QCR Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 8 speakers on the call.

Operator

And welcome to the QCR Holdings Inc. Earnings Conference Call for the Q1 of 2023. Yesterday, after market close, the company distributed its Q1 earnings press release. If there is anyone on the call who has not received a copy, you may access On the company's website, www.qcrh.com. With us today from management are Larry Helling, CEO and Todd Gipple, President, COO and CFO.

Operator

Management will provide a summary of the financial results, And then we'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing Today falls under the guideline of forward looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, Any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measures.

Operator

The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non GAAP measures. As a reminder, This conference is being recorded and will be available for replay through May 4, 2023. Starting this afternoon, approximately only 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn over the call to Mr.

Operator

Larry Henning at QCR Holdings.

Speaker 1

Thank you, operator. Welcome, everyone, and thank you for taking the time to join us today. I will start the call by providing some highlights for the quarter, followed by a discussion about our deposit base, liquidity position and capital levels, As well as a review of our specialty finance business. Todd will provide additional details on our financial results for the quarter. We are pleased with our operating performance for the Q1, highlighted by increased fee income and carefully managed expenses.

Speaker 1

Our already strong capital levels continue to grow and credit quality remained excellent. Our core deposit base remains strong And we improved our liquidity position significantly in response to the recent events in the banking industry. We delivered net income of $27,200,000 for the quarter or $1.50 per diluted share. Our adjusted net income for the quarter was $28,000,000 and our adjusted EPS was $1.65 per diluted share. We generated an adjusted ROAA of 1.42 percent and an adjusted ROAE A 14.11 percent for the quarter and believe that both metrics remain at the high end of our peer group.

Speaker 1

We have built a strong and diversified deposit franchise over the past 30 years and our Q1 deposit activity was a reflection of the importance of that franchise. During the Q1, our core deposits excluding short term broker deposits Grew nearly $20,000,000 or 1.4 percent annualized. Our core deposit growth in the quarter was notable Because we typically experience seasonal deposit outflows in the Q1 as our commercial clients draw down their deposits to pay bonuses, shareholder distributions and taxes. Our core deposits grew $80,000,000 from March 10th Through the end of the quarter, a time when many banks may have experienced net deposit outflows. We believe that this a testament to the relationships that we have built with our clients over the years.

Speaker 1

In addition, we intentionally bolstered our on balance sheet liquidity with short term broker deposits during the quarter using the proceeds to pay off our overnight borrowings from the Federal Home Loan Bank and add immediate on balance sheet liquidity. Our level of uninsured and uncollateralized deposits improved by $170,000,000 during the quarter to 23.8 percent of total deposits or 26.2% When excluding broker deposits, which compares favorably to our peers. We were an early adopter and have actively participated In the ICS Cedars program for nearly 20 years, the ICS Cedars program is a trusted resource that provides expanded FDIC insurance coverage for clients that maintain larger deposit balances. We have sufficient ICS Cedars capacity to ensure all uninsured or uncollateralized deposits if needed. More importantly, we have ample on balance sheet and immediately available off balance sheet liquidity to operate our business and meet client needs.

Speaker 1

At quarter end, our combined excess cash and borrowing Now turning to loan growth. During the quarter, we grew loans 3.3% on an annualized basis, Driven primarily by our traditional commercial lending and leasing businesses and the continued strength in our low income housing tax credit project lending business. We experienced more modest loan demand from our client base as a result of the macro headwinds being created by the Fed's sharp increase in rates. Therefore, given the ongoing economic uncertainty, we are now guiding to loan growth in the second quarter in the range of 0 5% on an annualized basis, which is net of the planned loan securitization. With the growing prominence of our Specialty Finance Group and the interest it has received from analysts and investors, I would like to spend some time discussing the drivers of this High performing business and why we believe that we have an important competitive advantage that sets us apart from our peers.

Speaker 1

Our specialty finance team offers low income housing tax credit lending to a select group of developers and investors with whom we have built long standing relationships. These developers and investors have deep experience, long track records and strong expertise in the development and construction of affordable multifamily housing. These are high quality loans bolstered by strong equity investment from banks and corporate investors. The industry has an excellent track record with negligible historical default rates. Since our program's inception in 2018, We are proud to help finance over 250 projects consisting of nearly 13,000 affordable housing units Without experiencing any delinquency or defaults in this portfolio, the strong track record makes these loans ideal for securitization, which we expect to use as an alternative funding source for this lower risk and attractive business.

