QCR Holdings, Inc.

Good morning and welcome to the QC-R Holdings, Inc. Second Quarter 2025 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Todd Gippel, CEO. Please go ahead.

Thank you, operator. Good morning, everyone. Thanks for joining our call today. I want to begin with an overview of our second quarter performance and then spend some time talking more deeply about the business. Nick will then provide additional details on our financial results. We delivered strong second quarter earnings, driving in an EPS improvement of 13% over the first quarter. These results were highlighted by a significant increase in net interest income, driven by both net interest margin expansion and strong loan growth, improved capital markets revenue, and disciplined non-interest expense management. We were pleased to deliver margin expansion during the quarter, as we continue to drive our cost of funds lower while maintaining stable loan yields in a persistently challenging inverted yield curve environment. Our loan growth also rebounded, reaching an annualized rate of 8% when adding back the impact from the planned runoff of M2 equipment finance loans and leases. This growth was driven by strong new loan production for the quarter. We continue to be optimistic about solid loan growth for the remainder of the year and are guiding to gross loan growth in a range of 8% to 10% in the second half of the year. While capital markets revenue from our LIHTC business came in below our historical run rate, it improved significantly from the first quarter and was up more than 50% on a link quarter basis as we move closer to more normalized levels. Our LIHTC pipeline is as strong as it has been for some time. This remains a highly sustainable and durable business for us, having successfully navigated challenges such as the pandemic, supply chain disruption, significant interest rate volatility, and more recently, the heightened level of economic and political uncertainty in Washington, D.C. We've emerged from this latest challenge with an even deeper network of developer relationships and a stronger LIHTC lending business. We believe that our capital markets revenue will continue to normalize over the next four quarters. Second quarter capital markets revenue ramped up close to historical levels as we expected and previously guided on our Q1 earnings call. Second quarter production was on pace for even stronger results, but notably two significant transactions that were expected to close late in Q2 shifted into early July. And as a result, we are off to a strong start here in Q3. Given the strength in pipeline, we are reaffirming our guidance for capital markets revenue to be in a range of 50 to 60 million over the next four quarters. In addition, we are also providing guidance over a shorter horizon and expect capital markets revenue for the third quarter to be fully back to a more normalized level and in a range of 13 to 16 million for the quarter. Our LIHTC production team has never worked harder to deepen relationships with existing clients and forge new partnerships with top tier LIHTC developers across the country. As a result, we remain very optimistic about the long-term durability and profitability of this business. Our non-interest expenses were again well controlled in the second quarter, supporting an adjusted ROAA of .29% and contributing to the substantial increase in our earnings per share on a late quarter basis. Asset quality remains excellent. While net charge-offs increased from Q1, they were tied to previously identified and fully reserved credits. Our provision for credit loss was essentially static from the prior quarter. We had a strong second quarter and our teams performed at a high level. We are a company built on relationships and these relationships matter most during times of uncertainty. I am grateful for our 1,000 employees that take great care of our clients, our communities and each other every day. Before I turn it over to Nick to provide more detail on our second quarter performance, I'd like to take a few minutes to share a broader perspective on our company and how I view our business today and the opportunities that lie ahead. I see our company is operating through three primary lines of business, traditional banking, wealth management and our LIHTC lending platform, which creates high quality assets and drives meaningful capital markets revenue. When I step back and view these three lines of business, I see tremendous opportunities in each. Our traditional banking model is built around separate, independent, autonomous community banks that attract top tier talent and the best clients in our markets. We hold number one market share in both the Quad Cities and Cedar Rapids, Iowa markets and number two market share in our Southwest Missouri market. In our largest MSA, Des Moines, Iowa, we are currently ranked sixth with plenty of opportunity for growth as we compete quite favorably with the larger banks in that market. Built upon our multi-charter business model that maintains the heart of community banking at the local level and the resulting strength of our local banking teams, combined with the significant resources of our $9 billion company, I expect continued strong organic growth in both loans and deposits across all of our markets. We have two significant opportunities to further enhance our operating leverage and financial performance in our traditional banking space. We are nearly halfway through our digital transformation journey as we create our bank of the future for our clients and our employees. We successfully transitioned all of our consumer clients to an improved online banking platform and are now preparing for the core conversion of our four banks into a unified, more efficient operating system. This new platform will improve performance at a lower cost and will help both our bankers and