth as we approach the 10 billion asset milestone.
Speaker Change: Securitizations play a key role in supporting the long-term sustainability of earnings and the growth of our tangible book type.
Speaker Change: We are pleased with the growth in our TCE ratio during the year. In addition, we are committed to maintaining strong regulatory capital ratios. We are pleased with the increases in these ratios during the year.
Speaker Change: Our strong earnings growth, coupled with a modest dividend, enables us to generate capital and increase our TCE more quickly than our peers. We continuously evaluate opportunities to optimize the mix and the quality of capital as we grow into a larger organization.
Speaker Change: We are focused on sustaining our exceptional financial performance including growth in earnings per share, top quartile ROAA, and significant growth in tangible book value per share.
Speaker Change: We create shareholder value with a client-centric focus, fostering employee well-being and making a positive impact in the communities in which we work and live.
Speaker Change: Over the past five years, we have consistently outperformed many of our peers. Total loans and deposits have grown a compound annual rate of 13%.
Speaker Change: This growth resulted in an increase of 14% in our core diluted earnings per share to 12% in our tangible book value per compound annual base.
Speaker Change: I will now turn the call over to Todd to provide further details regarding our fourth quarter results.
Todd Gipple: Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our earnings performance for the fourth quarter.
Todd Gipple: We delivered an adjusted net income of $33 million, or $1.93 per diluted share in Q4.
Todd Gipple: The interest income for the quarter was $61 million, a $1.5 million increase from the third quarter.
Todd Gipple: This linked quarter growth and net interest income was driven by significant margin expansion, which overpowered the impact of executing our fourth securitization of $155 million of stabilized, taxable LIHTC loans in November.
Todd Gipple: Our fourth quarter adjusted NIM on a tax-equivalent yield basis expanded by six basis points from the third quarter near the upper end of our guidance.
Todd Gipple: This increase was driven by a significant decrease in our deposit and funding costs.
Todd Gipple: We are pleased with our ability to drive down our funding costs, which has contributed meaningfully to our NIM expansion.
Todd Gipple: Early in the most recent interest rate hiking cycle, beginning in March of 22, we benefited from those interest rate increases given our asset sensitivity.
Todd Gipple: We are experiencing the benefits of strong deposit betas as we actively manage our deposit cost early in this current rate cutting cycle.
Todd Gipple: Looking forward, our balance sheet remains liability sensitive, positioning us to capitalize on future interest rate cuts, while also benefiting from continued loan repricing under a steepening yield curve.
Todd Gipple: However, we expect some headwinds related to the expiration of certain interest rate caps in the first quarter of 2025.
Todd Gipple: We utilize various derivative instruments to manage our interest rate risk.
Todd Gipple: Despite this, we expect to offset this impact and continue growing our net interest margin in the first quarter of 2025.
Todd Gipple: We project our adjusted NAMTEY for the first quarter will be in the range from static to an increase of five basis points.
Todd Gipple: Our non-interest income was $31 million for the fourth quarter, supported by consistently strong capital markets revenue of $21 million, which included a $1.4 million gain on our fourth LIHTC securitization.
Todd Gipple: The continued strong demand for affordable housing continues to support the sustainability of our LIHTC lending and swap fee revenue.
Todd Gipple: Our pipeline in this business remains robust. As a result, we expect our capital markets revenue from swap fees for the next 12 months to be in the range of $50 to $60 million.
Todd Gipple: Our wealth management business generated $5 million of revenue in the 4th quarter, a 25% annualized increase from the 3rd quarter.
Todd Gipple: Our wealth management assets under management have grown by $1 billion in 2024, driven by the expansion of our client base and market performance as we increase our market share.
For more information, visit www.FEMA.gov
Todd Gipple: This growth is driven by the personalized value proposition provided by our highly skilled team of advisors, the strong relationships we have cultivated with our clients, and a reliable network of trusted legal professionals and key referral partners.
Todd Gipple: We are focused on growing this business given the reliable and recurring revenue stream it provides.
Todd Gipple: As we discussed last quarter, we executed a derivative strategy with a notional value of $410 million during the third quarter.
Todd Gipple: These derivatives are structured to protect the company's regulatory capital ratios from the adverse effects of a significant decline in long-term interest rates.
