QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings, Inc. Earnings Conference Call for the first quarter of 2021. Yesterday, after market closed, the company distributed its first 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 at 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 those slides on the website. With us today from management are Larry Helling, CEO, and Todd Gippel, President, COO, and CFO. Management will provide a brief summary of the financial results, and then we'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference is being recorded and will be available for replay through May 12, 2021 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.

Thank you, Operator. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. I will start with a brief discussion of our first quarter performance. Todd will follow with additional details on our financial results for the quarter. We are pleased to deliver another quarter of strong net income driven by robust loan growth, expanded net interest margin, and carefully managed expenses. Despite a competitive lending environment, we grew core loans by 14% on an annualized basis while maintaining disciplined underwriting and excellent credit quality. We continue to attract new clients and deepen ties with existing clients which validates our relationship-based community banking model. For the first quarter, adjusted net income was $18.6 million, and diluted adjusted earnings per share was $1.16, both just shy of the record results we posted for the fourth quarter of last year. On a year-over-year basis, our adjusted earnings for the quarter were up 50%. Our double digit core loan growth in the first quarter was driven by strong production in both our core commercial business and in our specialty finance group. There continues to be strong client demand for our niche lending products, particularly in the area of municipal and tax credit finance. Additionally, our lending teams have been active in providing loans under the second round of PPP, both to new and existing clients. We expect to fund over $100 million of PPP loans in this second round, bringing our total funding for the program to nearly $500 million. As a result of our successful execution of this program, we have added many new highly valued commercial client relationships, both on the loan and the deposit side of our business. Given our strong first quarter production, Combined with our current pipeline, we are now targeting organic loan growth for the full year of 2021 of between eight and 10%, consistent with our long-term goal of 9%. We funded our loan growth in the quarter with excess liquidity combined with growth in our core deposits, which grew by just over 3% on an annualized basis. Core deposit growth was deliberately muted as we successfully shifted some of our excess correspondent banking deposits off balance sheet with the ability to bring them back as needed. At quarter end, our correspondent banks have total deposits under management of $2.35 billion, with over $600 million on our balance sheet and over $1.7 billion being held in reserves at the Federal Reserve Bank. As we continue to grow loans, we have the ability to move a portion of these deposits back onto our balance sheet. During the quarter, we continued to reduce higher cost non-core funds, reprice deposits lower, and increase our non-interest bearing deposits. This helped to lower our overall funding costs during the quarter, which was key to our success in growing our net interest margin. Todd will provide more detail on NIM in his remarks. Our asset quality remains very strong and our banks continue to be well capitalized. Our loan deferrals remain immaterial with only $7 million on deferral at the end of the quarter. Our net charge-offs continue to be negligible and we feel very good about our current reserve level, which when excluding PPP loans is approximately 2%. As always, I want to thank our employees for their efforts in delivering strong financial results Their hard work and dedication to building relationships with our clients remains the key to our ongoing success. In summary, we are optimistic about the rest of the year and have a favorable outlook for our local markets as we emerge from the pandemic and the economy further reopens. Having supported our clients with financial assistance and exceptional service during these challenging times, we are well positioned to continue pursuing our long-term goal of profitable growth and value creation, both organically and through strategic acquisitions. And now I'll turn it over to Todd for a bit more detail.

Thank you, Larry. As I review our first quarter financial results, I will focus on those items where some additional discussion is warranted. I'll start with our loan growth. As Larry mentioned, excluding our PPP loans, Our annualized loan and lease growth was 14% during the first quarter, which was driven by new production in our specialty finance group, particularly in tax credit project lending and municipal finance. Our core commercial lending business was also very solid, most notably in commercial real estate loans, as some of our clients are funding projects that were previously put on hold due to the pandemic. We are also seeing increased C&I demand as our client's utilization of revolving lines increased in March, which we believe reflects business optimism across our client base as we enter the second quarter. Our very strong loan and lease growth during the quarter was funded with some of our excess liquidity, as well as with growth in our core deposits. As Larry mentioned, we proactively managed our deposit growth by shifting a significant amount of our correspondent deposits off our balance sheet to the Federal Reserve EBA program. which help reduce excess liquidity and enhance our net interest margin. Additionally, we continue to grow our non-interest-bearing deposits during the quarter, as they increased by 124 million, or nearly 11% from the prior quarter. Non-interest-bearing deposits now represent 27% of our total deposit base. Now turning to earnings. Our net interest income for the quarter was $42 million, down $1.7 million from the fourth quarter of 2020. However, after excluding the impact of acquisition-related net accretion and PPP income, net interest income was static on a linked quarter basis. With respect to PPP loans, $207 million in balances have been forgiven through the end of the first quarter of 2021. We recorded PPP income of $2.3 million in the first quarter, with $3.6 million remaining to be recognized. New PPP clients have resulted in more than $80 million of additional new loan and deposit business to date. While average loan balances were relatively stable during the quarter, our cash balances declined, driving average earning assets down 2.4% and creating a more efficient balance sheet. Additionally, the yield on those assets declined by five basis points from the fourth quarter, driven by both rate and mix. Our deposit costs declined by one basis point, and when combined with the strong growth in non-interest-bearing deposits, we were able to grow our adjusted net interest margin by three basis points, exceeding the guidance we provided on our year-end call. Looking forward, Given the ongoing low interest rate environment, combined with the possibility of some excess liquidity build from seasonality and expected continued PPP forgiveness, we do anticipate a possible one to three basis points of NIM compression in the second quarter. However, we will continue to work hard to protect loan yields, drive down costs to funds, and proactively manage excess liquidity in an attempt to outperform that guidance. Now turning to our non-interest income. Non-interest income was 23.5 million in the first quarter, which included 13.6 million in swap fee income, effectively right at the lower end of our guidance. This compares to non-interest income of 32 million in the fourth quarter, which included very strong swap fee income of 21.4 million. Our pipeline for swap loans continues to be healthy, and we fully expect this source of fee income to be sustainable for the long term. As a result, we are reaffirming our guidance and expect our levels of swap fee income to continue to be approximately 14 to 18 million per quarter for the remainder of 21. We generated robust growth in wealth management income during the first quarter, which was up nearly 13% on a linked quarter basis. Our performance was driven by a 457 million increase in assets under management, bringing total AUM to 4.8 billion. New client generation continues to be strong, as well as sizable increases in our existing client portfolios. Now turning to our expenses. Non-interest expense for the first quarter totaled 37.2 million, down from 46.4 million in the fourth quarter. The linked quarter decline was primarily due to lower salary and benefits expense of $5.6 million, driven by lower commission and incentive compensation expense. We also experienced modestly lower occupancy and equipment expense, advertising and marketing expense, and professional and data processing fees. Additionally, in the fourth quarter of 2020, we booked a loss on liability extinguishment of $1.5 million, which did not reoccur in the first quarter. We were pleased to outperform our guidance on non-interest expense in the first quarter, and we are reaffirming our guidance for the second quarter in the range of 38 to 40 million. Our overall asset quality continues to be very strong. Both our non-performing assets and the ratio of NPAs to total assets remain consistent with the prior quarter, and our net charge-offs were once again very minimal. We successfully implemented CECL in the first quarter, which translated into a modestly lower credit loss provision on a link quarter basis and an ACL to total loans and leases of 1.99%, excluding PPP loans. With respect to capital, we continue to build capital through strong earnings and maintain robust capital levels. Our tangible common equity to tangible assets ratio improved to 9.67% as compared to 9.4% at year end. if you exclude the impact of the PPP loans. Our effective tax rate for the quarter came in at 16.5%. The rate was lower on a linked quarter basis due to a higher ratio of tax-exempt revenue. With that added context on our first quarter financial results, let's open up the call for your questions. Operator, we're ready for our first question.