QCR Holdings, Inc. (QCRH) Earnings Call Transcript & Summary

Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Second Quarter of 2023. Yesterday, after market close, the company distributed its second 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 summary of financial results and then we'll open 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 the 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. Additionally, 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 direct comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference is being recorded and will be available for replay through August 3, 2023, starting this afternoon, approximately 1 hour after the completion of this call. It will 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 thanks for taking the time to join us today. I will start the call by providing some highlights for the quarter, followed by discussions of our strong balance sheet performance, liquidity position and capital levels, as well as a review of our specialty finance business, and our loan securitization strategy. Todd will provide additional details on our financial results for the quarter. We continue to be pleased with our operating performance in 2023. We delivered outstanding second quarter results highlighted by robust loan and core deposit growth and significant fee income. In addition, we maintained strong asset quality. Our diverse revenue sources, which included capital markets and wealth management fees more than offset the pressure on our net interest income. We also continued to improve upon our already solid capital levels with exceptional earnings performance. In the second quarter, we delivered both reported and adjusted net income of $28.4 million or $1.69 per diluted share. We generated an ROAA of 1.44% and an ROAE of 13.97% for the quarter and believe that both metrics remain near the high end of our peer group. Loan growth was exceptional during the quarter, growing 12.2% on an annualized basis and driven primarily by our low income housing tax credit lending program. I'll expand on our success in growing loans shortly. Our experienced bankers grew core deposits significantly during the quarter, building upon our strong and diversified deposit franchise. As a result, our loans held for investment for deposits further improved to 92.1%. Our uninsured and uncollateralized deposits also improved to 19.9% and remain at very manageable levels. Our elevated on-balance sheet liquidity, combined with other immediately available liquidity at the Federal Home Loan Bank [that] more than cover our uninsured and uncollateralized [deposits]. We have assembled a strong and diversified deposit franchise over the years and our second quarter deposit activity continued to reflect the importance of the relationships that we have developed. During the second quarter, our core deposits excluding short-term broker deposits, grew $339 million, 23% annualized. Our asset quality remains excellent, as the ratio of nonperforming assets to total assets increased slightly by 3 basis points during the second quarter, yet remains near historic lows at 32 basis points. Our reserve for credit losses represents 1.41% of total loans and leases held for investment and continue to be at the high end of the [peer group]. We remain confident that our reserve for credit losses are adequate to weather future economic uncertainty. We plan to be disciplined and maintain prudent reserves as we continue to diligently monitor asset quality across all of our business. We remain cautiously optimistic about the economic resiliency of our markets and the financial health of our clients. We are not seeing any meaningful signs of weakness across our footprint. As we mentioned last quarter, our exposure to commercial office buildings is very low and quite manageable at just 3% of total loans with an average loan size of $800,000. These properties are predominantly located in suburban locations within or adjacent to our markets. They are well collateralized and are performing in line with expectations with no significant repayment concerns. Our capital levels are strong, and we remain focused on growing capital throughout the remainder of the year. We continue to target capital ratios in the top quartile of our peer group. We believe that our modest dividend and strong earnings power will allow us to continue to grow capital faster than our peers. During the quarter, we grew loans 12.2% on an annualized basis, driven primarily by the ongoing strength in our low-income housing tax credit lending business. With the growing prominence of our Specialty Finance Group and the light tech lending business, I would like to spend some time discussing the drivers of this high-performing business. Our specialty finance team offers long-term housing at credit lending to a select group of developers and investors with whom we have built long-standing relationships. Our clients continue to experience strong demand for their project as the need for affordable multifamily housing exceeds supply in the markets that we serve. These high-quality loans are bolstered by strong equity investment from other banks and corporate investors. The industry has an excellent track record with negligible historical default rates. Strong track record makes these loans ideal for securitization. In addition, these loans are made on a floating rate basis, which has greatly improved our ability to manage interest rate risk. Due to the long-term ownership structure of these projects, borrowers seek to lock in their financing costs over the life of the loan. As a result, our bankers arrange interest rate swaps to the borrowers, enabling them to secure the desired fixed rate financing and generating significant capital markets revenue for our company. The LIHTC business has been a consistent and important component of our noninterest income. In addition, as the economy has softened, some of the previous headwinds that our clients were experiencing in this space have eased. We saw a nice rebound in capital markets revenue from swap fees in the first half of 2023 as the supply chain constraints and inflationary pressures on the construction costs have begun to abate. In short, this is an extremely valuable business and we believe that it deserves a higher valuation multiple than traditional banking. Furthermore, based on decades of stability in the industry and our own experience, we believe that this business is countercyclical and will be very resilient in future recessionary environments. We are increasing the size of our planned securitizations of LIHTC loans to achieve improved pricing and execution. We now expect to close on the transactions early in the fourth quarter. The securitization of our LIHTC assets will be an effective tool in managing our liquidity and capital. In addition, it will provide expanded capacity for continued LIHTC production and the resulting capital markets revenue. While economic headwinds remain a risk, we experienced strong loan growth during the second quarter. As a result, we are increasing our guidance for loan growth for the remainder of the year to be in the range of 9% to 12% on an annualized basis, which would result in a 0% to 3% growth on an annualized basis, net of brand LIHTC loan securitizations. I will now turn the call over to Todd, provide further detail regarding our second quarter results.

