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QCR Holdings Inc (NASDAQ:QCRH)
Q3 2019 Earnings Call
Oct 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the QCR Holdings Inc. Third Quarter 2019 Conference Call. Yesterday, after market close, the company distributed its third quarter press release. And we hope that you have had the opportunity to review the results. 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, COO and CFO.

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Management will provide a brief summary of the quarterly results and then we will open up the call to questions from analysts.

Before we begin, I'd like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website.

Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

As a reminder, this conference is being recorded and will be available for replay through November 7, 2019, 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. Harry -- Mr. Larry Helling of QCR Holdings.

Larry J. Helling -- Chief Executive Officer and Director

Thank you, operator. Welcome, ladies and gentlemen, and thank you for taking the time to join us today.

I will start the call with a brief overview of our third quarter performance, and Todd Gipple will provide additional details on our financial results.

Before I get into the results for the quarter, I want to mention our pending sale of Rockford Bank & Trust. As we announced in August, we agreed to sell RB&T to Illinois Bank & Trust, a subsidiary of Heartland Financial, and expect to close the transaction in the fourth quarter. Divesting RB&T significantly benefits our shareholders as it provides us with additional capital that we can redeploy in our more profitable markets to drive continued organic and acquisitive growth.

We also expect to see an improvement in a number of our key performance metrics after the sale closes. Todd will provide more detail during his comments. We believe that the sale will also benefit RB&T and the Rockford community, as the combined organizations create the preeminent bank serving that market. We're grateful for all of the team members of RB&T and have confidence that they will continue to embody the values that have contributed to their success and have made the bank a great place to work.

Now turning to our third quarter financial results. We are very pleased with our results for the third quarter. We delivered another record quarter of net income driven by continued strong loan growth, an expanded net interest margin, record fee income, improved credit quality and careful management of noninterest expenses.

Despite the highly competitive lending environment, which has put industrywide pressure on rates, we have been able to maintain both our pricing and underwriting discipline. This helped us maintain our average loan yields even as we grew loans during the quarter. We continue to win new business with our high-touch service, market expertise and efficient local decision-making.

Third quarter net income was $15.1 million and diluted earnings per share was $0.94, both quarterly highs. Adjusted earnings, excluding acquisition-related and certain other costs, were $15.9 million. And adjusted diluted EPS was $1, a strong increase from the second quarter when we recorded adjusted earnings of $14.1 million and adjusted diluted EPS of $0.88.

On a year-over-year basis, our adjusted earnings for the quarter were up 53%.

Our annualized loan growth was 9.1% during the quarter, excluding the RB&T loans held for sale. Year-to-date, we have produced annualized growth of 9.4%. When combined with our solid pipelines, gives us confidence that we are on track to be in our targeted loan growth range of between 8% and 10% for the full year. Our loan growth for the quarter was driven by strong production from both our core commercial lending business and our Specialty Finance Group. This group is having a banner year, generating record production volumes based on strong client demand for our niche lending products, particularly in the area of municipal and tax credit finance. Our loan and lease growth was primarily funded by excess liquidity that resulted from the strong increase in core deposits that we generated in the first half of the year.

Total deposits, excluding RB&T, were down on a linked quarter basis, driven mainly by a decline in higher cost public funds and brokered CDs as we chose not to renew certain deposits when they matured.

Core deposit gathering across our entire footprint remains a significant focus, and year-to-date, these deposits have grown by 11.5% on an annualized basis, when excluding RB&T's deposits held for sale.

Despite robust competition for both loans and deposits, we expanded our net interest margin for the third quarter, which helped contribute to our strong profitability. Todd will go into more detail on number NIM during his portion of the call. We continue to be extremely pleased with our level of noninterest income, which in the third quarter was a record $19.9 million, up from $17.1 million in the second quarter, our previous record.

The increased level of performance was primarily driven by a record swap fee income, resulting from continued strong activity from our Specialty Finance Group as well as better pricing execution on our swap transactions due to the changes in the interest rate environment.

Finally, we continue to feel very good about our strong asset quality which improved, again, during the quarter. Excluding RB&T, our nonperforming assets to total assets was just 27 basis points, the lowest it has been in nearly 20 years. Our clients continue to generate solid financial performance, and we aren't seeing any significant signs of the economic slowdown or stress in our loan portfolios or in our local markets. All of this gives us confidence that we will be able to maintain strong credit quality while meeting our loan growth targets.