Todd Gipple: These derivatives are marked to market each quarter with gains or losses recorded in non-interest 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, or a loss, which is capped at the up-front premium.
Todd Gipple: If long-term interest rates decline, we will record an increase in the market value or gain that will help offset the risk to our regulatory capital ratios.
Todd Gipple: We view this derivative as a prudent way to protect our regulatory capital ratios.
Todd Gipple: For the fourth quarter, we recorded a loss on these derivatives of $3 million due to the increase in long-term interest rates from the prior quarter.
Todd Gipple: Additionally, and partially offsetting this loss, was a $1.5 million gain from the increase in the value of our floating rate trading securities, or the retained BPs of our securitizations, as long-term interest rates increased.
Todd Gipple: Non-interest expense for the fourth quarter totaled $53.5 million, which was static from the previous quarter.
Todd Gipple: Having achieved our strongest quarterly results of the year, our highly incentivized compensation structure rewards our employees after our shareholders are rewarded.
Todd Gipple: Professional and data processing fees increased during the quarter due to core system conversion related expenses related to our investments in our digital transformation.
Todd Gipple: Despite these increases, our full-year core non-interest expenses remain well controlled, decreasing by 5 million or 2% from the prior year and supporting meaningful improvement in our adjusted efficiency ratio to 58.4% for the year.
We remain focused on effectively managing our core operating expenses.
Todd Gipple: This includes strategic investments in technology and automation, along with a top-tier operations team that underpins our multi-charter community banking model.
Todd Gipple: Looking forward to the first quarter of 2025, we expect our non-interest expenses to be in the range of $52 to $55 million, a growth rate of 4%, which aligns with our 965 strategic model.
Todd Gipple: Over the past five years, this approach has consistently delivered record bottom line results.
Moving to our ballot sheet.
Todd Gipple: Including the $387 million of loans that were securitized during the year, our total loans grew by $628 million, or 10% from the prior year, which was at the upper end of our guidance range of 8 to 10%.
Todd Gipple: Loans held for investment grew $121 million, or 7% annualized, during the fourth quarter.
Todd Gipple: Our long-term securitization strategy supports the ongoing success of our LIHTC business and the substantial capital markets revenue it drives.
Todd Gipple: Through the securitization of LIHTC loans, we create sustainability of continued swap revenue generation, improve our liquidity, reduce our funding cost, strengthen our TCE, and ensure our LIHTC portfolio remains within our internal concentration limits.
Todd Gipple: Since our initial securitizations began in 2023, our execution has improved, leading to better financial results due to reduced transaction and administrative costs.
Todd Gipple: Looking ahead to 2025, we are planning to execute a single securitization of stabilized tax-exempt LIHTC loans in the latter part of the year. We are targeting a deal size of approximately $350 million, consistent with the average of the securitizations we have closed over the past two years.
For more information visit www.FEMA.gov
Todd Gipple: Total core deposits increased 76 million or 5% annualized during the quarter.
Todd Gipple: For the year, total core deposits have increased $474 million, or 8% from the prior year, outpacing our net loan growth, increasing liquidity, and reducing our loan to deposit ratio.
Todd Gipple: Deposit growth remains a primary focus for our company, and when combined with our securitizations, it reduces our reliance on wholesale or higher-cost funding sources.
Todd Gipple: Our total uninsured and uncollateralized deposits of $1.3 billion remain quite low at 19% of total deposits.
Todd Gipple: Additionally, the company had approximately $4 billion of available liquidity a quarter end, which includes $1.7 billion of instantly accessible liquidity.
Todd Gipple: Turning to our asset quality, which remains strong. During the quarter, total criticized loans increased 14 basis points to 2.34% of total loans and leases.
Todd Gipple: However, we are pleased with the reduction in total criticized loans for the year, which is down 65 basis points from the prior year.
[inaudible]
Todd Gipple: NPAs increased by 10 million to 46 million or 50 basis points of total assets from the prior quarter due to three specific loans.
Speaker Change: As Larry mentioned, these issues are reflective of a normalizing credit environment from historically low levels.
Speaker Change: Additionally, approximately 43% of our total NPAs are comprised of just four relationships.
