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QCR Holdings Inc (NASDAQ:QCRH)
Q2 2020 Earnings Call
Jul 28, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Second Quarter of 2020. Yesterday after market closed, 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. In addition, the Company has included a supplemental slide presentation with COVID-19 related disclosures that you can refer to during the call. You can also access these slides on the website.

With us today from management are Larry Helling, CEO; and Todd Gipple, President, COO and CFO. Management will provide a brief summary of the financial results and then we'll open the call up 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 August 11, 2020 starting this afternoon, approximately one hour after the completion of this call. It will also be accessible on the Company's website.

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

Larry J. Helling -- Chief Executive Officer

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 discussion regarding our second quarter performance. Todd will follow with additional details on our financial results. As the COVID-19 crisis continues to impact our country and the economy, our thoughts remain with those who have been most impacted as well as healthcare professionals and our first responders. Our top priority remains the health of our employees and clients. And I am proud of our entire team for stepping up in this unique environment and doing everything it takes to support each other, our clients and our communities.

Despite the challenges caused by the pandemic, we delivered a strong performance in the second quarter including record pre-provision pre-tax adjusted net income, driven by our strong loan growth, significant fee income and careful management of non-interest expenses. Our net income and diluted EPS were both up over 22% from the first quarter, while our tangible book value increased by 4% on a linked quarter basis and by 14% year-over-year. We achieve these exceptional results while significantly increasing our provision for loan losses and building our reserves.

We believe that bolstering reserves is prudent at this time, given the ongoing economic conditions and the uncertainty about continued government stimulus. As we discussed last quarter, we proactively implemented our loan relief program offering three month loan payment deferrals to our impacted clients helping them preserve cash and liquidity. The total amount of bank loan deferral requests that we received and granted during the quarter was $491 million, representing approximately 12% of our total loans. To date, we have limited request for a second round of deferrals. And at this time, we anticipate that less than 25% of our loan balances that participated in the first round of the program will seek additional assistance.

We believe that this speaks to both the high quality of our loan portfolio and the resiliency of our local markets, which are generally experiencing unemployment rates lower than the national average and seeing pandemic impacted jobs returned at a faster pace than the rest of the country. Additionally, our lending teams were successful in funding over $350 million of PPP loans to both new and existing customers, while also growing our core loans by over 8% on an annualized basis. Improved demand in both our core commercial lending business and our specialty finance group helped drive the growth.

We added a significant number of new commercial client relationships, many of which were obtained as a result of our successful execution of the PPP loan program. We were very proactive in reaching out to long-term targets in our communities and we're pleased that we were able to gain so many full relationship clients. This helped fuel our outsized deposit growth during the quarter. Additionally, we continued to attract significant deposits from our network of correspondent banks. Our asset quality remained strong and our current credit metrics improved during the quarter.

Importantly, we reduced non-performing assets by 21% through the sale of an OREO property. While we are not currently experiencing meaningful degradation of specific credits in our portfolio, we chose to be prudent and booked a provision for loan losses of $20 million this quarter in order to continue to build reserves against future potential credit issues related to COVID-19. It's difficult to predict the ultimate impact of this pandemic. However, our banks are well capitalized and well positioned to help them weather the storm. We continue to believe that our client focus, combined with local decision making is the best way to serve our markets during these uncertain times.

In addition, we have seasoned credit teams at all charters that have deep experience in dealing with significant economic stress and uncertainty. In summary, we believe that we will emerge from these challenges as a stronger company having supported our clients with financial assistance and exceptional service. We are well positioned to pursue our long-term goal of profitable growth and value creation, both organically and through strategic acquisition.

With that, I will turn the call over to Todd to provide further information about our second quarter results.

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

Thank you, Larry. As I review our second quarter financial results, I will focus on those items where some additional discussion is warranted. I'll start with our loan growth. As Larry noted, our loan growth for the quarter was driven by organic demand from our core lending segments as well as a very strong response to the SBA's Paycheck Protection Program. Our lending teams work diligently last quarter and we funded over 1,600 PPP loans totaling $358 million to both new and existing clients.

As Larry mentioned, we were successful in acquiring some highly desired new clients that we have been targeting for a long time and we are very pleased with those results. Our loan and lease growth this quarter excluding PPP loans was over 8% on an annualized basis and was driven by improved demand from both our core commercial lending businesses and our specialty finance group. This strong loan and lease growth in the second quarter increased our loan growth to 5% on an annualized basis for the first half of the year again, excluding the impact of PPP loans.

