QCR Holdings Inc

NASDAQ:QCRH

Earnings Call Analysis

Robust Quarterly Results and Positive Outlook

The company reported a record net income of $32.9 million, underpinned by a strong noninterest income from capital markets revenue, which surged 80% to $47.7 million for the quarter. Net interest income modestly increased, and net interest margin (NIM) improved slightly to 3.29%. Looking ahead, NIM is expected to stay stable with a potential 5 basis points variance either way. Noninterest expenses rose due to higher employee compensation but are projected to be tightly managed between $49 million to $52 million. Asset quality remains solid with a slight decline in nonperforming assets (NPAs) and a strong reserve for credit losses due to an uncertain economic environment. The company's financial position was strengthened, with tangible common equity (TCE) increasing to 8.75% and a projected effective tax rate between 8% to 11% for the upcoming year.

A Record Finish with Robust Capital Markets Revenue

The company concluded the quarter on a high note, posting a record net income of $32.9 million, translating to $1.95 per diluted share, primarily propelled by a substantial income from capital markets activity. Adjusted net income also indicated a strong performance at $33.3 million or $1.97 per diluted share. Amidst operational activities, a sizable chunk of loans amounting to $265 million was securitized and sold, which contributed to a marginal uptick in net interest income to $55.7 million, surpassing their prior projections. Consequently, the Net Interest Margin (NIM) on a tax equivalent yield basis edged up by 1 basis point to 3.29%, comfortably sitting above the guidance midpoint.

Managing Interest Rate Dynamics and Margin

Anticipating a status quo from the Federal Reserve with a continuous partially inverted yield curve in the upcoming quarter, the company's strategy revolves around matching the incline in loan and investment yields with any potential rise in funding costs. Rationally predicting a largely unchanged NIM, the guidance for the first quarter of 2024 projects a potential swing of 5 basis points, either in augmentation or diminution. With the backdrop of potential cuts in short-term interest rates later in the year and a shift in the balance sheet towards a modest liability-sensitive posture, the firm is well-equipped to navigate a rates-down environment.

Surge in Capital Markets and Wealth Management

The fourth quarter saw Capital Markets revenue soar to $37 million, leveraging favorable long-term interest rate movements. This booming sector, partly fueled by robust demand for affordable housing, secured annual outcomes far beyond the initially expected range. Based on the sustained dynamism in the lending pipeline and the capital markets, revenue projections for the ensuing 12 months are elevated to a new band of $50 million to $60 million. Simultaneously, Wealth Management reported a year-over-year growth of 7%, amassing $1.1 million and cultivating 340 fresh client relations, alongside a $700 million boost in assets under management. Encouraging results from this segment depict a positive sentiment for the future.

First Quarter Outlook on Expenses and Operating Costs

The company navigated a surge in noninterest expenses, which amounted to $60.9 million in the fourth quarter, primarily due to enhanced employee compensation in line with annual achievements. After adjustments, the normalized expenses were pegged at $51.9 million. Looking forward, noninterest expenses are anticipated to fall within the bounds of $49 million to $52 million for the initial quarter of 2024, evidencing a strategy framed around stringent control of recurring expenses.

Asset Quality and Capital Strength

Asset quality continues to reinforce the company’s financial robustness, manifested in a $500,000 decrement in Non-performing assets (NPAs), settling at 40 basis points of total assets. The provision for credit losses stood at $5.2 million, influenced by burgeoning commitments in the low-income housing tax credit (LIHTC) lending domain. The company pledges to maintain substantive reserves as a tactical precaution against the amorphous economic conditions. Additionally, tangible common equity to tangible assets ratio was amplified by 70 basis points, reaching 8.75%, and the tangible book value per share soared by 35% annualized in the fourth quarter, consolidating a 19% increase over the entire year. The total risk-based capital ratio experienced a slide, concluding at 14.15% due to growth-driven escalations in total risk-weighted assets.

Tax Strategy and Future Projections

The effective tax rate registered a rise to 12% from the preceding quarter's 7%, owed chiefly to an increment in capital markets earnings, thereby altering the ratio of taxable to tax-exempt income. For the cumulative year, the tax rate remained at 10%. Forecasting the progression into the upcoming annual cycle, the company expects to hold the effective tax rate within a corridor of 8% to 11%. This remains a testament to the company's adept handling of its tax-exempt loan and bond portfolios, aiming to preserve one of the lowest tax rates among its peers.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the QCR Holdings, Inc. 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 a copy, you may access it on the company's website, www.qcrh.com.