Speaker 1

All of these loans are made on a floating rate basis, which has greatly improved our ability to manage interest rate risk. Due to the long term ownership structure of these projects, our borrowers seek to lock in their financing costs over the life of the loan. As a result, our bankers arrange interest rate swap contracts for the borrowers, enabling them to secure the desired fixed rate financing. This LiTAC business has been a consistent and important component of our non interest income in all economic cycles. In addition, as the economy has softened, some of the previous headwinds that our clients were experiencing in this space have eased.

Speaker 1

We saw a nice rebound in capital markets revenue in the Q1 as the supply chain constraints And inflationary pressures on labor and raw materials that were impacting some client projects have begun to abate. Because of the strong underpinnings of this business, we are increasing our capital markets revenue guidance to a range of $40,000,000 to $50,000,000 for the next 12 months. We have assembled the expertise and built the tax credit lending business over several years. There are significant barriers to entry in this business that provide us with a significant competitive advantage. In short, this is an extremely valuable business and we believe that it deserves a higher valuation multiple than traditional banking.

Speaker 1

Furthermore, based on decades of stability in the industry and our own experience, we believe that this business is countercyclical and will be very resilient in future recessionary environments. Our asset quality remains excellent As the ratio of non performing assets to total assets was 0.29% at quarter end, we are comfortable with our reserve, which represents 1 point Or 3% of total loans and leases held for investment and continues to be at the high end of our peer group. We remain cautiously optimistic about the relative economic resiliency of our markets and we are not seeing any meaningful signs of weakness across our footprint. Our capital levels are strong and increased during the quarter. We remain focused on growing capital throughout the remainder of 2023.

Speaker 1

We are targeting capital ratios in the top quartile of our peer group. We believe that our modest dividend and strong earnings power will allow us to grow capital faster than our peers. With that, I will now turn the call over to Todd to provide further detail regarding our Q1 results.

Speaker 2

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our balance sheet activity during the quarter. As Larry mentioned, we grew total loans by 3.3% annualized during the quarter or $51,000,000 of net growth.

Speaker 2

Notably, in anticipation of our first plan loan securitization, we have classified $139,200,000 of LITEC loans To loans held for sale. We expect to strategically access the securitization market to help fund the growth of our tax credit lending business, improved liquidity and maintained the portfolio within our established concentration levels as needed. Total deposits grew $517,000,000 in the quarter, driven primarily by a $498,000,000 increase in short term broker deposits, which substantially increased our on balance sheet liquidity. We used these deposits to eliminate our reliance on overnight FHLB advances, which totaled $415,000,000 at December 31. Our core deposits, when excluding broker deposits, Have strong diversification due to our separate charters and markets as well as a commercial client base spread across many industries.

Speaker 2

Approximately 9% of our deposits are from our 194 correspondent banking partners with an average balance of 2,100,000 Another 60% represent deposits from our commercial clients with an average balance of 232,000 The remaining 31% consists of consumer deposits with an average balance of 18,000 Our loan to deposit ratio improved to 95.2 percent at quarter end, down from 102.6% as of the 4th quarter. Historically, our long term target for loans held for investment to deposits has been in the range of 95% to 100%. However, we expect to drive this ratio closer to the range of 90% to 95% in the coming quarters with additional core deposit growth. At quarter end, our total immediate liquidity was $1,500,000,000 and consisted of $254,000,000 of excess cash, $992,000,000 of borrowing availability with the FHLB and $290,000,000 of borrowing availability at the Federal Reserve Bank. While we don't expect the need to draw on this liquidity, it does more than cover our current level of uninsured and uncollateralized deposits.

Speaker 2

Our securities portfolio totaled $879,000,000 at quarter end, down from $928,000,000 as of the 4th quarter. Sold approximately $30,000,000 of securities and had pay downs and maturities contributing to the remaining net decline. The securities sold mid quarter were part of a small strategy to delever the balance sheet with a rapid earn back of the modest loss before the end of the calendar year. 36% of our securities portfolio is classified as available for sale And the remaining 64% is classified as held at maturity. Over 83% of the total portfolio consists of high quality municipal with a large portion from direct private placement transactions.

