QCR Holdings, Inc.

And welcome to the QCR Holdings, Inc. Earnings Conference Call for the third quarter of 2022. Yesterday, after market closed, 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 Gibble, President, COO, and CFO. Management will provide a brief summary of the financial results, and then we 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 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 gap 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 gap to non-gap measures. As a reminder, this conference is being recorded and will be available for replay through November 3rd, 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.

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 third quarter performance. Todd will follow with additional details on our financial results for the quarter. We delivered another strong quarter of net income driven by exceptional loan growth, improved credit quality, and carefully managed expenses. In addition, we strengthened our total risk-based capital ratio for the quarter with our previously announced $100 million subordinated debt issuance. This transaction increased our total risk-based capital ratio by 140 basis points. We posted core earnings of $28.9 million or $1.69 per share, generating an ROAA of 1.51% after adjusting for non-recurring items. Building on the momentum we generated in the first half of the year, we delivered robust lending activity again in the third quarter with annualized loan growth of 14.5%. Our loan growth for the quarter was driven by strength in our traditional commercial lending, leasing, and specially financed businesses. Our experienced lenders continue to generate exceptional levels of loan growth. Given our current pipelines, we are reaffirming our targeted loan growth of between 10 and 12% for the fourth quarter, while continuing to be vigilant on maintaining our exceptional credit quality. Our loan growth was primarily funded by growth in our deposits, which grew by $120 million, or 8.3% on an annualized basis. However, we did experience a shift in the composition of our deposits. Our non-interest-bearing demand deposits declined as the liquidity positions of our larger commercial and correspondent bank clients returned to more normal pre-pandemic levels. we were successful in moving some of the correspondent bank deposits onto our balance sheet during the third quarter. In addition, our time deposit portfolio grew as some of our more rate-sensitive clients shifted to term deposits. This shift and mix within our overall funding has added some upward pressure on our deposit costs. During the quarter, we expanded our adjusted net interest margin by five basis points prior to the three basis point dilutive impact of our subordinated debt issuance, as the impact of multiple rate hikes on our asset sensitive balance sheet drove interest earning asset yields higher. The increased cost of deposits and the impact of our subordinated debt issuance limited the increase in NIM. Notably, our adjusted NIM is up 26 basis points year over year. Todd will go into more detail in his remarks. We did see a modest decline in non-interest income in the third quarter as a result of lower capital market revenues from swap fees. This was primarily due to the delays in client projects caused by ongoing supply chain disruptions, inflationary pressures, and higher interest rates. Despite the delays, the underlying economics for these projects remain strong. These housing developments utilize tax credits, which provide affordable housing primarily across select middle markets throughout the central U.S. and the southeast. These are high-quality loans being made to experienced developers with low loan devalues. The industry has an excellent track record with minimal historic default rates. Since our program's inception in 2018, we are proud to have helped finance over 250 projects consisting of nearly 13,000 affordable housing units. We remain optimistic about this line of business as the need for affordable housing has never been greater. As a result, we expect it to continue to be a significant and consistent contributor to our profitability going forward. Our asset quality improved during the quarter as non-performing loans declined by $6.3 million or 27%. We had manageable net charge-offs during the quarter and are comfortable with our reserves which represent 1.51% of total loans and leases. We are mindful of recessionary concerns, but remain cautiously optimistic about the relative economic resiliency of our markets. Additionally, our excellent asset quality and strong credit culture prepares us well to weather economic uncertainty. As we previously announced during the third quarter, we issued $100 million of new subordinated debt as a proactive move to bolster our capital position. We believe that we are well positioned for potential economic challenges that may occur. We have strong earnings, a solid 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 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 net interest income on a tax-equivalent basis, adjusted for acquisition-related accretion and PPP, was $64.1 million, an annualized increase of 20.8% from the second quarter. The increase was due to the linked quarter growth in average earning assets of approximately 14% annualized, coupled with higher yields on those assets with a beta of 33% for the quarter. Additionally, our loan yield expanded 54 