Speaker Change: Our largest NPA of $10 million was recently paid off in mid-January.
Speaker Change: This successful outcome reduces our NPAs to 36 million, or 40 basis points of total assets on a pro forma basis, consistent with our NPA ratio at the end of 2023.
Speaker Change: We recorded a total provision for credit losses of $5 million during the quarter, representing an increase of $2 million from the prior quarter.
Speaker Change: The increase in the provision for credit losses during the quarter was primarily due to strong loan growth and the increase in total credit size balances.
Speaker Change: The allowance for credit losses to total loans held for investment increased to 1.32% from 1.30% as of the prior quarter.
Speaker Change: We continue to diligently monitor the asset quality of all our lines of business and remain committed to our strong credit culture.
Speaker Change: The improvement in TCE was driven by strong earnings, partially offset by a decrease in AOCI as longer rates increased.
Speaker Change: We also saw a nice improvement in our regulatory capital ratios during the quarter.
Speaker Change: and our Common Equity Tier 1 ratio increased by 24 basis points.
Speaker Change: to 10.03%, driven by strong earnings growth and a smaller increase in total risk-weighted assets.
Speaker Change: We remain committed to growing our regulatory capital, including maintaining our CE2-1 ratio above 10%.
Speaker Change: We continuously review our capital mix to support our business model and growth needs, while being mindful of our relative position to our peers. Over time, we will continue to focus on the quality of our capital as we continue to expand into a larger organization.
Speaker Change: We saw another significant increase in our tangible book value per share, which grew by $1.21, representing 10% annualized growth for the quarter.
Speaker Change: Over the past five years, our TBV has grown by more than 12% on a compound annual basis, emphasizing our strong financial performance and commitment to building long-term value for our shareholders.
Speaker Change: Finally, our effective tax rate for the quarter was 9% and within our guidance. Our tax-exempt loan and bond portfolios have consistently helped maintain our low tax liability, benefiting our shareholders.
Speaker Change: We continue to expect our effective tax rate to be in the range of 8 to 10 percent for the first quarter of 2025.
Speaker Change: With that added context on our fourth quarter and full year financial results, let's open the call for your questions. Operator, we're ready for our first question.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time 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.
Jeffrey Rulis, Brian Martin
Speaker Change: And the first question will come from Damon Del Monte with KBW. Please go ahead.
Hey, good morning guys and thanks for taking my questions.
Speaker Change: First one, I just wanted to touch on the outlook for the swap fee income. I appreciate the guidance of $50 to $60 million here in 2025. Just, and I know it's a...
Speaker Change: It's not an easy thing to kind of talk to, but just wondering on, like, the cadence that we can maybe look towards.
Speaker Change: kind of based on the pipeline at year end and kind of going into 25. Do you think that you know, you're going to still start off pretty strong and then maybe have a little bit of a rebuild as we go through the the middle part of the year, just kind of looking for little guidance on that.
Speaker Change: You know from following us for a long time, there's some inherent variability because we have to do transactions to generate those swap fees. So the pipeline remains robust, I'd say consistent with historical levels.
Speaker Change: The one headwind right now, this probably affects all commercial real estate, including the light tech businesses.
Speaker Change: Higher long-term rates could change the psychology of putting projects together of any kind. This one a little bit. There's certainly tremendous demand for the product that's getting produced here, but higher interest rates can cause things to slow a bit.
So...
due to the variability quarter-over-quarter.
Speaker Change: We've tried to be conservative in our estimates compared to what we've done.
Speaker Change: We certainly want to maintain our, say, high-due ratio. If you look historically, the first quarter is typically a little bit lighter than the other three quarters of the year.
Speaker Change: Our focus is to make it as consistent as we can, so that the market will fill in the valuation that we think we deserve there. But, you know, I'd say the pipeline's good. Higher interest rates could slow things just a little bit in the first quarter. But our four-quarter guidance, we think, is real solid.
Speaker Change: on the interest rate caps, which are expiring. So if those weren't expiring, then you're kind of looking for, call it five to 10 basis points on most of.
Speaker Change: of improvement quarter over quarter. How do we think about like the second quarter and kind of the back part of the year? Do you think you're still in a position to see a lift on the margin?
