QCR Holdings, Inc.

Greetings, everyone, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the first quarter of 2022. 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, 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 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 call is recorded and will be available for replay through May 4th, 2022, starting this afternoon, approximately one hour after completion of this call. It will be accessible on the company's website. At this time, I'd like to turn the floor over to Mr. Larry Helling at QCR Holdings. Sir, you may begin.

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 first quarter performance. Todd will follow with additional details on our financial results for the quarter. Before I discuss the quarter, I want to welcome any new shareholders that are on the call today as a result of our successful acquisition of Guaranty Federal Bank shares, which closed on April 1st. We have merged Guaranty Bank into SFC Bank, our charter in Southwest Missouri, and the integration process is going very well. We have retained the Guaranty Bank brand due to its more extensive branch network and strong name recognition in the market. We're eager to continue our growth in the vibrant Southwest Missouri region. Turning to quarterly results, which are highlighted by exceptional loan growth and expanded net interest margin, carefully managed expenses, and continued excellent credit quality. We continue to experience healthy demand from our client base and grew loans by 14.6% on an annualized basis, excluding PPP. Our accelerated loan growth in the first quarter was driven by strength in our traditional commercial banking, leasing, and specialty finance businesses. We are capitalizing on improved economic conditions in our markets and continue to gain market share across our charters. Our clients value our relationship-based community banking model, emphasizing the importance of strong relationships and customized service. Our loan pipelines remain healthy, and our near-term outlook for loan growth remains positive. Therefore, we are increasing our targeted loan growth to between 10 and 12 percent for the full year. While core deposits decreased modestly during the quarter, mainly due to expected seasonality with our commercial client base, we saw the mix of our deposits continue to improve with further rotation from time deposits to interest-bearing demand deposits. In addition, Guaranty Bank brings excess liquidity and a strong core deposit client base to our balance sheet, which will support our ability to continue to fund our expected loan growth. We expanded our net interest margin in the first quarter, which was up one basis point on an adjusted basis and up four basis points, excluding the impact of PPP fees. This expansion was supported by a favorable change in our asset mix, lower deposit costs, and stable loan yields. Given our asset-sensitive balance sheet, we are very well positioned for the current rising rate environment and expect to see meaningful NIM expansion in the second quarter. Todd will go into more details in his remarks. With respect to our non-interest income, we experienced a decline in capital markets revenue from swap fees due to project delays, which are caused by ongoing supply chain disruptions and inflationary pressures. The majority of our SWAT business is generated by low-income housing tax credit projects. Over the years, we have grown and diversified our client base, which has helped our outsized growth, and as a result, our pipeline remains robust. The gap between the demand and the availability of affordable housing is widening, and we believe that the long-term fundamentals for this business have actually strengthened, despite the short-term challenges. Our asset quality and credit metrics remain extremely strong. Non-performing assets improved again and represent a record low of four basis points of total assets. Additionally, our criticized loans and classified loans to total loans and leases decreased during the quarter. We continue to have negligible net charge loss, and we feel very good of our current reserve level at 1.55 percent of total loans and leases. Our excellent credit quality is a function of our disciplined and consistent underwriting, along with vibrant economic conditions across our markets. With that, I will now turn the call over to Todd to provide further information about our first quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start with net interest income. Our adjusted net interest income for the quarter was $48.5 million, down 1.4% from our record amount set in the fourth quarter. However, the decline was entirely due to the significant length quarter decrease in PPP loan forgiveness fees, which was expected as our PPP loan program nears its end. With our strong loan growth using our excess liquidity from the prior quarter, our balance sheet efficiency improved, helping to expand margin in the first quarter. We funded our loan and lease growth during the quarter with a combination of excess liquidity and overnight advances. Our non-maturity deposits typically experience a seasonal decline in the first quarter, as many of our commercial clients are using funds to make bonus and tax payments during this period. We continue to improve the mix of our deposit base, intentionally rotating out of higher-cost CD balances as they mature. The cost of our total interest-sparing liabilities further improved by one basis point from the fourth quarter. We utilized our overnight borrowing capacity during the quarter to temporarily fund some of our loan growth, and we subsequently repaid the majority of these advances after quarter end with guaranteed bank's