While this is solid organic loan growth, there remains some uncertainty among our clients regarding the strength of the economic rebound across our markets. However, given our current pipeline. We believe that we will be able to achieve organic loan growth excluding PPP between 3% and 5% for the full year. With respect to deposits, we again generated very strong deposit growth this quarter. Total deposits increased by $179 million or 4.3% on a linked quarter basis with increases particularly strong in non-interest bearing demand deposits, which were up $348 million.

Our time deposits and brokered deposits declined by $215 million as we let higher cost CDs run off the balance sheet, given our strong core deposit gathering activities, which has reduced our need for wholesale funding. Additionally, our average deposits during the quarter reflected even higher balances than we carried at quarter end. The vast majority of our deposit growth was sourced from our correspondent banking relationships with much of the remainder from commercial clients.

Over quarter end, a significant portion of our excess correspondent bank deposits temporarily shifted off balance sheet and into the Federal Reserve Bank EBA program. Shortly after quarter end, many of these deposits have returned. For the third quarter, we expect to again be operating with levels of excess liquidity, similar to what we did over the second quarter. However, our correspondent bank team is working to shift some of these core deposits off balance sheet throughout the quarter, while retaining the ability to bring them back, if needed to fund future loan growth. While this excess liquidity will continue to pressure margins, it really is an indication of our true franchise value and we feel very fortunate to have these types of core deposit relationships with clients. We believe that this is a significant benefit and that we don't have to rely on wholesale funding to support our loan growth, which is a positive for the long-term future of the Company.

Now turning to earnings. With the strong growth in our earning assets over the second quarter, funded by robust growth and core deposits, our net interest income grew $3.2 million or 8.6% on a linked quarter basis. However, net interest margin was significantly impacted by the previously mentioned excess liquidity that we carried during the quarter. Our deposit cost decreased significantly as we gathered a higher mix of non-interest bearing deposits and reduced our wholesale funding, allowing us to reduce our total cost of funds by 53 basis points. However, partially offsetting the improved funding costs were lower average loan yields due to the sharp decline in short-term interest rates. And when combined with the significant excess liquidity that we carried during the quarter, our reported NIM was adversely impacted by 29 basis points. Excluding the impact of the excess liquidity, we carried throughout most of the quarter, reported NIM would have increased 1 basis point from the first quarter.

Respectively, we are well positioned to continue to benefit from reductions in our cost of funds as we aggressively manage deposit rates lower and as higher cost wholesale funds and retail CDs continue to roll off and reprice. That said, we will continue to see some downward rate pressure on asset yields and we expect to continue to carry excess levels of liquidity. Therefore, we are guiding to a static margin for the third quarter.

Now turning to our non-interest income, which was $28.6 million, up sharply from the first quarter. We experienced record swap fee income, which came in at $19.9 million for the quarter nearly triple the first quarter results. We are seeing very strong swap activity with our core commercial borrowers as well as from our Specialty Finance Group clients. There are three primary drivers to this exceptional performance for the quarter. First, demand for our lending products remained strong, particularly in the tax credit space where we are making high quality variable rate loans and our enabling our clients to lock in attractive long-term fixed interest rates through the use of swaps. Second, the current low interest rate environment combined with the flat yield curve, makes these types of transactions very compelling for our clients. And third, the pandemic created some disruption with our competitors at a time when we were able to remain responsive to client needs.

The pipeline of loans at our banks and our Specialty Finance Group remains healthy and our expectations for swap fees also remains strong. While we don't anticipate achieving the same level of swap fees that we did in the second quarter, we do expect this fee income source will be approximately $30 million to $32 million for the second half of the year.

Now, turning to our expenses. After adjusting for an additional $2.8 million of salary and benefits related to increased bonus and commission expense in the quarter driven by the strong financial results and higher than anticipated swap fee income, our non-interest expense would have been $30.3 million below the low end of our guidance range of $31 million to $33 million we provided on last quarter's earnings call. Looking ahead to the second half of the year, we continue to anticipate that our non-interest expense will be between $31 million and $33 million per quarter. We remain focused on strong expense control in these uncertain times. Despite the disruption that COVID-19 is causing, our overall asset quality actually improved on a linked quarter basis.