Speaker 2

These private placement municipal securities Currently have a tax equivalent yield of 5.02%. The market value of our AFS and HTM bond portfolios improved to 6% and 94% of book value, respectively, with the decline in the intermediate and longer term interest rates. If we were to realize all of the losses in the HTM portfolio, the impact on our TCE ratio would only be 32 basis points. During the quarter, we identified an impairment of $989,000 for a subordinated debt investment in one of the recently failed banks. This was a legacy investment that we acquired as part of the 2022 Guaranty Bank acquisition.

Speaker 2

We established a full reserve for the impaired investment. Our remaining subordinated debt portfolio is $48,000,000 And after a thorough review of the entire portfolio, we believe that it consists of high performing banks with no identified credit weaknesses. As Larry mentioned, we delivered net income of $27,200,000 for the quarter. Unlike many of our peers, we have been successful in growing our pre tax pre provision Adjusted income. During the quarter, we grew our pre tax pre provision adjusted income by $2,000,000 or 6.4 percent when excluding the impact of loan discount accretion.

Speaker 2

Our adjusted net interest income on a tax equivalent basis was 62,000,000 down from $65,100,000 in the 4th quarter. Adjusted NIM on a tax equivalent yield basis was 3.47%, which was down 14 basis points from 3.61 percent in the prior quarter. Despite loan growth and the ongoing expansion of loan yields, we experienced a sharp increase in the cost of funds during the quarter. Our deposit betas accelerated more than anticipated this quarter as our mix shifted further from lower beta deposits to higher beta deposits. The change in deposit mix has shifted our interest rate risk position from asset sensitive to moderately liability sensitive, which has positioned us well to expand our net interest income and margin with potential rate cuts.

Speaker 2

As we look to the Q2, we anticipate continued pressure on margin and net interest income due to our modest liability sensitivity And the dilutive impact of carrying more liquidity on balance sheet. Assuming another 25 basis point rate hike in May And continued yield curve inversion throughout the Q2, we are guiding adjusted NIM TEY to compress in the range of 10 to 20 basis points. Turning to our non interest income, which was $25,800,000 for the quarter, up significantly from the $21,200,000 we generated in the 4th quarter. Our capital markets revenue was $17,000,000 an increase of $5,700,000 from the 4th quarter and well ahead of our guidance range. Our capital markets pipeline remains healthy and many of the headwinds that some of our tax credit lending clients had been experiencing Have begun to subside with several previously delayed projects now moving forward.

Speaker 2

As Larry mentioned, We are increasing our capital markets revenue guidance for the next 12 months to a range of $40,000,000 to $50,000,000 In addition, we generated $3,800,000 of wealth management revenue in the Q1, up 6% from the 4th quarter. Our wealth management team continues to onboard new client relationships, adding 340 new relationships and $585,000,000 of new assets under management over the last 12 months. Now turning to our expenses. Non interest expense for the Q1 totaled $48,800,000 compared to $49,700,000 for the 4th quarter and below the low end of our guidance range. The decrease from the prior quarter was primarily due to lower of base compensation, as we accrued a higher amount in the 4th quarter based on last year's record full year performance.

Speaker 2

In addition, we experienced lower professional and data processing fees, insurance and regulatory fees, and advertising and marketing expenses. We remain diligent in controlling our expense growth and for the Q2, we are adjusting our non interest expense guidance Downward to a range of $47,000,000 to $50,000,000 Turning to asset quality, which remains excellent with NPAs to total assets of 0.29%. We did have a modest increase in the Q1 as we moved 1 large credit to non This specific loan involves a newly constructed mixed use property where the local developer experienced cost overruns that impacted their ability to fully fund the property. The property has been completed and is fully leased. Given the attractiveness of this property, we expect to resolve this credit promptly without any further impairment.

Speaker 2

We believe this credit is an isolated incident And not an indication of any systemic credit issues. The provision for credit losses was $3,900,000 during the quarter. Of this amount, dollars 2,500,000 was added to the loan allowance, dollars 989,000 was added to the bond allowance And $481,000 was added to the allowance for off balance sheet exposures. We expect to continue to maintain strong reserves given the economic Our reserves to loans held for investment remained strong at 1.43% and continues to be at the high end of our peer group. Our total loan ACL balance experienced a net decline during the quarter as a result of removing $1,700,000 of the loan reserves related to the loans held for sale associated with our planned securitization.