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. As Larry mentioned, we grew total loans by 12.2% on an annualized basis during the quarter or $189 million of net growth. In anticipation of our first loan securitization, we have classified $291 million of LIHTC loans as held for sale. We added an additional $152 million of LIHTC loans to the held-for-sale category during the quarter as we continue to build towards the first securitization later this year. Executing our long-term securitization strategy will enable us to continue to fund the significant growth of our tax credit lending business and maintain the portfolio within our established concentration levels. Total deposits grew $105 million during the quarter, driven by strong core deposit growth from a mix of commercial, retail and municipal deposits. The growth in core deposits of $339 million which excludes broker deposits, increased total available liquidity and allowed us to reduce the amount of our broker deposits by $234 million. Our core deposits continue to have strong diversification due to our separate charters and markets as well as a commercial client base that is spread across a variety of industries. 55% of our core deposits represent deposits from our commercial clients and have an average balance of $214,000. Approximately 35% of our deposits consist of consumer deposits and have an average balance of $21,000. The remaining 10% of our deposits are from our 181 correspondent banking partners with an average balance of $2.3 million. Now turning to our income statement. We delivered net income of $28.4 million for the quarter, an annualized increase of 18.7%, as the decrease in our net interest margin was overpowered by strong capital markets revenue and well-controlled expenses. Our adjusted net interest income on a tax equivalent basis decreased $2.4 million to $59.5 million, down from $62 million in the first quarter. Adjusted NIM on a tax equivalent yield basis was 3.28%, which was down 19 basis points from 3.47% in the prior quarter and within our guidance range. As we anticipated and guided last quarter, we experienced a continued increase in the cost of funds during the second quarter. This was primarily the result of a shift in the composition of our deposits from lower beta to higher beta deposits. We've been pleased with the beta performance of our low beta deposits throughout the cycle. However, the continued shift from noninterest and lower beta deposits, to higher beta deposits has been more than expected and has led to an outsized increase in our cost of funds. As we look to the third quarter, including the 25 basis point rate hike announced yesterday, and a yield curve that continues to be sharply inverted, our moderate liability-sensitive balance sheet creates an interest rate environment that continues to be challenging. However, we expect the pressure on margin to lessen as the deposit mix shift has slowed and we benefit from strong late second quarter loan growth. We are guiding adjusted NIM TEY in the range of static to down 10 basis points for the third quarter. Turning to our noninterest income, which increased $6.7 million or 26% during the second quarter. Our capital markets revenue was $22.5 million, compared to $17 million for the first quarter, which outperformed our annualized guidance range. Capital Markets revenue from swaps continues to benefit from stabilization in the supply chain and construction costs. In addition, developers have been successful in restructuring their capital stacks in the new interest rate environment. Capital Markets revenue from swap fees has been a consistent