QCRH - NASDAQ

Greetings and welcome to the QCR Holdings Incorporated Earnings Conference Call for the Fourth Quarter and Full-Year 2023. Yesterday after market close, the company distributed its fourth quarter earnings press release. If there is anyone on the call who has not received the 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 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 management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, 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. 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 January 31, 2024 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 Helling, CEO. Please go ahead.

Thank you, operator. Welcome everyone. And thank you for joining us today. I will start the call with a high-level overview of our 2023 performance and the factors that continue to drive our success. Todd will follow with additional details on our financial results for the fourth quarter and the full year. We delivered record fourth quarter and full-year results highlighted by significant fee income and robust loan growth. In addition, for the full-year 2023, we completed our first two securitizations of low-income housing tax credit loans, grew core deposits and maintain our strong asset quality. We continue to benefit from our diverse revenue sources which includes capital markets and wealth management fees. The expansion in our non-interest income for the year overpowered the pressure on our net interest income. We also continue to strengthen our capital levels with exceptional earnings performance. As previously announced on December 12, we successfully closed our first two low income housing tax credit loan securitizations. The ability to securitize these loans is an important and effective tool in managing our liquidity and capital. It also enhances the sustainability and continued growth of our LIHTC lending and the related capital markets revenue. Our outstanding performance in 2023 is the result of our differentiated relationship-based community banking model. Our multi-chartered model enabled our local management teams to respond with speed and agility to our client needs. This results in a superior client experience that outperformed the larger national and regional banking alternatives. Our team of dedicated employees has driven our success. We have a strong corporate culture throughout our company and our employees are engaged with our clients and heavily involved in our communities. Recruiting and retaining talented employees is a top priority for us. Our reputation and culture attract the best bankers in our markets. We continue to receive high employee engagement scores, which are measured annually across our company. In addition, our local charters have won numerous awards throughout our footprint for being great places to work and do business. We believe that this leads to important outcomes, such as low turnover, improved productivity, higher profitability and enhanced shareholder value. Finally, we operate in some of the most vibrant and mid-sized markets in the Midwest. Our markets include regional economies with a diverse mix of commercial, industrial, and technology-focused activity. These areas attract highly educated workforces which helps drive steady economic growth, high relative household income and low employment. 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 12% and our deposits at 10%. These results have supported the 17% compounded annual growth in our core diluted earnings per share and the 30% compounded annual growth in our tangible book value per share over the same period. We have grown at a consistent pace but we've also significantly increased our profitability delivering annual core ROAA of 1.59% in 2022 and 1.41% in 2023 which is near the top of our peers. For the full year 2023, we delivered record net income of $113.6 million or $6.73 per diluted share. After adjusting for non-core items, our adjusted net income for the year was $115.1 million and our adjusted diluted EPS was $6.82. Total loan and lease growth for the full year was 11% prior to securitizing $265 million of low income housing tax credit loans and 7% on a net basis. Our full-year loan growth exceeded our guidance range of 8% to 10% provided at the beginning of the year. The robust loan growth was driven by our LIHTC lending program and solid performance from our traditional lending business. Given our current pipelines and ongoing strength of our markets, we are targeting loan growth of between 8% and 10% for 2024 prior to our planned loan securitizations. We are planning our next securitization of LIHTC loans of approximately $200 million in the middle of 2024. We intend to use securitizations to manage our net annual loan growth in the range of 4% to 6%. Our total deposits for the year grew $530 million or 9% as we continued to expand the number of client relationships and grew balances from existing client accounts. Core deposits excluding short term-broker deposits increased $346 million or 6% for the year. We have built a strong and diversified deposit franchise over the past 30-years. And our full-year activity in 2023 reflects the importance of that franchise. Growing core deposits remains a significant focus which we believe will drive long-term shareholder