QCR Holdings, Inc.

Greetings and welcome to the QCR Holdings Inc. earnings conference call for the first quarter of 2025. Yesterday, after market closed, the company distributed its first 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. Management will provide a summary of the financial results and then will open up the call for 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, and 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 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 to April 30th, 2025, 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 Hilling at QCR Holdings. Please go ahead.

Thank you, Operator. Welcome, everyone. And thank you for joining us today. I'll start by providing highlights for the quarter. Todd will then follow with additional details on our financial results. Our first quarter was highlighted by margin expansion, robust deposit growth, and disciplined expense management. We also had another quarter of strong growth in our wealth management business. Our performance was further bolstered by continued loan growth while maintaining excellent asset quality further strengthening our capital levels and significantly increasing our tangible book value per share. For the first quarter of 2025, we reported net income and adjusted net income of $26 million. Reported earnings per diluted share was $1.52 and $1.53 on an adjusted basis. Our adjusted net interest margin on a tax equivalent basis increased one basis point compared to the previous quarter. Our core operating margin performance overpowered four basis points of dilution from the impact of expired interest rate caps. Despite the reported decrease in net interest income for the quarter, when adjusting for the reduced number of days, net interest income increased slightly, successfully offsetting the headwinds related to the expiration of the interest rate caps in the first quarter. Annualized loan growth was 4% in the first quarter when adding back the impact of the planned runoff of M2 equipment finance loans. Due to heightened uncertainty, we are suspending our full year loan growth guidance. Instead, we are providing guidance for the second quarter of 2025, projecting an annualized growth rate of 4% to 6%. We do not have a defined timeline for our next securitization. However, we intend to continue utilizing securitizations to provide flexibility to sustain the capital markets revenue, enhance liquidity, and manage our growth as we approach $10 billion in assets. Total annualized core deposit growth was at a robust 20%, reflecting our success in expanding market share with both new and existing clients. The significant growth in deposits enhanced our liquidity and allowed us to reduce our level of wholesale funding. Non-interest income for the first quarter was $17 million, including $7 million generated from capital markets revenue. Macroeconomic uncertainty affected our LIHTC lending business and caused many projects to be delayed, which resulted in lower capital markets revenue in the first quarter. Our capital markets activity for the second quarter is beginning to normalize as clients adjust to the current environment. Our wealth management business remains strong, generating annualized revenue growth of 14% for the quarter, driven by growth in new client accounts and assets under management. We are focused on the growth potential of this business, given its consistent and recurring revenue stream. We expect continued longer-term growth in our wealth management business fueled by our strategic investments made in our Southwest Missouri and Central Iowa markets. As we have discussed many times in previous quarters, we have a significant amount of variable compensation compared to other banks. This has allowed us to adapt immediately to the challenging economic landscape. For the quarter, non-interest expenses decreased by $7 million, or 13%. The reduction in expenses this quarter is primarily due to lower capital markets revenue and the impact on variable compensation. Our asset quality remains excellent. Non-performing assets as a percent of total assets increased slightly by three basis points compared to the previous quarter, but remains well below historic averages. Total criticized loan balances decreased 28 basis points from the prior quarter, marking the lowest criticized ratio in five years. Our allowance for credit losses as a percent of total loans held for investment stood at 1.32% at the end of the first quarter. The provision for credit losses was $4 million for the quarter, a decrease of $915,000 from the prior quarter. In response to the changing macroeconomic conditions we are taking a measured and proactive approach with our loan portfolio. We are reviewing key industries within our portfolio, monitoring those clients with import concentrations, working with our credit officers to build tariff exposure into our underwriting and staying close to our borrowers. We remain optimistic about the long-term resiliency of our markets and the financial health of our clients. While the economic backdrop remains uncertain we have not observed any measurable indicators of financial stress across the regions we serve. The first quarter loan activity was also influenced by elevated traditional loan payoffs. The increase in traditional loan payoffs was partly driven by a few clients who either sold properties or sold their businesses during the quarter. Additionally, the demand for affordable housing remained significant. and the lower first quarter results in this sector should lead to a larger pipeline of future activity. Our commercial real estate portfolio remains solid with our LIHTC loans representing approximately half of our exposure to this asset class. We consider LIHTC loans to be the strongest asset class within our portfolio. The LIHTC industry has a strong track record over nearly four decades, enduring multiple credit cycles with outstanding performance. We have a strong pipeline of high-quality LIHTC loans, which remains a core strategic priority for our company. The LIHTC lending program is a significant driver of capital markets revenue, substantially contributing to our non-existent income. Furthermore, LIHTC loans are well-suited for securitization due to their solid historical performance and strong investor demand. Loan securitizations enhance the flexibility of our balance sheet, improve our TCE, increase liquidity, and expand our net interest margin. Additionally, it helps us manage our on-balance