This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: greetings and welcome to the qcr holdings inc earnings conference call for the fourth quarter and full year 2022. yesterday after market closed the company dispersed its fourth quarter earnings press release if there is anyone on the call who has not yet received a copy you may access it on the company's website www.qcrh.com with us today from management are Larry Helling, CEO, and Todd Gipple, President, COO, and CFO. Management will provide a brief summary of the financial results, and then we'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information we'll be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, 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 FCC 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 gap measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the gap to non-gap measures. As a reminder, this conference is being recorded and will be available for replay through February 1, 2023, starting this afternoon, approximately one hour after the completion of this call. It will also be accessible on the company's website. At this time, I will now turn the call over to Mr. Larry Howling at QCR Holdings.
spk02: Thank you, operator. Welcome, everyone, and thank you for taking the time to join us today. I will start the call with a high-level overview of our 2022 performance, a review of our business model, and the factors that drive our success. Todd will follow with additional details on our financial results for the fourth quarter. Our record net income in 2022 was driven by robust loan growth and increased net interest margin and excellent credit quality. Our team accomplished this while successfully closing and integrating our largest acquisition to date, where we significantly strengthened our company's position in the vibrant Southwest Missouri region. Our growth in earnings over the last five years has been exceptional. This is a result of our differentiated business model and commitment to relationship banking. Our multi-charter model provides our bankers with the agility to serve our clients. We deliver banking at the local level, which creates opportunities to strengthen current relationships and establish new relationships that drive our growth. In the last five years, we have nearly doubled our size, outperforming many of our peers. Our total loans have grown at a compounded annual rate of 15.7%, and our deposits at 12.9%. These results support the 20.7% compounded annual growth in our core diluted earnings per share, and the 10.2% compounded annual growth rate in our tangible book value per share over the same period. Importantly, while we've been able to grow at a consistent pace, we've also significantly increased our profitability, and our ROAA is now in the top quartile of our peer group. There are many factors that contribute to our success, including our dedicated employees, our economically vibrant markets, and our differentiated business model. Recruiting and retaining the right employees is critical to our success. We have strong corporate cultures that extend through each of our local charters. Our employees are engaged with our clients and involved in our communities. Our reputation and culture attract the best bankers and clients in our market. This leads to important outcomes. such as reduced turnover, improved productivity, higher profitability, and enhanced shareholder value. We continue to receive high employee engagement scores, which are measured annually across our company. Our local charters have won numerous awards throughout our footprint for being a great place to work and do business. This has resulted in consistent and sustained growth. We operate in some of the most vibrant midsize markets in the Midwest. They are part of regional economies with a diverse mix of commercial, industrial, and technology-focused activity, along with highly educated workforces, which helps drive steady economic growth, high relative household income, and low unemployment. Our unique model enables our local management teams to operate with the speed and agility to respond to client needs, which results in a better client experience that outperforms larger national and regional banking alternatives. This has created great outcomes for our employees, our clients, our communities, and our shareholders. Our management teams think and act like owners, which drives shareholder value. In addition, we have built high performing business lines that provide additional opportunities for growth and profitability. Our specialty finance group provides municipal and tax credit specialty lending which drives strong growth in bonds and loans as well as fee income. On the deposit side, our correspondent banking team serves the banking needs of nearly 200 downstream correspondent banks, which generates meaningful core deposits and related fee income. Lastly, we've grown our wealth management significantly over the years with assets under management of $4.6 billion. The combination of our traditional banking and our high performance business lines creates a diverse revenue stream which has helped us outperform in a variety of economic environments. We support our local charters with centralized group operations teams providing the required operational infrastructure, expertise, and benefits of scale. We aim to be a market leader in each of our markets as this scale improves our efficiency