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00:03 Greetings everyone, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the First Quarter of 2022. Yesterday, after our market closed, the company distributed its first quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website www.qcrh.com.
00:27 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 open the call to questions from analysts.
00:42 Before we begin, I'd 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. 01:16 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.
01:37 As a reminder, this conference call is recorded and will be available for replay through May 4th, 2022 starting this afternoon approximately one hour after completion of this call. It will be accessible on the company's website. 01:53 At this time, I'd like to turn the floor over to Mr. Larry Helling at QCR Holdings. Sir, you may begin..
02:02 Thank you, operator. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. I will start the call with a brief discussion regarding our first quarter performance. Todd will follow with additional details on our financial results for the quarter.
Before I discuss the quarter, I want to welcome any new shareholders that are on the call today as a result of our successful acquisition of Guaranty Federal Bancshares, which closed on April 1st. We have merged Guaranty Bank into SFC Bank or Charter in Southwest Missouri, and the integration process is going very well.
We have retained the Guaranty Bank brand, due to its more extensive branch network and strong name recognition in the market. We're eager to continue our growth in the vibrant Southwest Missouri region.
02:53 Turing to quarterly results, which are highlighted by exceptional loan growth and expanded net interest margin, carefully managed expenses, and continued excellent credit quality. We continue to experience healthy demand from our client base and grew loans by 14.6% on an annualized basis, excluding PPP.
Our accelerated loan growth in the first quarter was driven by strength in our traditional commercial banking, leasing and specialty finance businesses. We are capitalizing on improved economic conditions in our markets and continue to gain market share across our Charters.
Our clients value, our relationship-based community banking model emphasizing the importance of strong relationships and customized service. 03:43 Our loan pipelines remain healthy and our near-term outlook for loan growth remains positive. Therefore, we are increasing our targeted loan growth to between 10% and 12% for the full-year.
While core deposits decreased modestly during the quarter, mainly due to expected seasonality with our commercial client base, we saw the mix of our deposits continue to improve with further rotation from time deposits to interest bearing demand deposits.
04:13 In addition, Guaranty Bank brings excess liquidity and a strong core deposit client base to our balance sheet, which will support our ability to continue to fund our expected loan growth.
We expanded our net interest margin in the first quarter, which was up 1 basis point on an adjusted basis and up 4 basis points, excluding the impact of PPP fees. This expansion was supported by a favorable change in our asset mix, lower deposit costs and stable loan yields.
Given our asset sensitive balance sheet, we are very well positioned for the current rising rate environment and expect to see meaningful NIM expansion in the second quarter. Todd will go into more details in his remarks.
05:01 With respect to our non-interest income, we experienced a decline in capital markets revenue from swap fees, due to project delays, which were caused by ongoing supply chain disruptions and inflationary pressures. The majority of our swap business is generated by low-income housing tax credit projects.
Over the years, we have grown and diversified our client base, which has helped our outsized growth. And as a result, our pipeline remains robust. The gap between the demand and the availability of affordable housing is widening.
And we believe that the long-term fundamentals for this business have actually strengthened despite the short-term challenges. 05:45 Our asset quality and credit metrics remain extremely strong, non-performing assets improved again and represent a record low of 4 basis points of total assets.
Additionally, our criticized loans and classified loans to total loans and leases decreased during the quarter. We continue to have negligible net charge-offs and we feel very good about our current reserve level at 1.55% of total loans and leases.
Our excellent credit quality is a function of our disciplined and consistent underwriting along with vibrant economic conditions across our markets. 06:25 With that, I will now turn the call over to Todd, to provide further information about our first quarter results..
06:34 Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start with net interest income. Our adjusted net interest income for the quarter was $48.5 million, down 1.4% from our record amount set in the fourth quarter.
However, the decline was entirely due to the significant linked-quarter decrease in PPP loan forgiveness fees, which was expected as our PPP loan program nears its end. 07:02 With our strong loan growth using our excess liquidity from the prior quarter, our balance sheet efficiency improved helping to expand margin in the first quarter.