Our non-performing assets improved $3.6 million quarter-over-quarter, driving the ratio of NPAs to total assets, down to 24 basis points at quarter-end, an improvement of 8 basis points from the end of the prior quarter. Even with the improved asset quality results this quarter, and while our local economies appear to be doing better than much of the rest of the nation, we are still providing heavily for potential future losses, and therefore we booked nearly $20 million in provision for loan losses this quarter. The majority of this significant provision was a result of increasing qualitative factors due to the COVID-19 pandemic.

The level of our reserves excluding the impact of the $358 million in PPP loans was 1.61% to total loans and leases up 47 basis points from the end of March. With respect to capital, we continue to maintain strong capital levels and have abundant liquidity to meet our clients' needs during this pandemic. Our tangible common equity to tangible assets ratio would have improved to 9.03% as compared to 8.76% at the end of March if you exclude the dilutive impact of the PPP loans. Our overall pre-provision pre-tax earnings power remains significant and we are well positioned to aggressively fund reserves while still growing capital.

Our effective tax rate for the quarter came in at 16.9%. The rate was higher on a linked quarter basis due to the higher taxable earnings and a resulting lower proportion of tax exempt to revenue. I'd like to wrap up my comments by reinforcing what Larry noted earlier about our ability to manage through the economic challenges created by the COVID-19 pandemic. We are helping our clients and our communities weather this crisis, and we are fortunate to have great people throughout our entire Company doing what it takes each day to get the job done. I know we all look forward to when this crisis passes, and when it does, we believe we will emerge an even stronger organization, well positioned to continue our long-term growth and shareholder value creation strategies.

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

Questions and Answers:

Operator

Certainly. Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Good morning, Larry and Todd.

Larry J. Helling -- Chief Executive Officer

Good morning, Jeff.

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

Hi, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Appreciate the slide deck and the detail there. I think that's interesting sort of the deferrals. I think slide 8, you talked about, I think just over 5%, who sought [Phonetic] a second round of deferrals. I guess kind of mixing that with I think Larry, your comment about expecting less than 25% to extend or seek additional assistance, what percent of deferrals have reached a dead line? I mean, have you been through the entire round of the first round? Or you still have some, still approaching deadlines?

Larry J. Helling -- Chief Executive Officer

We would -- let me just give a little background, Jeff. We started right at the beginning of the last quarter to be -- have our structured deferral program. So that means we're in essence, three, four weeks into the opportunity for people to take a second deferral. I'd say we're roughly 40% of the way through, people haven't their regular payments being schedule now. And so we know that that number will go up, but as we had discussions with all of our credit officers yesterday to kind of talk about what we think will happen. We basically landed that we think less than 25% of the dollars in total will receive a second deferral or asked for a second deferral.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. Okay, that's helpful. Thanks. And on the swap outlook of $30 million to $32 million, is that pretty steady in 3Q, 4Q. Are you -- you think third quarter is a bit heavier. And then, well, maybe I'll just leave it there for now.

Larry J. Helling -- Chief Executive Officer

Yeah, I'll start and I'll let Todd follow up. I'd say, at this point, we stay -- fairly steady for the third and fourth quarters.

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

Okay. Yeah, Jeff, we had in the first quarter, a strong quarter at around $7 million. Obviously here in Q2 had an exceptional one at close to $20 million, so roughly $27 million for the first half of the year. We think the third and fourth quarters will be a little bit more balanced and little more down the middle, so maybe closer to $15 million each.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. And I -- Todd, I appreciate the comments on expenses. And there is some variable component to that. So I, if we're in the range of $31 million to $33 million for the balance of the year, and I want -- I want to ask about swap guidance for '21, but I'm just trying to get a sense for the variable component. And maybe just longer term expense control and how you approach that, if you assume a more normalized swap fee income level perhaps next year?

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

Sure. Great question, Jeff. So the $31 million to $33 million guidance would actually have that level swaps embedded in that in terms of the commission results. So we are within guidance in that $15 million-ish range each quarter, we would expect to land in that $31 million to $33 million, it's really baked into those numbers. When you look at '21, I think we've made it quite clear that our stated goal is to hold expense creep [Phonetic] to no more than 5%. So if you're looking at modeling out into '21, that's really, our expectation is to be 5% or less in terms of expense growth.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. Given that it's a pretty considerable swap number, if you even approach that. I guess if that, I mean do you, pretty early to tell, but you think, I don't know if you can hazard a wide range of '21. It just seems like if that's such a considerable fee income component if that were to come down quite a bit then, that would impact the cost side. I guess, maybe more specifically, sorry for meandering here. Is there a variable component on the on the swap side tied to comp? Is there any kind of formulaic number you could offer there?