and enables us to attract the best bankers and clients. Relationships build on expertise and trust matter in our markets And that is why we place such importance on high touch client service that is delivered at the local level. Now a few comments on our full year, 2022 results. We delivered net income of $99.1 million for the year or $5.87 per diluted share. After adjusting for the one-time costs associated with the guaranteed bank acquisition, our adjusted net income for the year was $114.9 million. and our adjusted EPS was $6.80 per diluted share of 14.8% and 8.5% respectively over our 2021 results. Our team accomplished this while successfully closing and integrating our largest acquisition to date as mentioned earlier. Organic loan and lease growth for the full year was 14.6% when excluding PPP and acquired loans and was driven by strength in our traditional commercial lending, leasing, and specially financed businesses. Given our current pipelines and the relative strength of our markets, we are targeting loan growth of between 8 and 10% for 2023, consistent with our long-term goals while continuing to be vigilant on maintaining our exceptional credit quality. While our deposits for the year were relatively static when excluding deposits acquired in the guarantee acquisition, the number of net new accounts continue to grow, which will lead to consistent deposit growth over time. Core deposits are our long-term focus, which will drive long-term franchise value. Importantly, our bankers are incentive to grow both loans and deposits. During the year, we expanded our tax equivalent yield net interest margin by 24 basis points, driven primarily by our asset-sensitive balance sheet in this rising interest rate environment. Our asset quality remains as the ratio of non-performing assets to total assets was 11 basis points at the end of the year. We had modest net charge off during the year and are comfortable with our reserves, which represent 1.43% total loans and leases. We are mindful of recessionary concerns, but remain cautiously optimistic about the relative economic resiliency of our market. Additionally, our strong asset quality and consistent credit culture prepares us well to weather economic uncertainty. In conclusion, I would like to thank the entire QCR Holdings team for their engagement and dedication to outstanding client service and for delivering record adjusted earnings for the year. Our employees are the key to our success. I'm immensely proud of all that we have accomplished in 2022. With that, I will now turn the call over to Todd to discuss our strategy to drive shareholder value and our strong financial results.
spk05: Thank you, Larry. Good morning, everyone. Thanks for joining us today. When Larry and I began our new roles with the company in early 2019, we developed an initiative to drive our financial results and enhance shareholder value. We call this our 965 strategy. a plan to grow earnings and drive attractive long-term results for shareholders. This strategy includes, at a minimum, generating organic loan and lease growth of 9% per year funded by core deposits, growing fee-based income by at least 6% per year, and limiting annual operating expense increases to 5% per year. These are long-term targets and not short-term quarterly benchmarks. Our 965 strategy creates a common language across the company that unites our teams and aligns our actions for long-term success. We believe that the true measure of our success will be our ability to consistently deliver on our strategic initiatives over time, and this will translate into greater shareholder value in the long run. As a result of our performance on our strategic 965 initiatives, combined with our successful acquisition of Guaranty Bank this year, Since 2018, we have grown adjusted net income and EPS at a compounded annual growth rate of 25.4% and 21.9%, respectively. And we are proud to have achieved top quartile ROAA and NIM within our high-performing peer group. While our historical performance has been impressive, we remain focused on the future and expect to continue to perform at the top of our peer group over the long term. Now we would like to provide some color regarding our fourth quarter results, starting with net interest income. Our net interest income on a tax equivalent basis was $70.8 million, an increase of $5.5 million from the third quarter. The increase was primarily due to higher acquisition-related net accretion of $4.6 million due to loan renewals, restructurings, and payoffs from our guaranteed bank acquisition, and the impact of multiple interest rate hikes on our asset-sensitive balance sheet. partially offset by the impact of increased deposit costs. With our strong growth in earning assets and improved loan yields, we significantly grew interest income for the current quarter. However, we also experienced higher interest expense as a result of higher deposit costs, a shift in the mix of our deposits, and the full quarter impact of our recent subordinated debt issuance. Our NIM on a tax equivalent yield basis improved by 22 basis points during the fourth quarter. driven by the higher loan yields and higher acquisition-related net accretion, and partially offset by higher deposit costs. As we have mentioned before, NIM is impacted typically in nonlinear patterns during periods of rapid rate increases. In the first half of 2022, we experienced the benefits of slower and