QCR Holdings Inc (QCRH) 2025 Q1 法說會逐字稿

Greetings and welcome to the QCR Holdings Inc. earnings conference call for the first quarter of 2025. Yesterday after 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 at www.qrh.com. With us today from management are Larry Helling, CEO; and Todd Gipple, President and CFO. Management will provide a summary of the financial results, and then we'll open up the call for 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 and expectations and predictions of the future of 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 until April 30, 2025, starting this afternoon, approximately one hour after the completion of this call. It would also be accessible on the company's website.

I will now turn the call over to Mr. Larry Helling at QCR Holdings. Please go ahead.

Thank you, operator. Welcome, everyone, and thank you for joining us today. I'll start by providing highlights for the quarter. Todd will then follow with additional details on our financial results.

Our first quarter was highlighted by margin expansion, robust deposit growth, and disciplined expense management. We also had another quarter of strong growth in our wealth management business. Our performance was further bolstered by continued loan growth while maintaining excellent asset quality, further strengthening our capital levels, and significantly increasing our tangible book value per share.

For the first quarter of 2025, we reported net income and adjusted net income of $26 million. Reported earnings per diluted share was $1.52 and $1.53 on an adjusted basis. Our adjusted net interest margin on a tax equivalent basis increased to 1 basis point compared to the previous quarter.

Our core operating margin performance overpowered 4 basis points of dilution from the impact of expired interest rate caps. Despite the reported decrease in net interest income for the quarter, when adjusting for the reduced number of days, net interest income increased slightly, successfully offsetting the headwinds related to the expiration of the interest rate caps in the first quarter.

Annualized loan growth was 4% in the first quarter when adding back the impact of the planned runoff of m2 equipment finance loans. Due to heightened uncertainty, we are suspending our full-year loan growth guidance. Instead, we are providing guidance for the second quarter of 2025, projecting an annualized growth rate of 4% to 6%.

We do not have a defined timeline for our next securitization. However, we intend to continue utilizing securitizations to provide flexibility to sustain the capital markets revenue, enhance liquidity, and manage our growth as we approach $10 billion in assets.

Total annualized core deposit growth was at a robust 20%, reflecting our success in expanding market share with both new and existing clients. The significant growth in deposits enhanced our liquidity and allowed us to reduce our level of wholesale funding.

Non-interest income for the first quarter was $17 million including $7 million generated from capital markets revenue. Macroeconomic uncertainty affected our LIHTC lending business and caused many projects to be delayed, which resulted in lower capital markets revenue in the first quarter.

Our capital markets activity for the second quarter is beginning to normalize as clients adjust to the current environment. Our wealth management business remains strong, generating annualized revenue growth of 14% for the quarter, driven by growth in new client accounts and assets under management. We are focused on the growth potential of this business, given its consistent and recurring revenue stream.

We expect continued longer-term growth in our wealth management business, fueled by our strategic investments made in our Southwest Missouri and Central Iowa markets.

As we have discussed many times in previous quarters, we have a significant amount of variable compensation compared to other banks. This has allowed us to adapt immediately to the challenging economic landscape.

For the quarter, non-interest expenses decreased by $7 million or 13%. The reduction in expenses this quarter is primarily due to lower capital markets revenue and the impact on variable compensation.

Our asset quality remains excellent. Non-performing assets as a percent of total assets increased slightly by 3 basis points compared to the previous quarter, but remains well below historic averages. Total criticized loan balances decreased 28 basis points from the prior quarter, marking the lowest criticized ratio in five years.

Our allowance for credit losses as a percent of total loans held for investment stood at 1.32% at the end of the first quarter. The provision for credit losses was $4 million for the quarter, a decrease of $915,000 from the prior quarter.

In response to the changing macroeconomic conditions, we are taking a measured and proactive approach with our loan portfolio. We are reviewing key industries within our portfolio, monitoring those clients with import concentrations, working with our credit officers to build tariff exposure into our underwriting, and staying close to our borrowers. We remain optimistic about the long-term resiliency of our markets and the financial health of our clients.

While the economic backdrop remains uncertain, we have not observed any measurable indicators of financial stress across the regions we serve. The first quarter loan activity was also influenced by elevated traditional loan payoffs. The increase in traditional loan payoffs was partly driven by a few clients who either sold properties or sold their businesses during the quarter.

Additionally, the demand for affordable housing remains significant, and the lower first-quarter results in this sector should lead to a larger pipeline of future activity. Our commercial real estate portfolio remains solid with our LIHTC loans representing approximately 50% of our exposure to this asset class.