We funded our loan and lease growth during the quarter with a combination of excess liquidity and overnight advances. Our non-maturity deposits typically experienced a seasonal decline in the first quarter, as many of our commercial clients are using funds to make bonus and tax payments during this period.
07:30 We continue to improve the mix of our deposit base, intentionally rotating out of higher cost CD balances as they mature.
The cost of our total interest bearing liabilities further improved by 1 basis point from the fourth quarter, we utilized our overnight borrowing capacity during the quarter to temporarily fund some of our loan growth and we subsequently repaid the majority of these advances after quarter end with Guaranty Bank's excess liquidity.
07:59 Our adjusted NIM improved by 1 basis point for the quarter. However, after excluding the impact of lower PPP income that I mentioned earlier, our core NIM expanded by 4 basis points, significantly outperforming our guidance of a slight decline of 2 basis points to 4 basis points.
We've been very pleased with our NIM performance over the last several quarters as we've been successful in maintaining earning asset yields while driving down our cost of funds. 08:29 As we are now entering a rising rate environment, our asset sensitive balance sheet will lead to significant further NIM expansion.
Our asset sensitivity is driven by the strong growth in our floating rate loan portfolio over the past three years. During that same period, the success we've had in growing core deposits has reduced our reliance on deposits tied to an index and higher cost wholesale funds.
08:54 Looking ahead, as we benefit from a full quarter of the March rate hike and factoring in another rate hike of 50 basis points in early May. Combined with the addition of the Guaranty Bank balance sheet, we project further NIM expansion of 9 basis points to 11 basis points in the second quarter.
Given the addition of Guaranty Bank in the second quarter, we are also providing additional guidance on net interest income for Q2. Excluding PPP and acquisition related accretion we expect net interest income for the second quarter in the range of $56 million to $58 million.
09:31 Now turning to our non-interest income of $15.6 million for the quarter, which was lower than the $23 million we generated in the fourth quarter. As Larry mentioned, we produced capital markets revenue from swap fees of $6.4 million in Q1.
While this result was below the lower end of our typical guidance range of $14 million, it is very consistent with our past Q1 LIHTC production, which has averaged $6.8 million in the past four years.
Capital markets revenue from LIHTC swap fees has averaged $15 million per quarter since the first quarter of 2020, which gives us continued confidence in the sustainability of this important source of fee income.
10:15 During the same nine quarter period, capital markets revenue from LIHTC swap fees has range from a low of $4.5 million to a high of $25.2 million.
Given our solid pipeline of transactions, but recognizing the project delays caused by ongoing supply chain disruptions and inflationary pressures that Larry mentioned previously, we are expecting this source of fee income to be in a range of $13 million to $15 million per quarter for the remainder of 2022.
10:47 Excluding swap fees and non-core items, non-interest income for the first quarter totaled $8.3 million. With the addition of Guaranty Bank in the second quarter, we are also providing additional non-interest income guidance.
We expect non-interest income, excluding capital markets revenue to be in the range of $9 million to $11 million for the second quarter. This guidance reflects the addition of Guaranty Bank's strong retail and commercial banking fee income, while adjusting for the headwinds of rising rates on our mortgage business. 11:20 Now turning to our expenses.
Non-interest expense for the first quarter totaled $38.3 million, compared to $39.4 million for the fourth quarter.
After adjusting for acquisition expenses and lower performance-based compensation expense related to capital markets revenue, non-interest expenses were $39 million, and at the low end of our guidance range of $39 million to $41 million. Our non-interest expense run rate remains very well controlled.
11:51 Looking ahead to the second quarter and factoring in the addition of Guaranty Bank, we anticipate that our level of non-interest expense will be in the range of $46 million to $48 million. This guidance includes the incremental expenses from Guaranty Bank, but excludes remaining integration costs.
In addition, we do not anticipate that the forecast savings from the Guaranty Bank acquisition will be recognized until 2023. 12:20 Our overall asset quality continues to be quite strong.
Non-performing assets remained very low at $2.7 million and as Larry mentioned, represent only 4 basis points of total assets; 21 basis points lower than one year ago.