sheet growth as we approach the $10 billion asset milestone. Securitizations are key to further supporting the growth of our earnings and tangible book value. We continue to assess the optimal timing for our next securitization. Our capital levels are strong. and we remain focused on increasing our regulatory capital. We are pleased with the growth in our capital ratios during the quarter. Our strong earnings combined with a modest dividend enables us to generate capital and increase our TCE ratio faster than our peers. We continuously evaluate opportunities to optimize the mix and the quality of our capital as we become a larger organization. Our core diluted earnings per share and tangible book value per share have grown at a compound annual rate of 11 and 12% respectively over the past five years. Our adjusted ROAA was 1.35% in 2024, up 20 basis points over the five year period, placing us near the top quartile of our peer group. We remain committed to delivering top tier financial performance highlighted by continued growth in earnings per share, top quartile ROAA, and substantial growth in tangible book value per share. During this period of elevated uncertainty, we remain focused on building capital and maintaining strong liquidity. In summary, we are dedicated to delivering industry-leading results through a client-first approach, prioritizing employee wellbeing and making a positive impact on the communities where we work and live. As announced on February 24th, I will be retiring from my role as CEO and as a member of the board of directors of QCR Holdings at the next shareholder meeting on May 22nd. It's been an honor to serve QCR Holding and its bank subsidiaries for more than two decades. I have been fortunate to see the positive impact that our company has made on the communities we serve. We are a relationship driven organization, and that is reflected in our talented employees who work diligently to make a positive difference for our clients and our shareholders. Todd is uniquely qualified to be my successor, and I take comfort in knowing that our company will be guided by a strong leader who embraces our culture. I will now turn the call over to Todd. to provide further details regarding our first quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'm honored to take on the CEO role of our company following our annual meeting in May. I've been fortunate to work with Larry since he joined QCR Holdings in 2001 when he founded Cedar Rapids Bank and Trust, and I've enjoyed working closely with him for the past six years as he has led our company as CEO. has been very rewarding both professionally and personally to be a part of our company's success over the past 25 years. I look forward to continuing that success by retaining our local community banking model that keeps us focused on exceeding the expectations of our clients, creating stronger communities, and sustaining our top tier financial performance. This focus has served us well throughout the history of our company and has created long-term value for our shareholders. Now moving to the details of our earnings performance for the first quarter. We delivered adjusted net income of $26 million, or $1.53 per diluted share. These results were driven by margin expansion, capital markets and wealth management revenue, combined with well-managed non-interest expenses. Net interest income for the quarter was $60 million, a $1 million decrease from the fourth quarter. However, when adjusting for fewer days in the quarter, that interest income grew slightly. This linked quarter growth was driven by margin expansion with continued decreases in our deposit and funding costs. The increase in core deposits allowed for a reduction in our higher-priced wholesale funding, which offset the impact of expired interest rate caps. Our first quarter adjusted NIM on a tax equivalent yield basis increased by one basis point from the fourth quarter and was within our guidance range, overpowering the dilution from the impact of the expired interest rate caps. Adjusting for the impact of those caps, our adjusted NIM TEY expanded five basis points. The increase in our core NIM when removing the impact of those expired interest rate caps was driven by a significant decrease in our deposit and funding costs, partially offset by lighter loan growth and lower average non-interest-bearing deposits. We've aggressively managed our deposit costs as the Federal Reserve began reducing interest rates last year. Our liability-sensitive balance sheet is now benefiting from these rate reductions. We are experiencing very strong deposit betas as we actively manage our deposit costs. Our balance sheet remains liability sensitive, positioning us to capitalize on potential future interest rate cuts while also benefiting from continued loan repricing. Our adjusted NIM-TEY has now expanded by 15 basis points over the past three quarters. We expect our adjusted NIM-TEY for the second quarter to be in the range from static to an increase of four basis points and assumes no further Fed rate cuts during the quarter. Our non-interest income was $17 million for the first quarter, supported by $7 million in capital markets revenue. As Larry mentioned earlier, capital markets revenue booked in the first quarter was lighter than recent quarters, specifically due to macroeconomic uncertainty. That said, the robust long-term demand for affordable housing continues to support the sustainability of our LIHTC lending and swap fee revenue. Our pipeline in this business remains strong and continues to grow. As a result, we expect our capital markets revenue from swap fees for the next four quarters to continue to be in our guidance range of $50 to $60 million. Our wealth management business generated $5 million of revenue for the first quarter, reflecting a 14% annualized increase from the prior quarter. Our wealth management assets under management continue to experience significant growth driven by our high performing team and additional strategic investments that are attracting new accounts and increasing our market share. Importantly, our ability to increase assets under management through new or existing accounts reduces the revenue pressure often experienced during volatile market conditions. Our wealth management growth is fueled by the personalized value our expert advisory team delivers, the strong relationships we build with our clients, and the dependable network of trusted legal professionals and key referral