Speaker 2

We strengthened our total risk based capital ratio during the quarter, generating an improvement of 22 basis points to 14.50%. We also increased our tangible common equity Tangible assets ratio to 8.21 percent, up from 7.93% at the end of December. Our TCE ratio grew 28 basis points or 4% to 8.21 percent and our tangible book value per Share increased by nearly $2 or 5 percent during the Q1. This was due to both our solid earnings And a $9,300,000 increase in AOCI. Tangible book value has increased by 12.5% Since the end of the Q2 of 2022, following our acquisition of Guaranty Bank.

Speaker 2

During the Q1, we purchased and retired 152,500 shares of our common stock at an average price of $50.61 per share As we continue to execute purchases under the share repurchase plan announced last year. In addition, many members of our senior leadership Board of Directors have recently purchased shares in the open market, which is a demonstration of their strong belief in the future of our company. Our capital allocation priorities are focused on growing our capital to further enhance our already strong levels. We believe that we can accrete approximately 20 basis points of TCE points of TCE each quarter, with earnings at this level and assuming a static AOCI, growing capital at a faster rate than many of our peers due to our earnings power and our low dividend level. Finally, our effective tax rate for the quarter improved to 9.3% from 15.9% in the 4th quarter.

Speaker 2

The rate was lower due to a higher ratio of tax exempt revenue to taxable earnings in the Q1, primarily due to strong growth in tax exempt floating rate loans as well as increased benefit from our tax credit portfolio. In addition, we recognized a stronger tax benefit on our stock based compensation, which tends to be elevated in the Q1. We continue to benefit from our strong portfolio of tax exempt investments and loans, which has helped our effective tax rate remain one of the lowest in our peer group. We expect the effective tax rate to be in a range of 11% to 14% for the remainder of 2023. With that added context on our Q1 financial results, let's open up the call for your questions.

Speaker 2

Operator, we're ready for our first question.

Operator

We will now begin the question and answer session. Our first question will come from Damon DelMonte with KBW. You may now go ahead.

Speaker 3

Hey, good morning guys and thanks for taking my questions this morning. Just wanted to start off with the margin Look, Todd, I think you said you're expecting additional pressure here in the Q2 of around 10 to 20 basis points. Do you feel that the margin will likely bottom after that? Or do you feel that accelerating betas throughout remainder of the year will add a little bit more pressure as we go through.

Speaker 2

Yes. Thanks, Damon. Yes, we are guiding to that 10 to 20 basis points of compression here in Q2. It really depends on the Fed's action. Now we're slightly a liability Sensitive.

Speaker 2

If the Fed doesn't, in fact, do a 25 basis point increase here and then stop, we would Expect to see a more static margin for the back half of the year. So we do see some optimism around margin. A lot of the Higher beta, a lot of the shift has really happened for us, and we think it would stabilize and be more static The back half of the year.

Speaker 3

Got it. Okay. So I think your cumulative deposit beta cycle of data is The total deposits around 38%. Where do you kind of see the full cycle going as we get through the end of the year?

Speaker 2

Yes. I think it will be right in that high 30, low 40 range. I don't expect it to jump Significantly, most of the challenge that we've had with beta has not been the underlying product. It's been more about the mix shift. So for example, the all other deposits that we don't consider high beta or 100 beta, our Beta cycle to date is only 17% on those, and that's $2,400,000,000 of funding for us.

Speaker 2

But That portion has dropped about $300,000,000,000 during the cycle. So it's really been more about the mix shift and less about the underlying betas, the high beta stuff, The 100 beta is about $1,800,000,000 for us, and it's at 91 beta. So it is very high. And that has jumped over $500,000,000 during the cycle. So Damon, it's been that mix shift that's really contributed to the higher beta.

Speaker 2

And we do anticipate that to start slowing here, as the Fed slows its actions.

Speaker 3

Got it. Okay. And then with regard to the securitization, that will occur during the Q2 here? And then can you just talk a little bit about maybe some of the balance sheet dynamics after that?

Speaker 1

Yes, sure. I'll take that one. I'll start with that and then you can jump in after that. Yes, we've got a planned date with Frag Mac to securitize late in the second quarter. As we talked previously, we don't expect really gain or loss on that first securitization, there's a lot of front end costs to do the first one.