We consider LIHTC loans to be the strongest asset class within our portfolio. The LIHTC industry has a strong track record over nearly four decades, and during multiple credit cycles with outstanding performance. We have a strong pipeline of high-quality LIHTC loans, which remains a core strategic priority for our company.

The LIHTC lending program is a significant driver of capital markets revenue, substantially contributing to our non-interest income. Furthermore, LIHTC loans are well suited for securitization due to their solid historical performance and strong investor demand.

Loan securitizations enhance the flexibility of our balance sheet, improve our TCE, increase liquidity, and expand our net interest margin. Additionally, it helps us manage our on-balance sheet growth as we approach the $10 billion asset milestone. Securitizations are key to further supporting the growth of our earnings and tangible book value. We continue to assess the optimal timing for our next securitization.

Our capital levels are strong, and we remain focused on increasing our regulatory capital. We are pleased with the growth in our capital ratios during the quarter. Our strong earnings combined with a modest dividend enables us to generate capital and increase our TCE ratio faster than our peers. We continuously evaluate opportunities to optimize the mix and the quality of our capital as we become a larger organization.

Our core diluted earnings per share and tangible book value per share have grown at a compound annual rate of 11% and 12% respectively over the past five years. Our adjusted ROAA was 1.35% in 2024, up 20 basis points over the five-year period, placing us near the top quartile of our peer group.

We remain committed to delivering top-tier financial performance, highlighted by continued growth and earnings per share, top quartile ROAA, and substantial growth in tangible book value per share. During this period of elevated uncertainty, we remained focused on building capital and maintaining strong liquidity.

In summary, we are dedicated to delivering industry-leading results through a client-first approach, prioritizing employee well-being and making a positive impact on the communities where we work and live.

As announced on February 24, I will be retiring from my role as CEO and as a member of the Board of Directors of QCR Holdings at the next shareholder meeting on May 22. It's been an honor to serve QCR Holdings and its bank subsidiaries for more than two decades. I've been fortunate to see the positive impact that our company has made on the communities we serve.

We are a relationship-driven organization and that is reflected in our talented employees who work diligently to make a positive difference for our clients and our shareholders.

Todd is uniquely qualified to be my successor, and I take comfort in knowing that our company will be guided by a strong leader who embraces our culture.

I will now turn the call over to Todd to provide further details regarding our first-quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today.

I'm honored to take on the CEO role of our company following our annual meeting in May. I've been fortunate to work with Larry since he joined QCR Holdings in 2001 when he founded Cedar Rapids Bank & Trust, and I've enjoyed working closely with him for the past six years as he has led our company as CEO. It's been very rewarding both professionally and personally to be a part of our company's success over the past 25 years.

I look forward to continuing that success by retaining our local community banking model that keeps us focused on exceeding the expectations of our clients, creating stronger communities, and sustaining our top-tier financial performance. This focus has served us well throughout the history of our company and has created long-term value for our shareholders.

Now moving to the details of our earnings performance for the first quarter. We delivered adjusted net income of $26 million or $1.53 per diluted share. These results were driven by margin expansion, capital markets and wealth management revenue combined with well-managed non-interest expenses.

Net interest income for the quarter was $60 million, a $1 million decrease from the fourth quarter. However, when adjusting for fewer days in the quarter, net interest income grew slightly. This linked quarter growth was driven by margin expansion with continued decreases in our deposit and funding cost. The increase in core deposits allowed for a reduction in our higher priced wholesale funding which offset the impact of expired interest rate caps.

Our first quarter adjusted NIM on a tax equivalent yield basis, increased by 1 basis point from the fourth quarter, and was within our guidance range, overpowering the dilution from the impact of the expired interest rate caps.

Adjusting for the impact of those caps are adjusted NIM TEY expanded 5 basis points. The increase in our core NIM when removing the impact of those expired interest rate caps was driven by a significant decrease in our deposit and funding cost, partially offset by lighter loan growth and lower average non-interest-bearing deposits.

We've aggressively managed our deposit costs as the Federal Reserve began reducing interest rates last year. Our liability sensitive balance sheet is now benefiting from these rate reductions. We are experiencing very strong deposit betas as we actively manage our deposit costs.

Our balance sheet remains liability sensitive, positioning us to capitalize on potential future interest rate cuts while also benefiting from continued loan repricing. Our adjusted NIM TEY has now expanded by 15 basis points over the past three quarters. We expect our adjusted NIM TEY for the second quarter to be in the range from static to an increase of 4 basis points and assumes no further Fed rate cuts during the quarter.

