QCR Holdings, Inc.

greetings and welcome to the qcr holdings inc earnings conference call for the third quarter of 2024. 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 and CFO. Management will provide a summary of the financial results and then will open 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 or forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included on 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 1, 2024, starting this afternoon approximately one hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Larry Helling at QCR Holdings.

Thank you, operator. Welcome, everyone, and thank you for joining us today. I'll start by presenting some highlights of our strong financial performance for the quarter and Todd will follow with additional details. We produced exceptional third quarter results, highlighted by our significant growth in net interest income and margin expansion. We also had another quarter of strong capital markets and wealth management revenue. We grew total core deposits and maintained a stable cost of funds. Core expenses remained well controlled, and our credit quality continues to be excellent. All of this led to a significant increase in tangible book value. We generated net income of $28 million, or $1.64 per diluted share during the quarter. Net income on an adjusted basis was $30 million, or $1.78 per diluted share. This produced an adjusted ROAA of 1.35 percent and an adjusted ROAE of 12.60 percent which continues to be at the higher end of our peer group. Our net interest income increased significantly by nearly $3.6 million in the third quarter, or 6%. This was driven by strong growth in loan and investment balances, combined with an expanded margin. Annualized year-to-date total loan growth is 6%, or 10.5%, and including loans that were securitized in the third quarter. This is just above our annual target range of 8 to 10 percent. Our low-income housing tax credit lending program and our conventional commercial lending business have been the primary drivers of our loan growth. We have funded this loan growth through a combination of deposit growth and liquidity provided from our loan securitizations. Total year-to-date annualized core deposit growth has been a robust 8.5 percent. stabilizing deposit costs and non-interest bearing balances combined with higher loan and investment yields produced higher margins and drove an eight basis point expansion and adjusted NIM from the prior quarter. Our total non-interest income for the third quarter was $27 million, driven primarily by our capital markets revenue of $16 million. Additionally, our wealth management business continues to generate outstanding growth and assets under managed We have added nearly $1 billion of assets under management year-to-date, or 18%, driven by significant new client volume. Our continued strong AUM growth and favorable market conditions drove a 17% annualized increase in total wealth management revenues for the quarter and 20% year-to-date. We believe that the addition of key personnel in the Southwest Missouri and Central Iowa regions will help support continued growth in this business. We continue to diligently manage our core operating expenses. Year to date after adjusting for one-time items, non-interest expenses have increased only 2% annualized. During the third quarter, total non-interest expenses increased from the prior quarter primarily due to the announced changes at our M2 equipment finance . We incurred a one-time charge of $2.4 million for restructuring expenses and goodwill impairment. We expect to recover these costs over the next two quarters. The decision to discontinue providing new loans and leases to our equipment finance business reinforces our focus on our core banking franchise. This change will allow us to improve profitability, increase liquidity, and reallocate capital to business lines that generate higher risk-adjusted returns. Our asset quality remains excellent, and our credit trends improved from last quarter. Non-performing assets as a percent of total assets were static when compared to the prior quarter and remain well below our historical averages. Total classified loans are meaningfully lower, and total criticized loans are also lower, having declined for the fourth consecutive quarter. Our allowance for credit losses as a percent of total loans held for investment was 1.30 percent for the quarter. The provision for credit losses was $2 million lower this quarter due to improvements in overall credit quality. We are encouraged by the economic stability of our markets and the balance sheet strength of our clients. We are not seeing any meaningful indicators of financial stress across our markets. We are comfortable with our commercial real estate concentration levels. Our investment in high-quality LIHTC loans make up roughly half of our exposure to this asset class. We believe that this is the best asset class in our loan portfolio. The entire LIHTC industry has a long track record of solid performance for nearly four decades and through several credit cycles. Our commercial real estate exposure excluding LIHTC loans is 140 percent of total risk-based capital. Commercial office space