value. Accordingly, our bankers are incented to grow both deposits and loans. During the year, we grew non-interest income by $52 million or 64% driven primarily by the strong growth in our capital markets revenue. Strong fee income overpowered the pressure on net interest income. Our asset quality remains excellent as the ratio of non-performing assets to total assets was 40 basis points at the end of the year. We are comfortable with our reserves, which represents 1.33% of total loans and leases held for investment. We remain disciplined with our reserves and continue to diligently monitor asset quality across all of our business lines. While we are mindful of the impact that elevated interest rates may have on the economy, we remain cautiously optimistic about the relative economic resiliency of our markets. Additionally, our strong asset quality and consistent credit culture prepares us well to weather potential economic uncertainty. Our capital levels are strong and we are focused on building upon our capital base in the year ahead. We continue to target capital ratios in the top quartile of our peer group. We believe that our modest dividend, strong earnings power and access to the securitization market will allow us to continue to grow capital faster than our peers. In conclusion, I would like to thank our entire QCR Holdings team for their hard work and dedication to outstanding client service and for delivering record financial results. Our employees fuel our success. And I'm very proud of all that we've accomplished together in 2023. With that, I will now turn the call over to Todd to discuss our financial results in more detail.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our balance sheet performance during the quarter. We grew total loans held for investment 13% on an annualized basis in the fourth quarter. This was primarily driven by continued strength in our LIHTC lending program and solid contributions from our traditional lending business. As Larry mentioned, we successfully completed our first two loan securitizations in the fourth quarter, totaling $265 million. The first securitization consisted of $130 million of tax-exempt LIHTC loans and was part of the Freddie Mac sponsored M-Series. The second securitization consisted of $135 million of taxable LIHTC loans that was part of the Freddie Mac sponsored Q-Series. Upon closing of the securitizations and selling of these loans, we recognized a net gain on sale of $664,000. More importantly, the securitization strengthened our liquidity by lessening the pressure on higher cost funding which further stabilized our deposit mix and enhanced our TCE ratio. Our securitization strategy will enable us to continue to fund the growth of our LIHTC lending business. In addition, securitizations will add to the long-term sustainability of the corresponding capital markets revenue that we receive from this business while maintaining the portfolio within our established concentration levels. Core deposits were relatively stable for the quarter. Our Correspondent Bank deposit portfolio typically falls temporarily in the fourth quarter as our clients position their balance sheets at year-end. Total Correspondent deposits declined $55 million or 9% at quarter end. And have since rebounded significantly increasing $188 million or 35% by mid-January. As Larry mentioned, we grew core deposits $346 million or 6% during 2023 which has allowed us to fund our strong loan growth. We place a high importance on the mix and diversification of our deposit base to provide the most cost effective path and funding our growth. We believe that our focus on growing core deposits will generate long-term value for our shareholders. Our total uninsured and uncollateralized deposits remain very low at 18% of total deposits. In addition, the company maintain approximately $3.1 billion of available liquidity sources at year-end, which includes $1.2 billion of immediately available liquidity. Now turning to our income statement. We delivered record net income of $32.9 million or $1.95 per diluted share for the quarter. Our record results were driven by very strong non-interest income from capital markets revenue. Our adjusted net income was $33.3 million or $1.97 per diluted share. Net interest income was $55.7 million a modest increase from the prior quarter as we overpowered the securitization and sale of $265 million of loans. We are pleased that adjusted NIM on a tax equivalent yield basis improved by 1 basis point on a linked quarter basis to 3.29% which was above the midpoint of our guidance range. During the quarter, our loan and investment yields continued to expand and modestly outpaced the increase in our cost of funds. We experienced a lower increase in our cost of funds with a slowing in the shift of the composition of our deposits from non-interest and lower beta deposits to higher beta deposits. We are pleased to see continued stabilization in our deposit mix. In addition, our securitizations help lessen the pressure on higher cost funding further stabilizing our deposit mix. Looking ahead, we anticipate a continued pause from the Fed and a yield curve that continues to be partially inverted for the next quarter. At this point in the interest rate cycle, we expect that the increase in our average loan and investment