QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings, Inc. Earnings Conference Call for the second quarter of 2021. 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. With us today for management are Larry Helling, CEO, and Todd Gipple, President, COO, and CFO. Hello. Management will provide a brief summary of the financial results, and then we will open 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 August 10th, 2021, starting this afternoon, approximately one hour after the completion of the call. It will also be accessible on the company's website. At this time, I would like to turn the call over to Mr. Larry Helning at QCR Holdings. Please go ahead.

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 second quarter performance Todd will follow with additional details on our financial results for the quarter. We delivered a record quarter of net income driven by continued robust loan growth, an expanded net interest margin, improved asset quality, and carefully managed expenses. Despite the competitive lending environment, we grew core loans and leases by 15% 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 speaks to the success of our relationship-based community banking model. Second quarter adjusted net income was $22.5 million and diluted adjusted earnings per share was $1.40. Both measures are company records and each up 21% from the first quarter. On a year-over-year basis, our adjusted earnings for the quarter were up 60%. Our double-digit core loan and lease growth in the second quarter was driven by strong production in our specialty finance group and in our core commercial lending and leasing business. Within SFG, we continue to see strong client demand for our niche lending products particularly in the area of municipal and tax credit finance. Given our robust first half production and combined with our current pipeline, we are now targeting organic loan growth for the full year of 2021 of between 10 and 12%, which is higher than our long-term goal of 9%. We funded our loan growth in the quarter with excess liquidity which was generated by continued growth in our core deposits, which grew by $57 million, or approximately 5% on an annualized basis. We continued to reduce higher cost non-core funds, reprice deposits lower, and increase our interest-bearing demand deposits. This helped lower our overall funding costs during the quarter and drive growth in our net interest margin. Todd will provide more detail on NIM in his remarks. Our asset quality remains very strong, as non-performing assets improved 28% for the quarter and now represent only 17 basis points of total assets. Our net charge-offs continue to be negligible, and we feel very good about our current reserve level, which, when excluding PPP loans, is 1.85%. Our banks continue to be well capitalized, and we are able to improve several of our capital ratios during the quarter, while at the same time repurchasing 100,000 shares of our stock. As previously announced on May 24th, we resumed our share repurchase program as part of our long-term capital allocation plan to further build shareholder value. As always, I want to thank our employees for their efforts in delivering these record financial results. Their hard work and dedication to building relationships with our clients remains key to our ongoing success. In summary, we are optimistic about the second half of the year and have a favorable outlook for our local markets and their respective economies. 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 further details.

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 net interest income. Our adjusted net interest income for the quarter was $45.7 million, up $1.9 million from the first quarter. This strong performance was due to an increase in our adjusted net interest margin, combined with the strong loan and lease growth that Larry discussed. With respect to PPP loans, we currently hold $148 million in balances, as over 90 percent of the first round loans have been forgiven to date. We expect forgiveness on the second round of PPP loans to ramp up during the second half of the year. Remaining net PPP origination fees to be recognized are approximately $3.5 million. During the quarter, we were able to grow our adjusted tax equivalent net interest margin by four basis points, significantly exceeding the guidance we provided on our last call. Our average earning assets grew by 2%, and the yield on those assets increased one basis point. While loan yields declined six basis points during the quarter in this very competitive rate environment, this was more than offset by higher yields on our investment portfolio. In addition, we continue to drive our funding costs lower by three basis points. As we look forward, we anticipate a relatively stable NIM in the third quarter, even with the headwinds of the ongoing low rate environment. As always, we will work hard to continue to protect loan yields drive down cost of funds, and proactively manage excess liquidity in an attempt to outperform that guidance. Now, turning to our non-interest income. Non-interest income was $19.3 million in the second quarter, including $9.6 million in capital markets revenue from SWOT fee income, which was lower than our guidance. This compares to non-interest income of $23.5 million in the first quarter, which included SWOT fee income of $13.6 million. Several of our swap loans that were scheduled to close in the second quarter were temporarily delayed. Most of those loans have subsequently closed here in July. We have now experienced very strong activity to start the third quarter, and as of July 23rd, we have already generated $10 million in swap fees for the month. Our pipeline for swap loans continues to be healthy, and we fully expect this source of capital market revenue to be sustainable for the long term. as it is an essential part of our tax credit lending. As a result, our current expectation is that third quarter swap fee income will be at the upper end of our guidance range of $14 to $18 million. We once again generated solid growth in wealth management income during the second quarter as it was up 4% on a link quarter basis. Our performance was driven by a $730 million increase in assets under management year to date. bringing total AUM to $5.1 billion. New client generation continues to be strong in addition to sizable increases in our existing client portfolios. Now, turning to our expenses. Non-interest expense for the second quarter totaled $35.7 million, down from $37.2 million for the first quarter, and less than our guidance. The linked quarter decline was primarily due to lower salary and benefits expense of $1.8 million driven by reduced incentive compensation and commission expense. Partially offsetting this decrease were modestly higher professional and data processing fees and advertising and marketing expense, both returning to more normalized levels from their lower levels in the prior quarter. We were pleased to outperform our guidance on noninterest expense in the second quarter, and we are reconfirming our guidance for the third quarter in the range of $38 to $40 million. Our overall asset quality continues to be very strong. As Larry mentioned, both our non-performing assets and the ratio of NPAs to total assets improved from the prior quarter, and our net charge-offs were once again minimal. We did not record a provision for credit losses during the quarter, primarily due to continued strong asset quality and a reduction in non-performing loans. We also did not release any reserves during the quarter due to continued strong loan growth. With respect to capital, we continue to build capital through strong earnings and maintain robust capital levels. As Larry mentioned, between May 24th and the end of the quarter, we repurchased 100,000 shares of our stock during the quarter at an average cost of $48 per share and have approximately 600,000 shares remaining available to repurchase under the current program. Our effective tax rate for the quarter was 17.6%. and we expect the tax rate to remain in the range of 17 to 18 percent. With that added context on our second quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.