In summary, we are extremely pleased with this quarter's performance and remain optimistic going into the end of the year. We remain committed to pursuing organic growth and disciplined capital deployment within the markets we serve, all with the coal of delivering attractive returns and creating increased value for our shareholders.

I will now turn the call over to Todd for further discussion on our third quarter results.

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Thank you, Larry. As I review our third quarter financial results, I will focus on those items where some additional discussion is warranted.

I'll start with net interest margin, as we worked very hard to protect and expand our NIM. As I mentioned on last quarter's call, we are proactively focused on reducing rates on our deposits, gathering more core deposits in order to lessen our reliance on higher cost wholesale funding and maintaining our pricing discipline on new loan production. These actions resulted in a significant increase in net interest margin in this quarter.

Our aggressive reductions in the rates paid on our deposits resulted in a reduction in our overall cost of funding of 5 basis points. Also positively impacting NIM this quarter was a larger-than-normal amount of interest recoveries on previously charged off loans that were repaid during the quarter. These interest recoveries provided 5 basis points of the NIM improvement during the quarter. After accounting for the positive impact of these recoveries, we were still able to maintain static loan yields, even as market rates continue to fall.

To summarize all of the moving parts impacting net interest margin this quarter, our reported NIM improved by 12 basis points on a linked quarter basis. Stripping out the impact of acquisitions-related net accretion, our NIM ex accretion improved by 10 basis points. Finally, removing the impact of the outsized interest recoveries that I just mentioned, our true core margin improved by 5 basis points this quarter. We are well positioned to continue to benefit from a flat to moderately down short-term interest rate environment, as our balance sheet is modestly liability-sensitive and we expect to see further margin improvement in Q4. While we do expect to see this additional improvement in core margin, we do not expect the same level of onetime interest recoveries that created 5 basis points of margin accretion in Q3 to reoccur again in Q4. Therefore, on a net basis, we're guiding to a static net interest margin in the fourth quarter.

Now turning to our noninterest income results. As Larry mentioned, we are extremely pleased with the growth in our noninterest income during the quarter, which was, once again, driven by record swap fees. Our swap fee income and gains on the sale of government-guaranteed loans for the first nine months was over $21 million, already putting us well in excess of our initial full year target of $8 million to $12 million. Our pipeline of loans at our Specialty Finance Group remains robust, so we anticipate another solid quarter of swap fees as we close out the year. Our current expectation is that this fee income source will be in the range of $5 million to $7 million for the fourth quarter. We are not yet providing guidance for full year 2020, but instead expect to do that on our 2019 year-end earnings call.

On the expense side, we remain focused on controlling expenses and improving our efficiency ratio. While our reported expense number came in at $39.9 million for the quarter, there were a number of significant items that impacted expenses. First, we incurred post-acquisition cost of $884,000; second, we recorded a $2 million writedown on an OREO property; third, we had an additional $3.9 million of bonus and commission expense, driven by the higher-than-anticipated fee income and very strong year-to-date net income; and fourth, we recorded debt extinguishment cost of $148,000. Excluding these line items, our noninterest expense came in just under $33 million, within the guidance range of $32 million to $33 million we provided on last quarter's earnings call.

Looking ahead to the fourth quarter, we anticipate that our level of spending will be moderately higher, based on increased staffing and some year-end investments in technology and efficiency improvements. Therefore, including the compensation impact of the anticipated level of swap fee income, our expectation for noninterest expense in the fourth quarter is between $35 million and $36 million.

Our asset quality continues to be excellent, with no material additions to NPAs in the third quarter. Our nonperforming assets declined by $2.5 million from the second quarter, if you exclude our RB&T. This was primarily due to the $2 million additional writedown of an OREO property. Our loan loss provision, excluding RB&T, decreased on a linked quarter basis primarily due to improved credit quality. As I just mentioned, we have further written down the large other real estate property that we're marketing for sale, in order to reflect current market conditions and recent offers we are considering. We remain very focused on moving that property as soon as possible.

Our effective tax rate for the quarter came in at 19.1%. There were not any onetime items impacting this rate. However, it was slightly elevated again this quarter due to the high fee income that changed our mix of taxable versus non-taxable income. We expect that our tax rate for the fourth quarter will be in the range of 19% to 20%, not including the beneficial impact of stock option and RSA exercises.