yields will generally offset any further increase in our funding costs. As a result, we are guiding to a relatively static adjusted NIM TEY in the first quarter of 2024 with a range of 5 basis points of expansion on the high end and 5 basis points of compression on the low end. We do expect that the Fed will begin to cut short-term interest rates later in the year. During 2023, our balance sheet has shifted from asset-sensitive to a more moderate liability-sensitive position with the funding mix shift to more higher beta funding. As a result, we are well positioned for a rates down scenario, particularly if the yield curve becomes less inverted at the same time. Turning to our non-interest income of $47.7 million for the fourth quarter, which increased $21.1 million or 80%. Our capital markets revenue was a record $37 million this quarter, up from $15.6 million in the prior quarter. For the year our capital markets revenue was $92.1 million, significantly in excess of our $45 million to $55 million annualized guidance range. Capital markets revenue surged late in the fourth quarter and was $37 million for the quarter. Our clients took advantage of the significant decrease in long-term interest rates late in the quarter to lock in attractive financing terms. Capital markets revenue from swap fees continues to benefit from the strong demand for affordable housing. Even with our strong results in the fourth quarter, our LIHTC lending and capital markets revenue pipelines remain healthy. As a result, we are increasing our capital markets revenue guidance for the next 12 months to be in a range of $50 million to $60 million. In addition, we generated $4.1 million of wealth management revenue in the fourth quarter, up 9% from the third quarter. For the full-year, wealth management revenue was up $1.1 million or 7%. Our wealth management teams continue to create new relationships, adding 340 new client relationships and 700 million in assets under management this past year. We are also pleased with the early results from our new wealth management business in the Southwest Missouri market at our guarantee bank charter. We have a highly experienced team in place that is already expanding the reach of our current wealth management business. Now turning to our expenses. Non-interest expense for the fourth quarter totaled $60.9 million compared to $51.1 million for the third quarter. The linked quarter increase was primarily due to higher variable employee compensation based on our strong full-year results. After adjusting for the higher variable compensation, our normalized expenses were $51.9 million just above our guidance range. Looking ahead to the first quarter of 2024, we anticipate that our level of non-interest expense will be in the range of $49 million to $52 million. This guidance range reflects our focus on closely managing our recurring noninterest expenses during 2024. Now turning to asset quality, which continues to be quite strong. During the quarter, NPAs declined by $500,000 to $34.2 million or 40 basis points of total assets. The provision for credit losses was $5.2 million during the quarter, which included $2.5 million of provision for loans and leases and $2.7 million of provision for unfunded commitments. The increased provision for credit losses on unfunded commitments was driven by the surge in commitments in our LIHTC lending business. Our allowance for credit losses to total loans held for investment was 1.33%. We expect to continue to maintain strong reserves, given the uncertain economic environment. We increased our tangible common equity to tangible assets ratio by 70 basis points to 8.75% at quarter end, up from 8.05% at the end of September. The fourth quarter improvement in our TCE ratio was driven by a combination of our strong earnings, loan securitizations and a $25.4 million increase in AOCI. The increase in AOCI was the result of growth in the value of our available for sale securities portfolio and certain derivatives due to the decline in long-term interest rates. Our total risk-based capital ratio was 14.15% at quarter end a decline of 33 basis points. This was a result of the significant increase in total risk-weighted assets due to the growth in unfunded commitments related to our LIHTC lending business as well as growth in total loans and leases during the quarter. We are pleased to have increased our tangible book value per share by $3.48, or 35% annualized during the fourth quarter and 19% for the full year. Finally, our effective tax rate for the quarter was 12%, compared to 7% in the prior quarter. The linked quarter increase was due primarily to the significantly higher capital markets revenue we earned during the quarter increasing the mix of our taxable income as compared to our tax-exempt income. For the full year, our effective tax rate was 10%. We continue to benefit from our tax-exempt loan and bond portfolios. As a result, this has helped our effective tax rate to remain one of the lowest in our peer group. We expect the effective tax rate to continue to be in a range of 8% to 11% for the full-year 2024. With that added context on our fourth quarter and full-year financial results, let's open up the call for your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Nathan Race with Piper Sandler. Please go ahead.