and strong source of fee income. And importantly, this revenue source has provided significant countercyclical benefits during the pandemic and is expected to do so in future economic downturns. Our tax credit lending and capital markets revenue pipeline remains healthy as our clients continue to experience strong demand for new projects. As a result, we are increasing our capital markets revenue guidance for the next 12 months to a range of $45 million to $55 million. In addition, we generated $3.8 million of wealth management revenue in the second quarter, consistent with the first quarter. Our wealth management team continues to benefit from new relationships, adding 148 new clients and $455 million in assets under management in the first half of this year. Now turning to our expenses. Noninterest expense for the second quarter totaled $49.7 million compared to $48.8 million for the first quarter and within our guidance range of $48 million to $51 million. The increase from the prior quarter was primarily due to higher variable compensation, increased FDIC insurance rates and higher direct costs from holding more deposits in the ICS program. Our strong fee-based performance in the second quarter led to an increase in variable compensation while other salary and benefit-related expenses decreased. We remain diligent in controlling our expense growth. For the third quarter, we are reaffirming our noninterest expense guidance again this quarter to be in a range of $48 million to $51 million. Our asset quality remains exceptional and better than our historical average. During the quarter, NPAs increased modestly. NPAs for the quarter were $26.1 million or only 32 basis points of total assets. Approximately half of our total NPAs consist of one relationship, and we believe that this credit will be resolved without a loss. The provision for credit losses was $3.6 million during the quarter. We expect to continue to maintain strong reserves given the economic uncertainty. Our reserve to loans held for investment was fairly static at 1.41% and continues to be at the higher end of our peer group. Our total risk-based capital ratio declined slightly by 2 basis points to 14.66% due to the strong loan growth during the quarter. We increased our tangible common equity to tangible assets ratio to 8.28%, up from 8.21% at the end of the prior quarter. With our continued strong earnings, coupled with our modest dividend, our tangible book value per share increased by $1.28 or 13.2% annualized during the second quarter. As interest rates moved higher during the quarter, our AOCI declined sequentially, which partially diluted some of the growth in our tangible common equity and tangible book value. During the quarter, we repurchased a modest number of shares. Our capital allocation priorities remain focused on growing our capital and targeting capital levels near the top of our peer group. Finally, our effective tax rate for the quarter was 12.2% compared to 9.3% in the first quarter. The increase was due to a higher mix of taxable income primarily from the significant growth in capital markets revenue this quarter. We continue to benefit from our strong portfolio of tax-exempt investments and loans, which has helped our effective tax rate remain one of the lowest in our peer group. We expect the effective tax rate to be in a range of 11% to 14% for the remainder of 2023. With that added context on our second quarter financial results, let's open the call for your questions. Operator, we're ready for our first question.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Damon DelMonte with KBW.