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

Well, it's a little convoluted, Jeff, and I understand it's hard for you to model that way. But we have always had a significant amount of our compensation be incentive based and variable. And so if you were to plug into your model something a little bit less than what we're likely going to do this year for swaps, then it's likely that that 5% growth guidance for next year would be much less of that, of course, because we'd be pulling back on incentives and commissions related to swaps.

I think honestly the best thing for you to do would be taking a look at your '20 model based on our guidance and drop in a 5% creep in expenses. That's probably the best way to model that.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. Fair enough. Thanks.

Operator

The next question will come from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- KBW -- Analyst

Hey, good morning, guys. How is it going today?

Larry J. Helling -- Chief Executive Officer

Good, so far, Damon.

Damon DelMonte -- KBW -- Analyst

Good to hear. So first question pretty, pretty sizable reserve build very aggressive and improved during these times. Could you just give us a perspective as to based on what you're seeing throughout your discussions with the loan officers, how you feel about your reserve level after this quarter's build?

Larry J. Helling -- Chief Executive Officer

Yeah, good question, Damon, with regard to reserve build, it's likely that we'll continue to see elevated reserving similar to what we did this quarter for the remainder of this year. After that, we would hope to have the COVID factor on our reserve build a number so that we've got the risk, quantified basis point, what we know today.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. So -- I'm sorry [Technical Issues].

Larry J. Helling -- Chief Executive Officer

Go ahead.

Damon DelMonte -- KBW -- Analyst

Okay. All right. So something similar to this level or just something and elevated in the sense that you're going to continue to build reserves?

Larry J. Helling -- Chief Executive Officer

You're asking me to project forward on what we're going to see. A lot of it will be determined by what we see in the second round of the deferrals when that gets wrapped up. So we'll know a lot more at the end of this quarter, but I think numbers relatively similar to where we booked this quarter or what we should expect maybe the next two quarters.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. That's helpful. Thank you. And then you think you guys mentioned that you had some new customer growth and it sounded like it was tied to the PPP relationships. So I just wanted to understand that. So I know that you had targeted some non-customers and you're able to accommodate them on the PPP side, are you saying that that actually turned into a new, like a new relationship where they brought over other business subsequent to that PPP loan.

Larry J. Helling -- Chief Executive Officer

Let me correct, Damon, we had about 300 new commercial relationships, many of those are going to be high level deposit relationships. There also full relationships in many cases. And so they had other building loans or lines of credit are those kind of things that we funded. So that helped us get to that 8% core loan funding growth which probably as we indicated, isn't sustainable for the rest of the year. But as we were moving those PPP new clients over, we also brought over those additional loans that came with it.

Damon DelMonte -- KBW -- Analyst

Got it. Okay, that's helpful. And then I guess just lastly, Todd, you made a comment on the tax rate, but I missed that. Could you just repeat what you were saying on the go forward tax rate?

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

Sure. The tax rate was elevated close to 17% here in Q2, because of the strong non-interest income and obviously that dilutes the favorable benefit of tax. So going forward, that's likely to settle down closer to the 15% to 16% rate versus 17% in Q2.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. That's all I had. Thank you very much and nice quarter.

Larry J. Helling -- Chief Executive Officer

Thanks, Damon.

Operator

The next question will come from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race -- Piper Sandler -- Analyst

Hi, guys. Good morning.

Larry J. Helling -- Chief Executive Officer

Good morning, Nate.

Nathan Race -- Piper Sandler -- Analyst

Going back to the swap discussion, I think earlier this year you guys are suggesting this business can be anywhere between 20 to 25 annually in terms of the revenue contribution, which I think is kind of what you guys suggested for 2021. So, and obviously you guys are tracking well above that this year. So just curious what changes you guys or what opportunities you guys are seeing within that space. I know in the past, I mean you guys have spoken to tax credit, finance. Being a good a good size component to this segment, so just curious different thoughts along those lines going forward.