Additionally, we recorded a $2.9 million negative provision for credit losses in the first quarter, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic.
Our allowance for credit losses remains quite strong at 1.55% of total loans and leases, down 13 basis points from the end of 2021. This allowance represents over 27 times our non-performing assets. 13:07 With respect to capital, our capital levels remained strong.
Our tangible common equity to tangible assets ratio modestly declined to 9.60% at quarter end, compared to 9.87% at the end of December. This was largely the result of a decline in our AOCI, the resumption of our share repurchase program during the quarter and strong organic loan growth.
While AOCI and the share repurchases did reduce the company's tangible common equity, our strong earnings helped to offset this impact, which led to a net decline of only 1.2% intangible book value. 13:48 Finally, our effective tax rate for the quarter was 9%, down significantly from 18.9% in the fourth quarter.
The rate was lower on a linked quarter basis, due to an increased benefit from a tax strategy we implemented in 2021 combined with the book tax expense benefits from our stock compensation plans, which are typically higher in the first quarter as well as a lower ratio of taxable earnings to tax-exempt revenue in the first quarter.
We expect the effective tax rate to normalize back to a range of 18% to 20%, including the addition of Guaranty Bank. 14:25 With that added context on our first quarter financial results, let's open up the call for your questions. Operator, we are ready for our first question..
14:35 Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Nathan Race from Piper Sandler. Please go ahead with your question..
15:05 Yes. Hi, guys. Good morning..
15:08 Good morning, Nate..
15:09 Good morning, Nate..
15:10 Maybe a question on the swap capital markets revenue outlook, I appreciate the updated guidance.
I guess, I'm just curious, if you guys could kind of update us just in terms of all the swap revenue pricing may be impacted in future quarters just based on what rates have done recently?.
15:32 You know, Nate, I'll start and let Todd any additional comments we think it's appropriate. The interest rate is really having just a modest impact on the pricing, compared to the other factors that we've talked about.
It's really the impact on the future swap revenue, which we guided to a slightly different numbers that's history is really, because of the inflationary pressures and the supply chain disruption that are causing the delays in the project. Our pipeline of activity is really consistent with a year ago.
It's really just a matter of getting those projects to fruition. So certainly a little impact from interest rates, but we do expect the vast majority of these projects that come to fruition at may be slightly less pricing power than we would have had during the pandemic. So probably pricing pressure maybe increase those fees maybe 10% to 15%..
16:34 Got it. Very helpful. Sorry, go ahead, Todd..
16:38 Nate, I would just point out Larry's spot on in terms of the impact of the rates. It's really a drop of about 10% in terms of our average fee on each deal, so fairly modest impact due to rate..
16:55 Understood. Maybe switching gears and kind of think about deposit trends in the quarter and the outlook. I appreciate some of the sequential decline in core deposits is somewhat seasonal in nature. And I know with Guaranty, you guys are picking up some excess liquidity.
So just trying to think about core deposit growth expectations going forward, I know you guys have some deposits off balance sheet that are maybe more $0.08 of that, you may want to keep there.
But I'm just curious if you guys expect deposit growth to when commensurate too, kind of, the loan growth expectations that you guys are guiding to in that 10% to 12% range for this year?.
17:34 Sure, Nate. Yes, we do continue to have a fair amount of what we would call just in time inventory off balance sheet with the correspondent bank team. That actually ended at roughly $1.4 billion in excess balance accounts at the Fed. So fair amount of liquidity available to us there.
We love the core deposit franchise we acquired with Guaranty Bank and added to our legacy Bank here in Southwest Missouri. So we do expect the loan to deposit ratio to settle back down a bit here in Q2 it elevated.
As we talked, we use some overnight funds to really supplement our loan growth funding in the first quarter, because we knew that Guaranty Bank balance sheet was coming on April 1st and that really paid off for us in terms of taking advantage of that here in the second quarter.
So while loan growth is very robust, we expect to keep pace with deposit growth and not have to rely on wholesale funding..