Our non-interest income was $17 million for the first quarter, supported by $7 million in capital markets revenue. As Larry mentioned earlier, capital markets revenue booked in the first quarter was lighter than recent quarters, specifically due to macroeconomic uncertainty. That said, the robust long-term demand for affordable housing continues to support the sustainability of our LIHTC lending and swap fee revenue.

Our pipeline in this business remains strong and continues to grow. As a result, we expect our capital markets revenue from swap fees for the next four quarters to continue to be in our guidance range of $50 million to $60 million.

Our wealth management business generated $5 million of revenue for the first quarter, reflecting a 14% annualized increase from the prior quarter. Our wealth management assets under management continue to experience significant growth driven by our high-performing team and additional strategic investments that are attracting new accounts and increasing our market share.

Importantly, our ability to increase assets under management through new or existing accounts reduces the revenue pressure often experienced during volatile market conditions. Our wealth management growth is fueled by the personalized value our expert advisory team delivers, the strong relationships we've built with our clients, and the dependable network of trusted legal professionals and key referral partners. We are committed to expanding this business given the consistent and recurring revenue it produces.

Now turning to our expenses. Non-interest expense declined $7 million from the prior quarter, or 13% to $47 million well below our guidance range of $52 million to $55 million.

Our highly incentivized compensation structure rewards our employees only after our shareholders are first rewarded. As a result, we experienced lower variable compensation this quarter due to lighter capital markets revenues and loan growth, highlighting our expense flexibility.

We continue to prioritize efficient management of our core operating expenses. However, we remain focused on strategic investments in technology, automation, and a high-performing operations team that efficiently supports our multi-charter community banking model to drive enhanced operating leverage.

Looking ahead to the second quarter, we expect our non-interest expenses to be in a range of $50 million to $53 million, which assumes both capital markets revenue and loan growth are within our guidance range.

Moving to our balance sheet. During the quarter, total loans held for investment grew by $39 million or 2% annualized. Our new loan fundings for the first quarter were in line with expectations. However, they were impacted by elevated traditional loan payoffs. Loan growth was funded by robust expansion and core deposits of $332 million which included $43 million of growth and non-interests bearing balances.

Loans grew by $74 million or 4% annualized from the prior quarter when adding back the runoff of m2 equipment finance loans. Impacted by the current market uncertainty, our analyzed gross loan growth was below our initial full year 2025 guidance range of 8% to 10%.

Our long-term securitization strategy supports the ongoing success of our LIHTC business and drives substantial capital markets revenue. By securitizing LIHTC loans, we sustain ongoing swap revenue generation, enhance liquidity, lower funding cost, strengthen our TCE, and maintain our LIHTC portfolio within internal concentration limits.

Since our initial securitizations began in 2023, our execution has improved, resulting in better financial results from lower transaction and administrative costs. We do not have a defined timeline for executing our next securitization. We continue to actively evaluate future securitizations to maintain our flexibility in managing our LIHTC lending business.

As mentioned previously, we experienced strong deposit growth during the quarter. Total core deposits increased by $332 million or 20% annualized during the quarter, which allowed us to decrease broker deposits by $56 million and overnight FHLB advances by $140 million. This growth was driven primarily by our correspondent banking clients.

Deposit growth remains a primary focus for our company, and when combined with our securitizations, it reduces our reliance on wholesale or higher cost funding. The substantial increase in deposits reduced the company's gross loan and leases held for investment to total deposits ratio of 93%.

Additionally, as of the end of the quarter, total liquidity increased $328 million, including $1.9 billion of instantly accessible liquidity, returning to our asset quality, which remains excellent.

Total criticized loans, a leading indicator of asset quality, decreased $18 million or 28 basis points to 2.06% of total loans and leases. NPAs increased $3 million from the prior quarter to $48 million or 53 basis points of total assets, yet still well below historical levels. Our largest NPA, as of the previous quarter was paid off in mid-January, although this was offset by a few other smaller NPA additions during the quarter.

These changes reflect the normalizing credit environment from historically low levels. Additionally, approximately 50% of our total NPAs are comprised of just five relationships.

We recorded a total provision for credit losses of $4 million during the quarter, representing a decrease of $915,000 from the prior quarter. This reduction was primarily due to lighter loan growth and a decrease in total criticized balances.

Net charge-offs were $4 million for the first quarter, an increase of $825,000 from the prior quarter. The allowance for credit losses to total loans held for investment remains steady at 1.32%. Our reserve methodology under the CECL model was implemented in 2021 and it served us well.

Our model leverages a combination of national and state economic drivers, nine qualitative factors, and actual historical performance of our banks during various market conditions. We continue to closely monitor asset quality across all of our lines of business while maintaining our strong credit culture.

