QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings Incorporated Earnings Conference call for the fourth quarter and full year 2024. Yesterday after market closed, the company distributed its fourth 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 from management are Larry Helling, CEO, and Todd Gipple, President and CFO of Management will provide a summary of the financial results, and then we'll open the call for questions from analysts. Before we begin, I would like to remind everyone that some of this information management will be providing today falls under the guidance 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. Additionally, 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 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 being recorded and will be available for replay through January 30th, 2025. Starting this afternoon, approximately one hour after the completion of the call, it will be accessible to the company's website. I would now like to turn the call over to Mr. Larry Helling at QCR Holdings. Please go ahead, sir.

Thank you, operator. Welcome, everyone. And thank you for joining us today. I'll start by providing highlights of our 2024 performance. Todd will follow with additional details on our financial results for the fourth quarter. We delivered our strongest results of the year in the fourth quarter, generating record full-year results. Our exceptional performance was highlighted by significant growth in net interest income, driven by strong margin expansion and robust loan growth. Additionally, we produced another year of strong capital markets and wealth management revenues. Poor operating expenses were well controlled during the year and our credit quality remains excellent. We also successfully executed two additional LIHTC loan securitizations during the year to support our LIHTC lending business. All of these factors led to a substantial increase in tangible book value. We delivered record net income of $114 million or $6.71 per diluted share for the full year NET INCOME ON AN ADJUSTED BASIS WAS $119 MILLION, OR $7.03 PER GELUTED SHARE. THIS RESULTED IN AN ADJUSTED ROAA OF 1.35% AND AN ADJUSTED ROAE OF 12.61%, PLACING US AT THE HIGHER END OF OUR PEER GROUP. TOTAL LOAN GROWTH FOR THE YEAR WAS 10% PRIOR TO LOAN SECURITIZATIONS OF $387 MILLION. of low-income housing tax credit loans and 4% on a net basis. This rate of loan growth is consistent with our target range of 8 to 10% and was driven by our low-income housing tax credit lending program and our conventional commercial lending business. Given our current pipeline and the ongoing strength of our markets, we anticipate gross loan growth of 8 to 10% in 2025. When factoring in the loan securitization that we have planned and the continuing runoff of M2 equipment finance loans, we are targeting net loan growth between 1% and 3% for the year. We intend to continue leveraging securitizations to sustain capital markets revenue, enhance liquidity, and manage growth as we approach $10 billion in assets. Total core deposits grew 474 million, or 8% for the year, outpacing our net loan growth and increasing immediate liquidity. We expanded market share with significant increases in new client accounts and strengthened relationships with existing clients. Highlighting our 2024 earnings performance was an increase in net interest income of $11 million, representing 5% growth for the year. This significant improvement was fueled by strong increases in loans and investments, as well as higher yields on those assets. At the same time, deposit costs began to stabilize. Total non-interest income for the year reached $116 million, led by $71 million from capital markets revenue, which included $1 million of net gains from securitizations. Our wealth management business saw exceptional growth, with assets under management increasing by $1 billion, or 20% for the previous year. This growth was driven by significant new client accounts and favorable market performance, resulting in a significant 15% increase in total wealth management revenue for the year. We are excited about the potential to further expand this business, given its consistent and recurring revenue streams. We anticipate continued growth in our wealth management business with the addition of key personnel during 2020-24 in southwest Missouri and central Iowa. We continue to carefully manage our core operating expenses. For the full year, core non-interest expenses decreased by more than 2%, primarily due to salary and benefit costs. Our asset quality remains strong and better than historical averages. Total criticized loan balances improved 37 million or 19% for the year, while non-performing assets increased 11 million or 33%. During the fourth quarter, we saw a modest increase in total criticized and non-performing assets, primarily due to three loans in discrete industries. These changes are reflective of the credit environment normalizing from historically low levels. Nonperforming asset ratio stood at 50 basis points of total assets. We have already made significant progress in early 2025 with the payoff of our largest nonperforming asset of $10 million. Our allowance for credit losses as a percentage of total loans held for investment was 1.32% as of the end of 2024, providing a strong buffer against potential future losses. The provision for credit losses was $17 million for the year, a modest increase of $600,000 from the prior year. We maintain a disciplined approach to our reserves and continue to carefully monitor asset quality across all of our business lines. We remain optimistic about the economic stability within our markets and the strong financial position of our clients. Currently, we have not observed any broad-based signs of financial stress across the regions we serve. Our commercial real estate portfolio remains solid with our LIHTC loans making up approximately half of our exposure to this asset class. We consider LIHTC loans to be the strongest asset class within our portfolio. The LIHTC sector has demonstrated a strong track record performance over nearly four decades. enduring multiple credit cycles with negligible credit issues. Including LIHTC loans, our commercial real estate exposure stands at 144% of total risk-based capital. We maintain a strong pipeline of high-quality LIHTC loans, which remains a key strategic initiative for our company. The LIHTC lending program drives significant capital markets revenue, contributing meaningfully to our non-interest income. Additionally, LIHTC loans are well-suited for securitization