I'd like to wrap up my comments with some observations regarding the pending sale of Rockford Bank & Trust. As Larry mentioned, we expect the transaction to close late in the fourth quarter and therefore, we will see the full benefit of the transaction in the first quarter of 2020. As a result of the sale of RB&T, we anticipate significant improvement in our profitability metrics, including a 7 to 9 basis points lift in net interest margin, an 8 basis point increase in ROAA, a 150 basis point improvement in our efficiency ratio and a $0.60 increase in our tangible book value per share. From a capital perspective, the transaction will significantly strengthen our capital as we anticipate an immediate increase in our tangible common equity to tangible assets ratio of approximately 110 basis points. Again, this decision makes great sense for our company as it frees up capital for us to redeploy in our existing and more comfortable markets and significantly improves our go-forward financial performance.

With that, let's open up the call for your questions. Operator, we're ready for our first question.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from Jeff Rulis of D.A. Davidson.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Thanks. Good morning. Todd, I guess, given the timing of the sale, I just wanted to -- some of the assumptions you outlined for 4Q on expenses and some of the fee income inputs, curious as to is that inclusive of Rockford run rate -- I guess as we get into 2021, this is completely sold. Do you see an adjustment to those fee income and expense levels? Or is it largely immaterial?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Great question, Jeff. So the guidance we just gave for Q4 really has Rockford Bank & Trust in for the entire quarter. We do expect that to close late in the quarter, could be as late as year-end, could be the end of November. We think we're on schedule for that. So rather than parse the quarter, we've given you guidance for the entire quarter. Going forward into 2020, we expect to be pretty transparent about the go-forward run rate on expenses ex Rockford. Really not a significant impact on the fees as many of our wealth management and certainly the swap fees are generated in our other charters, but the guidance that we provided really has Rockford in it for the entire quarter.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Okay. If the fee income impact is immaterial, I guess, the expenses we could assume -- or is it safe to think that there may be some moderate savings into the run rate? Is that so?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. Certainly there will be some expense reductions ex RB&T. And what we thought would be best would be at the year-end earnings call to really carve out all the income impact and revenue impact and the expense run rate impact at that point.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Okay. If we were to take just as a percent of assets or something, the similar percentage on expenses, is that as good a guess as any? Or would there be some puts and takes to that?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. There is going to be some puts and takes there as I think everyone is aware of the underlying financial performance at RB&T is less than our other subsidiary banks. So the overall impact on EPS going forward, which is really what I think you're trying to get after, Jeff, will be fairly modest when you consider the financial performance of Rockford coming out.

We do have some loans that are not part of the purchase that will be taken back to our other sister banks that will help offset the EPS dilution as a result of learning -- or losing the Rockford earnings. It really should only be a $0.01 or $0.02 of EPS going forward into 2020 -- each quarter, I'm sorry, $0.01 or $0.02 each quarter.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Okay. Right. Okay. And I've got your -- appreciated the impact to margin post the sale. The margin discussion in general and just trying to get a baseline rate assumption, are you assuming cuts to come by year-end in that figure?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. We're expecting cut as early as next week. And I think the current expectation is for at least one more after that. Our balance sheet is positioned to really benefit from that. That's our current expectation. We typically don't like to get as granular with the NIM discussion as we did. We thought it was important to be pretty transparent about the fact that we should think less about -- we picked up 10 basis points of core margin this quarter but more 5 -- the onetime lift from those interest recoveries added that other 5 basis points, and we didn't really want everyone expecting another 10 basis point improvement in Q4, when in reality, what really happened is, we improved core margin by a 5 bps here in Q3, and we expect to do that again. That's our guidance for Q4 as another 5 basis points. The swing in those onetime interest recoveries really made it look more like 10 and 0, if that makes sense.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Yes. No, I appreciate the detail on the margin, very helpful. I'll step back. Thanks.

Operator

Our next question will come from Damon DelMonte of KBW.

Damon DelMonte -- KBW -- Analyst

Good morning, guys. How's it going today? First question on loan growth. Could you just quantify the size of the Specialty Finance Group loan book with all of the activity that they've had going on?

Larry J. Helling -- Chief Executive Officer and Director

Yes. Basically they continue to grow at a pace consistent with the core bank growth. So about half of our growth in loans during the quarter came from the Specialty Finance Group and half from the core business.

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Okay. And what's the overall size of that book?