lower deposit betas, as we posted a NIM TEY increase of 24 basis points during that period. However, Those deposit betas accelerated as we progressed through the second half of the year with four additional Fed rate increases. For the first half of the year, our beta on total deposits was 8%. For the third quarter, our beta on total deposits moved to 31%, and for the fourth quarter, it was 44%, as a result of an accelerated shift in our deposit mix from non-interest-bearing to interest-bearing accounts and from demand deposits to CDs. For the full current rate height cycle to date, our beta on total deposits is 27%, which is comparable to our beta from the last period of rising rates that ended in 2019. With robust organic loan growth and NIM expansion for the year, our net interest income has also experienced significant growth, and we have achieved a NIM at or near the top of our peer group. Looking ahead, we project our NIM excluding the impact of acquisition-related net accretion to remain fairly static in the first quarter of 2023. Additionally, we expect acquisition-related net accretion to return to a more normalized level of approximately $500,000 per quarter. Turning to our non-interest income, which was $21.2 million for the quarter, up slightly from the $21.1 million we generated in the third quarter. Notably, our capital markets revenue was $11.3 million, an increase of $800,000 from the third quarter, and within our guidance range of $10 to $12 million. Despite the project delays that some of our clients have been experiencing, our pipeline remains strong. Capital markets revenue has averaged just over $10 million per quarter for the last four quarters, and therefore, we expect this source of fee income to be in a range of $40 to $48 million for the full year In addition, we generated $3.6 million of wealth management revenue in the fourth quarter, up slightly from the third quarter. Our wealth management team continues to generate meaningful new client relationships and is adding significant new assets under management, adding 340 new clients and $481 million in AUM this past year. This strong growth in new clients helped offset the sharp decline in stock market valuations that occurred in 2022. Now, turning to our expenses. Non-interest expense for the fourth quarter totaled $49.7 million compared to $47.7 million for the third quarter. The increase from the prior quarter was primarily due to higher incentive-based compensation related to our record full-year performance, partially offset by lower professional and data processing fees, due to the completion of the core conversion at Guaranty Bank and other merger cost savings. Looking ahead to the first quarter of 2023, we anticipate that our level of non-interest expense will be in the range of $49 to $51 million. This guidance range reflects less than a 5% increase in our fourth quarter non-interest expense run rate after excluding acquisition related items and is consistent with our strategic 965 initiatives. Turning to asset quality, which improved significantly in the fourth quarter and continues to be quite strong. Non-performing assets declined by 51% to $8.9 million at the end of the fourth quarter, driven by payoffs of several NPAs during the quarter. The ratio of NPAs to total assets was 0.11% at quarter end compared to 0.23% for the prior quarter. In addition, the company's criticized loans and classified loans to total loans and leases at the end of the fourth quarter were fairly static at 2.68% and 1.08% respectively, as compared to 2.35% and 1.29% from the prior quarter. As a result of continued improvements in overall credit quality, the company recorded no provision for credit losses in the fourth quarter. Our allowance for credit losses remained strong at 1.43% of total loans and leases. This allowance represents 10 times our non-performing loans and leases. We strengthened our total risk-based capital ratio during the quarter, posting an improvement of nine basis points to 14.47%. We also increased our tangible common equity to tangible assets ratio to 7.93% at quarter end, up from 7.68% at the end of September. Our tangible book value per share increased by 6.8% during the fourth quarter. This was due to both our strong earnings and a $10 million increase in AOCI as a result of an increase in the value of our available for sale securities portfolio and certain derivatives due to changes in long-term interest rates during the quarter. During the fourth quarter, we purchased and retired 100,000 shares of our common stock at an average price of $50.37 per share as we executed purchases under the share repurchase plan announced during the second quarter of 2022. Finally, our effective tax rate for the quarter increased to 15.9% from 14.1% in the third quarter. The rate was higher due to a higher ratio of taxable earnings to tax exempt revenue in the fourth quarter. Our effective tax rate for the full year 2022 was 12.8%, an improvement from 18.6% in 2021. This was primarily due to strong growth in tax exempt revenue, mostly from tax exempt floating rate loans, as well as increased benefit from our tax credit portfolio. We expect the effective tax rate to be in a range of 12% to 14% for the full year 2023. With that added context on our fourth quarter financial results, let's open up the call for your questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Rulis with DA Davidson. Please go ahead.