thanks to their proven performance and robust demand from investors. The securitization of LIHTC loans has enhanced the flexibility of our balance sheet, strengthened our TCE, improved liquidity, and increased our net interest margin. Additionally, it helps manage our on-balance sheet growth as we approach the $10 billion asset milestone. Securitizations play a key role in supporting the long-term sustainability of earnings and the growth of our tangible book type. We are pleased with the growth in our TCE ratio during the year. In addition, we are committed to maintaining strong regulatory capital ratios, and we are pleased with the increases in these ratios during the year. Our strong earnings growth coupled with a modest dividend enables us to generate capital and increase our TCE more quickly than our peers. We continuously evaluate opportunities to optimize the mix and the quality of capital as we grow into a larger organization. We are focused on sustaining our exceptional financial performance, including growth in earnings per share, top quartile ROAA, and significant growth in tangible book value per share. We create shareholder value with a client-centric focus fostering employee well-being and making a positive impact in the communities in which we work and live. Over the past five years, we have consistently outperformed many of our peers. Total loans and deposits have grown at a compound annual rate of 13%. This growth resulted in an increase of 14% in afforded diluted earnings per share, 12% in our tangible book value compound annual rate. I will now turn the call over to Todd to provide further details regarding our fourth 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 fourth quarter. We delivered adjusted net income of $33 million, or $1.93 per diluted share, in Q4. Our record full-year financial results were a result of significant growth in net interest income driven by margin expansion, combined with strong capital markets and wealth management revenues, along with tightly managed non-interest expenses. Net interest income for the quarter was $61 million, a $1.5 million increase from the third quarter. This linked quarter growth in net interest income was driven by significant margin expansion. which overpowered the impact of executing our fourth securitization of $155 million of stabilized taxable LIHTC loans in November. Our fourth quarter adjusted NIM on a tax-equivalent yield basis, expanded by six basis points from the third quarter, near the upper end of our guidance. This increase was driven by a significant decrease in our deposit and funding costs. We also experienced an increase in average non-interest-bearing deposit balances during the quarter. We are pleased with our ability to drive down our funding costs, which has contributed meaningfully to our NIM expansion. We have been aggressive in managing our deposit costs as the Federal Reserve began reducing interest rates. Early in the most recent interest rate hiking cycle, beginning in March of 22, We benefited from those interest rate increases given our asset sensitivity. As the historic interest rate increases continued, our balance sheet shifted to liability sensitive due to the resulting mix shift in our core deposit portfolio, and we are now benefiting from the recent reductions in interest rates. We are experiencing the benefits of strong deposit betas as we actively manage our deposit costs early in this current rate cutting cycle. Looking forward, our balance sheet remains liability sensitive, positioning us to capitalize on future interest rate cuts while also benefiting from continued loan repricing under a steepening yield curve. However, we expect some headwinds related to the expiration of certain interest rate caps in the first quarter of 2025. We utilize various derivative instruments to manage our interest rate risk. Although these caps have benefited us over the past few years, Their expiration is expected to reduce our NEM by four basis points in the first quarter. Despite this, we expect to offset this impact and continue growing our net interest margin in the first quarter of 2025. We project our adjusted NEM TEY for the first quarter will be in the range from static to an increase of five basis points. Our non-interest income was 31 million for the fourth quarter, supported by consistently strong capital markets revenue of 21 million, which included a 1.4 million gain on our fourth LIHTC securitization. The continued strong demand for affordable housing continues to support the sustainability of our LIHTC lending and swap fee revenue. Our pipeline in this business remains robust. As a result, We expect our capital markets revenue from swap fees for the next 12 months to be in the range of 50 to 60 million. Our wealth management business generated 5 million of revenue in the fourth quarter, a 25% annualized increase from the third quarter. Our wealth management assets under management have grown by 1 billion in 2024, driven by the expansion of our client base and market performance as we increase our market share. This growth is driven by the personalized value proposition provided by our highly skilled team of advisors, the strong relationships we have cultivated with our clients, and a reliable network of trusted legal professionals and key referral partners. We are focused on growing this business given the reliable and recurring revenue stream it provides. As we discussed last quarter, We executed a derivative strategy with a notional value of $410 million during the third quarter. These derivatives are structured to protect the company's regulatory capital ratios from the adverse effects of a significant decline in long-term interest rates. These derivatives are marked to market each quarter 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, or a loss, which is capped at the upfront premium. If long-term interest rates decline, we will record an increase in the market value, or a gain, that will help offset the risk to our regulatory capital ratios. We view this derivative as a prudent way to protect our regulatory capital ratios. For the fourth quarter, we recorded a loss on these derivatives of $3 million due to the increase in long-term interest rates from the prior quarter. Additionally, and partially offsetting this loss, was a $1.5 million gain from the increase in the value of our floating rate trading securities, or the retained BPs of our securitizations, as long-term interest rates increased. Now turning to our expenses. Non-interest expense for the fourth quarter totaled $53.5 million, which was static from the previous quarter. Having achieved our strongest quarterly results of the year, Our highly incentivized compensation structure rewards our employees after our shareholders are rewarded. Consequently, we experienced higher incentive-based compensation this quarter due to the very strong quarterly and record full-year results. Professional and data processing fees increased during the quarter due to core system conversion related expenses related to our investments in our digital transformation. Despite these increases, our full-year core non-interest expenses remain well controlled, decreasing by $5 million or 2% from the prior year and supporting meaningful improvement in our adjusted efficiency ratio to 58.4% for the year. We remain focused on effectively managing our core operating expenses. This includes strategic investments in technology and automation, along with a top-tier operations team that underpins our multi-charter community banking model. Looking forward to the first quarter of 2025, we expect our non-interest expenses to be in the range of $52 to $55 million, a growth rate of 4%, which aligns with our 965 strategic model. Over the past five years, this approach has consistently delivered record bottom-line results. The general increase in our expenses in 2025 are primarily from significant investments in our digital transformation, while continuing to invest in the people that drive our exceptional performance. Moving to our balance sheet. Including the $387 million of loans that were securitized during the year, our total loans grew by $628 million, or 10% from the prior year, which was at the upper end of our guidance range of 8% to 10%. Loans held for investment grew 121 million or 7% annualized during the fourth quarter. Our long-term securitization strategy supports the ongoing success of our LIHTC business and the substantial capital markets revenue it drives. Through the securitization of LIHTC loans, we create sustainability of continued swap revenue generation, improve our liquidity, reduce our funding cost, strengthen our TCE, and ensure our LIHTC portfolio remains within our internal concentration limits. Since our initial securitizations began in 2023, our execution has improved, leading to better financial results due to reduced transaction and administrative costs. Looking ahead to 2025, we are planning to execute a single securitization of stabilized tax exempt LIHTC loans in the latter part of the year. We are targeting a deal size of approximately $350 million, consistent with the average of the securitizations we have closed over the past two years. Total core deposits increased $76 million, or 5% annualized during the quarter. For the year, total core deposits have increased $474 million, or 8% from the prior year, outpacing our net loan growth, increasing liquidity, and reducing our loan-to-deposit ratio. Deposit growth remains a primary focus for our company, and when combined with our securitizations, it reduces our reliance on wholesale or higher-cost funding sources. Our total uninsured and uncollateralized deposits of $1.3 billion remain quite low at 19% of total deposits. Additionally, the company had approximately $4 billion of available liquidity at quarter end, which includes $1.7 billion of instantly accessible liquidity. Turning to our asset quality, which remains strong. During the quarter, total criticized loans increased 14 basis points to 2.34% of total loans and leases. However, we are pleased with the reduction in total criticized loans for the year, which is down 65 basis points from the prior year. NPAs increased by 10 million to 46 million, or 50 basis points of total assets from the prior quarter due to three specific loans. As Larry mentioned, these issues are reflective of a normalizing credit environment from historically low levels. Additionally, approximately 43% of our total NPAs are comprised of just four relationships. Our largest NPA of 10 million was recently paid off in mid-January. This successful outcome reduces our NPAs to 36 million, or 40 basis points of total assets on a pro forma basis. consistent with our MPA ratio at the end of 2023. We recorded a total provision for credit losses of $5 million during the quarter, representing an increase of $2 million from the prior quarter. The increase in the provision for credit losses during the quarter was primarily due to strong loan growth and the increase in total criticized balances. Net charge-offs were $3 million for the fourth quarter, which was consistent from the prior quarter. The allowance for credit losses to total loans held for investment increased to 1.32% from 1.30% as of the prior quarter. We continue to diligently monitor the asset quality of all our lines of business and remain committed to our strong credit culture. Our tangible common equity to tangible assets ratio increased by 31 basis points to 9.55% at quarter end. The improvement in TCE was driven by strong earnings, partially offset by a decrease in AOCI as longer rates increased. We also saw a nice improvement in our regulatory capital ratios during the quarter. Our total risk-based capital ratio increased 23 basis points to 14.10% at quarter end, and our common equity Tier 1 ratio increased by 24 basis points to 10.03%. driven by strong earnings growth and a smaller increase in total risk-weighted assets. We remain committed to growing our regulatory capital, including maintaining our CET1 ratio above 10%. We continuously review our capital mix to support our business model and growth needs, while being mindful of our relative position to our peers. Over time, We will continue to focus on the quality of our capital as we continue to expand into a larger organization. We saw another significant increase in our tangible book value per share, which grew by $1.21, representing 10% annualized growth for the quarter. Over the past five years, our TBV has grown by more than 12% on a compound annual basis, emphasizing our strong financial performance and commitment to building long-term value for our shareholders. Finally, our effective tax rate for the quarter was 9% and within our guidance. Our tax exempt loan and bond portfolios have consistently helped maintain our low tax liability, benefiting our shareholders. We continue to expect our effective tax rate to be in the range of 8 to 10% for the first quarter of 2025. With that added context on our fourth quarter and full year financial results, let's open the call for your questions. Operator, we're ready for our first question.