18:44 And I would add that, you're on -- interesting question, because of the excess liquidity, because all the government programs in the last year and half, some of that excess liquidity will flow out over time. And I think we saw some of that happened in the first quarter.
So we're trying to figure out what the new normal is in that space and what new liquidity levels are going to be for our clients, both on the retail and on the commercial side. What I would tell you is our new account opening activity during the past month of March was really strong.
So while balances are moving around, we're continuing to add clients at a really steady pace..
19:25 Okay, great. And then maybe just along those lines, thinking about the margin outlook going forward.
I’d love to get an update us in terms of kind of the interest rate sensitivity position, the balance sheet at the end of the quarter and how you guys see the margin trending over the next couple of quarters and similar Fed rises by -- I think 0.5% or so in both May and June?.
19:52 Sure, Nate. As we said in our opening comments, we're guiding for margin expansion of between 9 basis points and 11 basis points here in the second quarter might help you better plan for future quarters if you know really the mix of that improvement.
We talked during the Q4 call about a 4 basis points to 5 basis point improvements in margin for each 25 basis point hike. So with the full impact of the March hike here in the second quarter, that's 4 basis point to 5 basis points of that increased margin.
We are expecting, as we indicated in our opening comments, a 50 basis point hike by the Fed here in first part of May. That would also do 4 basis points to 5 basis points per 25 basis points there, but, of course, it's only about half the quarter. 20:45 So that nets down to a net 4 basis points to 5 basis points for Q2.
And then while that's in a range of 8 basis points to 10 basis points, we're adding another basis point of margin expansion expectation, due to the blending in of the Guaranty Bank balance sheet.
Their legacy NIM was $3.15 in the first quarter, solid, but less than our legacy NIM run rate, but between the excess liquidity that they brought to the balance sheet, some of the bond restructuring that was accomplished post closing, their balance sheet is actually slightly more rate sensitive than our legacy balance sheet.
So all of that has us pivoting to slightly accretive NIM from the acquisition and we're adding another basis point there here in the second quarter. So, that's really the buildup of the nine to 11 in terms of subsequent quarters. We certainly expect our asset sensitive balance sheet to continue to provide upward trajectory on margin.
So we're very pleased to be in this position from a balance sheet perspective..
22:00 Okay. Great. And then if I could just one more housekeeping question.
Todd, do you have the amount of PPP revenue that was recognized in the quarter and what's remaining?.
22:12 Yes. We have very little remaining as you would guess consistent with our comments. So in the fourth quarter, total PPP impact on NII was $1.4 million, dropped pretty significantly in the fourth quarter to about $530,000. So that $800,000 or so drop was really the cause for NII dollars to be down on a linked quarter basis. It was entirely PPP.
We only have $119,000 of remaining PPP fees and only about $6 million in remaining loan balances. So we're really at the end of that program..
23:00 Okay. Perfect. I appreciate the color. I'll step back. Thanks guys..
23:06 Thanks, Nate..
23:08 And our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question..
23:14 Thanks. Good morning, Larry and Todd..
23:17 Good morning, Jeff..
23:18 Good morning, Jeff..
23:20 Wanted to check in on Guaranty a little bit.
Just wanted to know as of the first of the month, what that loan balance you brought over kind of what -- basically what was growth in the first quarter and then still assuming a couple of million shares on the transaction?.
23:44 Yes. So the shares issued were slightly over two million, really did end up very close to the 80-20 stock cash split that was announced based on the elections of the GFED shareholders issued about $27 million in cash through along with the 2 million shares. Their average earning assets for GFED was $1.15 billion.
So I think, Jeff, that's probably the important number for you in terms of run rate on earning assets that came across. Very strong performance in the first quarter of Guaranty Bank and so really pleased with the balance sheet and people and the clients that they brought along with the transaction..
24:40 And Todd your -- the conversion expectation timing on that?.
24:45 Sure. So we had a lot of folks working really hard to make sure that our -- all of our collaboration tools were implemented right at closing on April 1st. And so teams and telephony and all the communication aspects are fully integrated right away. The conversion on to a single platform right now scheduled for early October.