Larry J. Helling -- Chief Executive Officer and Director

It's broke into a couple of different factors. In the tax credit side, it's probably approaching $200 million of outstandings. And we also have some municipal lending in that space that's probably another $100 million.

Damon DelMonte -- KBW -- Analyst

Got you. Okay. That's helpful. And as you kind of look out through the end of this year and we head into 2020, do you still feel good about that 8% to 10% range beyond 2019? Or are you guys not at a point where you want to disclose that?

Larry J. Helling -- Chief Executive Officer and Director

No, I mean I think we've done 8% to 10% for 25 years. So I mean, certainly, there's little ebbs and flows in that 8% to 10%. But I think we feel good at this point about being able to maintain that growth pace.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. And then, credit churn seems to be holding up pretty well. Todd, can you help us think a little bit about the provision expense going forward? And what a reasonable range to expect this?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Sure. Over the last several quarters, we've been right on top of $2 million. There was a good sized chunk of the provision in Q3, where it was related to NPA issue of Rockford Bank & Trust. We've got our arms fully around that. Based on further improvements in asset quality and no real degradation in any of the portfolios, I would expect that $2 million would be more like an upper limit in terms of Q4 provisioning, probably be a little lighter than that, maybe closer to $1.5 million in terms of Q4. And we obviously have our arms fully around CECL. We're not yet disclosing any specific numbers there, but would tell you we worked really hard to be prepared for the first quarter next year. At this point, we do not expect any material impact on capital ratios on adopting CECL.

Damon DelMonte -- KBW -- Analyst

That's all that I had. Thank you very much.

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Thank you, David.

Operator

The next question will come from Nathan Race of Piper Jaffray.

Nathan Race -- Piper Jaffray -- Analyst

Todd, maybe just to touch on deposit growth, deposit shrank a little bit and I imagine some of that shrinkage was intentional, just given the improvement that we saw in your funding cost sequentially. So just curious, how we should think about deposit growth going forward. And if there is some additional kind of pruning of the deposit base going forward to kind of support the NIM outlook?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. Great question, Nate. We actually really intentionally pulled back on liquidity in the quarter that helped us with margin. I think you remember both Q1 and Q2, we had fair amount of excess liquidity. We are having a fair amount of success growing deposits even ahead of our 8% to 10% loan growth. We did shrink deposits a bit, but in the right buckets. We got out of some public funds and some other more expensive deposit relationships, really pruned those, got a lot more efficient in terms of the balance sheet. I would expect our core deposit growth, and that's really where we did grow deposits during the quarter with a good non-interest-bearing demand, for example, our average non-interest-bearing demand was up through the quarter.

I would expect, going forward, that we would match our loan growth. And so if you look at our 95% loan-to-deposit ratio, we would expect to really stay on top of that, and be able to grow deposits at the same pace we're going loans. That's our expectation, really keeping our wholesale utilization around that 10% number. It was a little higher than that at the end of the quarter. We always have a little bit of run-off correspondent deposits right at quarter end, but it really was 10% on average during the quarter. And I would expect us to keep pace with that on deposit growth. We are very focused on growing core deposits. We want to continue to fund our loan growth with that, and I know Larry and I expect that to continue to happen.

Nathan Race -- Piper Jaffray -- Analyst

Got it. That's very helpful. And if I could just ask kind of along those lines and think about kind of the trajectory of core loan yields? I appreciate the guidance for the margin for the fourth quarter, but maybe assuming we get additional Fed rate cuts, can you kind of just help us think about the variability of the loan book relative to maybe the offsets you have in terms of some deposits that may be indexed to the short end of the curve as well?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Sure, Nate. We have about $1.2 billion in rate-sensitive assets and we've got about $1.1 billion in rate-sensitive liabilities. We are getting much better beta results on the liabilities. Of that $1.1 billion, roughly $700 million of that is really performing at a 100 beta on the way-down. And we're working really hard to continue that. We actually have some repricing on public CDs that we did keep and some brokered CDs that we are going to retain that are actually performing better than a 100 beta, probably about a 120 beta on the lay-down.

So the lifted margin that we saw in Q3, and that we're expecting in Q4, is really coming on the funding side, as you would guess. The $1.2 billion in rate-sensitive assets, probably only about 25% of those our prime floaters. And on those prime floaters, for the most part, we do have floors. Probably with this next cut, we'll start bumping into some of those floors. I think, Larry and I would expect that once we get to perhaps the second cut, we'd be at the floors on most of those. The other 75% of those are really LIBOR floaters. And you know, there is some disjointed reaction between LIBOR, disintermediation between LIBOR and Fed funds. And the LIBOR loans are performing pretty well. We expect those to be relatively modest beta going forward. And that's really why we're going to see a lift in margin.