Our tangible common equity to tangible assets ratio increased by 15 basis points to 9.70% at quarter end, driven by strong earnings as AOCI remained consistent during the quarter. Our common equity Tier 1 ratio increased 23 basis points to 10.26%, and our total risk-based capital ratio increased 6 basis points to 14.16%. The improvement in our regulatory capital ratios was driven by solid earnings and a smaller increase in total risk-weighted assets.

We are committed to continued growth in our regulatory capital, including maintaining our CET1 ratio above 10%. We consistently review our capital mix to support our business model and our growth while being mindful of our relative position to our peers. We remain focused on the quality of our capital as we become a larger organization.

We delivered another significant increase to our tangible book value per share, which grew by $1.43 representing 11% annualized growth for the quarter. Over the past five years, our TBV has grown by 12% on a compound annual basis, underscoring our strong financial performance and long-term commitment to building shareholder value.

Finally, our effective tax rate for the quarter was 1%, down from 9% in the prior quarter. The linked quarter decline is primarily due to a combination of the tax benefits from equity compensation in the first quarter, new state tax credit investments, and lower pre-tax income from lower capital markets revenue. These factors decrease the mix of our taxable income relative to our tax-exempt income.

Our tax-exempt loan and bond portfolios have consistently helped us maintain our low tax liability benefiting our shareholders. Given a more normalized mix of revenue, we expect our effective tax rate to be in the range of 6% to 8% for the second quarter.

With that added context on our first-quarter results, let's open the call for your questions. Operator, we are ready for our first question.

(Operator Instructions) Damon DelMonte, KBW.

Hey, good morning, guys. Thanks for taking my questions, and Larry, congrats on the upcoming retirement. Been enjoyable working with you over the years and best of luck to Todd as he takes over the reins.

First question on the loan growth outlook, you reduced it to 4% to 6% here in the second quarter. Can you kind of just help reconcile the thought process behind the revised range with the continued optimism that the LIHTC projects will continue and be a driver of growth? Do you feel that by the back half of the year, that business kind of gets back on track and you could see better growth as we progress through the year?

Yeah, first of all, you're right. First-quarter loan growth was modest. Again, the production was pretty normal. We just had some elevated payoffs, not because of anything bad, but because clients sold real estate, sold companies, those kind of things, and we got paid off on a handful of larger loans.

Our decreased guidance there is really because of how we see the uncertainties in the economy and it's more perspective looking forward for the next quarter and that maybe a quarter or two as far as we can look out right now because of all the macroeconomic factors and the things going on in Washington. So we look closely at our pipelines, we think we can increase loan growth in the second quarter to that 4% to 6% comfortably.

Longer term if things calm down, I think the growth can go back to that old levels, but things seem to change day to day right now in Washington, which is impacting the psychology of our clients and their ability to make capital decisions and build buildings and buy equipment and those things. So I think it's really more of an indicator of that and the uncertainty that's going on in the world right now.

Got it. Okay, that's helpful. Thank you.

So with the prospect of lower growth here, probably for Todd here on the provision line, should we think about a little bit lower provision or similar provision maybe to what we saw this quarter than we would have done otherwise if we had stronger growth?

Yes, Damon, I think that's quite likely. That lower provision, we are having a lot of success in terms of leading indicators of asset quality. We're very pleased to have a very low level of criticized classified. So expectation would be if loan growth is a little more muted in that 4% to 6% range than our provision expense, that might also trend down.

Okay, great. And then just lastly around the margin topic. Could you just remind us what the cadences of fixed rate loans that are repricing over the remainder of the year and kind of what they're maturing at and what the reset rates would be?

Sure. Yeah, we're still having a fair amount of success rolling up the rates in terms of new fundings. New fundings for the quarter were at a weighted average rate of 721. The roll off was 685, so a 36 basis points delta there, continue to have some success. There is pressure on rates in all of our markets, but we're still rolling uphill in terms of new loan yields.

Great, and then how about as far as the dollar amount you're expecting?

The dollar amount, sure. So fixed rates, our total balance of fixed rates is about $2.8 billion. And so if you were to -- I think in your model, Damon, if you were to look at that as kind of having a weighted average duration of maybe 36 months, that might be a good proxy for how quickly that would roll off each quarter.

Great, that's helpful. That's all that I have for now. I'll step back, thank you very much.

Thanks, Damon.

Thanks, Damon.

Jeff Rulis, D.A. Davidson.

Morning, this is Ryan Payne on for Jeff Rulis today. If I could start on fee income, just what are the expectations for non-capital markets revenue going forward if we carve that out? And what was the fair value loss that just due to accounting adjustments or was there movement within the portfolio triggering losses there?

