QCR Holdings, Inc.

greetings and welcome to the qcr holdings inc earnings conference call for the fourth quarter and full year 2022. yesterday after market closed the company dispersed its fourth quarter earnings press release if there is anyone on the call who has not yet 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'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information we'll 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 FCC 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 February 1, 2023, 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 Howling at QCR Holdings.

Thank you, operator. Welcome, everyone, and thank you for taking the time to join us today. I will start the call with a high-level overview of our 2022 performance, a review of our business model, and the factors that drive our success. Todd will follow with additional details on our financial results for the fourth quarter. Our record net income in 2022 was driven by robust loan growth and increased net interest margin and excellent credit quality. Our team accomplished this while successfully closing and integrating our largest acquisition to date, where we significantly strengthened our company's position in the vibrant Southwest Missouri region. Our growth in earnings over the last five years has been exceptional. This is a result of our differentiated business model and commitment to relationship banking. Our multi-charter model provides our bankers with the agility to serve our clients. We deliver banking at the local level, which creates opportunities to strengthen current relationships and establish new relationships that drive our growth. In the last five years, we have nearly doubled our size, outperforming many of our peers. Our total loans have grown at a compounded annual rate of 15.7%, and our deposits at 12.9%. These results support the 20.7% compounded annual growth in our core diluted earnings per share, and the 10.2% compounded annual growth rate in our tangible book value per share over the same period. Importantly, while we've been able to grow at a consistent pace, we've also significantly increased our profitability, and our ROAA is now in the top quartile of our peer group. There are many factors that contribute to our success, including our dedicated employees, our economically vibrant markets, and our differentiated business model. Recruiting and retaining the right employees is critical to our success. We have strong corporate cultures that extend through each of our local charters. Our employees are engaged with our clients and involved in our communities. Our reputation and culture attract the best bankers and clients in our market. This leads to important outcomes. such as reduced turnover, improved productivity, higher profitability, and enhanced shareholder value. We continue to receive high employee engagement scores, which are measured annually across our company. Our local charters have won numerous awards throughout our footprint for being a great place to work and do business. This has resulted in consistent and sustained growth. We operate in some of the most vibrant midsize markets in the Midwest. They are part of regional economies with a diverse mix of commercial, industrial, and technology-focused activity, along with highly educated workforces, which helps drive steady economic growth, high relative household income, and low unemployment. Our unique model enables our local management teams to operate with the speed and agility to respond to client needs, which results in a better client experience that outperforms larger national and regional banking alternatives. This has created great outcomes for our employees, our clients, our communities, and our shareholders. Our management teams think and act like owners, which drives shareholder value. In addition, we have built high performing business lines that provide additional opportunities for growth and profitability. Our specialty finance group provides municipal and tax credit specialty lending which drives strong growth in bonds and loans as well as fee income. On the deposit side, our correspondent banking team serves the banking needs of nearly 200 downstream correspondent banks, which generates meaningful core deposits and related fee income. Lastly, we've grown our wealth management significantly over the years with assets under management of $4.6 billion. The combination of our traditional banking and our high performance business lines creates a diverse revenue stream which has helped us outperform in a variety of economic environments. We support our local charters with centralized group operations teams providing the required operational infrastructure, expertise, and benefits of scale. We aim to be a market leader in each of our markets as this scale improves our efficiency and enables us to attract the best bankers and clients. Relationships build on expertise and trust matter in our markets And that is why we place such importance on high touch client service that is delivered at the local level. Now a few comments on our full year, 2022 results. We delivered net income of $99.1 million for the year or $5.87 per diluted share. After adjusting for the one-time costs associated with the guaranteed bank acquisition, our adjusted net income for the year was $114.9 million. and our adjusted EPS was $6.80 per diluted share of 14.8% and 8.5% respectively over our 2021 results. Our team accomplished this while successfully closing and integrating our largest acquisition to date as mentioned earlier. Organic loan and lease growth for the full year was 14.6% when excluding PPP and acquired loans and was driven by strength in our traditional commercial lending, leasing, and specially financed businesses. Given our current pipelines and the relative strength of our markets, we are targeting loan growth of between 8 and 10% for 2023, consistent with our long-term goals while continuing to be vigilant on maintaining our exceptional credit quality. While our deposits for the year were relatively static when excluding deposits acquired in the guarantee acquisition, the number of net new accounts continue to grow, which will lead to consistent deposit growth over time. Core deposits are our long-term focus, which will drive long-term franchise value. Importantly, our bankers are incentive to grow both loans and deposits. During the year, we expanded our tax equivalent yield net interest margin by 24 basis points, driven primarily by our asset-sensitive balance sheet in this rising interest rate environment. Our asset quality remains as the ratio of non-performing assets to total assets was 11 basis points at the end of the year. We had modest net charge off during the year and are comfortable with our reserves, which represent 1.43% total loans and leases. We are mindful of recessionary concerns, but remain cautiously optimistic about the relative economic resiliency of our market. Additionally, our strong asset quality and consistent credit culture prepares us well to weather economic uncertainty. In conclusion, I would like to thank the entire QCR Holdings team for their engagement and dedication to outstanding client service and for delivering record adjusted earnings for the year. Our employees are the key to our success. I'm immensely proud of all that we have accomplished in 2022. With that, I will now turn the call over to Todd to discuss our strategy to drive shareholder value and our strong financial results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. When Larry and I began our new roles with the company in early 2019, we developed an initiative to drive our financial results and