spk06: Thanks. Good morning, Larry and Todd.
spk00: Good morning, Jeff.
spk06: Good morning. On the non-performer, kind of the cleanup there, could we get any more color on the payoffs? Were those credits that you've been working on for some time or just sort of what type of loans were those looking for any kind of color?
spk02: Yeah, the only one Jeff that was over seven figures was one commercial real estate loan that we've had fully reserved for several quarters. And we just thought there's a dispute between not us between the borrower and a contractor. And we decided that would be best just to charge it off. And so we would hope to get some recovery in 2023. But Because of the dispute, we decided it was best just to clean it up. The other couple credits, there were a couple that were six figures that we decided just to clean up. And so you saw some really nice improvement in our NPAs. We had one large NPA that just paid off that was middle seven figures that's been on our list for a long time that we got paid off in the fourth quarter. So over the last two quarters, we've dropped our NPAs by, two-thirds down to what a number I didn't think was possible a few years ago down to 11 basis points. So our team has done a great job there.
spk06: Okay. And were there any associated recoveries of a meaningful amount on some of that cleanup?
spk02: No substantial recoveries. We expect a couple of those in 2023 because of the cleanups here, but, you know, just small odds and ends stuff, nothing substantial, Jeff.
spk06: Okay. Todd, just to kind of narrow in on the margin, do you have the average in the month of December, what that was?
spk05: Sure. Jeff, great question. That's one of the reasons we were guiding to a static margin. Intra quarter, we actually saw improvement each month in margin. Our core margin was 361 for the full quarter. It was 359 in October, 360 in November, and 362 in December. So we got some nice run there intra quarter. Part of that was for the first time we were really seeing the improvement in new loan yields that we had expected candidly to start in the fourth quarter. It was really more towards the end. Our yields on new loan fundings in December were 80 basis points higher than October. So part of the run up there towards the end of the quarter.
spk06: Okay. And I know that you kind of gave us a little read on Q1, but thereafter, It's, you know, any expectation would be near at kind of that level as maybe deposits kind of chew into earning asset yield improvement or kind of what would be the further out expectation?
spk05: Sure, Jeff. I think static is going to continue to be the right word for us, whether it's Q1 or looking a little further into the year. We feel really good about not only the intra-quarter improvement and that traction on fixed rate loan pricing, but part of the challenge we had with margin in the fourth quarter is we saw a very significant, more than we had forecast, shift from non-interest bearing and low beta deposits into higher beta and CDs. We saw a pretty significant runoff in correspondent balances $55 million in non-interest bearing, $66 million in money market. But that has reversed already here in January, which gave us significant confidence in talking about a static margin. So correspondent deposits have started to come back quickly in January. Non-interest bearing is up $33 million. Money market up $221 million. We feel really good about the start to the quarter. So kind of long answer to your short question, Jeff. I think static is really the word, not just for Q1, but as we look a little deeper into 23. Okay.
spk06: And just to confirm, we're talking about core, and I'll take into account your comment about the expectation for accretion to return more to normal levels.
spk05: Yes, Jeff, exactly. We wanted to be pretty prescriptive about that, given the big jump. in the fourth quarter. Actually very pleased by that, the level of restructurings and payoffs in that portfolio with good outcomes. It did accelerate the accretion, but now we'd be back to more like a 500K run rate. So yes, when you're doing your modeling, pull out the 5.7 in the fourth quarter, replace it with 500K thereafter.