I just wanted to start off on the revised outlook on the capital markets revenues. I think you said $45 million to $55 million over the next 4 quarters. Given the strong performance here in the first half of the year and especially in the second quarter, do you feel that the pipeline might be a little bit slower here in the back half of this year and it kind of ramps back up in 2024? Or do you feel that just given the kind of buying out of supply chain and construction costs that you're going to keep a higher level for the next couple of quarters?

So Damon, I'll start with a couple of data points for you first. First of all, our average per quarter of swap fee income in 2022 was $10 million per quarter. And our fourth quarter trailing is $15 million. So the middle of our guidance is kind of right in the middle of those two numbers. So we're certainly trying to give you numbers that we think are achievable. The pipeline remains strong. But as you know, it's a modest number of deals, the timing can move [indiscernible] some dollars between quarters. So we certainly believe our guidance is achievable, borrowing headwinds that we can't see today because as we talked a lot during the pandemic about supply chain and inflation pressures on those projects, those came through those beautifully, but it took some time. And so -- we certainly feel good about the pipeline going forward, where as you know, we're trying to turn this into a 4 quarters in the future business, not trying to predict what's going to happen next quarter because of the variability. But probably tell you it was -- we love this business. We think it's a great business long term. There is some variability, but long term, the underpinnings are really solid.

Got it. Okay. Thanks for that color. With regards to the guidance on the margin, Todd, I believe the accretable yield this quarter was only like $134,000 compared to like $800,000 last quarter. So if you kind of back both of those out of the first and second quarters, it looks like the core margin was like 347 to 328 -- so when you talk about the, I think you said 0 to 10 basis points compression, is that based off of that -- like based off the 328 number? And I guess, how should we think about fair value accretion going forward?

Sure, Damon. First off, you're spot on in terms of what happened to accretion, Q1 and Q2. I'll answer the last half first. I would expect that to be more like $500,000 per quarter in Q3 and Q4, so a more normalized number. The $328 million is what you should leap off of for the 0 to 10 basis point contraction in our guide. And -- just a little more color around how we got there. We did expect, as we said in the opening comments, the 25 basis point hike. We're assuming that we continue to have this inverted curve, and it remains fairly static. We modeled a range of outcomes on core deposit mix over the quarter. Under all scenarios, we do replace the $290 million of brokered CDs that we have maturing in Q3. Those $290 million of [brokers] are at a 506 rate today. So it's going to be nice to see those roll off and replaced with core deposits. And then we assume the midpoint of our loan growth guidance. So that modeling gives us a range of outcomes from a favorable static to was unfavorable 10 basis points of contraction. So that would be off of that 328 base.

Got it. Okay. That's very helpful. And then I guess, just lastly, and then I'll step back. On the credit quality, the slight uptick in nonperforming loans this quarter, little bit under $4 million. Was that one credit in particular? Or is there a couple involved in that?

Yes. Thanks, Damon. Good question. The pickup was just a handful of mostly equipment loans from small companies that came under pressure. And while we're not seeing any broad based degradation in our portfolio. It seems like the companies that are having the most stress are really the smaller companies with less sophisticated management and those kind of things. And that's maybe longer term, as we've talked about, normal credit costs coming to play long term. I don't know when that's going to be. It depends on what happens to the economy, but normal is going to feel different -- and so there's -- we had a handful of small companies that felt some pain. We're trying to be out -- trying to deal with them. And so it's certainly not a concentration in one big deal. It's a half a dozen smaller deals that created that NPA increase.

The next question comes from Nathan Race with Piper Sandler.

Just want to kind of think about the balance sheet side in the third quarter, it looks like the average balances, including loans held for investment and held for sale, were about 3% higher than the end of period balances. And I just want to make sure we're thinking about the earning asset size accurately heading in the third quarter, just kind of provide any color along those lines?

Yes. I mean initially, guidance we gave you was for the back half of the year. And so we expect the securitization that happened in the fourth quarter. So the growth in the third quarter will be toward the higher end of that range that we gave you -- and then we're going to do the securitization that will take some of that growth off the balance sheet in the fourth quarter. And so I mean, I think we expect continued growth. We had strong growth late in the second quarter, so that's going to run into the third quarter. And so we'd expect the growth to be toward the higher end of the range in the third quarter.

Got you. That's helpful. So it sounds like a lot of the growth occurred late in the quarter. And so earning assets should be up maybe $150 million to $200 million quarter-over-quarter.

That would be right. That's what we're expecting in that margin outcome that we talked about, Nate.

Okay. Perfect. Just want to make sure I have that right. And then, Todd, within your expense guidance, does that kind of contemplate you guys hitting the midpoint of the next 12-month capital markets revenue expectations or I guess, how should we kind of think about the variability of the expense base relative to that revenue source in particular?

