Earnings Call Transcript
QCR HOLDINGS INC (QCRH)
Earnings Call Transcript - QCRH Q2 2023
Operator, Operator
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. 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 one 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.
Larry Helling, CEO
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, more than covers 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 non-performing assets to total assets increased slightly by three 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 is 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 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 projects 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 non-interest income. Additionally, 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 0% to 3% growth on an annualized basis net of brand LIHTC loan securitizations. I will now turn the call over to Todd to provide further detail regarding our second quarter results.
Todd Gipple, CFO
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 non-interest 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 non-interest 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. Additionally, 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. 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 two 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.
Operator, Operator
Thank you very much. We will now begin the question-and-answer session. Today's first question comes from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte, Analyst
Good morning, guys. Hope everybody is doing well today.
Larry Helling, CEO
Hey, Damon.
Todd Gipple, CFO
Good morning, Damon.
Damon DelMonte, Analyst
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 four 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?
Larry Helling, CEO
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. Our fourth quarter trailing is $15 million. So the middle of our guidance is 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 in some dollars between quarters. So we certainly believe our guidance is achievable, barring 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, whereas we're trying to turn this into a four quarters-in-the-future business not trying to predict what's going to happen next quarter because of the variability. But I would probably tell you that 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.
Damon DelMonte, Analyst
Thanks for the information. Regarding the margin guidance, Todd, I noticed that the accretable yield this quarter was approximately $134,000, whereas it was around $800,000 last quarter. If we exclude those amounts from the first and second quarters, the core margin seems to range from about 347 to 328. When you mention the compression of zero to 10 basis points, is that based on the 328 figure? Additionally, how should we approach the concept of fair value accretion moving forward?
Todd Gipple, CFO
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 zero to 10 basis point contraction in our guide. 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 unfavorable 10 basis points of contraction. So that would be off of that 328 base.
Damon DelMonte, Analyst
Got it. Okay. That's very helpful. Thank you. And then I guess just lastly and then I'll step back. On the credit quality, the slight uptick in nonperforming loans this quarter, a little bit under $4 million. Was that one credit in particular, or is there a couple involved in that?
Larry Helling, CEO
Thank you, Damon. That's a good question. The increase was primarily due to a few equipment loans from small companies that are experiencing pressure. While we aren't observing widespread issues in our portfolio, it appears that the companies facing the most difficulties are primarily smaller ones with less experienced management. In the long run, as we mentioned, we expect normal credit costs to come into play, though I'm not sure when that will happen as it depends on the economic situation. However, the normal will be different moving forward. We had a few small companies that experienced some challenges, and we are working to address those situations. It's definitely not concentrated in one major deal; it's a few smaller deals that led to the increase in nonperforming assets.
Damon DelMonte, Analyst
Got it. Great. Thanks for all the color, and congrats on a nice quarter.
Larry Helling, CEO
Thanks Damon.
Todd Gipple, CFO
Thanks Damon.
Operator, Operator
The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race, Analyst
Hi, guys. Good morning. Thanks for taking the questions.
Todd Gipple, CFO
Good morning Nate.
Nathan Race, Analyst
Just want to 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 into the third quarter, just kind of provide any color along those lines?
Todd Gipple, CFO
Yeah, sure. Go ahead, Larry.
Larry Helling, CEO
Initially, we provided guidance for the latter half of the year, expecting the securitization to occur in the fourth quarter. Therefore, we anticipate that the growth in the third quarter will be towards the higher end of the range we communicated. The securitization will remove some of that growth from the balance sheet in the fourth quarter. We do expect ongoing growth, as we experienced strong growth late in the second quarter that will carry into the third quarter. As a result, we expect growth to be towards the higher end of the range in the third quarter.
Nathan Race, Analyst
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?
Todd Gipple, CFO
That would be right. That's what we're expecting in that margin outcome that we talked about Nate.
Nathan Race, Analyst
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?
Todd Gipple, CFO
Sure. As you well know Nate, that has a pretty significant impact on non-interest 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.
Nathan Race, Analyst
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?
Larry Helling, CEO
Yeah, 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 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 them. So we certainly feel good about that certainly in this environment. So deposit pipeline still feels fine to us.
Nathan Race, Analyst
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?
Larry Helling, CEO
Yeah. Good question, Nate. And I'd say yes, we're going to hold it probably in the 140s given what we know today. Barring 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 a conservative approach and manage it around these numbers as much as we can.
Nathan Race, Analyst
Okay. Perfect. I appreciate again taking the questions and all the color. Thanks again.
Larry Helling, CEO
Thanks Nate.
Todd Gipple, CFO
Thank you, Nate.
Operator, Operator
Next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Brian Martin, Analyst
Hey, good morning guys.
Larry Helling, CEO
Good morning, Brian.
Todd Gipple, CFO
Good morning, Brian.
Brian Martin, Analyst
Hey Todd, can you provide an update on the core deposits that were swapped from the broker to the new core deposits this quarter? What is the outlook for where those funds will be replaced?