our shared services support teams work more efficiently and effectively. We expect to have this work completed and fully implemented in the first half of 2027, positioning us for improved operating leverage in 2027 and beyond. The second significant opportunity in our traditional banking business is to improve the right side of our balance sheet. It will require sustained focus and effort over several years, but it's our top strategic initiative across our company. I can tell you that every one of our 1000 employees here at QCRAGE understands that our number one focus is growing and strengthening our core deposit base. And I'm confident our people come to work each day focused on doing that. As a result, I expect an improved funding mix to further enhance our profitability in our traditional banking business. Over the past five years, we've significantly expanded our wealth management business, growing both AUM and revenue by compound annual growth rate of 10%, remarkable results by our team. Wealth management is the ultimate relationship business and we excel at this. Our relationships in the traditional banking space and with key professionals in each of our markets are uniquely personal and deep. These relationships provide us with an excellent pipeline of wealth management opportunities to fuel our continued success in this business. We also benefit from a competitive landscape in wealth management, where larger institutions often fall short on service and relationships, allowing us to consistently gain market share. Wealth management is highly accretive to ROA, as the AUM is of course off balance sheet. We like to say that this business is the ultimate ROA business as it has no A. We plan to continue investing in this business and I expect it to play an increasingly important role in driving top quartile returns. Our LIHTC lending business has proven remarkably durable through the pandemic, supply chain disruptions, significant interest rate volatility, and the recent political and macroeconomic uncertainty. We are devoting significant resources to this business and are building third party relationships that will allow us to expand our level of production of LIHTC perm financing and the capital markets revenue this business generates. We continue to grow our network of LIHTC developer relationships, which we believe over time will lead to larger pipelines and more robust production volumes. The need for affordable housing in our country remains significant and the newly enacted legislation has expanded the availability of affordable housing tax credits. The combination of this relentless long-term demand for affordable housing coupled with our deep relationships with many of the best LIHTC developers in the country is why we are optimistic about growing this business and further enhancing our already strong financial performance. In summary, I see it like this. We are focused on building something here that is materially different and significantly better than others who operate in these spaces in which we compete. Our ability to continue to leverage our many unique capabilities and competencies here at QCRIH is why we have such great confidence in our ability to maintain and extend our competitive position. Executing on these opportunities across all three of our core lines of business positions us to sustain our top tier financial performance and reward our shareholders. I will now turn the call over to Nick to provide further details regarding our second quarter results.

Thank you, Todd. Good morning, everyone. Before I begin, I would like to thank the board of directors and Todd for the opportunity to serve as chief financial officer of QCRI Holdings. I also want to express my appreciation for the warm reception I've received from the investment community. I'm honored to take on the CFO role of our company after a 20 year career here at QCRIH alongside a highly experienced and talented team. I'm excited to continue serving all our stakeholders as we build on QCRIH's strong momentum and drive future success. Now, moving to the financial results for the second quarter. We delivered adjusted net income of 29 million or $1.73 per diluted share. Net interest income for the quarter was 62 million, a $2 million increase from the first quarter driven by strong earning asset growth combined with margin expansion. Our NIM on a tax equivalent yield basis increased by four basis points from the first quarter and was at the high end of our guidance range. The increase in our NIM was driven by strong growth in both loans and investments along with higher yields on those assets. We also continued to benefit from lower deposit costs, which we've been able to steadily reduce as the Federal Reserve began cutting interest rates last year. Our liability sensitive balance sheet and our progress in lowering deposit rates have resulted in strong deposit betas enabling us to capitalize on the declining rate environment. We are also well positioned to benefit from any potential future interest rate cuts. Our NIM TEY has now expanded by 21 basis points over the past five quarters. We expect our NIM TEY for the third quarter to be in the range of static to an increase of four basis points assuming no further Federal Reserve rate cuts during the quarter. Non-interest income totaled 22 million for the second quarter, driven in part by 10 million in capital markets revenue. During the quarter, we saw improved Y-Tech activity compared to the first quarter, resulting in a 3 million or 51% increase in capital markets revenue. Our pipeline continues to improve as clients adjust to evolving market conditions. We believe the long-term demand and our growing backlog for new deals will continue to provide robust support for our Y-Tech lending program. Our wealth management business generated 5 million in revenue for the second quarter, consistent