Speaker 1

After that, we do expect to have some gains, but it's a little premature for us to telegraph we think those will be. We do expect to do a second securitization later in the year. That one may be more likely in the $200,000,000 range. The other comment that I would make is, given the liquidity environment, if that stays static, we probably Change that. We have roughly an additional $700,000,000 of assets we could securitize Quickly, if we needed to.

Speaker 1

So that's a nice liquidity lever that most of our peers wouldn't have. If all of a sudden the liquidity environment gets Increasingly challenging for some reason. Certainly, we feel good about where we're at today, but that gives us some optionality that others do not have.

Speaker 3

Got it. Okay. And then I guess just lastly one more for me on the expense outlook. I think you said, Todd, the guidance is kind of 40 $7,000,000 to $50,000,000 Was that kind of going to is that going to hold for the remainder of the year? Or is that just for your Q2 outlook?

Speaker 2

Yes. Great clarification, Damon. That would really be our guidance for the remainder of the year, certainly subject to some adjustment After we do get through Q2 and the first half of the year, but we're having a lot of success with efficiency while improving client service at the same time. Really proud of our bankers, really proud of our operations staff Gaining some efficiency in automation. This was the 2nd quarter post Guaranty Bank conversion and integration.

Speaker 2

That went really well. Thanks to 120 folks who did a great job of that project. And we actually got a little bit better efficiency As a result of that good work. So I would say 47 to 50 for the remainder of the calendar year, subject to Clarification in July after Q2.

Speaker 3

Got it. Okay. That's all that I had for now. Thank you.

Speaker 1

Thanks, Damon. Thanks, Damon.

Operator

Our next question will come from Nathan Race with Piper Sandler. You may now go ahead.

Speaker 4

Yes. Hi, guys. Good morning.

Speaker 2

Good morning, Nate. Good morning,

Speaker 4

Nate. Going back to David's question around some of the balance sheet dynamics, Is the expectation with the securitization occurring here likely in the Q2 that there's the opportunity to maybe reduce some of the Broker CDs that were added in the quarter, particularly just given some of the softer loan growth outlook for 2Q?

Speaker 1

Yes, I'll start there, Todd, and let you sorry, I'll start and certainly that's one of the ways that we'll use That securitization is the lower the brokered reliance. The other thing I'd tell you, Nathan, We probably have the largest deposit pipeline of activity I've seen in our company's history. And I'm trying to figure out exactly what's causing that. Number 1, it's our focus on trying to grow core deposits. Part of it is The interest rates moving away from 0 and it's created more activity and people willing to talk to us About moving deposit relationships.

Speaker 1

So we think we also over time can make some meaningful headway just moving Core deposit relationships into our company and that activity is moving at a strong level right now. So We certainly between securitization and just growing our core funding think we can move the needle on that.

Speaker 2

So Nate, Larry did a great job telling you the how. We did intentionally set up these brokered as a very short ladder. The $525,000,000 all the $25,000,000 actually mature during this calendar year and much of that is front loaded in the first half. The second and third quarter of the remaining calendar year. So we were intentional about Having a short ladder there, it has a weighted average rate of 4.88 on those brokered.

Speaker 2

And again, some of the higher rates Our in Q2 and Q3. So we're going to use that really strong pipeline that Larry talked about to Bring those core deposits on and let these brokered roll off. That's our plan.

Speaker 4

Okay. So it sounds like these brokered CDs are callable?

Speaker 2

No, they're just a very short yes, they're just a very short ladder in terms of duration. So 3, 6, 9 months laddered.

Speaker 4

Got you. And then is the kind of static margin guidance for the back half The year, does that just contemplate one more Fed rate hike in May and then the Fed on hold in 3Q and 4Q?

Speaker 2

Correct, Nate. That would be the assumption that rates would be held steady by the Fed. In our opening comments, talked about our balance sheet moving to slightly liability sensitive. So it does set us up to perform better when rates Start coming down, but I think it's far too early to speculate when that might be. But if the Fed is done here in May and pauses, I think we'd be feeling better about something more static the back half of the year on margin.

Speaker 4

Okay, great. And then just within the capital markets and swap revenue in the quarter, was there any kind of pull through And activity in 1Q and I guess just how does that pipeline look entering the Q2 and as you guys kind of look out into 3Q and 4Q of this year as well?