partners. We are committed to expanding this business given the consistent and recurring revenue it produces. Now turning to our expenses. Non-interest expense declined 7 million from the prior quarter, or 13%, to 47 million, well below our guidance range of $52 to $55 million. Our highly incentivized compensation structure rewards our employees only after our shareholders are first rewarded. As a result, we experienced lower variable compensation this quarter due to lighter capital markets revenues and loan growth, highlighting our expense flexibility. We continue to prioritize efficient management of our core operating expenses. However, We remain focused on strategic investments in technology, automation, and a high-performing operations team that efficiently supports our multi-charter community banking model to drive enhanced operating leverage. Looking ahead to the second quarter, we expect our non-interest expenses to be in a range of $50 to $53 million, which assumes both capital markets revenue and loan growth are within our guidance range. Moving to our balance sheet. During the quarter, total loans held for investment grew by $39 million, or 2% annualized. Our new loan fundings for the first quarter were in line with expectations. However, they were impacted by elevated traditional loan payoffs. Loan growth was funded by robust expansion in core deposits of $332 million, which included $43 million of growth in non-inter-sparing balances. Loans grew by 74 million or 4% annualized from the prior quarter when adding back the runoff of M2 equipment finance loans. Impacted by the current market uncertainty, our annualized gross loan growth was below our initial full year 2025 guidance range of 8 to 10%. Our long-term securitization strategy supports the ongoing success of our LIHTC business and drives substantial capital markets revenue. By securitizing LIHTC loans, we sustain ongoing swap revenue generation, enhance liquidity, lower funding costs, strengthen our TCE, and maintain our LIHTC portfolio within internal concentration limits. Since our initial securitizations began in 2023, our execution has improved, resulting in better financial results from lower transaction and administrative costs. We do not have a defined timeline for executing our next securitization. We continue to actively evaluate future securitizations to maintain our flexibility in managing our LIHTC lending business. As mentioned previously, we experienced strong deposit growth during the quarter. Total core deposits increased by $332 million or 20% annualized during the quarter, which allowed us to decrease broker deposits by $56 million and overnight FHLB advances by $140 million. This growth was driven primarily by our correspondent banking clients. 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. The substantial increase in deposits reduced the company's gross loan and leases held for investment to a total deposits ratio of 93%. Additionally, as of the end of the quarter, total liquidity increased $328 million, including $1.9 billion of instantly accessible liquidity. Turning to our asset quality, which remains excellent. Total criticized loans, a leading indicator of asset quality, decreased 18 million, or 28 basis points, to 2.06% of total loans and leases. NPAs increased 3 million from the prior quarter to 48 million, or 53 basis points of total assets, yet still well below historical levels. Our largest NPA as of the previous quarter was paid off in mid-January, although this was offset by a few other smaller NPA additions during the quarter. These changes reflect the normalizing credit environment from historically low levels. Additionally, approximately half of our total NPAs are comprised of just five relationships. We recorded a total provision for credit losses of $4 million during the quarter, representing a decrease of $915,000 from the prior quarter. This reduction was primarily due to lighter loan growth and a decrease in total criticized balances. Net charge-offs were $4 million for the first quarter, an increase of $825,000 from the prior quarter. The allowance for credit losses to total loans held for investment remains steady at 1.32%. Our reserve methodology under the CECL model was implemented in 2021 and it served us well. Our model leverages a combination of national and state economic drivers, nine qualitative factors, and actual historical performance of our banks during various market conditions. We continue to closely monitor asset quality across all of our lines of business while maintaining our strong credit culture. Our tangible common equity to tangible assets ratio increased by 15 basis points to 9.70% at quarter end, driven by strong earnings as AOCI remained consistent during the quarter. Our common equity tier one ratio increased 23 basis points to 10.26% and our total risk-based capital ratio increased six basis points to 14.16%. The improvement in our regulatory capital ratios was driven by solid earnings and a smaller increase in total risk-weighted assets. We are committed to continued growth in our regulatory capital, including maintaining our CET1 ratio above 10%. We consistently review our capital mix to support our business model and our growth. while being mindful of our relative position to our peers. We remain focused on the quality of our capital as we become a larger organization. We delivered another significant increase to our tangible book value per share, which grew by $1.43, representing 11% annualized growth for the quarter. Over the past five years, our TBV has grown by 12% on a compound annual basis. underscoring our strong financial performance and long-term commitment to building shareholder value. Finally, our effective tax rate for the quarter was 1%, down from 9% in the prior quarter. The linked quarter decline is primarily due to a combination of the tax benefits from equity compensation in the first quarter, new state tax credit investments, and lower pre-tax income from lower capital markets revenue. These factors decrease the mix of our taxable income relative to our tax exempt income. Our tax exempt loan and bond portfolios have consistently helped us maintain our low tax liability, benefiting our shareholders. Given a more normalized mix of revenue, we expect our effective tax rate to be in the range of 6% to 8% for the second quarter. With that added context on our first quarter results, let's open the call for your questions. Operator, we are ready for our first question.