QCR Holdings, Inc.

Good morning, and thank you for joining us today for QCR Holdings, Inc.' 's third quarter 2025 earnings conference call. Following the close of the market yesterday, the company issued its earnings press release for the third quarter. If anyone joining us today has not yet received a copy, it is available on the company's website, www.qcrh.com. With us today from management are Todd Gipple, President and CEO, and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to 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, 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 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 call is being recorded and will be available for replay through October 30, 2025. starting this afternoon approximately one hour after the completion of this call. It will also be accessible on the company's website. I would now turn the call over to Mr. Todd Gipple at QCR Holdings.

Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our third quarter performance, and then Nick will walk us through the financial results in more detail. We delivered exceptional third quarter results, achieving record quarterly net income and strong earnings per share growth of 26% compared to the second quarter. I would characterize this as a return to form quarter for our company as we have internal expectations to drive sustained top tier financial performance for our shareholders and we hold ourselves accountable to achieve this level of success. We delivered across the board on our key operating metrics. and exceeded the upper end of our guidance range for loan growth, NIM expansion, and capital markets revenue. I would like to thank all 1,000 of our team members for their hard work delivering these exceptional results. Our record earnings were driven by a rebound in capital markets revenue, as well as robust loan growth and continued net interest margin expansion that drove a substantial increase in net interest income. Also contributing to our strong results was an 8% link quarter increase in wealth management revenue as this business continues to perform at a high level. We are pleased to report continued margin expansion again this quarter, driven by strong earnings asset growth and higher loan and investment yields, while maintaining a static cost of funds. Our loan growth accelerated significantly, increasing by $286 million, or 17% annualized, and was 15% net of the planned runoff from M2 equipment finance loans and leases. This growth was fueled by strong new loan production from both our LIHTC and traditional lending businesses. Looking ahead, we have a solid pipeline and remain optimistic about sustaining this momentum and are guiding to gross annualized loan growth in a range of 10% to 15% for the fourth quarter. As I discussed in our last earnings call, I view our company as operating through three primary lines of business, traditional banking, wealth management, and our LIHTC lending platform. I am pleased that each of these delivered improved performance this past quarter. We continue to deliver robust organic growth, and improve profitability in our traditional banking business. Our multi-charter community banking model built around separate autonomous banks that attract top tier talent and the best clients in our markets allows us to consistently capture market share from our competitors. We had strong traditional loan growth and core deposits grew at an annual rate of 6% for the quarter and 410 million or 8% annualized year to date. Additionally, our digital transformation remains on track with key milestones achieved this year, including foundational work toward our Bank of the Future and the successful conversion of the core operating system for the first of our four charters earlier this month. By streamlining and improving our technology stack, we expect to unlock significant operating leverage in the future as we convert our banks into a unified, more modern and efficient operating system. These upgrades are expected to drive measurable improvements in productivity, service delivery, and cost structure, while empowering both our bankers and our shared services support teams with better tools to serve clients more efficiently and effectively. Looking ahead, we anticipate continued progress on this initiative. with each conversion bringing us closer to a fully integrated agile platform that enhances efficiency and reduces long-term operating costs. This will further improve the profitability of our traditional banking business. Wealth management also remains a strategic growth engine. Year-to-date, we've added 384 new client relationships and brought in $738 million in new assets under management. In the third quarter alone, AUM grew by $316 million, or 5%, and revenue surpassed $5 million, an 8% increase over the prior quarter. Wealth management revenue year over year is up $1.5 million, or 15% annualized. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model, which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisors across our markets. As we expand into central Iowa and southwest Missouri, we are gaining momentum and deepening client engagement, reinforcing wealth management as a key driver of our long-term strategy. Our LIHTC lending business delivered exceptional performance in the third quarter. Activity rebounded sharply, underscoring the continued demand for affordable housing and the strength of our seasoned team. Developers are actively navigating the broader macroeconomic challenges from earlier in the year, demonstrating resilience and a commitment to advancing their projects. We continue to view LIHTC lending as a highly durable, highly profitable, and differentiated line of business for QCRH, anchored by our deep network of developer relationships and the historically high-quality assets our platform consistently delivers. The demand for affordable housing remains high, and recent legislation has expanded access to affordable housing tax credits. Our strong relationships with industry-leading LIHTC developers combined with persistent market appetite positions us well to grow this business and further strengthen our financial performance. In addition to winning more deals with our existing developer clients, our team has created new relationships with 10 experienced LIHTC developers this year, with several of these being among the best developers in the country. Given the strong momentum and the resulting strength of