Speaker Change: Sure, thanks for the great question, Damon. Yeah, maybe to reiterate a little detail around Q1 first and then...
Give you some longer-term thoughts for 25
Speaker Change: Correct, our guidance is static to up five. As we mentioned in our opening comments, we do have that interest rate cap expiring here in the first quarter. That cap benefited our NIM and NII the past several years.
Speaker Change: The maturity of that cap is going to cost us four basis points of margin. Someone may be thinking, is that partially...
Q1 and there's going to be more of that coming.
Speaker Change: baked into the first quarter guide. We do expect to overpower that with core margin expansion between four and nine basis points, hence the guide to static to up five, considering the impact of the cap.
Speaker Change: We expect that margin expansion to come from further benefit from the November 25 basis point cut. Certainly that's not fully baked into our run rate just yet. The late November securitization continues to help us a bit with pricing on the right side of the balance sheet.
Speaker Change: And, which will get me to the longer-term thoughts on 25, our deposit betas continue to outperform loan betas pretty significantly on the way down. And our new loan yields are still greater than our roll-off rates. So that's how we got to the guide of...
Speaker Change: four to nine basis points of improvement, netting out the gap, getting down to static to five. In terms of
Speaker Change: thoughts into Q2 and beyond. We are optimistic we can continue to further improve NIMM organically without any further rate cuts. Certainly the expectation of more Fed action is eased here over the last 60 days.
Speaker Change: I would say our continued expansion would be modest, a few basis points here and there, but continue to trend up.
Speaker Change: We expect that to happen through continued strong focus on managing cost of funds down. We're having a lot of success with that. Pretty significant beta performance on cutting rates.
is what's going to happen with the yield curve.
Speaker Change: At the end of 23, the three-month to five-year was inverted 156 basis points. It was essentially flat.
Speaker Change: beyond first quarter 25 is really going to depend on the level of slope to the curve. I think that will help us. I think that will help the entire industry. That may have more to do with future margin than even the Fed action.
Speaker Change: Long answer to your short question, but that's kind of how we feel about NIMM longer term.
Speaker Change: Got it. I appreciate that color. That's helpful. That's great. That's all that I have for now. I'll step back. Thank you.
Thanks, Damon.
Speaker Change: The next question will come from Nathan Race with Piper Sandler. Please go ahead. Hey, guys. Good morning. Thanks for taking the questions. Hope you're doing well.
Good morning.
Speaker Change: Appreciate the guidance around eight to ten percent loan growth for this year. So, you know, within that context, curious how your plan funding that loan growth within, you know, how much cash flow coming off the bond portfolio this year and also kind of what your deposit gathering aspirations are as well.
We expect to fund that with core deposits.
Speaker Change: We expect to continue to drive down our loan-to-deposit ratio. We made some nice headway on that this year. Our strong core deposit growth in 24 overpowered our net loan growth. It's another reason that securitizations are helpful to us.
Speaker Change: It does help with liquidity and margin and driving down loan-to-deposit ratio. Our aspiration, our expectation is to get loan-to-deposit ratio down into the low 90s.
Speaker Change: And so to do that, we're going to have to continue to fund this.
Speaker Change: this loan growth with core deposits. That's certainly our expectation and at the same time we want to exhibit strong betas on the way down to to really positively impact the cost of that funding.
For more information visit www.FEMA.gov
Speaker Change: Okay, got it. And then, you know, in the event that we do get a Fed rate cut, you know, in July perhaps, can you just remind us kind of the static impact from each 25 basis point cut?
on them.
Nim
Speaker Change: roughly one and a half to two million of NII on an annual basis. So that will continue to benefit us. We remain liability sensitive right now. That's helping us and again
Speaker Change: The beta on our deposits is outperforming loan beta on the way down, so we're very pleased with that
Speaker Change: Okay, great. And just in terms of the expense guidance that you provided, I think it was 53 to 55 million for the first quarter. Do you see it kind of holding in that range over the course of this year, assuming capital markets revenue kind of is within the guidance range?
Speaker Change: Yeah, Nate, thanks for asking. While that is guidance just for Q1, I would tell you that our expectation is for that to remain fairly static throughout the year. Yes.
Speaker Change: Okay, great. And then maybe I'll just ask one more on credit.