And during this time, one of the things that helps us through transitions like this is our multi-charter structure our group operations teams are used to dealing with divergent cores at times. So we're able to operate on the two separate cores here very effectively during this period.
We actually have some very powerful software that's rolling data and financials and other things up on a combined basis. So we are able to look at one Guaranty Bank..
25:43 Got you. And another check-in Todd.
Just the core -- what was the core margin you set up 4 basis points linked quarter? Just wanted to kind of back into that?.
25:55 Core margin for --.
25:59 I'm sorry, for the overall..
26:03 On a consolidated basis with them folded in with Guaranty Bank --.
26:08 Yes..
26:09 Your loan legacy first..
26:14 Yes. So our -- okay. So legacy QCR was at 350 on a tax equivalent basis and when we're giving this 9 to 11 guidance going forward that can either be layered on top of TEY or stripping out tax equivalent and just getting to the core margin of 330. Those would be our legacy numbers carrying into the second quarter.
The adjusted Guaranty Bank balance sheet would be accretive to that by 1 basis point in each case..
26:51 Right. Yes. Just getting back to -- you sort of stated linked quarter is a 1 basis point increase. So again, you talked about core of 4 basis point linked quarter and I'm trying to kind of equate those two..
27:13 Got you. The difference would be the decrease in PPP revenue would give you that delta of those 3 basis points..
27:24 Okay. I can just calculate. I just thought you had core margin linked quarter. The last one would be on the buyback. Just in that, it sounded from shareholder approval of Guaranty shareholders, I guess in -- like the third week of March you mentioned that amount of activity.
Was that the amount of time between Guaranty shareholder approvals at the end of the quarter or was that to-date, effectively kind of a month time frame today or yesterday of a full month? Or was that just kind of that small piece remaining in the first quarter?.
28:12 Yes, Jeff, that was just through quarter end 331..
28:19 Got it.
And then I guess the broader question for both you and Larry is just the appetite there and knowing that you had a moderate amount remaining under authorization, what are your kind of -- what's the appetite for future and discussions with the Board in terms of upping that authorization?.
28:44 Yes. I'll take first crack there, Jeff, that your timing is good. At our next Board meeting a few weeks, we're certainly going to discuss our overall capital plan and revisit the facts and beside of the appropriate time to reset our repurchase program in just a couple of weeks right about the same time is at our shareholder meeting..
29:12 Okay.
Do you -- are you -- is there any remaining authorization given the pullback in bank stocks just as of today until that, I guess to that meeting?.
29:25 Yes. We do still have some available and certainly at this price point we feel like we're undervalued and then there is an opportunity for us..
29:37 Perfect. Okay. Thank you..
29:39 Hey, Jeff, I feel badly that maybe I wasn't quite on top of understanding your linked quarter question.
And what I'm wondering is, are you looking for the adjusted NIM where we talked about the 4 basis point delta and what that core number is on a linked quarter basis?.
30:02 Yes, this -- it's -- it was on TEYs adjusted is 349 to 350, that stated is 329 to 330. You guys talking about a 4 basis point linked quarter increase.
Just trying to look at what was -- what is the other margin that you're referencing on core?.
30:24 Sure. Yes, that's why I wanted to get back to your question. So that gets down to taking the TEY 350, compared to the last quarter at 349. There is 1 basis point we're talking about pretty consistently.
And then when we strip out the impact of PPP, we get that down to a 343 in Q4 and a 347 in Q1, so it's really the stripping out of that PPP impact that gets us to that 4 bps..
31:03 Got it. Thank you..
31:05 Yes. Thanks, Jeff..
31:09 Our next question comes from Damon DelMonte from KBW. Please go ahead with your question..
31:15 Hey. Good morning, guys. Hope everybody is doing well today. Not to believer of the discussion on the margin.
But, so just to kind of close loop on this, so that 347 core that you just described to Jeff's question, from there, you would layer on 9 basis points to 11 basis points, is that correct?.
31:33 Correct..
31:34 Correct, Damon. Yes..