basis points for a beta of 36%. Partially offsetting the strong growth in earning assets and improved yields, we experienced higher interest expense as a result of higher deposit costs, a shift in the mix of our deposits, and the impact of our recent subordinated debt issuance. Our adjusted NIM improved by five basis points prior to the three basis point dilutive impact of our subordinated debt issuance. As we know, NIM impact is typically nonlinear during periods of rapid rate increases. In the previous quarter, we saw the benefits of slower and lower deposit betas as we posted a NIM increase of 17 basis points in the second quarter. Those betas accelerated as we progressed through the third quarter and two additional Fed rate increases. For the first half of the year, our beta on total deposits was 8%. For the third quarter, our beta on total deposits moved to 31%. And for the full rate hike cycle to date, our beta on total deposits is 20%, which is still below our beta from the last period of rising rates that ended in 2019, which was 30%. Part of the increased beta is a result of our shift in our deposit mix, which we expect to lessen as we move through the rate hike cycle. Our talented bankers are focused on growing well-priced core deposits to continue to fund our strong loan growth. Looking at our performance on a cycle to date basis, our adjusted NIM has expanded 26 basis points from the fourth quarter of 2021. With robust organic loan growth and solid NIM expansion for the year, Our net interest income has also experienced significant growth, and we have achieved a NIM at or near the top of our peer group. Looking ahead, we project adjusted NIM expansion in the range of two to four basis points in the fourth quarter after the additional dilution from a full quarter of the subordinated debt issuance. Turning to our non-interest income, which was $21.1 million for the quarter, lower than the $22.8 million we generated in the second quarter. As Larry mentioned, our capital markets revenue was below our guidance range of $13 to $15 million and was $10.5 million for the quarter. Despite the project delays that our clients are experiencing, our pipeline remains strong. Capital markets revenue has averaged approximately $11 million per quarter for the last four quarters. And therefore, we expect this source of fee income to be in a range of 10 to 12 million for the fourth quarter. Rounding out the discussion of non-interest income, we generated 3.5 million of wealth management revenue in the third quarter, consistent with the second quarter, despite the market decline. Our wealth management team continues to generate meaningful new client relationships and is adding significant new assets under management, which is helping to offset the sharp decline in stock market valuations. Now turning to our expenses. Non-interest expense for the third quarter totaled $47.7 million compared to $54.2 million for the second quarter. The decrease from the prior quarter was primarily due to elevated expenses in the second quarter related to the guaranteed bank acquisition and lower incentive-based compensation this quarter. After adjusting both quarters for acquisition and post-acquisition related expenses, Non-interest expenses were relatively static at 47.3 and 47.4 million, respectively, and at the low end of our guidance range of 47 to 49 million. Looking ahead to the fourth quarter, we anticipate that our level of non-interest expense will again be in the range of 47 to 49 million. As Larry noted, our overall asset quality continues to be quite strong. Non-performing assets improved by $6 million, down to $18 million at the end of the third quarter, driven by paydowns on several NPAs during the quarter. The ratio of NPAs to total assets was 0.23% at the end of the third quarter, compared to 0.33% for the prior quarter. In addition, the company's criticized loans and classified loans to total loans and leases at the end of the third quarter improved to 2.35%, and 1.29% respectively, as compared to 2.37% and 1.43% from the prior quarter. We did not record a provision for credit losses in the third quarter as a result of continued improvements in overall credit quality. Our allowance for credit losses remains strong at 1.51% of total loans and leases. This allowance represents over five times our non-performing assets. As Larry mentioned, we strengthened our total risk-based capital ratio during the quarter with our subordinated debt issuance and stronger earnings, posting an improvement of 115 basis points to 14.55%. While our tangible common equity to tangible assets ratio declined to 7.68% at quarter end compared to 8.11% at the end of June, this was largely the result of a decline in our AOCI in our share repurchase activity during the quarter. While AOCI and the share repurchases negatively impacted the company's tangible common equity, our strong earnings helped to offset this impact, which led to a slight increase in tangible book value per share. Finally, our effective tax rate for the quarter increased to 14.1% from 8.9% in the second quarter. The rate was higher due to a higher ratio of taxable earnings to tax exempt revenue in the third quarter. We expect the effective tax rate to be in a range of 14% to 16% for the fourth quarter. With that added context on our third quarter financial results, let's open up the call for your questions. Operator, we are ready for our first question.