our pipeline, we are increasing our guidance for capital markets revenue to be in a range of 55 to 65 million over the next four quarters. On the topic of annual guidance for capital markets revenue, I wanted to share some facts about our past performance that will provide some strong evidence on the durability of this business. We first provided next four quarters guidance for capital markets revenue in January of 2023 as part of our Q4 2022 earnings call. Since then and through our earnings call in October of 24, we provided next four quarters capital markets guidance a total of eight times. Our actual capital markets revenue results are perfect eight and O in those eight periods. Capital markets revenue for those next four quarters was within the guidance range once and actually exceeded the upper end of the guidance range the remaining seven times. During this two-year period, Our LIHTC team has navigated a variety of interest rate environments and other challenges to deliver consistently strong, rolling 12-month results. We believe that this clearly demonstrates the durability of this highly profitable business. We do not evaluate our success or the value of this business by a single quarter, but rather our performance over a four-quarter horizon. This is not a transactional business. but one built on relationships with some of the best LIHTC developers in the country, and their projects have a long production cycle. We will work hard to continue to demonstrate the durability of this business in order to drive the high valuation that we believe it deserves. We also continue to work on our strategic goal of improving the balance sheet efficiency of our LIHTC lending business, especially during the typical two to three year construction phase for many of our LIHTC clients. One strategy includes partnering with third parties in LIHTC construction loan sale transactions, which will enable us to expand our permanent loan LIHTC lending capacity and drive increased capital markets revenue. Additionally, a LIHTC construction loan sale transaction strengthens our regulatory capital position by reducing risk-weighted assets. resulting in increased total risk-based and common equity Tier 1 capital that improves our capital flexibility and allows us to more effectively deploy capital. LIHTC construction loan sale transactions build on the momentum of our successful LIHTC permanent loan securitizations launched in 2023, which has opened significant growth opportunities for this portion of our business. We remain committed to finding innovative ways to expand our LIHTC lending capacity and support our developer clients who are making a meaningful difference in the lives of those that need affordable housing. Our continued focus on innovation within our LIHTC business will not only strengthen our financial position, but also reinforces our long-term commitment to scalable growth that benefits our shareholders. Our use of LIHTC permanent loan securitizations and construction loan sale transactions enable us to balance concentration risk, asset growth, liquidity, and capital levels while generating capital markets revenue that significantly exceeds the impact of the loan sales on net interest income. Although securitizations and LIHTC construction loan sale strategies reduce on-balance sheet growth, they offer greater long-term value to our bottom line. we've consistently grown our LIHTC business, both in terms of portfolio size and the capital markets revenue it generates. By freeing up balance sheet capacity, we can accelerate new loan production and unlock additional capital markets revenue opportunities. Since 2024, our average quarterly net loan growth has been 160 million, excluding securitizations, and we expect this momentum to continue. As a result, even when we securitize loans in a given quarter, the go-forward impact on NII is muted. We rapidly redeploy that capacity into new originations, generating capital markets revenue that exceeds what we would earn by retaining those loans on balance sheet. We continue to manage our LIHTC business with agility and execute on strategies to enhance its sustainability. and begin growing this business in order to drive long-term value for our shareholders. As we capitalize on significant growth opportunities, we are also strategically managing our approach to surpassing the $10 billion asset threshold. Our use of LIHTC permanent loan securitizations and the construction loan sale transactions provide meaningful flexibility in navigating this milestone. Our preparation for crossing $10 billion began several years ago, and we have proactively layered the associated costs into our current run rate. As part of our Bank of the Future digital transformation, we've also successfully secured higher interchange revenues and reduced debit card processing costs, helping to partially offset the anticipated Durbin Amendment impact. Thanks to our proactive planning and strategic execution, we are well positioned to cross the $10 billion asset threshold with confidence and modest financial impact. Moving to asset quality, which improved this quarter with overall credit metrics remaining excellent. Net charge-offs declined compared to the second quarter, and our provision for credit losses was slightly lower than the prior period. Additionally, total criticized loans improved during the quarter and have decreased 9% year-to-date. Between the start of the third quarter and October 20th, we have returned $10 million of capital to shareholders with 129,000 common shares repurchased at opportunistic valuation levels. On October 20th, the Board approved a new share repurchase program, authorizing the repurchase of up to 1.7 million shares of outstanding common stock. The new share repurchase program authorization equips us with a flexible capital allocation tool, enabling us to be opportunistic and repurchase shares when it aligns with our strategic and financial objectives, underscoring our ongoing commitment to shareholder value. In summary, QCR Holdings is executing at a high level across all three core business lines. We continue to invest in technology, talent, and strategic growth initiatives. while maintaining disciplined expense management. We remain confident in our ability to sustain top-tier financial performance and deliver long-term value to our shareholders. I will now turn the call over to Nick to provide further details regarding our third quarter results.