Sure. As you well know, Nate, that has a pretty significant impact on noninterest expense. I'm comfortable that we would still be within that upper end of the range at $51 million even if we continue to perform at the higher range of our annualized guidance that we just increase to the $55 million for a rolling 12 months. I think we still feel very confident about coming in at that $51 million or a touch under.

Okay. Great. And then just maybe one last one. I think last quarter Larry you were describing a pretty strong core deposit pipeline coming into 2Q, and it seems like that kind of came to fruition here in the second quarter. So I would just be curious kind of what the kind of the pipeline looks for additional core deposit wins and share gains?

Yes, I'll start and then maybe let Todd finish here. Certainly, the pipeline still remains strong, and I'm certainly really proud of our team for 23% core deposit growth during the quarter. As you -- you can see what we did late in the first quarter when the banking market was just getting disrupted, we added a bunch of broker CDs just to boost liquidity and then what we did very successfully in the last quarter is rotated a lot of that out and replaced it with core deposits. So I'd say the pipeline is certainly still there, and we've proven that our client base when we need the money, we can go get it from [indiscernible]. So we certainly feel good about that certainly in this environment. So deposit pipeline still feels fine to us.

Got it. That's great to hear. And then if I could actually just ask one last one just in terms of the outlook on the ACL, it came down a little bit quarter-over-quarter. Is the goal to kind of just hold it here and just provide for growth and any charge-offs. And it seems like the charge-off outlook looks fairly benign coming out of the second quarter.

Yes. Good question, Nate. And I'd say, yes, we're going to hold it probably in the 140s given what we know today. [indiscernible] some change in the economy, good or bad here certainly, we think this is a prudent level to be at, we'd be hiring our peer group and have credit quality certainly consistent with our peer group. So I think we're trying to take conservative approach and manage it around these numbers as much as we can.

Next question comes from Brian Martin with Janney Montgomery.

Todd, maybe just one back for that. On the core deposit that swapped from -- what you're changing out from the broker to the new core deposits this quarter. What's kind of the range of outlook as far as where those funding -- where those get replaced at.

Sure. Really glad you asked that question, Brian. So again, just to reset, we had $290 million of brokers we're going to replace at 506. Our expectation is to do that really at that 506 or slightly better. We had a lot of success in Q2 with growing deposits, as you could see. And I'm looking at a sheet of some of our big wins and we had some new money from existing clients at $50 million in the mid-5s, but we also picked up some significant dollars from existing clients in the mid-4s. And we continue to bring on some new clients. Certainly, some of those new funds would be with a 5 handle, but I'm looking at a couple of wins here with a couple of $4 million and $5 million new relationships in the 2 and 3 range in terms of ICS money market. So we're working really hard to replace that at a lesser weighted average rate than that 506. And that really is part of our -- even though we guided static to 10 basis points of contraction that may be a little more optimistic than most might have expected. And we think that's certainly achievable. We are really focused on growing core deposits. And while they're pricy these days, we think we'll beat that 506.

Got you. No, that's helpful. And is that kind of your outlook for rates [indiscernible]? Does it kind of contemplate that if it's down next quarter, not picking a number, but sequentially, it's down -- maybe a little bit less fourth quarter and kind of begins to trough out [indiscernible]. Is that big picture how we should think about the near term?

Well, Brian, maybe if you could be a little more clear. Are you asking me about our expectations on the Fed or more on our deposit fundings.

Just your margin and your outlook on base -- if have the rate increase, yes.