Speaker Change: You know, we've seen charge-offs in the 20-basis point range the last couple quarters. You know, we saw some increase in...
Speaker Change: criticize and non-performing loans, but it sounds like, you know, there's some near-term resolutions coming on that front. So, you know, just curious how you guys are kind of thinking about an acceptable or expected charge-off range for 2025 and beyond.
Yeah, Nate, maybe just a little bit of history.
that kind of put us on the same wavelength here.
You know, post-pandemic and post-PPP, credit wasn't acting normal.
um
and movement between upgrades, downgrades, charge-offs, additions to the list.
Speaker Change: Oh, that didn't happen the way it did historically, and I'd say now we've slowly moved to kind of normal territory on the movement of credit up and down, upgrading, charging off, those kind of things.
Speaker Change: So I think this last year was more indicative of what we should kind of be thinking about going forward
You know, if...
Speaker Change: We, you know, two weeks into the year we had our largest NPA payoff. So basically our NPAs, you can criticize, were basically back to the third quarter levels two weeks after the end of the year.
Speaker Change: and so I think we can expect just kind of normal chopping around at these kind of relative levels of NPAs and criticized going forward.
Speaker Change: You know as I look at it NPAs and Criticizers are about half of our 20-year average. Yeah, so we certainly still feel good about our credit quality But the normal movement is kind of back
Speaker Change: and that's because I think during when we have PPP bad management decisions didn't show up on our client base and now that
Speaker Change: That's kind of in the rearview mirror. If management of one of our companies that we bank makes a couple bad decisions it can show up and we've got to criticize that. So I think we're kind of back to normal in the movement sector on credit.
Speaker Change: Okay, that's really helpful. I appreciate all the color. Thanks, guys.
Thank you. Thanks, mate.
Speaker Change: Again, if you have a question, please press star, then 1. Our next question will come from Daniel Tamayo, excuse me, next question will come from Brian Martin.
with Danny Montgomery. Please go ahead.
Hey, good morning, guys.
Speaker Change: Bye, Brian. Good morning, Brian. Hey, guys. Can you give a little thought on just kind of how you're thinking about capital here and any changes to kind of your outlook there, whether it be on the – I know where you're heading in terms of the capital levels, but in terms of buyback, M&A, and just funding kind of organic growth kind of just priorities?
Yeah, I'll take that one, Brian. Certainly, there's...
Speaker Change: A fair amount of uncertainty in the world right now between interest rate movement and
Speaker Change: trying to figure out where inflation's go on, a new administration in Washington, global uncertainty. You add all those up, the prudent thing to us seems right now that we should continue to hold on to capital in the near term.
Speaker Change: and you saw us build capital ratios nicely during the past year. We expect to continue to hold on to our capital and probably not be, at these relative stock prices, probably not active in the buyback sector.
Um
Speaker Change: And M&A is certainly not a priority for us right now. We've got really good organic growth prospects compared to almost everyone else. So M&A is not really a priority, and I think our shareholders would be rewarded if we hold onto capital and just continue to grow organically.
Speaker Change: Gotcha okay that's helpful and then just Todd maybe just on the margin on the can you just remind us on the the Delta on the you know the rate sensitive assets and race sensitive liabilities today and then just kind of the betas that you're kind of expecting here you know you know in the near term
Speaker Change: In terms of betas, cycle to date on the cutting cycle, so since September, on the 100 basis points of cuts, our earning asset yields about a 13 beta, and cost of funds are a little more than double that, 28.
Speaker Change: beta in the fourth quarter and cost of funds 58% so again
Speaker Change: Being liability sensitive is helping, but in addition to that, the beta performance is certainly much stronger in terms of cost of funds down. So we're very pleased to have been able to manage those costs down that quickly.
Speaker Change: I think that takes care of most of my things. If I need to, I'll jump back in the queue. Thanks, guys.
Thanks, Brian.
Speaker Change: The next question will come from Daniel Tamayo with Raymond James. Please go ahead.