with the first quarter. As compared to the like period in 2024, wealth management revenue has grown by 8%, reflecting the strength and momentum of this business. Our continued investment and wealth management is paying off. Reinforcing our position as a trusted local partner to our clients. Notably, the strategic expansions we announced on previous calls in central Iowa and southwest Missouri are attracting new client relationships. Our consistent AUM growth in our markets not only strengthens our foundation, but also helps temper revenue pressure during periods of broader market volatility. Now turning to our expenses. Non-interest expense for the second quarter was 49.6 million, an increase of 3 million, coming in just below the lower end of our guidance range of 50 to 53 million. This increase was primarily driven by higher capital markets revenue and strong loan growth, resulting in an improved ROAA, which drove higher variable compensation. Professional and data processing expenses also increased and were related to our digital transformation. Compared to the first half of 2024, non-interest expenses remain well-controlled and are down 9% on an annualized basis. Our highly incentivized variable compensation structure is designed to enhance operating leverage and provide expense flexibility across changing revenue cycles, rewarding our employees only after value has been delivered to our shareholders. We remain disciplined in managing core operating expenses while continuing to invest strategically in technology and automation to further support our high-performing operations team. These investments are essential to strengthening our operating leverage and supporting our multi-charter community banking model. As Todd noted, we are making progress on our comprehensive multi-year digital transformation initiative that encompasses several strategic projects. We will continue to manage expenses with discipline. Our updated non-interest expense guidance is projected to be in the range of 52 to 55 million for the third quarter. This updated guidance captures costs associated with our digital transformation and assumes both capital markets revenue and loan growth are within our expected guidance ranges. Moving to our balance sheet. During quarter, total loans grew by 137 million or 8% annualized when adding back the impact from the planned runoff of M2 equipment, finance loans and leases. Our loan growth was driven both by our LIHTC and traditional lending businesses. Since 2023, loan securitizations have played a key role in supporting the continued success of our LIHTC business, which remains a significant driver of capital markets revenue. As our LIHTC permanent loan pipeline continues to build, we expect our next securitization to close in early 2026. Following the robust deposit growth of 276 million or 16% annualized in the first quarter, we retain the majority of those balances throughout the second quarter. Total deposits declined slightly by 19 million or 1% on an annualized basis during the second quarter, while average deposit balances rose by 72 million compared to the first quarter. Year to date, core deposits have increased by 311 million or 9% annualized. Turning to our asset quality, which remains excellent. Total non-performing assets declined 5.5 million or 11% during the second quarter. Our total NPAs to total assets ratio also improved to 46 basis points, which is approximately half of our 20-year historical average. Total criticized loans increased 9 million or 10 basis points to .16% of total loans and leases. Net charge-offs increased by 2 million, primarily driven by the charge-off of loans that had been previously fully reserved. Additionally, over half of our total remaining NPAs are comprised of just five relationships. Total provision for credit losses of 4 million was down slightly from the previous quarter. The allowance for credit losses to total loans held for investment was 1.28%. We continue to closely monitor asset quality across all business lines as part of our historically strong credit culture. Our tangible common equity to tangible assets ratio increased by 22 basis points to .92% at quarter end. This increase was driven by strong earnings as AOCI remained consistent during the quarter. Our common equity tier one ratio increased 16 basis points to 10.43%. And our total risk-based capital ratio increased eight basis points to 14.26%. The improvement in our regulatory capital ratios was also driven by our strong earnings. We remain committed to growing our regulatory capital and we consistently evaluate our capital mix to support both our business model and growth objectives while benchmarking against peers. Additionally, we plan to call and replace our 70 million of subordinated debt in September. This will maintain our current tier two total risk-based capital levels and we expect to do so at a favorable fixed rate. We delivered another strong increase in tangible book value per share, which rose by $1.64, reflecting 13% annualized growth for the quarter. Over the past five years, TBV has grown at a compound annual rate of 12%, highlighting our solid financial performance and long-term focus on creating shareholder value. Finally, our effective tax rate for the quarter was 5%, up from 1% in the prior quarter. The link quarter increase is primarily due to higher pre-tax income from higher capital markets revenue. These factors increase the mix of our taxable income relative to our tax-exempt income. Our tax-exempt loan and bond portfolios have consistently supported a low tax liability. Given a more normalized mix of revenue, in line with our guidance, we expect our effective tax rate to be in the range of 6% to 8% for the third quarter of 2025. With that added context on our second quarter results, let's open the call for your questions. Operator, we are ready for our first question.