Nathan Race -- Piper Jaffray -- Analyst

Understood. Very helpful. And if I could just ask one more on fee income. I guess, with the Rockford divestiture, you acquired base there within the last couple of years. So is it fair to assume that you guys will maintain a wealth management presence in Rockford going forward?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. So great question, Nate. Currently, the Bates Financial Companies, given the timing of that transaction and its proximity to our decision to sell RB&T, we've left the Bates Companies at a holding company. It was not part of our transaction with Heartland. We continue to own Bates and right now, that's generating about $3 million to $3.2 million a year in wealth management fees.

Nathan Race -- Piper Jaffray -- Analyst

Okay, got it. Thank you for all the color.

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Thanks.

Operator

The next question will come from Terry McEvoy of Stephens.

Terence James McEvoy -- Stephens Inc -- Analyst

Good morning everyone. First question on capital. Could you just talk about the excess capital coming from the RB&T sale? And just prioritize. I know you mentioned redeploying in more profitable markets, acquisitive growth, and there's also, I guess, I'll throw it, buyback. So how are you thinking about offsetting the dilution from the transaction? Is it emphasis on finding an acquisition to utilizing the capital? If that doesn't materialize, what are your thoughts on buyback?

Larry J. Helling -- Chief Executive Officer and Director

Okay. Our first priority certainly would be to fund our strong organic growth in our other markets. And we're fortunate to have that in nearly all of the other markets that we operate in. Our second focus would be some potential acquisitive growth within those markets. It would be our -- because if we think the ability to execute and lower risk of executing on something inside one of our existing markets. After that would be an additional market at some time.

From a stock buyback standpoint, we do plan to talk about that conceptually at our next holding company Board meeting in a few weeks.

We're not in a rush to do a buyback because of what we think our opportunities are to redeploy that, either in strong organic growth or in acquisitive growth within our markets in not that distant future. However, we will consider stock buybacks, really position ourselves in case there is a meaningful disruption in the bank stock markets and value would deteriorate substantially.

Terence James McEvoy -- Stephens Inc -- Analyst

And then as a follow-up, if I go back to the presentation, when you announced the sale, there was an appendix slide that had the pro forma impact that listed noninterest income, noninterest expenses. Is that -- getting back, I think it was Jeff's question, is that a good guide to use as we do our best to model out the first quarter and second quarter on a pro forma basis ahead of January, when you are prepared to provide more pro forma guidance or discussion?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. I think that would be -- Terry, that would be a good proxy for more detail in January with our Q4. That was the intent of putting that deck together to give you and everyone else some modeling information for that. So I think that would be a good proxy for now. I do want to fill in a little bit of the capital discussion. We talked about 110 basis point lift in TCE at closing. I just thought I'd give everyone the expected target there as we end the year. So we accreted 15 basis points of TCE organically here in the third quarter. We certainly would expect something like that in Q4. That would put us at about 8.35 TCE, and that 110 basis point of lift after closing the transaction puts us in the mid-9s. So just to put some context around Larry's comments on capital and deployment and usage of capital, we think we should feel very good about being in the 9.50 range that's really a good number for us. We feel good about landing there. And we'll be very mindful of how we deploy and spend that capital.

Terence James McEvoy -- Stephens Inc -- Analyst

Thanks

Larry J. Helling -- Chief Executive Officer and Director

Thank you.

Operator

The next question will come from Daniel Cardenas of Raymond James.

Daniel Edward Cardenas -- Raymond James -- Analyst

Good morning. Maybe -- appreciate all the information and color so far, but maybe some color on competitive factors, I mean, they've been a mixed bag in terms of what I'm hearing from other companies in terms of frothiness building up in various markets on both -- primarily on the lending side. Are you seeing any of that in your footprint? And then maybe a quick update on how Missouri is working for you guys?

Larry J. Helling -- Chief Executive Officer and Director

Dan, are you saying frothiness in loan activity or? I'm not sure -- I want to make sure...

Daniel Edward Cardenas -- Raymond James -- Analyst

Yes, frothiness in loan activity, kind of irrational pricing in terms.