Thank you, Todd. Good morning, everyone. We delivered record quarterly adjusted net income of $37 million, or $2.17 per diluted share. driven by strong performance across our core businesses. Capital markets revenue rebounded to 24 million, up 14 million from the prior quarter. Net interest income increased 3 million, or 18% annualized, supported by continued net interest margin expansion and exceptional loan growth. Our NIM on a tax equivalent yield basis increased by five basis points from the second quarter, exceeding the high end of our guidance range. This expansion was driven by strong growth in both loans and investments, coupled with higher asset yields. By leveraging our liability sensitive balance sheet and maintaining disciplined deposit rate management, we've achieved deposit betas nearly two and a half times higher than our earning asset betas. We have reduced our cost of funds by 43 basis points since the Fed began cutting rates in 2024. While the most recent rate cut occurred just two weeks before quarter end, we expect to realize the full benefit of that rate cut in the fourth quarter of approximately 500,000 of additional net interest income, or two to three basis points of NIM accretion. We also remain well-positioned to benefit from any future rate reductions as rate-sensitive liabilities exceed our rate-sensitive assets by 1.1 billion. In the near term, if there are additional Fed rate cuts we expect two to three basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect performance at the top end of that range. And if the yield curve remains flat or modestly inverted, then we would expect performance at the lower end of the range. Our NIM TEY has now expanded by 26 basis points over the past six quarters. We anticipate continued core margin expansion and are guiding to an increase in fourth quarter NIM TEY ranging from three to seven basis points, assuming no further Federal Reserve rate cuts during the quarter. The NIM TEY guidance range reflects a full quarter benefit from the September rate cut. In addition, we have repricing opportunities on approximately 168 million in fixed rate loans yielding 5.5%, resetting nearly 100 basis points higher, and continued CD repricing in the fourth quarter with maturities of nearly 400 million. These CDs are currently yielding 4.13% and are expected to be retained and repriced at rates between 3.45% to 3.75%. Non-interest income totaled 37 million for the third quarter, driven primarily by 24 million in capital markets revenue. We saw robust LIHTC activity, which led to a $14 million increase in capital markets revenue and exceeded the top end of our guidance range. Our wealth management business generated 5 million in revenue for the third quarter, an increase of 8% compared to the second quarter. On a year-over-year basis, Wealth management revenue has grown by 15% annualized, reflecting the strength and momentum of this business. Significant AUM growth across our markets not only strengthens our foundation, but also helps mitigate revenue pressure during periods of broader market volatility. Now turning to our expenses. Non-interest expenses grew 7 million for the third quarter, primarily from robust capital markets revenue and loan growth. which drove variable compensation higher. Professional and data processing expenses and occupancy and equipment expenses related to our digital transformation also contributed to the increase in non-interest expense. 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. For the third quarter, our efficiency ratio was 55.8%, the lowest in four years. Compared to the first nine months of 2024, we've maintained strong discipline over core non-interest expenses, which are up less than 1% on an annualized basis, while adjusted net income has grown by 9% annualized. We continue to manage our operating expenses with discipline while making strategic investments in technology and automation to further empower our high-performing operations team. These investments are key to enhancing our future operating leverage and supporting the scalability and profitability of our multi-charter community banking model. We are retaining our quarterly non-interest expense guidance, which is projected to be in the range of 52 to 55 million for the fourth quarter. This includes costs for our digital transformation, including the successful completion of our first core operating system conversion in the fourth quarter. It also reflects assumptions that both capital markets revenue and loan growth are within our guided ranges. Moving to our balance sheet. During the quarter, total loans grew by 254 million, or 15% annualized. When adding back the impact, from the planned runoff of the M2 equipment portfolio, total loans grew by $286 million or 17% annualized. 