With us today from management are Larry Helling, CEO; and Todd Gipple, President 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 a 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 1 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.

[Larry Helling, executive]

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 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 2 securitizations of low-income housing tax credit loans, grew core deposits and maintained 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 noninterest income for the year overpowered the pressure on our net interest income.

We also continued to strengthen our capital levels with exceptional earnings performance.

As previously announced on December 12, we successfully closed our first 2 low-income housing tax credit loan securitizations. The ability to securitize these loans is an important and effective tool in managing our liquidity and the 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 multichartered model enables our local management teams to respond with speed and agility to our client needs. This results in a superior client experience that outperforms 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 enhance shareholder value.

Finally, we operate in some of the most vibrant and midsized 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 unemployment.

In the last 5 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've 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 noncore 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 continue 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 noninterest 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 nonperforming 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 feel our success, and I am 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.

[Todd Gipple, executive]

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 2 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 and 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've received 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 in 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 remained very low at 18% of total deposits. In addition, the company maintained 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 noninterest 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 outpace 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 noninterest 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 TUI 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 noninterest 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 remained healthy. As a result, we are increasing our capital markets revenue guidance for the next 12 months to be in the 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 Guaranty 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. Noninterest 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 noninterest 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 the 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.

[Operator]

[Operator Instructions] Our first question is from Nathan Race with Piper Sandler.

[Nathan Race, analyst]

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 occur at some point this year. I imagine with some of the LIHTC securitizations that you guys completed in the fourth quarter 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.

[Todd Gipple, executive]

Sure, sure. Nate, 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 color 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 on its core or broker, 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 the securitization. We do present a 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 3 to 5 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.

[Nathan Race, analyst]

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 a kind of moderate lag, just given the likelihood for an additional securitization or 2 at some point this year?

[Todd Gipple, executive]

Sure. Nate, we are incredibly focused on core deposit growth. I'll let Larry tag on a little bit here. But I would 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's got on that.

[Larry Helling, executive]

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

[Nathan Race, analyst]

Okay. Great. And then just turning to capital markets revenue, obviously, a 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 it was the case here in 4Q. And obviously, you raised guidance, so we just love some updated commentary in terms of what you're seeing in terms of opportunities across that asset class today.

[Larry Helling, executive]

Sure. Nate, I'll give a crack here. First of all, as you know, an 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 variables 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 cost as quickly as they could." So they were pushed on -- they were in our pipeline, and now they're 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 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 is 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 3-year averages and our spot 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.

[Nathan Race, analyst]

Got it. And 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 or 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?

[Larry Helling, executive]

Yes. It certainly could be playing a factor in. And it's harder 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 10 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 it surely is a 10, 15 biggest banks are our primary competitors in this space.

[Nathan Race, analyst]

Okay. Got it. And then just one last one for me. I imagine similar to what we discussed last quarter on expenses, but I imagine the guidance for 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?

[Todd Gipple, executive]

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 noninterest expense run rate. Our guide only moved up 2% year-over-year. And a 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.

[Nathan Race, analyst]

Okay. Great. Congrats on a great quarter.

[Operator]

The next question is from Damon DelMonte with KBW.

[Damon Del Monte, analyst]

Excellent. Just a follow-up on Nate's question there at the end on the expenses. So Todd, do you kind of think about the guided range in the first quarter of $49 million to $52 million would reflect kind of a seasonally weaker 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?

[Todd Gipple, executive]

Yes. Damon, kind of 2-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 a $49 million to $52 million. What we like about our compensation structure here at QCR is a very high percentage of all of our comp is incentivized. So we would really only expect that noninterest expense results 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.

[Damon Del Monte, analyst]

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 in the last 3 quarters of -- or the first 3 quarters of 2023?

[Larry Helling, executive]

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, and 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 I think it would 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 a 0 interest rates the last 3, 4 years.

[Operator]

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

[Brian Martin, analyst]

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

[Larry Helling, executive]

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 5-year average, but a little lower than our 10-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 will probably move up slowly over time.

[Brian Martin, analyst]

Got you. Okay. Yes. And just the new loan yields in the quarter, the new production you put on late in the quarter. Can you give some color on just kind of what you're 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?