Yes. Okay. So kind of a blended answer here. There's no meeting in August. There's a meeting in September. I guess no one really knows if we'll see another increase or another pause there. But we're very optimistic about; one, achieving this guidance in the third quarter of static to 10% down. We're very optimistic about margin in the fourth quarter. Larry gave some more details around the securitization in the fourth quarter. That securitization will actually be NIM accretive by about 4 basis points. So we'll get a little bit of lift in margin from the securitization and that offtake. It has a ton of other benefits, of course, but will give us a little lift in margin. And we're right now at a 50 beta on total deposits for the entire cycle. We think that's getting pretty close to our peak beta. And while we probably got to peak betas more quickly than most of the industry, we feel like we're through the worst of it now. And maybe the rest of the industry might have a little longer tail on that level of beta performance, but we're more optimistic about the back half of the year for all those reasons.

Got you. No, that's helpful. I appreciate it, Todd. And maybe just last one on margin. Just remind us the -- if we do see some cuts next year, just the -- how QCR sets up in that type of environment?

Yes. Thanks, Brian. We are now modestly liability sensitive. Over time, we have gone from an asset sensitivity that helped us in the first third of the hiking cycle. So during the first third, we saw margin expansion as our deposits have rotated from noninterest-bearing and low beta interest-bearing to 100 beta deposits, we've now converted to where we are modestly liability sensitive. So when rate cuts were to take place, however, long that might be out in the future. When that does happen, we feel like we're well positioned to see some margin lift when rates come back down.

Perfect. Okay. That's super helpful. And just if I can ask one last one. Just the commentary on loan growth and taking the guidance up, it looked -- you guys talked about the specialty business being particularly strong, but the traditional side maybe being a little bit more modest. I mean, I guess in your guide or just how you're thinking about the next couple of quarters, do you see some rebound in that traditional business? Or is it still more the specialty business that's kind of leading the charge?

Yes. I think the specialty business, especially the LIHTC space is very resilient and seems to be -- as we talked about it in the past, there was kind of a slowing down of that during the pandemic that now seems to be kind of back to a normal pace in that business. The core commercial business, the C&I and normal commercial real estate, they're still dealing with the shock up in rates, and I think it's affected the psychology of people. So certainly, that's, I think, will grow but at a modest pace, certainly low single digits there and how we're going to get to that double-digit pre-securitization kind of numbers is really because of the nice growth in the LIHTC.

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

This is Andrew on for Jeff today. Just another follow-up question in regards to the LIHTC loans. Just wondering what type of servicing revenue or gain you received from those? And then also just wondering who the targeted buyers of that product are?

Yes. So first of all, we will probably not retain the servicing long term. That's not probably a long-term play for us because we'd have to build some more infrastructure as we securitize those. So initially, we're going to engage an outside service around that. And so the buyers for this, because we're turning this into a AAA-rated security, our institutional investors of all kinds, insurance companies, banks, funds, those kind of places is where this would go. So we think it's readily markable. And we'll go to the normal kind of institutional buyers.

Okay. That makes sense. And then another question maybe more on the expense side. Just with the -- with the surge in fee income this quarter, we thought expenses might have picked up a little higher, but going forward is there a way to handicap the variable cost component when swap fees that are higher or lower than average?

Sure, Andrew. There's a correlation certainly between the Capital Markets results and our variable compensation. And historically, for all in, incentives and variable comp around that, you might say that's 20% of that, I guess, I would say, beat. So to the extent -- we might beat our guidance on a more normal quarter. Roughly 20% of that beat would add to the noninterest expense carry. The reason that you didn't see it here in the second quarter, quite honestly, is we expected several quarters ago that margins may be getting squeezed in our industry. And we've really and our entire leadership team focused on being deliberate and thoughtful around expenses. We've been doing that for several quarters now. That's why our noninterest expense guide has remained very static here probably for the last 4 quarters. And we're just really focused paying attention to expenses. We're still making great long-term decisions, but we're just being more thoughtful and intentional on spend. So that's why that 48 to 51 guide, I think we're still pretty comfortable that even though we might be in the upper end of that range, we'd still be within the range even if we outperform on capital markets revenue. So kind of a long answer to your short question, but just a lot of moving parts there, but really think about 20% handle on that capital markets revenue.