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. Year to date, core deposits have increased by $410 million or 8% annualized. We continue to generate strong deposit growth across our markets. These results reflect the success of our relationship driven strategy of growing core deposits, providing a solid funding base that supports future growth. Turning to our asset quality, which remains excellent. Total criticized loans decreased 6 million or 15 basis points to 2.01% of total loans and leases. Net charge-offs decreased by 2 million from the second quarter, driven by lower charge-offs from our M2 equipment portfolio. Our total NPAs to total asset ratio declined one basis point to 0.45%, which is the lowest level since September of 2024, and approximately half of our 20-year historical average. Total provision for credit losses of 4 million was up slightly from the previous quarter, and was due to loan growth partially offset by improved credit quality of the loan portfolio. The allowance for credit losses to total loans held for investment was 1.24%. We continue to closely monitor asset quality across all business lines as part of our historically strong credit culture. As we have passed the one year mark since announcing our exit from the equipment financing business, We are pleased to report that the runoff of this portfolio is progressing as planned. The portfolio has declined by nearly 40% and is on track to fall below 200 million or less than 3% of our total loan portfolio by year end. Credit loss expenses for this business are down 45% or 4 million year over year. NPAs are also down 29% year over year, reflecting both the runoff of the higher risk assets and the improved seasoning of the remaining portfolio. These positive trends support our expectation for continued softening in future charge-offs from this portfolio and enable us to redeploy capital into our core traditional and LIHTC lending businesses. Our tangible common equity to tangible assets ratio rose by five basis points to 9.97% at quarter end. driven by record earnings and approved AOCI as interest rates declined, partially offset by exceptional loan growth and share repurchases. Our common equity tier one ratio decreased nine basis points to 10.34%, and our total risk-based capital ratio decreased 23 basis points to 14.03% due to our strong earnings growth that was overpowered by our exceptional 15% loan growth and opportunistic share repurchases. We remain committed to maintaining strong regulatory capital and consistently assess our capital structure to support our business model and growth objectives. Our goal is to maximize capital flexibility while benchmarking against industry peers. In September, we successfully completed the replacement of 70 million of subordinated debt originally issued in 2020 that became callable. The new issuance for the same amount was structured in two privately placed tranches at highly competitive rates. This transaction further supports our Tier 2 capital levels. Additionally, in August, we secured a new source of funding, which will further enhance our available sources of liquidity to support our growth. We pledged a portion of our held-to-maturity, non-rated municipal bonds in exchange for term borrowings of $134 million at a rate of 4.05%. which will reprice in three years. Our nearly $1 billion investment portfolio of HTM municipal bonds is a differentiator for us and is a strong, high-quality earning asset with tax-equivalent yields near 6% and new bond issuances in the mid-7% range. This recent transaction highlights our ability to strategically unlock liquidity from long-term investments to support growth. We delivered another quarter of exceptional growth in tangible book value per share, which rose $2.50, approaching nearly $56 per share, reflecting 19% annualized growth for the quarter. Over the past five years, TBV has grown at a compound annual rate of 12%, highlighting our continued financial performance and long-term focus on creating shareholder value. Finally, Our effective tax rate for the quarter was 9.5%, up from 5% in the prior quarter. The linked quarter increase is primarily due to $10 million in higher pre-tax income that increased 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 mix of revenue in line with our guidance range, we expect our effective tax rate to be in the range of 7% to 8% for the fourth quarter of 2025. With that added context on our third quarter results, let's open the call for your questions. Operator, we are ready for our first question.