spk02: So, Jeff, I'd add just a comment. I'm thrilled to see that loan discount accretion accelerate because that means that the, you know, some of those individual credit marks that we put on what we perceive are some of the higher credits we were able to get rid of because they either paid off or restructured in a way that we thought was appropriate. So, that speaks well and shows up really in our NPA numbers and the tremendous progress we've made in the last couple quarters.
spk06: Okay. Thank you.
spk00: next question comes from Damon Del Monte with KBW. Please go ahead.
spk03: Hey, guys. How's it going today?
spk02: Good.
spk03: Good. So just wanted to kind of circle back on the credit front. It sounds like things are really strong there. But can you give us a little guidance, Todd, on how we should think about the provision going through 2023? You know, the reserve was pretty healthy at 143. Do you feel you need to Maintain that. Is there some room to let that go down a little bit? And just trying to get a little idea on the cadence of the provision over the coming quarters.
spk02: Sure. I'll take the first point at that one, Todd, and then let Todd fill in the gaps here. You know, we think we're very comfortable with our reserve today when our reserve coverage is 10 times our NPAs. But it also seems like the right time to not let that number float a lot lower. So as we look through the rest of the year, we're certainly going to need to start providing a little bit of reserve for the growth that we've had. You know, we've seen no degradation in credit that's apparent in the numbers, as you see with our classified numbers coming down, our MPA numbers coming down in the quarter. But, you know, we all expect at some point for things to start to return to more normal. There's certainly nothing in the numbers that show that that's going to happen in the first quarter or two of next year or this year, excuse me. You know, depending on what happens to the economy, certainly there's some of that possible later in the year, but it's not showing up yet. So, you know, we would expect if we do have reserving, it's probably going to be a little more backend loaded during the year because of our credits holding up, but we'll have to reserve a little bit and hope to maintain it about the levels we're at for the next few quarters.
spk03: Got it. Okay. That's helpful. Thanks. And then with regards to expenses, Todd, could you just repeat what your guidance was as you look into the first quarter and kind of as we progress for the remainder of the year?
spk05: Sure. We're really looking for a range of $49 to $51 million. Again, we're pleased with the outcome on our expense run rate. That's staying under the 5% in our 965. So that would be our guidance 49 to 51. Gives us a little bit room for some increased costs there, but feel very good about run rate on non-interest expense. We have really accomplished a great deal of the cost saves from the Guaranty Bank acquisition and merger and integration. We did carry a little bit heavier staffing over year end. We really wanted to make sure we were taking great care of clients and making sure we were doing all the right things from a control environment perspective. It's a marathon, not a sprint, so we wanted to make sure we had things well in hand over year end. We mentioned some of the incentive-based compensation in a little bit of the pop in fourth quarter expenses. We also got more fully staffed. One of the things we didn't really talk about in our opening comments, but you might have noticed that our FTE headcount was up 17 link quarter. So we're doing a lot better job of getting fully staffed and things are going well from a people perspective.
spk03: Okay, great. And then just one quick final question. With respect to like the commercial real estate portfolio, how much office exposure do you guys have? And are you seeing any signs of weakness in that segment?
spk02: Yeah, I'll take a swing at that one, Damon. Our office exposure is about 3% of our portfolio. So we don't have big exposure there. And as I look at it, we have 16 deals that are over $3 million in size. 13 of those are 100% leased. And the others really have pretty good sponsors. And we had one struggling deal that we got paid off during the fourth quarter. So That portfolio is performing really well. We have very little, you know, you would think about in big markets where we've got office towers filled with multi-tenants. We have very little of that. Our tenants are more likely government-related entities, accounting firms, medical office facilities, those kind of things. And so ours are holding up really well so far. So really no issues in that portfolio so far. Again, it's about 3% or $188 million of our total portfolio.