Todd Gipple, CFO
Sure, I'm glad you asked that question, Brian. To clarify, we are looking to replace $290 million of brokers at a rate of 506. Our expectation is to achieve that rate or slightly better. We had significant success in Q2 with growing deposits, and I have some highlights here, including $50 million in new money from existing clients at rates in the mid-5s, along with substantial amounts from existing clients in the mid-4s. We are continuing to onboard new clients, many of which will come in at rates with a five handle, and I've seen some encouraging developments with new relationships bringing in $4 million and $5 million in the two and three range for ICS money market. We are diligently working to replace these at a lower weighted average rate than 506. While we projected a static contraction of 10 basis points, we believe that might be more optimistic than some had anticipated, but we consider it to be achievable. Our focus remains on growing core deposits, and even though they are costly right now, we believe we will exceed that 506.
Brian Martin, Analyst
Got you. No, that's helpful. And is that your outlook for rates, Todd? Does it consider that if rates go down next quarter, not specifying a number, but if they decrease sequentially, maybe a little less in the fourth quarter and start to level off? Is that the general way we should think about the near-term?
Todd Gipple, CFO
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 non-interest-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.
Brian Martin, Analyst
That's very helpful. I have one final question. Regarding loan growth and the upward guidance, you mentioned that the specialty business is performing particularly well, while the traditional side seems to be more modest. Looking ahead to the next couple of quarters, do you anticipate any recovery in the traditional business, or will the specialty business continue to take the lead?
Larry Helling, CEO
Yes, I believe the specialty business, particularly in the LIHTC space, is quite resilient and seems to have returned to a normal pace after slowing down during the pandemic. The core commercial business, including C&I and regular commercial real estate, is still grappling with the impact of rising rates, which I think has influenced people's mindset. Therefore, I expect modest growth in that area, likely in the low-single digits. The anticipated achievement of double-digit pre-securitization figures will primarily result from strong growth in the LIHTC sector.
Brian Martin, Analyst
Got you. Okay. Perfect. I appreciate that you take all the questions.
Larry Helling, CEO
Thank you, Brian.
Todd Gipple, CFO
Thanks, Brian.
Operator, Operator
The next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.
Unidentified Analyst, Analyst
Hi. Good morning. 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?
Larry Helling, CEO
Yeah. 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. The buyers for this, because we're turning this into a AAA-rated security, are institutional investors of all kinds, insurance companies, banks, funds, those kind of places is where this would go. So we think it's readily remarkable. We'll go to the normal kind of institutional buyers.
Unidentified Analyst, Analyst
Thank you for that explanation. I have another question regarding expenses. With the increase in fee income this quarter, we expected expenses to rise a bit more. Moving forward, can you provide any insights on how to assess the variable cost component related to swap fees that may be above or below average?
Todd Gipple, CFO
Sure, Andrew. There's a correlation certainly between the Capital Markets results and our variable compensation. 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 non-interest 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. 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 four quarters. We're just really focused on 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.
Unidentified Analyst, Analyst
Thank you. 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?
Todd Gipple, CFO
Yeah. 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.
Unidentified Analyst, Analyst
That helps. Thank you and congrats on the quarter.
Todd Gipple, CFO
Thank you.
Larry Helling, CEO
Thank you.
Operator, Operator
The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo, Analyst
Thank you. Good morning everyone. 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?
Larry Helling, CEO
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. We've got a little over $800 million in construction that is in the process of stabilizing and completion. So, that is what we'll be creating the future pipeline securitizable assets as we go forward.
Daniel Tamayo, Analyst
Okay. All right. Thank you for that. 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?
Larry Helling, CEO
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 of 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, non-maturity type deposits.
Daniel Tamayo, Analyst
Thank you. I want to revisit the loan growth discussion. You mentioned a net loan growth of 0% to 3% related to securitization, indicating that this will play a larger role in your strategy moving forward. I have two questions. First, what is your comfort level regarding the size of the LIHTC portfolio in terms of on-balance sheet loans? Second, how do you view net loan growth heading into 2024? It seems likely to be influenced more by a return to traditional loan growth, but I’m interested in how this fits into the overall strategy.
Larry Helling, CEO
Great. The LIHTC loans currently total about $1.6 billion. We plan to securitize nearly $300 million in the fourth quarter, which is our way of managing that amount. If we allow it to grow, the outstanding loans would likely increase at a modest rate, around 5% on the balance sheet, which our capital could keep up with, maintaining a similar percentage of capital. The advantage of our securitization tool, which others might not have, is that it enables us to effectively manage liquidity, capital, and loan growth, as long as we plan ahead for a quarter or two for future securitizations. We anticipate conducting more securitizations in 2024, and as we approach that, we will provide details on timing and amounts. Overall, we aim to moderate that growth and ensure it remains relatively stable as a percentage of our capital.
Daniel Tamayo, Analyst
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?
Larry Helling, CEO
Yes. The yields are primarily from floating rate loans on our books, and they range from the 7s up to 8%, with a significant portion of those loans being tax-exempt, making the tax equivalent yields more effective.
Daniel Tamayo, Analyst
That's for the construction portion.
Larry Helling, CEO
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.
Daniel Tamayo, Analyst
Got it. All right. Terrific. Thanks for all the color there. That’s all I had.
Larry Helling, CEO
Thanks, Daniel.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the call over to Mr. Larry Helling for closing remarks.
Larry Helling, CEO
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.
Operator, Operator
The conference has now concluded. Thank you for your participation. You may now disconnect.