Hi guys, good morning. Thanks for taking the questions.

Good morning, Nath.

Good morning, Nath.

I appreciate the commentary Todd for the kind of static margin and consistent guidance that you provided last quarter there for the first quarter, but just curious how you're kind of thinking about the margin impact from Fed rate cuts occurring at some point this year. I imagine with some of the LIHTC securitization that you guys completed in the fourth quarter that that maybe reduces your rate sensitive assets, but would just be curious to kind of get your thoughts on kind of how the rate sensitivity stacks up today in terms of rate sensitive assets and on the other side of the balance sheet as well.

Sure. Nath, the securitization does impact both sides of the balance sheet, obviously, but really it's a bigger win for us in terms of taking pressure off of funding cost and that's a big part of the benefit we saw in the fourth quarter with a static NIM and our guide for Q1. I'll get to potential rate cuts here in a moment. But candidly, just to be transparent, we're really expecting static here in the first quarter and that has a lot to do with again the dramatic slowing in the mix shift of our core deposit portfolio and that's where securitization has really helped us. So I'll just be candid. My notes say relatively static deposit portfolio, it was actually very static, very little movement and that's really benefited us, and we expect that to continue here in the first quarter. So given the thousands of items that impact margin, we think it's prudent to give a collar around that. Hence the 5 up or 5 down. What makes us feel comfortable with a relatively static NIM though is most of our loan growth in the fourth quarter was very late in the year in December and we do -- we guided to another 8% to 10% loan growth pace, so good loan growth is coming with some good pricing. So we're starting to get better pricing power on loan yields. That deposit mix I talked about is very static. And when we look at our CD repricing whether it's core or brokered, we think we can be fairly neutral on repricing rates when we replace those with core deposits, so for all those reasons, we're very comfortable really effectively guiding to a static margin. We'll get some better results if we can claw back a few basis points on some of our higher beta deposits and we expect to do that. And if we can get even better new loan pricing, we may have poorer results than that if we don't get some cost of funds relief and if we don't see that yield expansion. But we certainly believe that we will. And then maybe to get to your end question, where do we sit in terms of sensitivity now with the change in our deposit mix and securitization? We do present as slightly liability-sensitive and not a high degree of precision around this yet. But a 25 basis point cut might give us $2 million to $3 million in NII annually and maybe three to five basis points of NIM accretion. So we are situated from a balance sheet perspective to take advantage of rate cuts should they come later in the year.

Okay, great. And then just within the context of the 8% to 10% loan growth guidance for this year, curious how you guys are thinking about core deposit gathering prospects if that can largely keep pace with loan growth, or do you expect kind of a moderate lag just given the likelihood for an additional securitization or two at some point this year?

Sure, Nate, we are incredibly focused on core deposit growth. I'll let Larry tag on a little bit here, but we'll just tell you that while our loan to deposit ratio floated up right at quarter end, we have seen some nice inflows back in of deposits more seasonally here at the first of the quarter. And our loan to deposit ratio is back down to 97 and we do expect to keep pace with our loan growth with core deposits. I know, Larry has got some other comments around that.

Yes. What I'd add Nate is we're in the middle of resetting incentives for 2024 with both staff and certainly there won't be any dramatic shift in how we look at things, but a greater emphasis on deposits generation and incentives for our staff in 2024 to make sure that we keep pace.

Okay, great. And then just turning to capital markets revenue obviously really, really strong quarter here in 4Q. It sounds like the pipeline is still pretty strong just based on the increase in unfunded commitments within the loan provision this quarter. So would just be curious to hear if there was any pull through in activity, which, again, it doesn't seem like was the case here in 4Q. And obviously, you raised guidance, so would just love some updated commentary in terms of what you're seeing in terms of opportunities across that asset class today.

Sure, Nate, I'll give it a crack here. First of all, as you know, incredibly strong quarter and the stars kind of aligned and what really happened is if you look back a little more historically at our ability to produce new business and fees, there was a dip in 2022 and that was really caused by several factors. Inflation, inability to get materials, availability of labor and a spike in interest rates back in 2022, and then those variable started to ease in 2023 and we were on track to have a really solid tick up in swap fee income and capital markets revenue. And then the long end of the yield curve dropped dramatically in the fourth quarter, which caused our clients to say, hey, I want to lock in my funding costs as quickly as they could. So they were pushing on. They were in our pipeline and now they are going, we want to get our -- all of our variables lined up as quickly as we can. So we had a really strong fourth quarter and stronger than we anticipated. Most of it was the '22 business that got closed in 2023 because of all those other historic variables we talked about. So we were confident enough in our overall pipeline to look at it and say, okay, we're going to increase our guidance by $5 million for the year. And there is seasonal variability here, as you know, so I'd encourage you to maybe look back at the swap fee income quarter-to-quarter. It's generally a little bit lighter in the first quarter of the year as our clients kind of reset their activities in the LIHTC space and so annually, we feel really good about our guidance and our pipeline of business but if you look back at the history, the first quarter generally may perform maybe in the lower end of our annual guidance range, but certainly we feel strongly about the ability to produce the guidance that we've given to you. If you look at the last three year averages in our swap business is a little over $60 million. That makes us feel good about that $50 million to $60 million guidance number that we're giving you.

Got it. And then if I could just ask one more follow-up across this line of business, are you seeing any competitors pull back that are maybe more liquidity-constrained who don't have the secondary market options as you guys now have on the securitization front to continue to lean into this product, whereas maybe some competitors don't have those opportunities?

Yes, it certainly could be playing a factor in it. It's hard to tell. Our competitors in this space are all the big national players and our value proposition in this space is really speed of execution. And as we've talked previously, the securitization gives us a lot of runway to continue to add business at a steady pace here. So I don't necessarily know, if you look at the ten biggest banks, it's hard for me to gauge whether they're feathering the throttle here a little bit and they're lending in total, but that -- it's really the 10, 15 biggest banks are our primary competitors in this space.