spk03: Great. Appreciate the color. That's all that I had. Thank you.
spk05: Thanks, Damon.
spk00: Our next question comes from Daniel Cameo with Raymond James. Please go ahead.
spk07: Thanks for the question. Good morning, everybody.
spk02: Good morning. Good morning.
spk07: Maybe we just start. I know you gave the outlook on the SWAP. the income, and it does feel like we've hit a pretty stable run rate for that line item. What would you expect to be kind of the lever for that run rate to increase back to levels that you saw in prior years? It's beyond 2023, I guess, is how I'm thinking about this.
spk02: Yeah, I'll... Our first focus is certainly trying to produce consistent results like we have in the last couple quarters. What will help that longer term is we've been talking about the headwinds for a couple years now when we had tremendous inflation which slowed down the project construction because of getting materials and the inflationary cost of the materials. That was one factor. The other was, you know, higher interest rates had some impact on the cash flow on projects because the debt service is higher. With long rates, you know, kind of topping out and coming back a little bit, that has started to help. And so I would say the factors here that would really increase that over time would be a continued reduction in long-term interest rates and kind of inflation getting under control so that the certainty of the cost of the projects are easier to get to.
spk07: um because they've got to put their capital stacks together and getting back to a normal inflationary environment on building materials would certainly help yep that makes sense um and do you have an outlook for the remainder of the fee income um in this year in the first quarter excluding the swaps yeah danny um
spk05: Probably the biggest bucket of that would be wealth management. And you heard our comments in the open with respect to new clients and new AUMs. So in keeping with 965, we would expect to see wealth management and other parts of our fee income business to grow at 6% annual.
spk07: Okay, terrific. And then just lastly, you know, we talked a lot about the margin here. and funding loan growth. But, you know, I think in the past we've asked about the loan deposit ratio up at around 103% now. How comfortable are you or how high are you comfortable letting that ratio go? And then what's the strategy for funding loan growth if it is more difficult than expected to bring in core deposit growth?
spk05: Sure. So, Danny, I was hoping someone would ask about to deposit ratio. Yes, it was over 100 right at quarter end, year end. It's floated back down into the 90s now with some of the return of that funding I mentioned with correspondent banking. So we will run that in the upper 90s. We prefer to keep it under 100, but it's likely going to be in that 95 to 100 range. We do expect all of our bankers to find the funding we need to continue to grow loans at the guidance rate that we gave you. So we don't expect that to float any higher. One point of color is we've historically run at this rate on loan to deposits. We ended 2018 at 101 and 1231-19 was 98. So this isn't a new phenomenon. for our company. We've always had a very strong loan growth engine. Keeping pace with that with funding has always been a key priority for us. But it's part of the reason that we perform at a high level with respect to margin and ROAA. The left side of our balance sheet is fairly heavily to loans. And so we're pretty comfortable operating in that upper 90s. It's historically a normal range for us.
spk02: So Danny, the other thing I would say is we talked about this for a few quarters now and we are on track to do a securitization of a portion of our LIHTC portfolio in the second quarter. Our first tranche, just to get the first one done, is likely in the $150 million range. We're working on the details of that, you know, as we speak. But we do expect to do a securitization, which will take some of the pressure off the funding in the second quarter. And longer term, that's a lever we'll be able to pull over time, create additional liquidity if we need to.
spk07: Okay, terrific. All very helpful. Thanks for answering my questions, guys.
spk05: Thanks, Danny. Thank you.
spk00: Our next question comes from Brian Martin with Janie Montgomery. Please go ahead.
spk04: Hey, good morning, guys. Good morning, Brian. Hey, see, one of mine was just answered, or answered on the LIHTC and the loan to deposit. Other one, just on, Todd, on the loan portfolio, or just kind of the pipelines, or Larry, just kind of the pipelines today that are, it sounds like they're pretty healthy if you're kind of thinking about your guidance along with maintaining the credit quality, but just where are the pipelines today You know, is it specifically in the kind of the traditional commercial and the specialty finance, or is that kind of what's driving it, or just geographically just maybe give a little color on where the pipelines are at?