enhance shareholder value. We call this our 965 strategy. a plan to grow earnings and drive attractive long-term results for shareholders. This strategy includes, at a minimum, generating organic loan and lease growth of 9% per year funded by core deposits, growing fee-based income by at least 6% per year, and limiting annual operating expense increases to 5% per year. These are long-term targets and not short-term quarterly benchmarks. Our 965 strategy creates a common language across the company that unites our teams and aligns our actions for long-term success. We believe that the true measure of our success will be our ability to consistently deliver on our strategic initiatives over time, and this will translate into greater shareholder value in the long run. As a result of our performance on our strategic 965 initiatives, combined with our successful acquisition of Guaranty Bank this year, Since 2018, we have grown adjusted net income and EPS at a compounded annual growth rate of 25.4% and 21.9%, respectively. And we are proud to have achieved top quartile ROAA and NIM within our high-performing peer group. While our historical performance has been impressive, we remain focused on the future and expect to continue to perform at the top of our peer group over the long term. Now we would like to provide some color regarding our fourth quarter results, starting with net interest income. Our net interest income on a tax equivalent basis was $70.8 million, an increase of $5.5 million from the third quarter. The increase was primarily due to higher acquisition-related net accretion of $4.6 million due to loan renewals, restructurings, and payoffs from our guaranteed bank acquisition, and the impact of multiple interest rate hikes on our asset-sensitive balance sheet. partially offset by the impact of increased deposit costs. With our strong growth in earning assets and improved loan yields, we significantly grew interest income for the current quarter. However, we also experienced higher interest expense as a result of higher deposit costs, a shift in the mix of our deposits, and the full quarter impact of our recent subordinated debt issuance. Our NIM on a tax equivalent yield basis improved by 22 basis points during the fourth quarter. driven by the higher loan yields and higher acquisition-related net accretion, and partially offset by higher deposit costs. As we have mentioned before, NIM is impacted typically in nonlinear patterns during periods of rapid rate increases. In the first half of 2022, we experienced the benefits of slower and lower deposit betas, as we posted a NIM TEY increase of 24 basis points during that period. However, Those deposit betas accelerated as we progressed through the second half of the year with four 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 fourth quarter, it was 44%, as a result of an accelerated shift in our deposit mix from non-interest-bearing to interest-bearing accounts and from demand deposits to CDs. For the full current rate height cycle to date, our beta on total deposits is 27%, which is comparable to our beta from the last period of rising rates that ended in 2019. With robust organic loan growth and 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 our NIM excluding the impact of acquisition-related net accretion to remain fairly static in the first quarter of 2023. Additionally, we expect acquisition-related net accretion to return to a more normalized level of approximately $500,000 per quarter. Turning to our non-interest income, which was $21.2 million for the quarter, up slightly from the $21.1 million we generated in the third quarter. Notably, our capital markets revenue was $11.3 million, an increase of $800,000 from the third quarter, and within our guidance range of $10 to $12 million. Despite the project delays that some of our clients have been experiencing, our pipeline remains strong. Capital markets revenue has averaged just over $10 million per quarter for the last four quarters, and therefore, we expect this source of fee income to be in a range of $40 to $48 million for the full year In addition, we generated $3.6 million of wealth management revenue in the fourth quarter, up slightly from the third quarter. Our wealth management team continues to generate meaningful new client relationships and is adding significant new assets under management, adding 340 new clients and $481 million in AUM this past year. This strong growth in new clients helped offset the sharp decline in stock market valuations that occurred in 2022. Now, turning to our expenses. Non-interest expense for the fourth quarter totaled $49.7 million compared to $47.7 million for the third quarter. The increase from the prior quarter was primarily due to higher incentive-based compensation related to our record full-year performance, partially offset by lower professional and data processing fees, due to the completion of the core conversion at Guaranty Bank and other merger cost savings. Looking ahead to the first quarter of 2023, we anticipate that our level of non-interest expense will be in the range of $49 to $51 million. This guidance range reflects less than a 5% increase in our fourth quarter non-interest expense run rate after excluding acquisition related items and is consistent with our strategic 965 initiatives. Turning to asset quality, which improved significantly in the fourth quarter and continues to be quite strong. Non-performing assets declined by 51% to $8.9 million at the end of the fourth quarter, driven by payoffs of several NPAs during the quarter. The ratio of NPAs to total assets was 0.11% at quarter end compared to 0.23% for the prior quarter. In addition, the company's criticized loans and classified loans to total loans and leases at the end of the fourth quarter were fairly static at 2.68% and 1.08% respectively, as compared to 2.35% and 1.29% from the prior quarter. As a result of continued improvements in overall credit quality, the company recorded no provision for credit losses in the fourth quarter. Our allowance for credit losses remained strong at 1.43% of total loans and leases. This allowance represents 10 times our non-performing loans and leases. We strengthened our total risk-based capital ratio during the quarter, posting an improvement of nine basis points to 14.47%. We also increased our tangible common equity to tangible assets ratio to 7.93% at quarter end, up from 7.68% at the end of September. Our tangible book value per share increased by 6.8% during the fourth quarter. This was due to both our strong earnings and a $10 million increase in AOCI as a result of an increase in the value of our available for sale securities portfolio and certain derivatives due to changes in long-term interest rates during the quarter. During the fourth quarter, we purchased and retired 100,000 shares of our common stock at an average price of $50.37 per share as we executed purchases under the share repurchase plan announced during the second quarter of 2022. Finally, our effective tax rate for the quarter increased to 15.9% from 14.1% in the third quarter. The rate was higher due to a higher ratio of taxable earnings to tax exempt revenue in the fourth quarter. Our effective tax rate for the full year 2022 was 12.8%, an improvement from 18.6% in 2021. This was primarily due to strong growth in tax exempt revenue, mostly from tax exempt floating rate loans, as well as increased benefit from our tax credit portfolio. We expect the effective tax rate to be in a range of 12% to 14% for the full year 2023. With that added context on our fourth quarter financial results, let's open up the call for your questions.