Speaker 1

Yes. Thanks, Nate. Yes,

Operator

as you

Speaker 1

know, we increased our guidance a bit in that space because of I'd say the pipeline is starting to unthaw a bit. The pipeline there of activity continues to be strong It actually built a little bit during the last quarter. And some of the things that have slowed those projects down have started to thaw. The most material one is probably cost of materials and supply chain issues that has started to ease. Labor costs haven't eased much yet, but we expect that to have some impact too over the next few quarters.

Speaker 1

So That's what's helping getting some of these projects across the finish line and why we've had solid increased activity. Over the last four quarters, our average Fee income in that space, I think, has been $12,500,000 if I'm looking right. And so that'd be toward the top end of our range and Certainly, why we feel we can continue to perform at those levels.

Speaker 4

Okay, great. Very helpful. And then maybe just one last one on credit quality dynamics. I apologize if you touched on it in your prepared comments, but just in terms of the driver For the issue that occurred with that one relationship that moved to non accrual in the quarter. And just generally, have you guys seen any loss content there?

Speaker 4

How you guys kind of think about charge offs and the need to provide for Somewhat slower loan growth, I guess, at least into 2Q?

Speaker 1

Yes. Certainly, the one project that We put on non accrual. It's a pretty simple explanation. Costs went up. They didn't manage the project right and they ran out of cash And we were unwilling to loan more money into the space.

Speaker 1

So we decided we were better to move forward with foreclosing on the property. That's what we're doing. We've already reserved for what we think the total loss will be if there is one. So we've been conservative like we always would be once we've got a project At that spot. And so our focus on reserves globally for the rest The year is to continue to maintain our reserves at what we think are top quartile conservative levels, Because we just think that's prudent going into this probably more uncertain environment.

Speaker 1

We don't see any broad based degradation that People have been talking about likely that will happen and the phrase that I've used with our employees and with you guys and with our Board in the past is Things eventually will move back to normal. And normal will feel bad because it's our credit experience and everybody's credit experience has been so good the last 2 years. That normal will feel weird, but it's likely we'll move back toward normal over the next year or 2.

Speaker 4

Got it. It's very helpful. I appreciate all the color guys. Thank you.

Speaker 1

Thanks, Nate.

Operator

Our next question will come from Brian Martin with Janney Montgomery. You may now go ahead.

Speaker 5

Hey, good morning guys.

Speaker 2

Good morning, Brian. Hey,

Operator

just a couple of

Speaker 5

things for me. Just on the loan growth the guidance and just kind of the outlook, maybe just a little conversation about what you're hearing kind of beyond or what you're thinking beyond next quarter. This quarter it seems definitely more cautious on the loan growth front, just certainly understandably with the market, I just try and understand how you guys are thinking about that, the pipeline is just beyond the next quarter?

Speaker 1

Yes, Brian, sometimes we're framed by recency of conversation. So yesterday morning, I just talked one of our very successful apartment developers, who's got a portfolio of very nice cash flowing performing properties And they had planned to do an addition to one of their apartment projects, a meaningful one, probably a 10,000,000 $12,000,000 addition to an apartment project. And when I saw him yesterday morning, he goes, yes, we're just putting that on hold because it doesn't really work at these interest rates because They did the first piece of this at 3.5% that they locked in for a long time. And so they're going, we're on pause. So certainly the project kind of lending that we would normally see for new anything in Non owner occupied, that's certainly slower because it's just harder to make projects work.

Speaker 1

So that's why we think 0 to 5 Probably throughout the rest of this year makes sense. Our C and I clients, I'd say Probably still falling ahead. Their numbers look good and they're still building buildings and growing capacities and buying companies and those kinds of things. But it's more of the Investor real estate that is likely going to the activity is just going to slow down there in that space.

Speaker 5

Got you. And just utilization rates, are they Any change there?

Speaker 1

Line utilization is kind of in the middle. So We're getting kind of closer back to normal at the peak. Our line utilization would be in the 40% range. When all the PPP money came out, it got into the low 20s. We're back in the kind of the mid-30s again here on line utilization.

Speaker 1

So There's probably a little more utilization to come out, but it's starting to move toward normal.