exposure remains low at only 3 percent of total loans, with an average loan size of less than $900,000. Most of these properties are in suburban markets and are performing consistent with our expectations, with no indications of repayment concerns. We continue to have a robust pipeline of high-quality LIHTC loans. The LIHTC lending program has been a key strategic initiative for our company. This program generates significant capital markets revenue, which contributes meaningfully to our non-interest income. In addition, LIHTC loans are ideal for securitization due to their strong track record and substantial investor demand. Securitization of LIHTC loans improves the optionality in our balance sheet, improves our TCE, increases liquidity, and expands our net interest margin. Additionally, it moderates our on-balance sheet growth as we approach the $10 billion asset level. Securitizations will continue to drive the sustainability of our earnings and tangible book value growth. Our next securitization is targeted for the fourth quarter. Capital levels are solid, and we continue to focus on increasing our regulatory capital. Our strong and steady earnings growth combined with our modest dividend allows us to generate capital and increase our TCE ratio more quickly than our peers. We are dedicated to delivering top-tier financial performance, which includes EPS growth, top quartile ROAA, and meaningful, tangible book value per share growth. We create shareholder value by remaining client-focused, creating employee well-being, and delivering a positive impact in the communities in which we live and work. In summary, we are committed to industry-leading results and outstanding client service, which we believe will continue to drive strong operating performance. I will now turn the call over to Todd to provide further details regarding our third quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our earnings performance for the quarter. We delivered adjusted net income of $30 million, or $1.78 per diluted share for the quarter. Our strong financial results were driven by significant growth in net interest income, solid non-interest income from capital markets and wealth management revenue, combined with well-managed core expenses. Net interest income was $60 million, a $3.6 million increase from the second quarter. This 6% link quarter growth in NII was driven by strong growth in loans and investments combined with significant margin expansion. Our adjusted NIM on a tax-equivalent yield basis expanded by 8 basis points from the second quarter and exceeded the upper end of our guidance. The increase was fueled by a combination of improving loan and investment yields and stable deposit costs. Looking ahead with our liability-sensitive balance sheet, we are well positioned to benefit from the Fed's decision to lower interest rates in the third quarter. Assuming a stable funding mix and no additional Fed action, we anticipate continued growth in net interest income for the fourth quarter. We are updating our guidance for adjusted NEM TEY in the fourth quarter to increase in the range of between two and seven basis points. Our non-interest income was $27 million for the third quarter, supported by continued strong capital markets revenue of $16 million. Our LIHTC lending and revenue from swap fees continue to be fueled by the steady demand for affordable housing. Our pipeline in this business remains healthy. We are therefore reaffirming our capital markets revenue guidance for the next 12 months to be in a range of $50 to $60 million. Our wealth management business generated $4.5 million of revenue in the third quarter, a 17% annualized increase from the second quarter. Year to date, our wealth management assets under management have grown by $1 billion, driven by growth in our existing client base and the expansion of this business into two of our markets. This growth is driven by the high-touch value proposition that our extremely knowledgeable team of advisors deliver. the strong relationships we have built with our clients, and a network of trusted legal advisors and key referral sources. During the third quarter, we executed a derivative strategy with a notional value of $410 million. These derivatives are designed to safeguard the company's regulatory capital ratios against the adverse effects of a significant decline in long-term interest rates. that would impact the value of our back-to-back swaps in our LIHTC loan portfolio. These derivatives are unhedged and are mark-to-market with gains or losses recorded in non-interest income and reflected as a non-core item. If long-term interest rates increase, we will reflect a reduction in the market value of the derivative capped at the upfront premium. However, should long-term interest rates decline, we will record an increase in the market value of the derivative that will help offset the risk to our regulatory capital ratios. For the quarter, we recorded a loss on those derivatives of $414,000. In addition, we recorded a $473,000 loss on the securitization in the third quarter. This result was better than anticipated due to improved economics in our execution. Now turning to our expenses. Non-interest expense for