spk02: Yeah, I'll start, Brian, and let Todd fill in if he's got some other thoughts. Certainly, I would say I look at our pipeline trends this morning again. They're very consistent over the last couple quarters for new business and new transactions that we're working on. What's changed is, you know, we and others had really frothy growth earlier in the year in that 14, 15% range, really because of the liquidity coming out of the system and clients starting to use their lines of credit and those kind of things. Our line of credit usage for clients is back close to pre-pandemic levels now. So that big push on liquidity and loan increases is kind of done. We could get a little bit more uses there, but it's pretty much the excess liquidity seems to be kind of pushed out. And so both the specialty finance group and the core business pipelines look solid. So we'd expect consistent growth from both of those and get us more back into what we've done over the long run, which is kind of numbers in that 8%, 9%, 10% range is what we've done over years. And so It won't be easy. We'll have to work hard to achieve at those levels, but that's something we've done over a long period of time.
spk04: Gotcha. Okay. No, that's helpful. Thanks, Larry. And just the LIHTC portfolio today is just kind of the specialty finance pipeline. If you think about the securitization, how big is that portfolio today that you think about, you know, taking something off the table there with the securitization?
spk02: So, yeah, I mean, the stabilized LIHTC portfolio is around $750 million today. which we believe to be probably the highest quality asset we have on our lending balance sheet. The first tranche, you know, we could theoretically securitize all of that. That's not likely because we like it on our books, but we're going to pull the first $150 million off in the securitization as we discussed just to have that tool available because we've got consistent growth in that market. And so if we want to take the top off the growth there, and creating a little extra additional liquidity. We want to make sure we've got that lever completely figured out so that it's there when we need it in the future.
spk04: Gotcha. Okay. So that's the LIHTC piece. The whole piece of specialty financial aid on loans, how big is that portfolio today?
spk02: There's another $700 million roughly between municipal lending that we've done and some LIHTC construction. So it's a big piece of our business, but again, we think some of the very highest quality stuff that we have.
spk04: Yeah, no, understood. So I just want to get a frame of how big it is. So, okay, that's helpful. And maybe just on the capital front, given kind of the build here and just the look on AOCI, how does your outlook look on the buyback? I mean, I know there's still uncertainty out there with rates and economically, but Just trying to balance that or just understand how you guys are thinking about it.
spk02: So great question, Brian. First, I would say we feel really good about where our capital levels are at today. Given the weirdness in the AOCI environment and the economic uncertainty, our priority going forward is growing TCE and total risk-based capital. As you know, our operating performance is certainly top quartile in our peer group now, and we expect to keep that there. What we're driving to now longer term is to get our capital ratios. We're kind of middle of peer group right now in our capital ratios. We'd like to push those to the top quartile because the shareholders we think will be well served in a possibly tougher economic environment. If we've got top quartile earnings, And top quartile capital, we think we are well positioned to weather the storm that might be in front of us, but hasn't shown up yet.
spk04: Gotcha. So maybe not quite as active on the buyback in the near term, just given kind of your commentary. Is that fair?
spk02: I think that's fair. Yep. Our priority is building capital.
spk04: Yeah. Gotcha. Okay. And then maybe just last one for Todd, just on the margin, Todd, I think normally you'll give the RSAs, you know, just kind of where those are at. But just in general, you know, as you look to, you know, it sounds like the funding base, just kind of your assumptions on the stability and the margin. It sounds like it's just maintain the deposit. You've talked about the kind of changes and mix on funding and whatnot. But your outlook for some stability, is that assuming that the deposit mix and the level of borrowings today are consistent or down or just kind of how you're thinking about that?