Tim DeLacy: Hey, good morning guys. This is Tim DeLacy on for Danny. Hope you're doing well Just a couple of quick questions for me
Tim DeLacy: You know appreciate the guidance here for 2025 on the loan growth, but I was curious, you know in that guidance You know how much of the M2 equipment finance runoff is being contemplated in there? You know seeing about six hundred thirty million dollars in the portfolio currently. So just curious on any thoughts there
Speaker Change: Yeah, the size of the M2 portfolio is about $340 million, and so as we run that off, about 40% of that will run off, about $120 million should run off during the next 12 months.
and so
Speaker Change: Over time, that will kind of bleed in, but we continue to run that off, and over the next couple of years, we'll make that a smaller portion of our credit portfolio.
Speaker Change: Understood. Thanks for that Larry and sorry for the bad math there.
just told.
Speaker Change: Just a follow-up from me here, just curious, nice to see the gain on the securitization in this portfolio, but do you guys see any levers or any dynamics where you could drive any better dynamics on future securitizations or does this kind of represent a fair mark of performance for you guys this quarter?
Yeah, Tim, we, um, we had guided to have, uh,
Speaker Change: That's stronger gain here in the fourth quarter on the securitization. We just did we Candidly underperformed that a bit. We had a 1.4 million dollar gain
Speaker Change: We were hoping for a floor of around two, so a slight underperformance there. It really had to do with the pricing we received when that went to market.
But really, to get to your question about the future...
Speaker Change: We do know that there is significant added leverage in financial performance to do a single larger deal. And so that's why we're going to pivot to that approach. Instead of two per year, we're going to do one large one late in 2025.
Speaker Change: As we get closer to Q4, and that starts to come together, and we have those loans in the queue, and
Speaker Change: Our further along the path on securitization will probably provide a bit more guidance in terms of the financial outcome But I will tell you we would expect it to be better
Speaker Change: We are getting improved economics in terms of costs, but really the leverage you get with one single larger deal is going to help us with performance there.
Speaker Change: Okay, great. Well, thanks for the color there, guys. I'll step back into the queue.
Thanks, Tim.
Speaker Change: Again, if you have a question, please press star, then 1. Our next question is a follow-up from Brian Martin with Jannie Montgomery. Please go ahead.
Brian Martin: Hey guys, just one follow-up for me. I think you guys talked about the LIHTC portfolio and the outlook, but just in terms of the legacy footprint, in terms of loan growth.
Brian Martin: just give us an update on where that's at, what you're hearing from your customers there and kind of expectations on that front. And then Todd your comment about the loan-to-deposit ratio and kind of focus there.
Brian Martin: Do you have any kind of guideposts as far as where you think you can, you know, get to that long-term target you're thinking about or maybe, you know, kind of end of this year, end of next year, kind of where you're trending to?
Speaker Change: Yeah, Brian, I'll start. And if Todd's got some additional comments, you can add those on here.
Speaker Change: with our client base. I think there's so much noise in the world going right now. I would say Sentiment from when I talk to our commercial bankers is our clients are cautious Certainly consumer spending holding up better than certainly I imagine given the uncertainty and everything going on
but higher long-term rates.
Concerns about inflation.
Speaker Change: global economy, all those kinds of things I think are making people kind of pause for a second. So I'd expect, you know, our core base to grow in the, you know, two to five percent range, basically our core commercial, and that's probably all the faster we can grow that portion of the business without taking undue risk.
Speaker Change: And so certainly we think there's growth there, but it's not that robust, I think, because of people's general concerns.
Their performance of our clients continues to be strong.
Speaker Change: but they're just got a little question in the back of their head about what the future looks like and I think that could Change quickly if things just settle in a bit here But there's been so many changes the last 90 and 180 days that everybody's kind of paused and I think that make big capital investments
Speaker Change: With regard to loan-to-deposit ratio, Todd talked about that a little bit earlier, certainly we'd like to get to the low 90s here over the next couple of years to do it quickly. As you know, cost earnings, we're going to try and do it gradually, work on our core funding. And we've made...
Speaker Change: Core funding and deposits a significant part of the incentive comp for all the officers in our company. So we have their focus
Gotcha. Okay, I appreciate it. Thanks, guys.
Thanks, Brian.
This concludes our call.
Speaker Change: 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.
[inaudible]
Larry Helling: Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day. We look forward to connecting with you again very soon.
Larry Helling: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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In Pursuit of an Actual Life