the third quarter totaled $54 million. The increase in expenses for the third quarter included the one-time restructuring and goodwill impairment charges totaling $2.4 million, resulting from our decision to discontinue offering new loans and leases through our equipment finance business. Adjusting non-interest expense for those one-time charges resulted in core non-interest expenses of $51 million, an increase of approximately $1 million from the prior quarter, and within our guidance range of $49 to $52 million. The linked quarter increase was primarily driven by higher incentive compensation and advertising expenses. Our year-to-date core non-interest expenses remain well controlled, having increased only 2% annually. We continue to carefully manage our core operating expenses. Our approach includes investments in technology and automation, combined with a best-in-class operations team that supports our multi-charter community banking model. As we look ahead to the fourth quarter, we expect our non-interest expenses to continue to be in the range of $49 to $52 million. Turning to our balance sheet. Year-to-date total loans have grown by $285 million, or 6% annualized, funded by growth in core deposits of $400 million. Including the $230 million of loans that were securitized during the quarter, total loans have grown 10.5% year-to-date and just above our guidance range of 8% to 10%. In anticipation of our next loan securitization plan for the fourth quarter, we have designated $166 million of LIHTC loans as held for sale. Our long-term securitization strategy underscores the continued success of our LIHTC business and the significant capital markets revenue it generates. By securitizing LIHTC loans, we create capacity for sustained future swap revenue generation, enhance liquidity, reduce funding costs, strengthen TCE, and we maintain our LIHTC portfolio within established concentration levels. Our upcoming securitization in the fourth quarter will consist of $166 million of stabilized taxable LIHTC loans. Our execution has improved since our initial securitizations late last year, and we expect improved economics with future securitizations from lower transaction and administrative costs. Total deposits increased $220 million, or 13% annualized during the quarter. Year-to-date total core deposits have increased $400 million or 9% on an annualized basis. Deposit growth remains a core focus for our company and, in combination with our securitizations, helps us decrease reliance on wholesale or higher cost funding. Our total uninsured and uncollateralized deposits remain quite low at 21% of total deposits. Additionally, The company had approximately $3 billion of available liquidity at quarter end, which includes $1.4 billion of instantly accessible liquidity. Turning to our asset quality, which remains excellent. During the quarter, total criticized loans decreased 21 basis points to 2.20% of total loans and leases. This marks the fourth consecutive quarter of improvement, resulting in a $50 million reduction in total criticized balances. NPAs increased by 1 million to 36 million, or 39 basis points of total assets, which is static to the prior quarter. Two relationships drove this moderate increase in NPAs. Additionally, approximately 45 percent of our total NPAs are comprised of just four relationships. We recorded a total provision for credit losses of $3.5 million during the quarter, representing a decline of $2 million from the prior quarter. The reduction in the provision for credit losses during the quarter was primarily due to the overall credit quality improvements. Net charge-offs were $3.4 million for the third quarter, an increase of $1.8 million from the prior quarter. The increase in net charge-offs primarily included smaller loans and leases at M2. The allowance for credit losses to total loans held for investment decreased to 1.30% from 1.33% as of the prior quarter. Our tangible common equity to tangible assets ratio increased by 24 basis points to 9.24% at quarter end, up from 9% at the end of June. The improvement in TCE was driven by very strong earnings and an increase in AOCI. Our total risk-based capital ratio decreased to 13.87% at quarter end, and our common equity tier one ratio decreased to 9.79% due to sizable loan and investment growth partially offset by strong earnings. We remain focused on growing our regulatory capital and targeting TCE in the top quartile of our peer group. We saw another significant increase in our tangible book value per share, which grew by $2.35 representing a 20% annualized growth for the quarter. Over the past five years, our TBV has grown by more than 12% on a compound annual basis, highlighting our strong financial performance and commitment to building long-term shareholder value. Finally, our effective tax rate for the quarter was 7%, just under the low end of our guidance. Our high-yielding tax-exempt loan and bond portfolios have consistently preserved our low tax obligation and benefited our shareholders. We continue to expect our effective tax rate to be in a range of 8% to 10% in the fourth quarter. With that added context on our third quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.