31:37 All right. Great, okay. Thank you. And then I guess with regards to the swap fees, you gave a good description as to why they came in lower this quarter and provided some commentary with the outlook. Do you expect -- we've seen this in previous quarters where you have like a soft quarter for one reason or another.
You kind of have a snap back in the following quarter.
Would you expect that something similar to occur here in the second quarter, where you could get to the high-end of that range or even exceed it, but then it kind of blends in for the remainder of the year to average that $13 million to $15 million per quarter?.
32:14 Yes. I think, because we cut off to a little bit of a slow start, we think the total for the year will be in the $45 million to $50 million range given what we know today. And while the supply chain things -- our clients are turning out ways to work through those. It could still slow overall the execution on these projects.
So I think we really still believe the $13 million to $15 million per quarter is our best estimate for today on a quarterly basis throughout the rest of the year..
32:44 Okay. So I think there was in the third quarter of last year where you spoke in the July call and you had said, oh, we already had three deals pricing in the beginning of July. That's not the case this go around..
32:59 Yes. It's a little smaller, because of this supply chain, inflationary pressures make them reset the capital stacks for deal. So we always -- this business is a little more consistent, but the pipeline is still there.
And is it possible what you're describing happens in the second or third quarter? It's possible, but I don't want to -- it's probably premature to give that kind of guidance yet..
33:28 Got it. Okay, and then in the previous quarter you guys had commented that you're exploring the opportunity or potential opportunity to securitize some of the SFG loans and sell them off.
Is there any update on where that stands and any color around that?.
33:46 Yes. It's still something that we would expect to do at some point in the future, possibly late in the year, because the growth slowed a little bit there, we're not in the big rush to execute on securitization, but it's still something we want available to us later in the year.
So, we plan to be very transparent when we get closer to do in a securitization let you know exactly how it's going to work in the economics of the transaction when we do that, but it's a couple of quarters possibly down the road yet. We'll give you a preview when we get there.
But I would tell you that the loan growth number that we guided you to would be net of any securitization if that happens later this year..
34:32 Got it. Okay. That's all that I had. Thank you very much for the commentary this quarter..
34:37 Thanks, Damon..
34:38 Thanks, Damon..
34:40 And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question..
34:46 Good morning guys..
34:48 Good morning, Brian..
34:49 Good morning, Brian..
34:50 Hey, I just wondered if you could, Todd, I appreciate all the added color this quarter on the margin and particularly with Guaranty.
Just -- as it relates to the margin, just big picture, I think when you look at their variable rate loans and in the past you've typically given some thought on the our rate sensitive assets and liabilities just kind of combined.
But I guess if we think about your guidance or just kind of your outlook for second quarter on the margin, if we think about additional rate increase, I'm just kind of wondering what those repricing assets and liabilities are? And just maybe what betas you've got assumed in there.
So we can think about additional hikes and just kind of how to think that through.
And so I don't know the best way to for you to answer that, but that's kind of the path of what I'm kind of asking?.
35:35 Sure. Brian, I think it's fair to give you a little more insight on RSA, RSL. So we ended the quarter and this is on a combined basis. So this is pro forma with GFED at 331. We have just shy of $1 billion in net RSAs. So $2.6 billion RSAs, RSLs -- about 1.6 -- so roughly a $1 billion net positive RSAs.
And in terms of deposit betas, one of the significant pivots we've made in our balance sheet, I think all of you that have covered us for a while understand that we have a much more effective right side of the balance sheet now.
36:22 And as a result, only about 25% of our funding is in rate sensitive liabilities that would have high betas and so that roughly $1.3 billion would be most of that $1.6 billion that I just mentioned. In that $1.6 billion, we've had betas in a range of 60 to 100 here just starting off with some of the rate increases. Some of those are truly index.
So they are going to perform like a 100 beta, some of those are very rate sensitive, but they're more negotiated rates. And we can hold back of that in the betas, not quite as strong. But 75% of our deposits have exhibited zero betas thus far. 37:06 And we think that -- we still got some runway to hold on to deposit rates before they need to increase.