Larry J. Helling -- Chief Executive Officer and Director

Yes. We are certainly trying to remain disciplined in the markets that we're in. I think we're fortunate that we're in kind of midsized markets in the Midwest, which don't necessarily experience the extreme highs and lows as some of the large metropolitan areas. And so certainly there is some competitive pricing pressure starting to come into the discussions. We did a really outstanding job this last quarter holding on to pricing. And it's certainly -- we're going to feel some of that pressure ultimately over the next few quarters likely. And so it's hard to measure what that impact is going to be because it's kind of a little more forward-looking than we probably can anticipate at this point. But our loan growth has been pretty broad-based, and so it's not like it's sectors that are, I think, one particular sector property, more than another, or any of those kind of things. So that helps us, hopefully, to withstand that pressure down the road.

With regard to Springfield, we're really excited about that marketplace. The management team there has done a great job so for of growing the business and growing their earnings in a meaningful way in a fairly short period of time. So we really love that market and hope to continue to grow there.

Daniel Edward Cardenas -- Raymond James -- Analyst

Excellent. And credit metrics are good but maybe a little bit of color on classified levels, how did they trend this quarter?

Larry J. Helling -- Chief Executive Officer and Director

Yes. Modestly lower on the classified trends, really no meaningful movement of significance. So we hear the noise, particularly in manufacturing at a national level, but it really has not shown up on our client base as much yet.

Daniel Edward Cardenas -- Raymond James -- Analyst

Great. All my other questions have been answered. Thanks, guys. I'll step back from TV.

Operator

[Operator Instructions] The next question will come from Evan Lisle of Janney Montgomery Scott.

Evan Lyle -- Janney Montgomery Scott

This is Evan Lisle and I'm on for Brian Martin. Just a couple of quick questions. Clarifying your comments on floors in your loan book. How many loans have floors? And what percentage of those loans are at the floors?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. So again, of our roughly $1.2 billion in floating rate loans, about 25% of those would be prime-based floaters. And right now, a few of those would be at their floors. Of course, the floors would be scattered a fair amount in terms of where they get triggered. But a few of those would have been triggered now. Another good sized chunk probably at half the way there with the next rate cut. But if there is a second 25 basis point cut, so another 50 down, we'd expect virtually all of those to have hit their floor.

Evan Lyle -- Janney Montgomery Scott

Okay. Awesome. Appreciate that. And then just a few housekeeping items. Can you talk about your accretion income? And then also the tax rate moving forward?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Sure. So first on tax rate. That's an easy one. That's elevated a bit as we have a little bit more taxable streams of income coming from the SFG swap fees. So we're guiding to stay in that 19% to 20% tax rate range.

In terms of accretion, we expect another about 1.1 to 1.2 of that in Q4. We got an estimated remaining discount at the end of the year of 6.6 going into 2020. So right now, at the end of Q3, 7.7, budgeted accretion for -- expected accretion for Q4 is about 1.1, gets us to 6.6 remaining at the end of the year.

Evan Lyle -- Janney Montgomery Scott

All right. Awesome. And then lastly, I know there've been a lot of questions on your margin and you gave guidance for 4Q. But can you talk about the possibility of 3 rate cuts in the next 3 meetings, and what that means?

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Yes. Really based on our balance sheet position, based on some of the comments that we've just shared with you on floors, helping us a bit on floating rate loans and based on the success we're having with being very aggressive on rates reduction and having a pretty big chunk of our rate-sensitive liabilities really moving at a 100 beta, additional cuts over and above the 1 or 2 that everyone's counting on now, actually we would expect to help us. So based on our balance sheet position, based on how we're having a great deal of success managing deposit rates down, we could see 3 cuts and still have positive impact on margin going forward.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Larry Helling for any closing remarks.

Larry J. Helling -- Chief Executive Officer and Director

Thank you all for joining us today and for the great questions. We look forward to speaking to you all again soon. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Todd A. Gipple -- President Chief Operating Officer Chief Financial Officer

Larry J. Helling -- Chief Executive Officer and Director

Jeffrey Allen Rulis -- D.A. Davidson & Co -- Analyst

Damon DelMonte -- KBW -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

Terence James McEvoy -- Stephens Inc -- Analyst

Daniel Edward Cardenas -- Raymond James -- Analyst

Evan Lyle -- Janney Montgomery Scott

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