QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings, Inc. Earnings Conference Call for the third quarter of 2021. Yesterday after market close, the company distributed its third 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 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 will open 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 Our 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 11, 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 would like to 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 third quarter performance. Todd will follow with additional details on our financial results for the quarter. We delivered another quarter of record net income driven by exceptional loan growth, strong fee income, expanded net interest margin, and excellent credit quality. Despite the competitive lending environment, we grew core loans and leases by a very robust 23 percent on an annualized basis, while maintaining excellent credit quality. Year-to-date, our annualized loan growth has been 18%, exceeding our long-term target of 9%. We continue to attract new clients and deepen ties with existing clients, which is an ongoing strategic priority of our relationship-based community banking model. Third quarter net income was $31.6 million, and diluted adjusted earnings per share was $1.99. Both measures are company records and each up more than 40 percent from the second quarter. On a year-over-year basis, our earnings for the quarter were up 82 percent. The third quarter performance was due to robust loan growth and was bolstered by very strong capital markets revenue, some of which was carried over from the second quarter, as indicated on last quarter's call. We believe this revenue source is sustainable long-term and Todd will provide more detail later in the call. Our exceptional loan and lease growth in the third quarter was driven by strong production in our specialty finance group and continued growth in our traditional commercial lending and leasing business. Within SFG, we continue to experience strong client demand for our niche lending products. particularly in the area of municipal and tax credit finance. Our M2 equipment finance group also had an impressive quarter, building upon the momentum that they have seen all year. Lease balances grew by 7% on an annualized basis during the third quarter and 10% annualized for the first nine months of the year. Given our strong loan and lease production year to date, combined with our current pipeline, We are now targeting organic loan and lease growth for the full year 2021 of between 16 and 18 percent. We funded our loan growth in the quarter with continued growth in our core deposits, which grew $183 million, or approximately 16 percent on an annualized basis. This growth was driven by strong contributions from our commercial clients. We also continued to reprice deposits lower, while growing our non-interest and interest-bearing demand deposits. This helped reduce our overall funding costs during the quarter and drive growth in our net interest income, both in dollars and in margin. Todd will provide more details on NIM in his remarks. Our asset quality remains exceptional as our non-performing assets improved 32 percent for the quarter and now represent only 11 basis points of total assets. We had minimal net charge-off during the quarter, and we feel very good about our current reserve level, which, when excluding PPP loans, is now 1.79%. Our banks continue to be well capitalized, and we were able to maintain our capital ratios despite our significant growth in loans, while at the same time repurchasing 193,000 shares of our stock at an average price of $48.50 per share. Since we announced the resumption of our share repurchase program earlier this year, we have repurchased nearly 300,000 shares, approximately 2% of our outstanding shares, as part of our long-term capital allocation plan to further build shareholder value. I would like to thank the entire QCR Holdings team for their hard work and dedication to excellent client service and for delivering another quarter of record earnings performance. Our employees are the heart of our company, and I am very proud of our entire team for all they've accomplished this year. In summary, we are extremely pleased with this quarter's performance and remain optimistic going into the end of the year. We continue our pursuit of organic growth and disciplined capital deployment within the markets we serve with the goal of delivering attractive returns and creating increased value for our shareholders. I will now turn it over to Todd for further details.

Thank you, Larry. Welcome, everyone. Thanks for joining us today. 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 income. Our adjusted net interest income for the quarter was a record $48.5 million and up $2.8 million or 6.2% from the second quarter. This exceptional performance was due to the outstanding loan and lease growth that Larry discussed, combined with an increase in our adjusted net interest margin. During the quarter, we were able to grow our adjusted tax equivalent NIM by nine basis points. Our average earning assets grew 2.5 percent, and the yield on those assets increased nine basis points, due primarily to higher loan yields. In addition, we continued to drive our funding costs lower by two basis points. as higher cost time deposits are being repriced lower upon renewal or rotating to lower cost non-maturity deposits. Our adjusted NIM also benefited from 64 million of PPP loan forgiveness during the quarter and the associated origination fees that were recorded as a result. These fees amounted to 1.9 million and positively impacted our NIM by seven basis points. Excluding the impact of our PPP fees, our core NIM expanded by two basis points, outperforming our Q3 guidance for a static net interest margin. With respect to PPP loans, we currently hold $84 million in remaining balances and expect forgiveness on the bulk of these loans to occur in the fourth quarter. This would result in the recognition of the remaining $2 million of PPP origination fees. As we look forward, we anticipate a slight decline in our core NIM in the fourth quarter, given the headwinds of the ongoing highly competitive and low interest rate environment and a limited amount of room for our funding costs to decline further. As always, we will work hard to continue to protect loan yields and proactively manage excess liquidity in an attempt to outperform that guidance. Given our strong loan growth, we do expect another quarter of solid growth in net interest income. Now turning to our non-interest income. Non-interest income was $34.7 million in the third quarter, including $24.9 million in capital markets revenue from swap fee income. This very strong quarter included a number of transactions that were scheduled to close in the second quarter and instead carried over into the third quarter, as we indicated on last quarter's call. Capital markets revenue has averaged $16 million per quarter thus far in 2021, and $16.3 million for the last eight quarters. As a result, we expect this revenue source will continue in the range of $14 to $18 million per quarter going forward. We believe that our guidance range is sustainable given our strong historical performance and the ongoing and long-term demand for our capital markets products. With respect to our wealth management business, we continue to onboard new client relationships, adding 79 new relationships in the quarter totaling $128 million in AUM. Year-to-date, we have gathered $319 million in new client assets, representing a 7% increase in assets under management from the beginning of the year. Total AUM at quarter end was $5.1 billion, down slightly from the previous quarter, as our new client assets were offset by portfolio market volatility and some specific client disbursements. Now turning to our expenses. Noninterest expense for the third quarter totaled $41.4 million, up from $35.7 million for the second quarter. The linked quarter increase was primarily due to higher performance-based salary and benefits expense of $5.2 million, driven by strong revenue production and earnings performance during the quarter. Additionally, we recorded a $1.5 million charge related to the write-down of certain fixed assets. Partially offsetting these increases was a $1.3 million net gain on the sale of other real estate. Excluding these two one-time items and adjusting for a more normalized capital markets revenue of $16 million, our core non-interest expense would have been $39 million, right at the midpoint of our guidance range of $38 to $40 million. Looking ahead to the fourth quarter, we continue to expect our non-interest expense to be in this range. Our overall asset quality continues to be excellent. As Larry mentioned, both our non-performing assets and the ratio of NPAs to total assets improved from the prior quarter, and there were minimal net charge-offs in the quarter. We also successfully sold another real estate property, which led to the $1.3 million net gain that I mentioned earlier. We again did not record a provision for credit losses during the quarter, nor did we release any reserves. This was primarily due to the continued strong asset quality, a reduction in non-performing loans, and continued robust loan growth. With respect to capital, we continue to maintain strong capital levels as a result of our solid earnings and excellent credit quality. As Larry mentioned, we repurchased 193,000 shares of our stock during the quarter at an average cost of $48.50 per share. and have approximately 400,000 shares remaining available to repurchase under the current program. Our effective tax rate for the quarter was 20 percent, a bit higher than our expected range of 17 to 18 percent, and was driven by the strong growth in taxable revenue sources, primarily capital markets revenue, which outpaced net growth in our tax exempt revenue. With that added context on our third quarter financial results, let's open the call for your questions. Operator, we're ready for our first question.