So we're very optimistic not just having the $1 billion of net RSAs, but in the characteristics of the underlying rate sensitive liabilities we feel very good about ongoing betas. So that is what's leading us to give this very strong guidance for the second quarter as the Fed continues to hike rates.
We think that we will stay fairly static with respect to the uptick in margin as a result of those 25 basis point increases, but I will tell you, we'll probably have more guidance for you in July with Q2, and be a little more precise about the rest of '22.
Is that helped?.
38:01 Got it. Yes. That helps. And I guess just at bottom line is your second, if you got another 50 basis point hike after the May 1, the benefit should be less than what you're guiding to this quarter based on the 50 hike in May. Is that accurate you'll just give more detail later..
38:20 I don't know that we yet have enough insight once we get past this next 50 in May, if we are going to see diminished returns on rate hikes. I think it's a little too early for us to capitulate there and so that that's going to narrow. We're optimistic based on what we're seeing, Brian, that we will continue to see a nice upward trend.
We'll have more guidance in July, but I don't know that we're ready to yet say we're going to start getting diminished returns. Of course, we all know it's subject to market factors on deposit and loan pricing. And that's why I think we'll have a little more insight in July..
39:03 Got you. Okay. No, I appreciate all the color, Todd. That's helpful.
And maybe just one or two others, just on the -- with the transaction, the accretion, Todd, the purchase accounting accretion, how -- can you give any color on how to think about that as you just get into second quarter?.
39:20 Sure. So we right now looking at what we announced in November for the transaction and what we're seeing here being through closing an integration. The numbers are holding up very consistent with our initial thoughts back at announcement, so not seeing much in the way of variation there.
We talked about a initial credit mark on non-PCD of around $10.5 million and actually disclosed in our deck that we had a negative interest rate mark of just shy of $3 million factored into the model. So that's roughly $13.5 million that would be get accreted back over the three years.
So that will give you a little bit of insight as to what early expectations would be for loan accretion adding to Q2 and beyond..
40:16 Got you. Okay, that's helpful.
And just the last one, just -- the loan growth this quarter, can you give any just update on where the Specialty Finance balances are today relative to year-end? I mean was there much of a change there? Or is that kind of spread equally among the buckets there the traditional, the leasing and specialty?.
40:38 Yes.
Brian, it was really fairly evenly distributed where our traditional leaching and lending business was up and probably represented 60% to 70% of our growth in the first quarter of the Specialty Group, because of the supply chain disruptions that we talked about in the LIHTC business grew, but more slowly than it had, but as we get into the year, we'd expect that pace to pick up..
41:06 Got you. Okay. Thank you, Larry. I appreciate it. Thanks for taking the questions guys. I appreciate it..
41:12 Thanks, Brian..
41:13 Thanks. Brian..
41:15 And our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question..
41:22 Hey, good morning guys..
41:24 Good morning, Danny..
41:27 Maybe just a quick follow-up on the swaps someone asked earlier about pricing. Can you just go into a little more detail on what the swipes pricing is based on and kind of your thoughts on if it could potentially tighten further as rates rise the rest of the year? Thanks..
41:47 Yes. Certainly the swap pricing is determined by things going on in the yield curve in the duration of the swap that we're doing. And so as we talk, there has been some marginal pricing pressure on that maybe 10% off the top end of our historic performance.
As rates are starting to move, I don't think that's going to continue to impact pricing in the marketplace seems of kind of started to adjust to that now. So while it will continue to be compressed, compared to a year ago probably a little bit pricing is really not the issue here.
It's really people getting projects to the point where they're comfortable executing and moving forward, because of the other inflationary pressures and supply chain issues..
42:40 Okay. That's helpful.
And then within the fee income guidance that you gave just curious what your assumptions are around the gain on sale of mortgage banking piece including with Guaranty Federal?.
42:57 Sure, Danny. Yes. So the additional guidance we provided x-swaps was really to help everyone understand what we thought the combined post closing a run rate might be. So when you look back at that other non-interest income, we had about $8.3 million of that legacy QCRH GFED Guaranty Bank had about $2.2 million in the first quarter.