Okay, got it. And then just one last one for me. I imagine some of what we discussed last quarter on expenses, but I imagine the guidance of the first quarter kind of contemplates the middle ends of the next 12 months' capital markets revenue guidance. Is that a fair assumption again, Todd?

Yes, it is, Nate. That would be the assumption of somewhere in the middle of that guidance for the first quarter. And we're candidly very pleased to be able to provide that kind of a guidance on non-interest expense run rate. Our guide only moved up 2% year over year and testament to the strong team that we have keeping an eye on expenses and efficiency and being able to produce these kind of results. So that really is in a nutshell why we're guiding that for Q1.

Okay, great. Congrats on a great quarter.

Thanks, Nate.

The next question is from Damon DelMonte with KBW. Please go ahead.

Hey, good morning, guys. I hope you guys are doing well today.

Good morning, Damon.

We are.

Excellent. Just to follow-up on Nate's question there at the end on the expenses. So Todd, do we kind of think about the guided range in the first quarter of 49 to 52 would reflect kind of a seasonally weaker or slower spot fee income level? So as we go through the year, we're probably going to be growing outside of that range because you're going to have presumably higher swap fees as we go through the year. Is that fair?

Yes, Damon, kind of two-parter there. So as Larry described, we still expect solid results here in the first quarter from capital markets revenue, but our expense guide would be based on the midpoint of those goalposts in terms of what we expect for the quarter. So say $12 million to $14 million and that would fit us within that guide we just gave you of 49 to 52. What we like about our compensation structure here at QCR is very high percentage of all of our comp is incentivized. So we would really only expect that non-interest expense result and guide to go up if we do have really outstanding results in terms of profitability. So in a quarter like we just had here in the fourth quarter, we can see a pretty high percentage of incentive comp jump for outstanding results like that. But we think that strong alignment is good for us where we reward our people after we reward shareholders. And that's part of our strategy to sustain top quartile peer performance. So really the only outlier to that guidance would be if we're already providing really strong revenue outside of the guidance range.

Got it. I appreciate that color. And then just to touch on the provision level here, you noted that the 133 reserve, you feel pretty comfortable with that. And this quarter included some allocation for unfunded commitments. How do we kind of think about balancing the traditional loan reserve and the unfunded commitments going forward? I mean, if you're continuing to book these loans, should we start to kind of incorporate a provision that's maybe not as high as this quarter, but maybe indicative of what we saw the last three quarters of -- or the first three quarters of 2023?

Yes, good question, Damon. As we think about provision expense, it was 18 basis points in 2023. So if we think longer term, we've talked about credit historically on these calls and maybe with you individually, Damon, about things are returning to normal in a credit outlook standpoint and that probably applies to provision too. And so unfunded commitments was an outlier. That was a good thing this past quarter because you saw what that produced for us from a fee income standpoint. And so that was certainly -- that level of provision needed for unfunded commitments will certainly come down and probably come back closer to normal as we go through the next few quarters. But as you think about the long term and credit returning to normal, part of the provision is to replace charge-offs. And so, gee, I think it'd be a reasonable expectation to think that provision expense would stay steady year over year to a little bit higher as we go into what I think is maybe a more normalized credit environment as we come off of zero interest rates the last three, four years.

Got it. Okay, that's helpful. That's all that I had, I'll step back. Thank you.

Thanks Damon.

The next question is from Brian Martin with Janney Montgomery Scott. Please go ahead.

Hey, good morning, guys, great quarter.

Thanks, Brian.

Thanks, Brian.

Say just wanted to -- just one follow up on that provision question, Larry. I guess was that total credit loss expense or I guess, are you just referring to kind of the provision for loan losses, given kind of the dynamics this quarter with those unfunded commitments?

Yes, that was really just, this last quarter was a little unique because of the spike up in unfunded commitments. So the 18 basis points was total provision in 2023. Our net charge-offs for the year were 13 basis points. That number is really pretty consistent with our last five-year average, but a little lower than our ten-year average, if you want to go back and look at those. And so again, I think as we expect things to normalize, as we get into a more normal interest rate environment, normal economic environment, it'll probably move up slowly over time

Got you. Okay. Yes. And just the new loan yields in the quarter, kind of the new production you put on late in the quarter, can you give some color on just kind of what you were seeing there and then just maybe your outlook as far as what the production this year, how you're kind of thinking about where those yields are?

