QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings, Inc. Earnings Conference Call for the second quarter of 2022. 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 at www.qcrh.com. With us today for management are Larry Helling, CEO, and Todd Gipple, President, COO, and CFO. Management will provide a brief summary of the financial results and then will 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 filing, 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 3, 2022, 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. Please go ahead.

Larry Helling, QCR Holdings, 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 second quarter performance. Todd will follow with additional details on our financial results for the quarter. We delivered another strong quarter of financial performance and we completed the acquisition and integration of Guaranty Bank into SFC Bank. We're excited to continue to grow the Guaranty Bank brand in the vibrant Southwest Missouri region and are pleased that this team delivered solid loan growth during the second quarter, given the additional work that is involved with the combining of two banks. Overall, our strong results during the quarter were driven by exceptional loan growth, expanding net interest margin, and carefully managed expenses. We increased our core earnings by $6 million for the first quarter, hosting core earnings per share of $1.73, and generating an ROAA of 1.66 percent after adjusting for non-recurring items, primarily related to the closing of the guaranteed bank acquisition. Building on the momentum we generated in the first quarter, we delivered robust lending activity again in the second quarter with annualized loan growth of 14 percent after excluding the impact of the acquired portfolio and PPP activity. Our organic loan growth in the quarter was driven by strength in our traditional commercial lending, leasing, and the specialty finance business. We are capitalizing on the economic resilience of our markets and continue to gain market share across our charters. This is a testament to our relationship-based community banking model, one that emphasizes the importance of strong relationships and customized service with new and existing clients. Our loan pipelines remain healthy, and our near-term outlook for the loan growth remains positive. Therefore, we are reaffirming our targeted organic loan growth of between 10 and 12 percent for the full year. Our core deposits also grew during the quarter, matching our loan growth, primarily due to the addition of Guaranty Bank's deposits. 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 significantly again in the second quarter, which was up 23 basis points and up 17 basis points, excluding acquisition accretion and the impact of PPP fees. This expansion was driven by the impact of multiple rate hikes on our asset-sensitive balance sheet, as well as the addition of Guaranty Bank. We are very well positioned for the current rising rate environment and expect to see meaningful continued NIM expansion in the third quarter. Todd will go into more detail in his remarks. Our asset quality remains strong. We did experience an increase in non-performing assets during the quarter, primarily the result of the guaranteed bank acquisition and two legacy lending relationships. We had minimal net charge-offs during the quarter, and we increased our reserves slightly to 1.59%. of total loans and leases. We feel very comfortable with our reserve level despite the potential economic challenges and maintain a prudently cautious view on credit as reflected in our reserve coverage. We have a strong credit culture that focuses on high-quality loans, disciplined underwriting, and diligent credit administration. Given the current heightened level of economic uncertainty, we are well prepared for any potential economic challenges that may occur. We have solid earnings, a strong capital position, excellent credit quality, and a prudent level of reserves, which will enable us to continue to deliver disciplined growth and attractive returns for our shareholders. With that, I will now turn the call over to Todd to provide further information on our first quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with net interest income. Our reported net interest income for the quarter was $59.4 million, and excluding acquisition accretion of $1.7 million, it was $57.7 million, near the upper end of our guidance range of $56 to $58 million. This outperformance was driven by robust organic loan growth combined with strong NIM expansion. We funded our solid loan and lease growth during the quarter with a combination of the excess liquidity we obtained from Guaranty Bank and overnight advances. Guaranty Bank provided strong core deposits in the acquisition, and we continue to benefit from a favorable mix of deposits. As of the end of the second quarter, demand deposits, both non-interest and interest-bearing, represented over 90% of our total deposits and are an important factor in managing our cost of funds, in this rapidly rising rate environment and allowing us to significantly expand margin. We did temporarily increase our utilization of overnight borrowings during the quarter as a better priced funding option. However, we plan to reduce our modest reliance on wholesale funding during the latter half of this year. Our report in NIM improved by 23 basis points for the quarter. After excluding acquisition accretion and the impact of PPP income, our NIM expanded by 17 basis points, significantly outperforming our guidance of a 9 to 11 basis point improvement. We were very pleased with our NIM performance for the quarter, as