Larry J. Helling -- Chief Executive Officer

Right. I mean, Nate, we kind of outlined in our comments, there is really -- the marketplace is really receptive to what we've been doing both on the commercial and in the Specialty Finance Group. The interest rate environment has been ideal for doing these kinds of transactions. So that's helped us. And then there has been some disruption in some of our competitors with their ability to respond, because of other people, working from home and we've been able to work around that very quickly. So it certainly was a unique environment to get swap income at these relative levels. So we have not given guidance for next year yet, but as we indicated, we would expect to run at elevated levels compared to our history for the next two quarters for sure. And in the next couple of quarters, we'll give some thoughts about what we're going to do in 2021.

Nathan Race -- Piper Sandler -- Analyst

Okay, great. I appreciate that. And then just going back to the reserve discussion, obviously non-performers came down nicely in the quarter. I'm just curious what you guys talking with criticized classified migration, I imagine, it was relatively benign, just given what you guys are seeing in terms of loan modifications coming in or at least not expected to be more than 25% of the first round. So just curious, some thoughts along those lines as we kind of think about the reserve level going forward as well.

Larry J. Helling -- Chief Executive Officer

Sure. Right. The migration was also pretty benign. We did migrate a fair amount of our hotel loans to criticize, not classified, just because we're watching that that sector, particularly closely, but certainly many of them are long ways away from turning it into non-performing assets yet. The change in substandard assets was negligible, almost no movement during the quarter.

Nathan Race -- Piper Sandler -- Analyst

Okay, great. And then just on the hotel book, have you guys kind of seen what more recent occupancy rates have trended up to over the course of the second quarter? I imagine it's improved, but just curious kind of where those stand versus kind of historical levels within the past year or two.

Larry J. Helling -- Chief Executive Officer

Right. Come off at the bottom in the last 90 days, where rates three months ago where 5% to 10% of occupancy. Now it's probably 35% to 45% and because some of the consumer travel is coming back. I think we can claim to 50%-ish or so in this environment. But until business travel comes back, it's going to be difficult to get far beyond that number. And so most of these hotels need to start approaching 50%, to be able to cover their costs and to provide debt service.

Nathan Race -- Piper Sandler -- Analyst

Okay, got it. I appreciate that color. And then just lastly on capital. I don't think there are any buybacks in the quarter, but just any thoughts on just tapping that going forward. And just any kind of updated thoughts on capital deployment priorities at this point.

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

Sure, Nate. We did build capital roughly 27 basis points of TCE through our earnings as close to $14 million. As you know, we have very modest dividend amount, that's only going to cost us about 2 basis points on TCE each quarter. So our expectation is to continue to build TCE and total risk-based capital through earnings even while making some outsized provision. So feel very good about that. AOCI actually increased a bit, that added 8 basis points to TCE. The real dilution in reported TCE of course was from the PPP loans, so ex-PPP loans taken those out of the equation, we're back over 9%.

Nathan Race -- Piper Sandler -- Analyst

Okay. I appreciate you guys. Thanks for the questions and congrats on a great quarter.

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

Thanks, Nate.

Operator

[Operator Instructions] The next question will come from Evan Lisle with Janney Montgomery Scott. Please go ahead.

Evan Lisle -- Janney Montgomery Scott -- Analyst

Hey, guys, yeah, this is Evan. I'm on for Brian Martin, and nice quarter.

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

Thanks, Evan.

Evan Lisle -- Janney Montgomery Scott -- Analyst

Just a couple of quick questions, just looking back to the deferral front, you guys gave some great color in the slides and then on this call, but just looking at the second round referrals, just curious who might be looking at that, you know just kind of for that second round of deferral request.

Larry J. Helling -- Chief Executive Officer

Right. As we indicated earlier, we're just kind of midway through that process right now. It certainly appears that the hotel industry, which is probably the most challenged segment will be the ones asking for the most deferrals in that space. And then probably entertainment, it's not a big portion of our business, but entertainment venues, those kind of things would probably maybe second in that space.

Evan Lisle -- Janney Montgomery Scott -- Analyst

Okay, awesome. Thank you. And then, just sticking with just trends with COVID, obviously you guys gave, you have healthy loan growth this quarter and you guys gave some great color on that trend. I'm just curious where you're seeing your geographic footprint and just an update on the market conditions of COVID would be awesome.

Larry J. Helling -- Chief Executive Officer

Yeah, I'll start, Todd, and I'll let you finish. We've been fortunate, I think to be in mid-sized markets rather than the big metropolitan areas. So I think the effects of the pandemic have been easier to manage. And so that's been one thing, and we have been at certainly much lower unemployment levels. The last Iowa number I saw about 10 days ago was 8% instead of the national being 10% or over. And so that's really helped us a lot from a performance in our loan portfolio so far.

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

Evan, just to tag on to that. We are really fortunate to have so much of our operation in the State of Iowa. Then of course Missouri and little bit of Illinois in the quad cities. But just to put it in perspective, total hospitalizations in the State of Iowa are 241 for the entire state. So we are not seeing near the second wave that many of the states in the country are seeing. The severity is much more muted here. It's been a large part of why some of our clients are recovering more quickly and why our expectation for the second round of deferrals is fairly modest. I think Larry gave you good color on, we do expect those second round deferral request to come from them, but absent of hotels, maybe a few restaurants and some of the entertainment venues, we expect it to be pretty muted.

Evan Lisle -- Janney Montgomery Scott -- Analyst

Okay, awesome. Yeah. That helps. Very helpful. Then just last thing for me is, you touched on the margin for this year, just staying in this current rate environment, if we look into '21, how do you guys see that playing out? How does that weigh in?

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

Evan, that's a tough question for '21. I will tell you a little bit about what we expect next quarter. We guided to static and we've got some tailwinds in the form of a little bit more room to go on deposit repricing. I believe we will continue to see some mix improvement as non-interest bearing and low price interest bearing continues to grow and we continue to roll out of wholesale CDs. And we're going to work really hard to put some of this liquidity to work. Again, as Larry and I have said, we are blessed to have great deposit growth and that bodes well for our long-term future. It's pressure in margin right now, but we expect to put a little bit more of that to work and shed a little bit of liquidity. Really, the only headwind of course would be loan yields. We have a fair amount of floating-rate loans and many of those that are swapped don't have floors, but they've almost effectively hit their floors.

When you think about a loan swap to floating LIBOR at 250 [Phonetic] with LIBOR, one month LIBOR, 18 basis points, it's nearly hit the floor, if not the floors. So we're going to continue to see some pressure on loan pricing certainly in some aspects. We may have hit close to the floor. So we're looking at static here in Q3, probably this time next quarter, we'll have a little bit more thought on Q4. And as we get closer to the end of the year, a little bit more about '21. But certainly, it's a very tough time for banks with margin in this very low -- this very low rate environment and this very flat yield curve.

Evan Lisle -- Janney Montgomery Scott -- Analyst

All right. Yeah, well, that's helpful. Yeah, thanks for the color. And that's it for me. And great quarter guys.

Larry J. Helling -- Chief Executive Officer

Thanks, Evan.

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

Thanks, Evan.

Operator

The next question is a follow up from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Just wanted to circle back on, on CECL and get an update on your appetite for adoption. I don't know if you view this is a true end of the year, end of the pandemic, or if you feel like you any closer. And then, Todd, I think last quarter you mentioned what you thought the gap was, I imagine that close quite a bit, given the level of provisioning, but any thoughts on those two fronts. Thanks.

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

Jeff, I'm so glad you drop back and asked those questions. We have not talked about CECL yet. And you are right, that gap narrowed. We have a CECL calculation that's only a little more than $4 million higher than our incurred loss model. So that gap has narrowed as we expected it to. And right now we are not contemplating adopting CECL. I think the jury is still out on what we may be required to do, but right now, my expectation is that might be one of '21 depending on what the SEC guidance ends up being, but that the gap has narrowed. We talked about the vast majority of this additional provisioning being very specific to COVID factors. It's one of the reasons we like the incurred loss model gives us much more flexibility to react more quickly and more, a little bit more precisely. So that's where we are with respect to CECL right now.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. Thanks, Todd.

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

Thanks, Jeff.

Operator

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

Larry J. Helling -- Chief Executive Officer

Thanks to all of you for joining us today. We hope that everyone remains healthy and safe. Have a great day. Thanks everyone.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Larry J. Helling -- Chief Executive Officer

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

Jeff Rulis -- D.A. Davidson -- Analyst

Damon DelMonte -- KBW -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Evan Lisle -- Janney Montgomery Scott -- Analyst

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