excess liquidity. Our adjusted NIM improved by one basis point for the quarter. However, after excluding the impact of lower PPP income that I mentioned earlier, our core NIM expanded by four basis points, significantly outperforming our guidance of a slight decline of two to four basis points. We've been very pleased with our NIM performance over the last several quarters as we've been successful in maintaining earning asset yields while driving down our cost of funds. As we are now entering a rising rate environment, our asset-sensitive balance sheet will lead to significant further NIM expansion. Our asset sensitivity is driven by the strong growth in our floating rate loan portfolio over the past three years. During that same period, the success we've had in growing core deposits has reduced our reliance on deposits tied to an index and higher-cost wholesale funds. Looking ahead, as we benefit from a full quarter of the March rate hike and factoring in another rate hike of 50 basis points in early May, combined with the addition of the Guaranteed Bank Balance Sheet, we project further NIM expansion of 9 to 11 basis points in the second quarter. Given the addition of Guaranty Bank in the second quarter, we are also providing additional guidance on net interest income for Q2. Excluding PPP and acquisition-related accretion, we expect net interest income for the second quarter in the range of 56 to 58 million. Now turning to our non-interest income of 15.6 million for the quarter. which was lower than the 23 million we generated in the fourth quarter. As Larry mentioned, we produced capital markets revenue from swap fees of 6.4 million in Q1. While this result was below the lower end of our typical guidance range of 14 million, it is very consistent with our past Q1 LIHTC production, which has averaged 6.8 million the past four years. Capital markets revenue from LIHTC swap fees has averaged 15 million per quarter since the first quarter of 2020, which gives us continued confidence in the sustainability of this important source of fee income. During the same nine-quarter period, capital markets revenue from LIHTC swap fees has ranged from a low of 4.5 million to a high of 25.2 million. Given our solid pipeline of transactions, but recognizing the project delays caused by ongoing supply chain disruptions and inflationary pressures that Larry mentioned previously, we are expecting the source of fee income to be in a range of 13 to 15 million per quarter for the remainder of 2022. Excluding swap fees and non-core items, non-interest income for the first quarter totaled 8.3 million. With the addition of guaranteed bank in the second quarter, we are also providing additional non-interest income guidance. We expect non-interest income, excluding capital markets revenue, to be in the range of $9 to $11 million for the second quarter. This guidance reflects the addition of Guaranty Bank's strong retail and commercial banking fee income while adjusting for the headwinds of rising rates on our mortgage business. Now turning to our expenses. Non-interest expense for the first quarter totaled $38.3 million compared to $39.4 million for the fourth quarter. After adjusting for acquisition expenses and lower performance-based compensation expense related to capital markets revenue, non-interest expenses were $39 million and at the low end of our guidance range of $39 to $41 million. Our non-interest expense run rate remains very well controlled. Looking ahead to the second quarter and factoring in the addition of Guarantee Bank, we anticipate that our level of non-interest expense will be in the range of 46 to 48 million. This guidance includes the incremental expenses from Guaranty Bank, but excludes remaining integration costs. In addition, we do not anticipate that the full cost savings from the Guaranty Bank acquisition will be recognized until 2023. Our overall asset quality continues to be quite strong. Non-performing assets remain very low at 2.7 million, and as Larry mentioned, represent only four basis points of total assets, 21 basis points lower than one year ago. Additionally, we recorded a 2.9 million negative provision for credit losses in the first quarter, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic. Our allowance for credit losses remains quite strong at 1.55% of total loans and leases, down 13 basis points from the end of 2021. This allowance represents over 27 times our non-performing assets. With respect to capital, our capital levels remain strong. Our tangible common equity to tangible assets ratio modestly declined to 9.60% at quarter end. compared to 9.87% at the end of December. This was largely the result of a decline in our AOCI, the resumption of our share repurchase program during the quarter, and strong organic loan growth. While AOCI and the share repurchases did reduce the company's tangible common equity, our strong earnings helped to offset this impact, which led to a net decline of only 1.2% in tangible book value. Finally, our effective tax rate for the quarter was 9 percent, down significantly from 18.9 percent in the fourth quarter. The rate was lower on a late-quarter basis due to an increased benefit from a tax strategy we implemented in 2021, combined with the book tax expense benefits from our stock compensation plans, which are typically higher in the first quarter, as well as a lower ratio of taxable earnings to tax-exempt revenue in the first quarter. We expect the effective tax rate to normalize back to a range of 18 to 20%, including the addition of Guaranty Bank. With that added context on our first quarter financial results, let's open up the call for your questions. Operator, we are ready for our first question.