Sure, Brian. We actually saw a bigger delta in December between payoff rate and new funding rate than we had previously. So payoff rate, 675, new fundings, 751 for 76 basis point delta. That's the highest that we've seen. That's one of the reasons, again, we feel very good about a more static margin from here on out. Fundings on a tax equivalent yield basis for floating rate loans. And that would be really, the LIHTC portfolio were 819 yield for December, and we have a lot of production and still had a really high outcome there in terms of yield. So feel very good about that. And certainly, we are starting to get more pricing power really all around the footprint of the company. So our bankers are doing a great job helping us get paid better.

Got you. Okay, that's helpful. And Todd, I think you mentioned that the securitization could help the margin, and then once you got past the first one, it could potentially offer some other benefits. I guess as you look at potentially doing another one here mid-year, any thought on how to think about the benefits that roll through there or came through on this one as we look forward on that one?

Sure. We really view it as incredibly helpful tool for us to help manage the balance sheet more efficiently is probably the right word. We know that when we sell off couple hundred million dollars of high-quality assets, that we're going to impact NII for a bit. And so the great news was we did that in the fourth quarter. We were able to overpower those assets going away and actually improve NII as part of the process. So as Larry has said over the last several quarters, there's a whole lot of benefit to being able to securitize those assets. But with respect to margin, it really takes the pressure off of that new deposit funding. It really -- we can see it. It's really been meaningful in terms of what it's done for our deposit mix and pricing. And just to give you an example of how powerful that is, in the first quarter of this year, our cost of funds increased 53 basis points. In the second quarter, it was 43 basis points. In the third quarter, it was 33 basis points. Kind of interesting symmetry there. But last quarter, in the fourth quarter, when we did the securitization, our cost of funds only went up 14 basis points. So it's a very powerful tool for us to help manage a more effective balance sheet and efficient balance sheet.

Yes, and the cost of funds -- go ahead, Larry. I'm sorry.

I'm sorry, Brian. The thing I would add maybe is if you're thinking about gains on securitization sales, we learned a lot doing our first two securitizations. We haven't learned everything yet, so we probably don't expect only modest income statement impact on the next couple of securitizations. We can continue to learn about the right way to securitize and the timing of the quarter. And we're pushing on the expense structure of our securitizations now. It may take us a few more to get all that ironed out. Eventually, there will be some gains, but it might take us 2024 to get through a couple more securitizations to learn the right scaling and economies of scale and right expense structures because we're pushing on our providers to be more efficient there. But it might be 2025 before we sort through lots of that.

Got you. Okay, and the -- Todd, the cost of funds exiting December is for the month of December. How did that look relative to the quarter? Or does it get mixed up with the securitization where it's maybe not a fair question or not appropriate?

No, I think it's certainly appropriate. It really didn't have much of any impact on cost of funds and net interest margin. Our margin intra-quarter was 327 in October, 329 in November and 329 in December and we reported 329. So again, we saw a very good outcome in terms of almost no mix change during the quarter. And again, that 14 basis point increase in cost of funds was the best since tightening cycle started and I would tell you, we expect more of the same in the future in terms of helping us manage cost of funds.

Got you. Okay. And last one for me was just on capital, really building it here. Just kind of wondering how your -- what your thoughts are on just utilization of capital this year and does the buyback become a bit more and part of the narrative or not really with the growth, given strong growth outlook you still have. Just trying to understand how you're thinking about that with continuing to want to build it.

Yes, Brian, good question. As we think about '24, I'd say, it's too early to declare victory over the economy here yet, so we're going to be cautious going forward for a bit. Six weeks ago we thought we were going to have interest rates higher for longer and we're going to have a recession. And now we've all changed our minds in the last six weeks. So I'm hoping that the world is right, but sometimes they're not. And so it seems prudent for us to continue to hold onto capital for a while. And so our focus is to really get our TCE into the top quartile of our peer group and build that fortress balance sheet. And when we arrive there and think the other factors are appropriate and it's a prudent time, we do want to be in a position to do buybacks, but it's probably certainly several quarters down the road.

Okay, that's all I had guys. I appreciate it and keep up the good work.

Thank you.

Thanks, Brian.

The next question is from Jeff Rulis with DA Davidson. Please go ahead.

Thanks, good morning. Pretty good color on the margin discussion and the slight liability-sensitive position. I guess safe to say, you'd be more confident in NII growth than margin expansion at this point. I don't want to put words in your mouth, but it sounds as if kind of the way you've positioned it is the confidence might be bigger on growing NII than maybe margin. Is that fair?