we were more successful than anticipated in managing deposit betas, and our balance sheet strategies related to the guaranteed bank acquisition proved to be more successful than expected. As interest rates continue to rise, our asset-sensitive balance sheet will lead to significant further NIM expansion. Over the past three years, we have intentionally grown our floating rate loan portfolio, which has positioned us well for rising rates. This, combined with 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 June rate hike and factoring in today's expected rate hike, we project further adjusted NIM expansion of 9 to 11 basis points in the third quarter. Now turning to our non-interest income, which was $22.8 million for the quarter, up $7.2 million from the prior quarter. The increase was primarily due to higher capital markets revenue from swap fees as well as the additional non-interest income from Guaranty Bank. Capital markets revenue totaled $13 million for the quarter, which was within our guidance range, and more than double the amount booked in the first quarter. Given our solid pipeline of transactions, while recognizing timing continues to be impacted by project delays caused by ongoing supply chain disruptions and inflationary pressures, we continue to expect 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 second quarter totaled $9.3 million, which was within our guidance range provided on last quarter's call. Now turning to our expenses. Non-interest expense for the second quarter totaled $54.2 million, which included acquisition and post-acquisition related expenses of $6.8 million, which was significantly less than originally modeled. After adjusting for these non-recurring items, non-interest expenses were $47.5 million and within our guidance range of $46 to $48 million. Our non-interest expense run rate remains well controlled. However, we, like the rest of the industry, are experiencing cost pressures in a number of areas. As a result, we anticipate that our level of core non-interest expense will be in a range of $47 to $49 million in the third quarter. In addition, we do not anticipate that the full cost savings from the guaranteed bank acquisition will be recognized until 2023. Now turning to asset quality. As Larry mentioned, our increase in non-performing assets was a combination of the addition of guaranteed bank and two legacy credit relationships. The Guaranty Bank MPAs at closing were 3 million, or 25%, lower than at the initial acquisition announcement date, as Guaranty Bank reached positive resolutions on several MPAs prior to closing the transaction. Our MPAs are quite manageable and represent only 33 basis points of total assets. We recorded an $11.2 million provision for credit losses in the second quarter, due solely to the CECL Day 2 provision of $12.4 million to establish the initial credit loss allowances for the acquired non-PCD loan portfolio and off-balance sheet exposure as a result of the Guarantee Bank acquisition. Our allowance for credit losses remains quite strong at 1.59% of total loans and leases, and represents nearly four times our non-performing assets. With respect to capital, our capital levels remain solid. The decline in our capital ratios this quarter was driven by several factors. Specifically, the decline in our TCE ratio due to the guaranteed bank transaction was 72 basis points, which came in better than our initial modeling of 100 basis points when we announced the acquisition. Additionally, our share repurchase activity during the quarter had an impact of 46 basis points, and the decline in our AOCI had an impact of 34 basis points, primarily due to a decrease in the value of our available-for-sale securities. Finally, our strong loan growth contributed to the remaining 18 basis point decline. Our reported net income partially offset these factors to arrive at a TCE ratio of 8.11%, at quarter end. Our tangible book value was impacted by these same factors and was down $3.14 per share during the quarter. We had modeled initial tangible book value dilution of $2.04 from the guaranteed bank acquisition and are pleased that it came in better than our estimate at $1.88 per share. The remainder of the reduction in TBV was due to the decline in our AOCI of $1.42 per share and our share repurchases of $0.72 per share during the quarter. These were partially offset by our reported net income to arrive at a tangible book value per share of $34.41 at the end of this second quarter. With respect to our share repurchase program, we purchased 602,500 shares at an average price of $54.80 per share in the second quarter. as we completed repurchases under our original 2020 authorized plan and began repurchases under the May 2022 authorized plan. Under the 2020 plan, we repurchased 794,000 shares in total and an average price of $50.60 per share. The 2022 share repurchase program authorized an approximate 1.5 million additional shares to be repurchased. and we repurchased 280,000 shares during the quarter and have approximately 1.2 million shares remaining on this program. We will continue to be opportunistic with our approach to future share repurchases based on market conditions and our capital levels. Finally, our effective tax rate for the quarter was 8.9%, lower than our expected range due to the impact of the acquisition and post-acquisition related expenses and the day two CECL provision. We expect the effective tax rate to normalize back to a range of 16 to 18% in the second half of the year. With that added context on our second quarter financial results, let's open up the call for your questions. Operator, we're ready for our first question.