Speaker 5

Got you. Okay. And then maybe just for Todd, On the margin of those deposits, Todd, I mean, the ones that go off on the broker, you gave us the rate, just the ones coming on or you anticipate coming Where do you see the replacements, if you will, coming on the core deposit front?

Speaker 2

Yes. Brian, great question. What are we going to replace it with? And those rates are going to be nearly right on top of the brokered rates. So we're really simply converting Brokered CDs to what we really want, of course, long term would be core deposits.

Speaker 2

As Larry indicated, the pipeline there, The initiatives we have underway for doing that are very robust, but we're not really going to make any headway in terms of cost. It's going to be right on top of these brokereds as these roll off. And again, just to clarify, these aren't callables that we did. These were just very short duration Brokered CDs that we intentionally laddered short to be able to unwind them, let them roll off during this calendar year.

Speaker 5

Got you. No, that's helpful. And how about just to the margin for one moment, that was, do you anticipate, I mean, when you look at Where the March margin was, Todd, where did that shake out versus where you ended the quarter or versus where you were for the average for the quarter?

Speaker 2

Sure. Was down a bit from the average for the quarter and that of course would have been impacted by a fair amount of excess Liquidity that we put on the back half of the month, like I keep seeing in our financials. We were carrying a couple of $100,000,000 of excess cash The last half of the month, and that's part of the margin compression guidance that we've provided. We intend to continue to carry some excess liquidity. So that's maybe a third of that compression.

Speaker 2

So that's maybe a third of that compression would be carrying that excess liquidity. We think it's just prudent to do that here for a bit. Okay.

Speaker 5

And do you have the margin I guess is the margin not, I guess, a good representative of how to think about where to start 2Q? Or I mean, I guess, is it not worth having you provided are you able to provide that what it was for Mark?

Speaker 2

Yes. I don't think it's really going to help you or anyone else I'll try to model Q2. I think it's probably better to look at our guidance on both loan growth and the margin compression and probably model off that. March is not a very accurate representation of go forward considering all the moving parts in the back half of the month.

Speaker 5

Got you. Understood. And then just your thinking on when deposits actually peak, what are you thinking there if the Fed does pause? Is that a 3rd quarter, 4th quarter event?

Speaker 2

Yes. Again, and I think if the Fed was to, I think 80%, now likely 25 basis points here in May and then pause. I think we're optimistic that sometime in Q3, we would like to think that our deposit mix is done changing and our deposit Betis would flatten out and things would settle down from a cost of funds perspective.

Speaker 5

Got you. Okay. And then last one was just simple. I assume not much change on the buyback. I know you did a few shares this quarter, but Still the focus is on building the capital to getting to where you guys your end goal is, but it sounds like it's still going to grow pretty rapidly here the next couple Quarters, so just kind of wondering, it's still just going to be a balance, particularly where the valuation is in the stock today?

Speaker 1

Yes. Thanks, Brian. Yes, our first focus is to make sure we're growing capital every quarter. So TCE would be our primary focus and We'd like to move that up roughly 20 basis points a quarter. That would get us Probably the top quartile in our peer group by the end of the year.

Speaker 1

We're already at really strong levels, but given the uncertainty and the prospect For some kind of recession that could have some impact, we think building some capital is the right thing. You're right, the valuation makes it Hard not to buy more, but we will likely be still kind of in that modest buyback phase until we get capital built a little bit further. And after we get to that top quartile of our peer group, that might give us some more opportunities to be More aggressive given what we know today, but there's a lot of things will happen between now and then.

Speaker 5

Got you. Okay. Thank you for taking the questions guys. I appreciate it.

Speaker 1

Thanks Brian.

Operator

Our next question will come from Daniel DiMao with Raymond James. You may now go ahead.

Speaker 6

Hey, good morning, guys. Good morning, Steve.

Speaker 2

Good morning, Steve.

Speaker 6

My questions have been answered at this point, but just a quick clarification. I apologize if I missed it, but the outside of the capital markets revenue in terms of fee income, it seemed to be Relatively in line with what we were looking for, at least what I was looking for. But just curious if you had any Comments on the rest of fee income and where the your outlook lies?

Speaker 2

Yes. The other thing we did mention, Danny, was Wealth Management had a really nice Q1, 6% up from Q4 and continued great job by our Wealth Management folks In terms of growing numbers of clients and AUM, so we're Optimistic about wealth management continuing to grow. We gave some numbers in the opening comments in terms of full year Additions to clients and AUM, but just in this past quarter alone, we had nearly 100 new clients and 185,000,000 A new AUM, so optimistic about wealth management continuing to grow for us in addition to capital markets.