Yes, Jeff, I think that is fair. We are trying to build a more efficient balance sheet and securitization helps us with that. We feel very confident that the mix change in terms of cost of funds and the mix of core deposits has really almost come to a halt. So now we're looking forward to that loan growth guide providing expanded NII and treading water here on margin would actually be a pretty good result considering the backdrop. So we feel very good about that.

Okay. And then back to credit. Can we get a sense for the net charge-offs picked up a little bit in the quarter? What was that? And maybe any broad comments from a credit perspective of what's flowing through?

Jeff, I'll start with broad comments first, and then probably try and peel it down to the net charge-offs a bit. Certainly, if you look at the underlying credit metrics, almost all of our measurements were slightly improved if you look at criticized classified NPAs. And I think we continue to move toward a normalized environment, which is, as I've talked about more for a couple. Now, I think we're moving toward normal. So we might have had a little bit of -- there's a natural tendency in the fourth quarter to do a little cleanup. So I don't think there were any significant trends in movement. It was just our normal cleanup. Our net charge-offs for the year were 13 basis points. If you look over the last five years, our net charge-offs were 12 basis points. So it's really right on top of what we experienced over the last five years. Over the last ten years, our net charge-offs have been 17 basis points. So, gee, over time, I expect us to move back to kind of that normal. And I think the industry number that everybody's talking about is 20 basis points of charge-off. Over time, I think we'll move that way. There certainly aren't any indications in our underlying credit quality metrics that point to that, but it seems prudent that that's where we would kind of expect things to go over time.

Okay, so on a net charge -- the charge-offs this quarter, maybe some cleanup in Q4 it wasn't necessarily segment-focused. It was chasing down a few things.

Yes, nothing that's -- nothing significant that should impact the trends going forward.

Okay, maybe last one, just on kind of the growth and expectations for the coming year pretty specific, but geography or segment, any thoughts on where you're seeing maybe some momentum in the footprint or within a certain line of business?

Yes, I'd start, Jeff, with the thing that surprised me about 2023 was our traditional lending business normal C&I and commercial real estate was actually fairly strong, up 5% to 6% for the year. And then we've got this unique LIHTC business that provided some outsized growth. So the thing that surprised me on the traditional business, I don't think it's because the activity was that strong, but because some of our competitors, because of capital constraints, because of liquidity constraints, decided to kind of slow down their activity. So it's allowed us to grab market share in the markets we're in. And so that's a good thing because I know there are some names that we've worked on for a decade where we got business in 2023 because of the tone that was getting set with them by some other banks. So I kind of expect that to continue about the way it was in 2024. But again, because of the securitization tool, we can do that without putting too much pressure on our funding. And we think we can certainly grow comfortably in that 4% to 6% range as we look for the next year.

Okay. Thank you.

Thanks, Jeff.

Thank you.

Excuse me. The next question is from Daniel Tamayo with Raymond James. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Dan.

Just a couple of follow-up questions. First, just on the NII benefit that you think you'll get from rate cuts that you talked about. Todd, just curious, the immediacy of that in your budgeting in terms of how many -- how much lag you're expecting in funding costs or whatever, the lag, if there is any built into when you get -- when the rate cuts come through versus when that actually hits the bottom line. Thanks.

Yes, sure, Danny. Good clarifying question there. They would be fairly immediate in terms of the NII and NIM impacts. Part of the significant increase in cost of funds, of course, has been the mix shift coming out of non-interest bearing and lower beta deposits. And those have gone into higher beta deposits. We think that we would have the ability to claw back those costs of funds very quickly with a rate cut so nearly immediately. Don't think there'd be much lag there if the Fed starts cutting.

Okay, great, thanks. And then secondly, just on the swap revenue, obviously. So I mean, kind of looking across the year, it was a strong year, a very strong year, 92 million in probably a difficult environment with rates going up, you obviously had the big result at the end of the quarter, but the annual guidance, 50 to 60 million for 2024 is still quite a bit below that. I'm just curious how you think, it -- was there something about the end of the year's lower rates that you don't think would continue to applied it to the way that your clients react to lower rates in 2024? Or is there a possibility that if we do continue to get lower rates that that swap activity could be higher than your guidance?