That's very helpful. And then just one more from me. Do you have a June average for net interest margin or spot rate on cost of deposits?

Yes. Actually, I'd probably feel more comfortable just doing the spot margin, but I'm very glad you asked that question because we had not gotten to that. That's one of the reasons that we're pretty confident about a good outcome in Q3. Our Q3 NIM was that $328 million that we talked about with Damon earlier in the call. The big contraction in margin in the second quarter was really in April and May. Our May margin was 326, and June was static at 326. So that's one of the reasons we have some confidence about a good outcome in Q3. We really saw that level off in June. So I hope that helps.

The next question comes from Daniel Tamayo with Raymond James.

Maybe just a little bit further digging into the LIHTC portfolio. So first, just if you could remind us kind of how much in terms of what's on the balance sheet is in construction and multifamily, just specific to LIHTC at this point?

We've got about $800 million of LIHTC stabilized that's up and running that we would be able to securitize at any time as we go forward. And then we got a little over $800 million in construction that is in the process of stabilizing and completion. And so that is what we'll be creating the future pipeline securitizable assets as we go forward.

Okay. All right. And then -- in terms of the kind of the deposit relationship for those borrowers, how do you think about kind of loan to deposit for the LIHTC borrowers? Or how much in deposits are you getting from them? And what type currently, are they putting on?

Yes. We are getting deposits from those that source of business but certainly not at the pace where [quick] loans are -- it's around $150 million that we got in deposits out of that sector of the business so far. We have a new initiative that we are getting more serious about collecting deposits from that space, just because it makes sense from a long-term business perspective. It would be a combination, some interest-bearing, some low interest-bearing deposit cost because there's certainly reserve funds and those kind of things that are parts of the structurings that we put together. So it's kind of a combination of both, I would say, interest-bearing, non-interest-bearing accounts. Typically, nonmaturity type deposit.

Okay. Great. And then circling back to the loan growth conversation. So you talked about kind of a 0% to 3% net loan growth of the securitization. It sounds like the securitizations are going to be a bigger part of the strategy going forward. There's two questions here. First, how big are you comfortable letting the LIHTC on portfolio, on balance sheet loans get? And number two, how are we thinking about -- or how are you thinking about kind of net loan growth maybe into 2024, it's probably more a function of the traditional loan growth coming back. But just curious if this is how this all fits into the bigger picture?

So yes, if you look at the LIHTC loans they're in total, about $1.6 billion today, we're going to securitize just short of $300 million in the fourth quarter. So we're taking the top off of it there. And if we do let it grow, those outstandings would grow at a modest pace going forward -- probably more in the 5% range on balance sheet, which would -- our capital then could keep pace with and keep it relatively static at the same percent of capital. Longer term for loan growth, I think that's the beauty of this securitization tool that we have that most won't have. We can use it to manage liquidity and capital and loan growth pretty nicely as long as we plan out in front a quarter or two as we look for future securitizations. So we expect to do more securitizations in 2024. As we get closer to that, we'll probably give you some indication of when and how much, but yes, certainly we're going to take the top off of that growth, grow that much more modestly on balance sheet, which should keep it close to the same kind of relative basis as a percent of capital.

Okay. Great. That's helpful. And just lastly, again, on the LIHTC. What are the yields on those loans look like, especially relative to kind of what you already are doing in construction and multifamily?

Yes. The yields are, number one, the exclusively floating rate loans on our books. And those yields are between -- and I'm going to -- also tax effective because there's a tax exempt component to a big portion of the loans. So the tax equivalent yields are in the 7s up to 8%.

That's for the construction portion.

And for the permanent because the permanent are floating and on our books, too. So that's all floating, and on those same relative prices.

This concludes our question-and-answer session. I would now like to turn the call over to Mr. Larry Helling for closing remarks.

Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day. We look forward to talking with you again in the coming months.

The conference has now concluded. Thank you for your participation. You may now disconnect.