Speaker 1

Danny, I just talked to one of the leaders of our wealth management business this morning. And The interest rate activity that's been going on has actually created more willingness to talk there. People are thinking about buying bonds for the first time in a long time. And so I think that's wind in our sales, in our Wealth Management business. Their business continues to be really good and we're getting some At VAST with clients and potential clients that we've been working with for a long time.

Speaker 1

And so we think that business is going to continue to grow nicely.

Speaker 6

Okay. And I guess along those lines of the wealth management's growth and then the big Increase that you saw on the swaps in the Q1, how those two line items would play into the $47,000,000 $50,000,000 expense guidance? I think we've talked about this before, but just remind us if you could of any lag impacts on the expenses from The swap fees as well.

Speaker 2

Sure, Danny. Those really for the most part are Within the same quarter, when we see capital markets revenue have a good quarter, we're going to see the related compensation Get booked in that very quarter, no lag there. The guidance range that we gave Would really take care of the incentives and other compensation impact related to capital markets being in our guidance Range. So you shouldn't expect us to blow through the top end of that non interest expense range, unless we really were to outperform Our guidance on swaps. So both of those items of guidance are really Put together in terms of our expectation.

Speaker 2

So you shouldn't expect any surprise later from good results in capital markets.

Operator

Our next question will come from Jeff Rulis with D. A. Davidson. You may now go ahead.

Speaker 1

Thanks. This is

Speaker 7

Andrew on. Hey, good morning. This is

Speaker 2

Jeff Fiskeciate on for

Speaker 7

Jeff, today. And just a quick question on the deposit side. I see excluding those brokered deposits, deposits were up Over the quarter. Just curious if you guys have seen anything unusual with those deposit flows in April or just more recently?

Speaker 2

No surprise. Go ahead, Matt.

Speaker 1

I'll say nothing unusual. The concerns that money was going to flow to the big banks did not happen for us. So we had no unusual activity other than our deposits were held up better because normally we would see Deposits dipped from our commercial clients in the Q1 because of bonuses and distributions and tax payments and all those things that happened in the Q1. Our deposits since quarter end have continued to grow. So we feel better than we even did a couple of weeks ago at quarter end About our ability to continue to grow deposits.

Speaker 1

As I said earlier in the Q and A, we're looking at this Temporary dislocation or disruption in the banking space create many deposit opportunities for us. So we're excited. We're going to say the glass is half full. It doesn't mean there aren't challenges, but there's going to be an opportunity for us to build through relationships at a faster pace here as we go forward.

Speaker 7

Got it. That's great to hear. And then just on the loan side, I might have Missed this, but just wondering what the current exposure is to office commercial real estate?

Speaker 1

Yes, I'll take that one. Office is not a big exposure for us. And I checked with our Chief Credit Officer a couple of days ago as we talked through potential questions that had come up. First of all, our total exposure is 3%. The non owner occupied is in the high 2s percent.

Speaker 1

And I'm just going to talk about the deals. We don't have an office building that's higher than 3 stories. So that will give you some sense for it's different than what people I think about in the major metropolitan areas where you get multi story large office buildings that are half taken. We just don't experience that and We have very little of those kind of buildings in our markets. So if you look at we've got 15 deals that are greater than $3,000,000 14 of those are 100 percent leased.

Speaker 1

So those are working just fine and the tenants are Things like a government agency, a major accounting firm, a major brokerage firm, A major insurance company. And so we have just not seen the kinds of issues that others are starting to experience in that space and don't expect And in total, in that space, we have less than $1,000,000 That would be on our watch list or worse. So that portfolio is really looking strong for us and we've seen no issues in that space.

Speaker 7

Okay. That's great detail. Thank you. And that's all I had today. So I'll step away.

Speaker 7

Thank you.

Speaker 2

Thank you. Thanks, Andrew.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Larry Henling for any closing remarks.

Speaker 1

Thanks to all of you for joining our call today. We appreciate your interest in QCRH. Have a great day and we look forward to connecting with many of you in the coming

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Earnings Conference Call
QCR Q1 2023
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