So that get you $10.5 million. And if we gave a range of $9 million to $11 million, we have certainly seen a significant impact on run rate on mortgage. 43:38 The good news is Guaranty Bank has a very strong standing in the community and mortgage. We have a very strong team coming over from legacy SFC.
We think on a combined basis, they're going to be able to hold on to their share of the market and perhaps improve it. So there is a pretty wide delta there obviously between $9 million and $11 million fortunately the net number is not all that material.
But our expectation is mortgage is going to be under pressure, of course, and part of that is rate and part of that is supply. 44:10 So our assumptions on mortgage would be maybe taking that look at what we did in Q1 and that might be static number or down slightly further from that.
We in the first quarter did not have a whole lot of refi activity for obvious reasons. So we are kind of getting down to core purchase activity, which tends to be more stable of course.
So our outlook for mortgage is down, but we are expecting that most of that -- most of the headwinds there have already been faced and we'll start trading along with purchase mortgage volume going forward..
44:59 Okay. Great. Thank you for that. And then finally, just a quick one here. I'm just curious how much impact the decline in swap fees had on expenses? Obviously we had a big step down, but you provided the guidance for that of kind of rebound with here in the second quarter.
Just curious how much of that was associated with the decline in swaps?.
45:21 Sure. Danny, about 2.5 was reduced commission and other salary expense related to that decline. So, the guidance that we gave has that added back in, if you will, and our guidance on non-interest expense that we just provided would be at the mid-point of that $13 million to $15 million.
So $14 million of swap would get back to the guidance that we gave on non-interest expense. So it was about a $2.5 million reduction in Q1..
45:59 Alright, that's great. I appreciate it. That's all I had. Thanks for answering my questions..
46:04 Thanks, Danny..
46:05 Thank you..
46:07 And our next question is a follow up from Jeff Rulis from D.A. Davidson. Please go ahead with your follow-up..
46:13 Thanks. I just wanted to check in on the 56 to 58 NII guide for next quarter.
Is that comparable to the 45.7 GAAP or the adjusted 48.5?.
46:27 Great question, Jeff. I'm glad you asked that clarifying comment, or clarifying question. So that is based on reported 45.7 not grossed up for TEY. So QCR for Q1, we had the 45.7, Guaranty Bank had 8.6, so 54.3 combined on a pro forma basis for Q1, and then our guidance is 56 to 58. And again that's non-TEY.
So I'm glad you asked that clarifying question..
47:04 Thanks, Todd. And just one other one and this is a little more squishy. The swap business and the supply chain and inflation pressures, any sense that has eased, I mean it was that consistent throughout the quarter? I think Larry mentioned finding ways to kind of get around that a bit.
In other words, is there any kind of hope that maybe those pressures were early in the quarter and now as we're into April, is that easing at all? Or is it pretty steady state, and it's a -- each project is its own animal. Thanks..
47:47 Yes. You're right, that's a little bit of a squishy one, Jeff.
What I would tell you is I think our clients are starting to find ways to work through the restructuring of their capital stacks for their transactions in order to make things move forward and starting to find ways to get materials and material costs figured out, so that they can be comfortable committing going forward on a project.
I would -- it's certainly not over, I would say. I think they are finding ways to adjust to it and we're finding ways to adjust to it because we're out probably being more active on it, outbound basis reaching out to this people operating this trying to find new transactions. So I'd say we're in the middle of it yet, but certainly not over..
48:34 Okay. Fair enough. I think you'd be doing -- this is mostly helping them through as well. But I appreciate it. Thank you, guys..
48:43 Thanks, Jeff..
48:45 And ladies and gentlemen, with that, we will be concluding today's question-and-answer session. I'd like to turn the floor back over to Larry Helling, for any closing remarks..
48:57 Thank you, operator. I'd just like to thank everyone for joining us on our call today. We hope, everyone, remains healthy and safe. Have a great day. We look forward to speaking with you all again soon..
49:10 And ladies and gentlemen, with that, we will be concluding today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines..