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spk06: 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.
spk02: 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.
spk03: 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.
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on a touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw the question with your question, please press star then two. And today's first question comes from Jeff Rulis with DA Davidson. Please go ahead.
spk04: Thanks. Good morning, Larry and Todd. Morning, Jeff. Good morning, Jeff. First is a balance sheet question. Would you anticipate still growing earning asset balances in the third quarter despite PPP runoff, I guess similar to what you saw in the second quarter?
spk03: Yes. Yeah, we would expect net growth.
spk04: Gotcha. And I guess given the guide through the full year, you know, that would in the fourth quarter also kind of at this point seeing, you know, continued earning asset growth? Yes, yes. Okay, gotcha. Todd, on the expenses, you know, given that guide, I imagine we would see an increase in the comp side with swaps sort of bouncing back. Is there any other, we're just talking big picture and maybe beyond third quarter, is there other spend that we should be aware of beyond maybe just general growth of reopening economy? It sounds like some of the data processing and professional fees kind of coming back to normal, but is there anything underway. I just wanted to check back in with you guys on how you're feeling about expenses. Do you feel like you've underspent and or are you launching any kind of initiatives to tighten up efficiency? Just wanted to kind of check in on the expenses, generally speaking.
spk03: Yeah, great question, Jeff. I think more of the latter. We're really working hard to look at processes and spend, and we expect to continue to gain some efficiencies through our best-in-class program where we're looking at processing and approach across the entire company. We don't really have any spend that we've deferred during the pandemic necessarily, so I wouldn't be looking for any big jump. in any areas. We've spent a fair amount on talent, but that's, for the most part, baked in already in terms of IT spend, and it's saving us in terms of some of the software spend. So no real expectations for Jump there. The increase would be more in the line of incentives and commissions related to swaps.
spk04: Great. And the last one, I guess if loan growth kind of hits your target in the credit quality in-house and maybe the macro picture is stable to better, would you anticipate a provision, needing to post a provision in the third and fourth quarters based on kind of what you know today?
spk02: Yeah, given what we're seeing right now, certainly there's no degradation either from a macro standpoint or in our portfolio. So I think Probably a replay of the second quarter would be maybe the most likely at this point, given what we can see today. But if we have continued loan growth, we're not anxious probably to release reserves quickly either.
spk04: Fair enough. Okay. Well, thank you. Thank you.
spk06: And our next question today comes from Nathan Race at Piper Sandler. Please go ahead.
spk01: Yep. Hi, guys. Good morning.
spk06: Good morning, Nate.
spk01: Nate? I was hoping to maybe just start on the loan growth trends in the quarter. You know, obviously really impressive growth overall at CBP. It looks like a lot of the growth was in commercial real estate. So I was wondering if you guys could just kind of parse out where that growth is coming from between, you know, tax credit finance, municipal finance, and also more in-footprint commercial basis as well and kind of how the pipeline looks by segment into the back half of the year.
spk02: So I'll start with pipeline in reverse order kind of here. The pipeline still looks very solid and has grown in the last quarter. So activity appears to be continuing. Our core commercial lending growth, I'll start with line of credit usage, really hasn't changed a lot. Our clients are still sitting on a lot of liquidity. We haven't seen a lot of growth in line usage. But at some point when those clients burn through that excess liquidity, caused by PPP would expect some usage to start increasing in the next few quarters. So in our core business, the growth has really come in term loan funding on equipment, finance, buildings, facilities. And as you all know, shortage of labor is an issue in everybody's market these days. And so for our clients that are in the manufacturing and distribution space, that probably means investments in plant and equipment to try and get more production with the same numbers of people. The municipal finance continues to grow at a steady pace. And then in the tax credit space, the historic tax lending has been steady, but those are shorter-lived assets, so it takes a fair volume of activity just to replace those. That's been fairly steady. Our real growth and the biggest outlier would have been in the LIHTC space, which grew close to $100 million in the last quarter.
spk01: Okay, great. And along those lines, in terms of the light tech growth, any updated thoughts from a concentration perspective? You know, you guys are considering a securitization or something along those lines just to manage overall concentration levels on balance sheets within that portfolio?
spk02: Yeah, we continue to feel good about the levels we're at today. Longer term, as you alluded to, we will maybe want to move some of this off balance sheet long term. But at this point, we feel comfortable with our hold levels, and the LIHTC portfolio is performing spectacularly right now. So we really like the asset class, and its performance in this sector, it's been consistent for 30 years. And so we really like the quality of the assets and feel comfortable where we're at.
spk01: Okay, great. And if I could just ask one housekeeping question, and Todd, I apologize if it came up. but I appreciate the guidance on the remaining PPP fees, but do you have the amount of PPP fees, excuse me, that were realized in the second quarter?
spk03: Yeah, sure do, and no worries on the housekeeping. So in Q2, we had about 1.1 recognized. We've got 3.5 left, and I would expect that to really, for the most part, get accreted in over the Q3 and Q4 periods. So about 1.7 or 1.8 per quarter next couple quarters.
spk01: Okay, perfect. I'll step back. I appreciate all the color.
spk03: Thanks, Nate. Thanks, Nate.
spk06: And our next question today comes from Damon Del Monte with KBW. Please go ahead.
spk00: Hi, this is Patrick for Damon. I hope everybody's doing well. Just was hoping to get your thoughts on M&A. Any thoughts on location and size? Thanks.
spk02: Yeah, as we've said historically, we have positioned ourselves to be an acquirer at the right time. We continue to be focused on the markets we're in because we think the execution risk is less. And so, we continue to be having ongoing discussions. Um, certainly size wise, you know, we, we'd probably like it to be 250 million in size bank or larger, you know, up to a billion and a half or so because of, uh, that'd be a natural fit for us size wise. Uh, so that's our continued focus and we continue to have ongoing dialogue.
spk06: And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1 to join the question queue. And our next question comes from Evan Lau with Jenny Montgomery Scott. Please go ahead.
spk05: Hey, guys. Good morning. I'm on for Brian Martin. Good morning, Evan. Yeah, so a lot of my questions have been asked, but I just thought I'd start on the margin. I know you guys obviously gave some color about 3Q. I was just wondering, you know, looking forward next three or four quarters, you know, I was just wondering if you have any color on that. Just, you know, what are the puts and takes to the margin for, you know, looking forward for the next couple of quarters? That'd be helpful.
spk03: Sure. Yeah. Thanks, Evan. Well, certainly the headwind would be continued pressure on loan yields. We've been very successful. holding that off for the most part. I know Larry and I would like to compliment our bankers all the way around the company for doing such a fabulous job with client service and pricing, but we're holding that off best we can, but certainly that would be a headwind. Liquidity continues to be a bit of a challenge. One of the reasons we've held on to margin and actually expanded margin is we've been very successful about putting it to work and That goes hand-in-hand with the strong loan growth, of course. Tailwinds would be continuing that strong loan growth and putting that liquidity to work. As we guided, we expect to continue to have double-digit loan growth, so that's helping quite a bit. Then maybe another tailwind would be some continued ability to reduce cost of funds. We're getting close to some floors in some areas, but Again, testament to our talented bankers all the way around the company. Our correspondent bank team has done a fabulous job managing cost of funds in that area. So we're pretty optimistic about a static margin here in Q3, and that was our guidance. Don't want to get too far over our skis according to next year, but I think the expectation certainly for the rest of this year would be close to static, and we're comfortable with that.
spk05: Hey, awesome. It's very helpful. And then I think just touching, obviously, there's this question on M&A, but, you know, you guys resume share purchase this quarter. Are you guys, you know, just curious on how you see that moving forward or, you know, how are you thinking about capital deployment as we move through the year?
spk02: Yeah, certainly as we've done our modeling, our goal on the – Buyback side is to be consistent in that space at these relative price levels, and that gives us the capacity to also do a meaningful M&A transaction. And so we've been thoughtful about trying to strike the right balance between those two.
spk05: Awesome. Very helpful. Yeah, that's it for me. Thanks for the answers, guys. Thank you. Thanks for having us.
spk06: And our next question is a follow-up from Nathan Race from Piper Sandler. Please go ahead.
spk01: Yep. Thank you for taking the follow-up. Just a question on credit. You know, charge-offs were a little higher than what we've seen from you guys over the last several quarters. So we're just hoping to get maybe a little bit of color there on kind of how you see charge-offs trending in the back after this year. And I know it's difficult to kind of think about, you know, getting back to a pre-pandemic reserve level, just given that it's not apples to apples with you guys. implementing CECL fairly recently. So just any thoughts on kind of the outlook for additional reserve releases here and kind of where you see the reserve trending to as a percentage of loans over the next several quarters?
spk02: So, yeah, we had one larger deal that we had well reserved that we kind of just cleaned up during the quarter. So nothing from a trend standpoint. We're certainly striving in this you know, extraordinarily good credit environment to get ourselves really clean for the day when the world goes back to normal, which we don't have the answer to when that's going to be, but certainly we think like in the next year things may make closer to normal about credit costs and those kinds of things. Long term, you know, our average reserve over our 25 years existence I think has been 145 basis points, 145 to 50 is probably where we think it needs to be long-term still, even with the new methodology. And so that's probably where we would migrate to over a longer period of time.
spk01: Okay, very helpful. Thanks, Larry. And then just on the appetite for additional query purchases going forward, you know, it's nice to see you guys. get back in the market during the second quarter? Just any updated thoughts on, you know, continuing with buybacks or stepping up the pace, particularly just given the downdraft and sector-wide valuations recently?
spk02: Yeah, I mean, our focus is to be consistent. And, you know, if we stay at these relative price levels, we'll probably keep our activity consistent and You know, depending on which direction the price goes, that would certainly change our attitude on one direction or the other.
spk01: Okay, perfect. Thanks again, guys.
spk06: Thanks, Nate. And, ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to the management team for the final remarks.
spk02: Okay, thanks to everyone for joining our call today. Have a great day. We look forward to speaking to you all again soon.
spk06: And, ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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