Yes. Daniel, I'd say it's -- what happened in the fourth quarter was a lot driven by the sharp drop in the long end of the yield curve and the lower rates. So that had a big factor in clients wanting to lock in rates as quickly as they could. And so there's maybe a little bit of the activity in 2024, got committed a little bit earlier than normal because that drop in rates and the client's sense of urgency. But bigger part of it was really 2022 deals that got stalled into 2023, waiting for lower rates and for inflation to normalize. So it's hard to tell exactly how much of those is which, but if you look over the long term, our normalized is more in that $50 million to $60 million range, and we think we've got the capacity to do that kind of through thick and thin. If you told me we're going to have another 100 basis point drop in the long end of the yield curve, okay, we could get another flurry of activity because clients clamoring to lock in deals that doesn't appear to be in the cards right now. But so given what we have from an interest rate prospect, which is kind of steady throughout the year here, and maybe a short end of the curve dropping a bit, we think this is a pretty reasonable guidance level.

Okay. And is the amount of -- I mean, so if I average the last two years, you're still over $130 million. So $65 million a year. So still above the guidance for 2024. Are you expecting volume to be similar over the -- in 2024 from what you've done over the last couple of years or is there some kind of rate impact in there that -- that's capturing the difference?

Yes, I mean, a little bit. We pulled some deals from '24 into '23 that probably the borrowers, if we hadn't had that drop in rates, would have waited to lock their rates in until first or second quarter. So a little bit of that happened, probably. And so that's part of the guidance there. Part of it's just trying to make sure we give you a number that we can hit on an annual basis because we don't like disappointing you guys. And so I think it's just the industry. There's still a tremendous backlog of a need for affordable housing. The developers are finding it easier now to put the capital stacks together since there's been a tick down in the long-term interest rates. And if I knew what was going to happen on rates, I could probably give you a little clear view, but we're certainly trying to just give you a rational number that we think we can hit and I'd probably look back at the last four or five years of what we think normal is in our swap fees to give you some sense for why we think 50 to 60 is the reasonable guidance for today.

That's great. And I appreciate all the color. I'm not trying to stick you with a higher number. Just trying to understand the drivers here. I appreciate all that.

Yes. Thank you.

The next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead.

Yes. I appreciate you guys taking the follow-ups, just had one on wealth management revenue, a nice step-up and it seems like you guys are still adding new clients there. So we'd just be curious to get an update on how growth in that line of business is trending in southwest Missouri. And then also, I believe you guys are making a push into Des Moines as well.

Yes good memory, Nate. We're very pleased with the start we have in southwest Missouri at the guarantee bank charter. A couple of very experienced folks have got that off to a fast start. One of the reasons we're able to do that fairly efficiently is we don't need to recreate the back office structure for those folks. They can worry about serving clients and bringing in new AUM, and we can lean on the existing infrastructure that we already have created and wealth management really out of our Quad City Bank initial charter. So off to a good start there. We are continuing to pursue another start like this in the Des Moines metro. And we're excited about that. We expect to have some news sometime this year on that front, but very proud of that wealth management team creating another 340 relationships this year and 760 some million in brand new AUM. And the vast majority of that is in our higher leverage, higher profitability trust segment. So 700 million of that close to was in trust, which is the ultimate relationship business. So appreciate you asking about that, Nate

Great. And then just on the tax rate going forward, I think last quarter we're talking between 9% and 10%. Is that still a good level to use going forward?

Yes. Our guide was 8% to 11%. Still feel pretty good in that range. The only thing that would really fluctuate there would be an outsized capital markets quarter where all of a sudden taxable revenues spike up a bit more than tax exempt, but feel very good about that effective tax rate. Proud to have that be one of the lowest in our peer group. And again really helps us provide good earnings per share.

Got you. And then maybe one last one for Larry, just curious to get your latest thoughts on the M&A environments. Obviously, you guys are in a pretty advantageous position with your excess capital and your currency. So, just curious if you're any more or less optimistic on acquisitions occurring at some point this year or into next year.

Yes. I think our first priority, Nate, is making sure we got a fortress balance sheet to basically support what's been really solid growth for us. And we've got really good momentum, so we don't want to do anything that messes that up. Longer term, certainly we may have some appetite for M&A, our stock, if it start trading a little bit higher, some of the economics might start to make sense in some M&A transactions. But we're going to be cautious for a bit yet because, again, as I commented early, we're not declaring victory over the economy yet because everybody's kind of changed their mind in the last 45 or 60 days on what's going to happen. And I think we'll just be cautious for a bit yet. And we certainly continue to have ongoing discussions with things that we think might be a strategic fit long term. Probably nothing in the foreseeable future, though.

Got it. Makes sense. I appreciate all the color. Thank you, guys.

Thanks, Nate.

Thanks, Nate.

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

Thanks for joining our call today. We hope everyone remains healthy and safe during the New Year. Have a great day. We look forward to speaking with you all again soon.