Sure, yeah, Ryan, thanks for your two questions. So the last one, I guess I would have to say that that was some of our derivatives, pretty modest adjustment this quarter. We'll have some more detail in the queue on that. Kind of looking to see if I have that. Might get back to that here in a second, but I do want to address the other forms of revenue and revenue growth.

You might be familiar with our 965 strategy where we really expect to be growing all forms of non-interest income at 6%. We've been outperforming that in wealth management. We had another very strong quarter in wealth management growth that is also a significant contributor to our non-interest income revenue.

So we expect that to continue to grow candidly close to double digits, and our expectation for the rest of our revenue sources to really grow at that 6% or better. So that will continue to help us with bottom line income, of course.

Okay, thank you, that's helpful. And I guess the other side, I'm going to capital markets revenue. With the guide, it suggests there's some pent-up demand or we'll see that coming back, so if you have any thoughts on timing or just to unpack that line for the year?

Yeah, Ryan, let me give you my best shot here. First of all, just to remind, we love this business for various reasons. It's produced tremendous fee income for us historically and the credit quality of the loan portfolio in that space has been exceptional.

One of the overriding factors, the first quarter in this business is typically the lowest quarter of the year. And then in addition, it was exacerbated because of all the uncertainty in Washington and just remember, developers use the tax credit capital to go into projects. So all the uncertainty in Washington just caused everybody to kind of push back their projects and slow them down until there is some clarity.

Since the end of the year, there is actually more tax credits available in '25 than there were in '24 now. And that's become clear and things have started to calm down. So the developers are starting to move forward again. It's probably a little too early in the second quarter to know which deals will close in the second quarter versus later in the year.

I think we are confident that we will have improved performance compared to the first quarter, but how it's going to fall is a little unclear quarter to quarter, and that's why we've gone to this fourth quarter guidance, which we still believe our historical guidance here is in line and will produce $50 million to $60 million in the next four quarters.

And so we're bullish on this business longer term, this is just a pause that we think will slow us down for a quarter and maybe two, but after that, we'd expect it to be closer to normal.

Okay. Got it. Thank you.

And Ryan, this is Todd again. I was able to find what you were asking about in terms of the non-core. It was primarily, as I expected, unhedged caps that we have. We treat the adjustment, the market value adjustments on those as non-core, and wasn't really -- on my radar screen, the total number is only [$156,000] here in Q1. A bigger impact in Q4, but that's what that's related to.

Okay, appreciate that. Just one quick last one for me, for the three added loans to non-accrual, and just any color on the type and sector of those and maybe resolution, anything? Any of those expected quicker on resolution terms than others?

Yeah, the three that we talked about, the good news is there was no consistent theme. But I would say we talked about this last quarter, quality of management is showing up. When it didn't during the pandemic a couple of years ago, one of the companies was a manufacturer whose product kind of fell out of favor.

One was a real estate construction project that got mismanaged and one was a distribution company. So they're really separate industries. And so there's no common theme. It's just really quality of management and we kind of think we have kind of normal movement going on in the credit sector now. Upgrades, downgrades, those kind of things. We're operating much more like normal than we did during the pandemic and post pandemic.

And so, one of those three, I think could maybe move off quickly. The other ones will probably take a little bit longer to work out.

Okay, thank you. That's all I have. Thanks for taking the questions.

Daniel Tamayo, Raymond James.

Thank you. Good morning, guys. Let me first say congratulations to Larry on your retirement, and to, of course, Todd on taking over.

I guess going back to the LIHTC loans here quickly. I know you've talked a lot about it, but when you say that the uncertainty drove the slowdown in the first quarter, I was curious if you have a sense for what that means. I mean -- I guess, general loan growth, I think a lot of that is impacted by the tariffs. Certainly, there's a lot of uncertainty in other areas coming out of Washington, but just curious kind of what you're watching or what we should be watching in terms of what could spur a rebound in that business?

Sounds like it's you're expecting that to happen or maybe already happening but maybe just a little more color if you have on kind of how you're seeing things in terms of the -- yeah, the uncertainty in Washington?

Let me break it into two segments. Maybe we'll talk about the LIHTC just a little bit differently, and then maybe our more traditional business. The LIHTC business appears to be starting to move forward again. There was this pause that just basically backed everything up. Because of the tax credits or the equity going into these multi-family projects, there was uncertainty in Washington that has abated a bit, and most of the noise that happened in that space has kind of been quiet here now for the last six weeks or so.

It feels like the LIHTC pipeline is starting to move forward. We're starting to get good activity. We're hearing good news regularly about projects moving forward, timing on how exactly that's going to happen, still a little bit unclear.

For a more traditional business, it's probably -- that's where the tariff uncertainty, it's not actual tariffs showing up in financial results. It's just what's it going to mean to people's business and our clients there are just basically pausing. I can give you a list of projects where clients are planning to add on to their plan or add a meaningful piece of equipment.

And they're just going, gee, I'm going to wait a quarter or two and see how this plays out. So just, if we could get some calm, I think this could all work out fine without too much disruption. But that calm has not been the byword here. And so it's really the confidence our clients have in the overall economy, and it's just going to all work out rationally. And that uncertainty, just like with consumers, business owners go, yeah, my life is pretty good and their financial situations are really very good.

Gee, they're just waiting to make a decision.

Danny, I might just tag on to Larry's comments. One of the specific things in the LIHTC space is [HUD] was one of the agencies targeted by Doge for a bit, and they suggested their 8,000 employees should be 4,000 employees, and that created some disruption in terms of getting deals to the finish line.

That's just another example of that uncertainty that Larry mentioned, that's a little more precision around it, but we were having folks on our team hearing from HUD that, yeah, we don't know when we're going to get this deal approved so you can close, and that's part of the disruption.

Very helpful, thank you. As it relates to the securitizations, if you do get an acceleration, a re-acceleration in the LIHTC business, but the traditional business continues to be slower for a while and you start to see an increase in concentration, would that make it more likely that you would see kind of securitizations earlier than expected?

I mean, I think the last thought was around the fourth quarter. I know you guys have just removed guidance for the time being, but just in terms of that, the way that that those mechanics works is that sounds like that would probably be the case just to manage concentrations for the LIHTC business?

Absolutely, Danny, you're spot on. What I guess I would remind everyone of the original game plan for securitization was just that to give us flexibility. Concentration limits, capital, balance sheet, liquidity, give us flexibility to manage all of that. Exactly what would happen is when we see LIHTC production coming back online based on the pipeline we have, then we'll be able to spool up the securitization and take action on that.

The way you're looking at it is what we expect as well that when LIHTC comes back and we feel like it's the right thing to do, to take some off the table, then we'll do that next securitization. Just a little more color around the plan for that is we're planning on doing one large one instead of a couple of smaller ones, so probably something in the $350 million range. We do expect better economics as we're getting better at this.

And one of the things that we're expecting to do is also sell the [bee piece] when we have that securitization, which will free up all the regulatory capital associated with that. That'll help us continue to move up CET1, that will give us more capital flexibility and optionality with TCE.

And just to put that in perspective, when we do a $350 million securitization, that will free up roughly 40 basis points of CET1. So that's why it's important to us. The timing is really going to be dependent on the pace of growth we see in LIHTC.

Okay, very helpful. And then lastly, I guess from an expense side, so you took the 2Q guidance down to $50 million to $53 million. I'm assuming that's because you've got the slower growth and fewer mouths to feed or less variable compensation in the near term, but if you could kind of size for us like, if the security -- I'm sorry, if the LIHTC business starts to re-accelerate in the back half of the year, does that push the expense back into the range that you were looking at before?

Or is that -- is there something structurally slower, maybe the traditional loan growth being a little bit slower impacts that as well. Just curious how that -- how you think the pace of expenses moves in the back half of the year if LIHTC loan growth picks up?

Sure, Danny, great question. We're guiding to that $50 million to $53 million, backing down $2 million on both the floor and the ceiling on our guide for that very reason, that with our loan guide, this ramp back into normalcy with LIHTC. Short term, we think we're in that range.

We expect things to get back to more normal, and when that happens, my expectation would be in the back half of the year, that guide would move back up to $52 million to $55 million. But in order for that to happen, we're going to have to see more normalized ROAA, more normalized loan growth, more normalized capital markets revenue, all of those things.

It's really our variable compensation that's driving that number down right now. So that guide isn't going to go up unless we're seeing significant bottom line improvement.

Understood. Okay, very helpful. That's all I had. Thanks for taking my questions.

Brian Martin, Janney.

Hey, good morning, guys. Congratulations to both of you. And Larry, it's been a pleasure working with you over the years, so best of luck.

And then just maybe one question just on the credit quality. Given the trends you're seeing in the criticizes, which are the leading indicator are down, but just kind of talking earlier in the call about looking at the portfolio and just potential risks from the tariffs, can you just give any thought on where are you looking or just what's on your mind given it feels like credit quality -- Todd's comment about maybe provision being down, to criticize being down, but then looking at the tariffs, is there something that's impactful or significant that we should be thinking out in terms of where your risks are with the potential tariffs?

Yeah, we've been very diligent the last couple of weeks. We went and did a credit-by-credit analysis of all of our largest commercial borrowers and looked at tariff exposure, and we tried to rank them in low, medium, and high risk. And we really only identified two companies that we consider high risk because they are very dependent on imports from China.

The total amount of credit we have out to those two companies is about $6 million. They're already in the process of trying to move their production to other countries. So there's a couple businesses there that could be severely impacted. I don't think it's credit losses for us, but it could mean they have to basically liquidate their company if they can't find production fast enough to get it replaced.

We have lots of other clients that import products. Most of our manufacturers support the either ag or industrial sector for big companies like John Deere and Caterpillar and long list of others. Those companies have shifted most of their imports out of China years ago and have been steadily doing that for our clients.

So our clients will certainly have probably that 10% tariff to deal with, but not the huge tariffs or the stalemate that's going on with China right now. So it doesn't appear in the near term it's going to have a big impact. Again, some normalcy and some calm would be good here, Brian.

There's a lot of unknowns yet out there yet on how this is going to run through our clients' financials. It's not showing up on any of their financials yet, but it could if things get different than they are today, but most of our clients migrated away from China years ago.

Got you. Okay, that's helpful. Thanks, Larry. And then Todd, maybe just on the margin, just maybe I missed your comment earlier about the near term, maybe the second quarter impact, but just I think last quarter you talked about the impact of a rate cut being maybe 2 or 3 basis points benefits to the margin.

Is that kind of still your outlook? And maybe just if you can run through that on your outlook on deposit beta here?

Sure. So Brian, the guidance that we gave in January with fourth-quarter results on rate cuts is still holding up in terms of our balance sheet being slightly liability sensitive. So for a 25 basis points cut, we would expect 2 to 3 bps of margin improvement. That's roughly $1.5 million to $2 million in annual NII left. I appreciate you asking. That has not changed.

We're still liability sensitive. We've got $3.5 billion in RSAs, $4.2 billion in RSLs, and we are having a lot of success with the deposit betas and reducing rates and so that transitions me to your second part of the question, which was betas.

Our cost of funds or full cost of funds beta has been 41%. For the rate cutting cycle, our asset yields fortunately have been smaller, 26%. What's really interesting, the math normally doesn't work this well, but that's 15 percentage points different. On a 100 basis points of cuts, that's 15 basis points of margin, and that's exactly what we've picked up since the Fed started cutting rates.

So our betas on deposits, we're very pleased. When we guided here for the second quarter in that static to up 4 basis points, that really is being led by continued grinding out some reductions on interest sparing, non-maturity deposits, our bankers are doing a fabulous job fighting for every basis point. So we're going to keep having some success bringing those rates down.

And then one thing we really didn't mention in a lot of detail is we have about $400 million in CDs maturing in the second quarter at a weighted average rate of 451, and we believe we can reprice those and keep them at about 40 bps less. So those things are combining to our continued NIM guidance for NIM growth without Fed cuts, but if we do see those, it would still be that 2 to 3 basis points for every 25 basis points of Fed cut.

Okay. And as far as exiting the quarter, Todd, where the margin was given the improvement in the funding mix in the quarter, I guess did a lot of that occur later in the quarter? So you exited at a higher margin per se and for the month of March. Does that seem fair?

Yeah, there was a lot of noise in the quarter with some one-time things, but what I would tell you is the way we see it when you break out all the noise, it looks like it was 341 January, 341 February, 342 March. So that also gives us more optimism for Q2.

Yeah, got you. Okay, that's super helpful, Todd, and I guess I think the only other thing I had was just the -- is it possible that given the outlook on the securitization and the uncertainty that maybe you don't do a securitization this year or you think it's likely to do and the timing is just unclear?

Yeah, I think we had originally talked about doing it late in the year, and I think when pressed on how you and everyone else should model that, we suggested maybe at the start of the fourth quarter.

I would tell you again, I'm sorry for the lack of precision here, but it really is dependent on do we need the flexibility or do we not? So if LIHTC comes back the way we expect it to and the back half of the year has a lot of production, then we're probably going to go ahead and do that in the fourth quarter.

And if that continues to lag or traditional loan growth is lagging too much or Larry mentioned, we had a lot of payoffs for good things happening in the first quarter. We may delay it until the start of '26, but my strong guess would be, it would be one of those two quarters.

Yeah, okay, that makes sense. And in the deposit growth, how you talked about it, but it was great in the quarter. Is there still momentum on the deposit side in terms of what you're seeing, or would you expect -- I mean, obviously, but it likely slows down a little bit in 2Q but just in general, still pretty optimistic on seeing continued deposit growth here in the coming quarters?

We are. It's the biggest focus in our company. I can't remember if I said this on the call last quarter, but Larry and I seemingly find a way to talk about deposit growth regardless of the meeting we're in. We could be in a credit committee meeting and Larry's going to ask, are we getting all the deposits? I could be in an operations meeting and we're asking if people are referring in clients.

Deposits are our big focus, so we want to keep growing deposits, that's a little delicate when you're also trying to drive down the rates the way we are, so it makes things harder. But again, our bankers are doing a fabulous job. We're able to grow while reducing rack rates while reducing repricing rates, so we're going to stay focused on core deposits.

Understood. Okay. Thanks you, guys. I appreciate it.

Nathan Race, Piper Sandler.

Hey, guys, just want to echo the earlier comments. Congratulations, Larry and Todd. And, Larry, hope you have a great upcoming retirement in the next chapter.

A lot of my questions have been asked and answered, but obviously, you guys are still building capital at pretty strong clips. It's been a difficult year for the stock relative to peers, so just curious to get maybe some updated thoughts on re-engaging on buybacks?

Yeah, I'll start, Nate. As we've talked, it's an uncertain world right now, so we're going to be deliberate on how we think about buybacks. We certainly -- it appears that we're going to have capital levels that allow us to consider that.

If things calm down and there's more clarity on the macroeconomic factors and what it's going to mean to our clients, we could certainly be more active. We're kind of still in the wait and see mode. We have lots of capacity, and Todd, I don't remember how much we have left in our approved -- I'm putting Todd on the spot on the question here, but we've got a lot of capacity in our current authorized buyback.

Yeah, Larry. 760,000 shares left.

So the answer is we're going to -- the answer is we're going to consider it but deliberately, Nate.

Okay, got it. Charge-offs picked up a little bit. Obviously, it's not an elevated level, but maybe relative to your standards because I think the last time you had charge offs, 25 bps was coming out of the pandemic. So just curious what the driver was there in the quarter?

And I know it's difficult to think about a normalized charge-off range just given all the macro dynamics at play these days, but just any thoughts on kind of how you guys are thinking about a normalized charge-off range going forward?

Yeah, the uncertain economy makes it challenging to know exactly how some of these things are going to work out. Yeah, I think if we average what we've done the last three, four quarters, I think that's probably what we think going forward. It's probably not going up significantly or down significantly in the near term, given the uncertainty that's going on here. So probably more of the same. If you average the last four quarters, it might be my best estimate.

Yeah, Nate, just as Larry said, last three quarters we've been at about 39, 47, 49 somewhere in that relative range, high 3s, low 4s, feels like what we would consider normal today. And we are seeing some good results in m2's roll off and runoff, that is winding up as we expected. Things are going well there.

But with a more normalized credit environment, we're seeing some things come on the list and some things rolling off the list, and that's okay. That's what typically happens. But kind of long answer to your short question, I would say high 3s, low 4s in terms of our expectations.

Okay, got it. That's helpful. And then just one last one to clarify on the margin outlook, I think Todd mentioned, with each 25 bp rate cut, you get 2 to 3 bps of expansion, but I imagine it would likely be more than that in the back half of the year, just given some of the repricing characteristics that you described around loans and then also what you have kind of repricing on the CD side of things as well?

Yeah, So again, our guide of static to 4 assumes no cuts here in Q2. And as we talked, 2 to 3 basis points for every 25 basis points cut by the Fed. What's really going to drive our success on the back half of the year, Nate, more than maybe even Fed action is going to be what the yield curve is going to look like. That is going to be a bigger issue for us in the back half of the year. If we're going to stay flat, slightly inverted.

Continuing to grind margin is going to get a bit harder. If we can get some slope, then grinding margin uphill even without the Fed's help, I think is more likely. We're in the 340 range. I think our high-water mark for margin a few years ago was in the mid 360s, 365 maybe. And it's going to take some slope to the yield curve to get margins back there, considering the significant magnitude of dollars that have shifted from non-interest bearing to interest-bearing as clients have become rate sensitive.

Back half of the year, what would help us the most would be some slope.

Okay. Got it. Makes sense. I appreciate all the color. Thanks, guys.

Thanks, Nate.

This concludes the question-and-answer session. I would like to turn the conference back over to Larry Helling for any closing remarks. Please go ahead.

Thanks to all of you for joining our call today. We appreciate your sincere interest in our company. It's been my great honor to serve as the CEO of this great company. Have a great day and we look forward to connecting with you again soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.