[Todd Gipple, executive]

Sure, Brian. Yes, we actually saw a bigger delta in December between payoff rate and new funding rate than we had previously. So payoff rate 6.75%, new fundings 7.51% for a 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, we're 8.19% yield for December, and we had 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 our pricing power really all around the footprint of the company. So our bankers are doing a great job helping us get paid better.

[Brian Martin, analyst]

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

[Todd Gipple, executive]

Sure. We really view it as an 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 a couple of hundred million dollars of high-quality assets that were 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 an 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, an efficient balance sheet.

[Brian Martin, analyst]

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

[Larry Helling, executive]

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 2 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 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 after that.

[Brian Martin, analyst]

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

[Todd Gipple, executive]

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 3.27% in October, 3.29% in November and 3.29% December, and we reported 3.29%. 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.

[Brian Martin, analyst]

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 the strong growth outlook you still have? Just trying to understand how you're thinking about that with continuing to want to build it?

[Larry Helling, executive]

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. 6 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 6 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 on to 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 quarter's balance sheet. And when we arrive there and think the other factor is -- are appropriate and to prudent time, we do want to be in a position to do buybacks, but it's probably certainly several quarters down the road.

[Operator]

The next question is from Jeff Rulis with D.A. Davidson.

[Jeff Rulis, analyst]

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?

[Todd Gipple, executive]

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.

[Jeff Rulis, analyst]

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?

[Larry Helling, executive]

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 talked about more for a couple of years now, normal is going to feel bad because we've got -- we were in this 0 interest rate environment where nobody had any losses. Now I think we're moving toward normal. So we might have had a little bit [indiscernible] there's a natural tendency in the fourth quarter to do a little cleanup. So I don't think there are 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 5 years, our net charge-offs were 12 basis points. So it's really right on top of what we experienced over the last 5 years. Over the last 10 years, our net charge-offs have been 17 basis points. So over time, I expect us to move back to kind of that normal. And I think the industry number that everybody is 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.

[Jeff Rulis, analyst]

Okay. So on the 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?

[Larry Helling, executive]

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

[Jeff Rulis, analyst]

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?

[Larry Helling, executive]

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.

[Operator]

The next question is from Daniel Tamayo with Raymond James.

[Daniel Tamayo, analyst]

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?

[Todd Gipple, executive]

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

[Daniel Tamayo, analyst]

Okay. Great. 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 million to $60 million for 2024 is still quite a bit below that. I'm just curious how you think -- was there something about the end of the year's lower rates that you don't think would continue to apply due 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?

[Larry Helling, executive]

Yes. Danny, 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. I mean, 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 of that drop in rates in the client sense of urgency. But a bigger part of it was really 2022 deals that got installed into 2023, waiting for lower rates and for inflation to normalized. 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 a 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, maybe a short end of the curve dropping a bit, we think this is a pretty reasonable guidance level.

[Daniel Tamayo, analyst]

Okay. And is the amount of -- I mean -- so by average the last 2 years, you're still over $130 million, so $65 million a year. So still above the guidance for 2024. I mean are you expecting volume to be similar in 2024 from what you've done over the last couple of years? Or is there some kind of rate impact in there that's capturing the difference?

[Larry Helling, executive]

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 we'd waited to lock the rates in until first or second quarters or a little bit of that happened probably. And so that's part of the guidance there. Part of it is just trying to make sure we give you a number that we can hit on an annual basis because we don't like to disappoint you guys. And so I think it's just the industry, there's still a tremendous backlog of 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 4 or 5 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.

[Daniel Tamayo, analyst]

That's great. 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.

[Operator]

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

[Nathan Race, analyst]

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 I'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 in to Des Moines as well.

[Todd Gipple, executive]

Yes. Good memory, Nate. We're very pleased with the start we have in Southwest Missouri at the Guaranty Bank charter. A couple of very experienced folks have gotten 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 in 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 I appreciate you asking about that, Nate.

[Nathan Race, analyst]

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?

[Todd Gipple, executive]

Yes. Our guide was 8% to 11%. We 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 we 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.

[Nathan Race, analyst]

Got you. And then maybe one last one for Larry. Just curious to get your latest thoughts on the M&A environment. Obviously, you guys are in 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?

[Larry Helling, executive]

Yes. I think our first priority, Nate, is making sure we've 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 earlier, we're not declaring victory over the economy yet because everybody has 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.

[Operator]

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

[Larry Helling, executive]

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.

[Operator]

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