spk05: Sure, Brian. Yeah, we feel pretty good about where we're sitting today still being slightly asset sensitive. And our guidance to static margin, yes, does assume that the big mix shift that we've seen lately has really come to a Conclusion, we feel very good about that considering how we started the year here in January. We've been able to pay down borrowings pretty significantly as correspondent and other deposits have flown back in or flowed back in. So we've been paying down overnight borrowings, getting some margin benefit from that, feeling better about loan to deposits being in the 90s instead of over 100. So all those things are, yes, that's what we're assuming in that guidance.
spk04: Gotcha. Okay. And then the RSAs, what's the other piece of it?
spk05: Sure. So RSAs are still 2.4 billion. Okay. And still continue to see some nice lift there. I think that has been a very positive trend throughout the rate up cycle, of course, but probably the biggest thing that we saw late in the fourth quarter, as I mentioned earlier, was we're really finally starting to see that traction on new loan yields, on fixed rate deals. And that jumped 80 basis points from October to December. So that gives us some more confidence about being able to help us with margin.
spk04: Gotcha. Okay. Perfect. Thanks for taking the questions.
spk03: Thanks, Brian.
spk00: Again, if you'd like to ask a question, please press star then one. Our next question comes from Nathan Ray with Piper Sandler. Please go ahead.
spk01: Yeah. Hi, guys. Good morning. Appreciate you taking the question. Good morning, Nate. Just want to zoom out on the margin outlook. You know, if we contemplate maybe a couple Fed rate hikes in the back half of this year, do you guys believe that just the higher pricing that you're seeing on new loan production today, you know, can offset just some of the variable rate loans repricing lower. Within that context, obviously, you'll have some index deposits that will also reprice lower. So I guess I'm just kind of curious how you guys are thinking about, you know, kind of protecting margin if we do get some Fed cuts later this year.
spk05: Sure. Nate, actually, as I think you know well, the right side of our balance sheet is a bit more of a challenge for us with the ratio of commercial deposits to retail deposits, and that's really been our struggle in terms of margin and holding on to margin. That does give us a very good outlook if the Fed was to cut rates later in the year. If they were to do that, I think we'd likely outperform many in terms of our ability to bring cost of funding down quite quickly. We would be able to take those rate-sensitive liabilities down pretty sharply. They have performed that bucket that we would call like our 100 beta bucket of deposits. So far it's been 91% over the cycle. And so we think it would perform well in rates down and give us some relief on cost of funds quite quickly.
spk01: Okay, great. And then just one clarifying question to Larry's point earlier on just the reserve. Larry, were you describing kind of a stable reserve on an absolute dollar basis or stable in terms of just as a percentage of loans?
spk02: Yeah. Just, yeah, thanks for that clarification. Yes, probably stable as a percentage of loans. We're in that, we're still pretty high, particularly given 11 basis points of NPAs, but that, we'd like to hold in that low 140s range for now, possibly build it if we see economic headwinds, but certainly hold it there so that we've got some powder in our reserve if we do see some degradation later in the year.
spk01: Gotcha. And then just maybe lastly, just in terms of the M&A outlook, are you guys still kind of less interested in opportunities these days, just given the macro environment and interest rate for value marks and so forth? Are there how you guys kind of think about and seeing kind of the flow of those opportunities develop these days?
spk02: Yeah, Nate, good question. Again, certainly it kind of goes in line with stock buyback questions earlier in the call. Our focus is on building capital right now. And the M&A environment is, you know, given all the uncertainty going on, certainly less likely. So yeah, Long term, you know, certainly we'd be open to things, but in the near term, certainly we don't see anything. Our focus is on building a bulletproof balance sheet that will stay on the test of time here if we do see economic uncertainty.
spk01: Okay, great. I appreciate you guys taking the questions in all the color. Thanks, Nate.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Larry Helling for any closing remarks.
spk02: Thank you, Operator. I'd like to thank all of you for joining us on our call today. We hope everyone remains healthy and safe during the new year. Have a great day. I look forward to speaking with you all again soon.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer