QCR Holdings, Inc.

Good morning, and thank you for joining us today for QCR Holdings, Inc.' 's first quarter 2026 earnings conference call. Following the close of the market yesterday, the company issued its earnings press release for the first 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 GAAP measures. The press release, available on the website, contains the financial and other quantitative information to be discussed today, as well as reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through April 30, 2026, 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. Todd Gipple at QCR Holdings. Please go ahead.

Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our first quarter performance, and then Nick will walk us through the financial results in more detail. We are pleased to deliver the most profitable first quarter in our company's history. This performance was driven by healthy loan and deposit growth, significantly lower non-interest expense, and modest margin expansion. We maintained excellent asset quality and generated meaningful growth and tangible book value per share while returning capital to our shareholders through opportunistic share repurchases. We also continue to make further investments in our digital transformation as we build a more modern, scalable bank for our clients and employees. Strong performance in our traditional banking and wealth management businesses partially offset the linked quarter reduction in our capital markets revenue. Capital markets results were in line with our expectations given typical first quarter seasonality and were equal to our five-year average for Q1 production. As a result, we delivered a very strong return on average assets of 1.40% and earnings per share growth of 31% compared to the same period last year. highlighting the strong earnings potential of our diverse business model. Our traditional banking business continues to deliver solid organic growth supported by healthy commercial and industrial activity across our markets. Our multi-charter model enables us to consistently gain market share with locally led community banks that build deep relationships with high value clients and communities where they live and work. Our digital transformation remains on track with the successful completion of the second of four core system conversions in early April. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience, and driving operating leverage. Our wealth management business also delivered very strong results with annualized revenue growth of 14%. 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. We are deepening client engagement and reinforcing wealth management as a key driver of our sustained top-tier financial performance. Our LIHTC lending business also continues to perform as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. We view LIHTC lending as a highly profitable, annually consistent, and differentiated line of business for QCRH, anchored by our deep network of developer relationships and the historically high-quality assets our platform delivers. Our LIHTC business has consistently delivered strong results, demonstrating our success in navigating various interest rate cycles and dynamic market conditions. Our strong relationships with industry-leading LIHTC developers combined with market demand position us well to grow this business and further strengthen our financial performance. Given the strength of our pipeline in our traditional and LIHTC lending platforms, We are reaffirming our guidance for gross annualized loan growth of 10 to 15% over the final three quarters of 2026. We are also increasing the lower end of our capital markets revenue guidance by 5 million, now targeting a range of 60 million to 70 million for the next four quarters. In combination with our LIHTC permanent loan securitizations launched in 2023, We have also begun partnering with private investors in LIHTC construction loan sale transactions. These transactions enable us to expand our permanent LIHTC lending capacity, which will drive increased capital markets revenue. The ability to sell off these LIHTC construction loans allows our team to say yes when our developer clients would like us to provide the construction financing for their projects, in addition to the permanent financing that generates our capital markets revenue. This is allowing us to grow our market share in the affordable housing space. During the quarter, we identified a total of $523 million in LIHTC loans, both construction and permanent, for securitization and sale. The transactions are planned to close during the second quarter and will mark our fifth permanent loan securitization and our second construction loan sale. This is our LIHTC flywheel in action. Strong demand for affordable housing, reinforced by the federal government's commitment to increase LIHTC tax credits, combined with our deep developer relationships and our exceptional client service, positions us to capture market share from the larger competitors in this space. LIHTC Industries' proven long-term performance drives investor demand for these assets, enabling us to execute LIHTC loan securizations and sales. These transactions allow us to proactively manage concentration risk, balance sheet growth, liquidity, and capital levels while generating increased capital markets revenue. We are building an asset-light, capital-efficient, and revenue-heavy business in affordable housing. While securitizations and LIHTC construction loan sales temper near-term, unbalanced sheet growth, they enhance long-term profitability by creating more capacity. The balance sheet capacity created by these transactions is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue to more than offset the foregone interest income over time. These loan sales and securitizations are also allowing us to strategically manage our total assets under the 10 billion asset threshold this year. We anticipate growing beyond $10 billion sometime in 2027, and we plan to be fully prepared for the associated organizational impacts by mid-2028, building on the planning efforts we began in 2023. Our company is executing at a high level across all three of our core lines of business. Our team has driven a five-year earnings per share CAGR of 14%, and a five-year tangible book value per share CAGR of 12.5%. Our continued investments in talent, technology, and strategic growth combined with disciplined expense management position us to sustain this top-tier financial performance. I am grateful for our 1,000 teammates that take exceptional care of our clients, our communities, and each other as they deliver long-term value for our shareholders. I will now turn the call over to Nick to provide further details regarding our first quarter results.

Thank you, Todd, and good morning, everyone. We delivered net income of $33 million, or $1.99 per diluted share, for the quarter. Net interest income was $67 million, an increase slightly on a linked quarter basis when adjusted for fewer days in the first quarter. Our NIM-TEY increased one basis point from the fourth quarter of 2025. which was below the low end of our guidance range. Our robust deposit growth came early in the quarter from our correspondent business, which carries higher pricing. And when combined with loan growth occurring very late in the quarter, margin expansion was muted. The increase in our margin was driven by significant improvements in the cost of funds, partially offset by a reduction in our earning asset yields. We continue to have a disciplined approach to deposit pricing, and combined with a liability-sensitive balance sheet, our cost of funds betas are more than one and a half times those of our earning assets during the current rate-cutting cycle. Since the Fed began cutting rates in 2024, our cost of funds have declined by 79 basis points, compared to only a 47 basis point decline in earning asset yields. While we continue to benefit from repricing lower-yielding loans into higher market rates, The opportunity is naturally moderating as the rate cutting cycle matures. During the quarter, new loan origination yields exceeded those on loan payoffs by 22 basis points. However, loan growth arrived very late in the quarter and average loan balances were down 109 million, contributing to the decline in the loan yield compared to the prior quarter. While our balance sheet has moved closer to neutral since the rate cutting cycle began, we remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $900 million, providing upside to margin in a declining rate environment. For future cuts in the Fed funds rate, we estimate one to two basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect NIM expansion at the top end of that range. And if the yield curve remains relatively flat, we would expect NIM expansion at the lower end of the range. Supported by our late first quarter loan growth, we are guiding second quarter NIM TEY ranging from static to an increase of three basis points, assuming no further Fed funds rate changes. Upside in our second quarter NIM is supported by repricing opportunities on approximately $163 million in fixed rate loans currently yielding 6.2%, which we would project to reset nearly 25 to 30 basis points higher. We also anticipate continued CD repricing during the second quarter with approximately $400 million of maturities currently costing 3.7% which we expect to retain and reprice nearly 25 to 30 basis points lower. We project investment yields to expand, supported by a solid pipeline of new municipal bonds priced well above 7% on a tax-equivalent basis. Additionally, we are planning to offtake approximately $523 million of LIHTC loans through the securitization and loan sale in the second quarter, which should be moderately NIM accretive and is reflected in our NIM guidance. Non-interest income totaled $23 million in the first quarter, including $11 million from capital markets revenue and $5 million from wealth management. Our LIHTC lending team closed 13 projects during the quarter, including three with new developers as we continue to expand our LIHTC platform. Our wealth management team delivered strong results this quarter, adding 80 new client relationships and $177 million in new assets under management. While market volatility pressured AUM levels, new client growth largely offset that impact. Wealth management revenue was up 3% from the prior quarter. This business continues to provide stability, recurring fee income, and meaningful diversification to our overall revenue mix. Now turning to our expenses. Non-interest expense for the first quarter was $52 million compared to $63 million for the fourth quarter. The $11 million decrease was primarily driven by a $5.5 million reduction in salaries and benefits expenses associated with variable compensation related to earnings performance. In addition, we experienced lower professional and data processing costs due to the timing of digital transformation activities and the impact of the debt extinguishment loss in the prior quarter. Our flexible cost structure, particularly variable compensation tied to performance, is designed to support operating leverage while preserving flexibility through various revenue cycles. As a result, expenses were well below our guided range, highlighting our expense flexibility. This structure closely aligns our underlying cost base with performance, supporting a pay for performance culture and value creation for shareholders. our significantly lower non-interest expenses resulted in an adjusted core efficiency ratio of 57.7% for the first quarter. For the second quarter, we are guiding non-interest expenses to be in the range of 55 to 58 million, which assumes capital markets revenue and loan growth are within our guided ranges, while also continuing to invest in our digital transformation initiatives. This outlook reflects our disciplined approach to expense management aligned with our 965 strategic model, which targets non-interest expense growth of less than 5% annually while enhancing operating leverage and profitability. Moving to our balance sheet, total loans grew $145 million for the quarter, or 8% annualized, excluding the planned runoff of the M2 equipment finance portfolio. There are 523 million of LIHTC loans identified for securitization and sale included in the held for sale category. These loans consist of a $207 million pool of LIHTC construction loans identified for sale to a new private investor and a $316 million Freddie Mac LIHTC tax exempt permanent loan pool securitization. Continued execution of our LIHTC offtake strategies has increased our confidence to supporting larger transactions and a broader range of developer opportunities. Complementing our loan growth, core deposit growth accelerated during the quarter, increasing $409 million, or 23%, on an annualized basis. Average deposit balances only rose by $31 million, or 2% annualized, compared to the fourth quarter as we actively managed our excess liquidity off balance sheet to optimize balance sheet efficiency. We remain highly focused on expanding core deposits and improving the deposit mix across our markets. Our deposit mix improved this quarter, driven by higher non-interest bearing balances and a reduction in higher cost CD and broker deposits, further strengthening our funding profile. Asset quality remained excellent during the quarter. Non-performing assets totaled $43 million, a decrease of $439,000, from the prior quarter, which resulted in the NPA to total asset ratio remaining static at 0.45%. The ratio of criticized loans to total loans and leases was 2.01%, remaining well below the company's long-term historical average and near the five-year low of 1.94% established in the prior quarter. The marginal increase in criticized loans was primarily driven by one large credit, which is expected to be resolved favorably later this year. The company recorded total provision for credit losses of $2.5 million during the quarter, down from $5.5 million in the prior quarter, primarily due to the reclassification of LIHTC construction loans to the held for sale category, as these loans are expected to be sold at par. Net charge-offs were $4 million during the first quarter of 2026. a decline of $300,000 from the prior quarter. Between the start of the first quarter and April 20th, we returned almost $25 million of capital to shareholders with about 288,000 common shares repurchased at opportunistic valuations. Since we began repurchasing shares in August of last year, we have repurchased 566,000 common shares, returning a total of $46 million to our shareholders. These repurchases demonstrate our capital allocation flexibility, enabling opportunistic repurchases when they create value and align with our strategic and financial priorities. We delivered another quarter of strong growth in tangible book value per share, which rose $1.33 to over $59, reflecting 9% annualized growth. Over the past five years, tangible book value has grown at a compound annual rate of 12.5%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Our tangible common equity to tangible assets ratio decreased two basis points to 10.31%. The common equity tier one ratio increased two basis points to 10.54%. And our total risk-based capital ratio decreased 19 basis points to 14%. These quarterly changes reflect the combined impact of strong earnings and share repurchases during the quarter. The total risk-based capital ratio was also impacted by a reduction in subordinated debt capital treatment on our 2019 issuance and lower ACL balances. Finally, our effective tax rate for the quarter was 7%, down from 8% in the prior quarter, reflecting lower pre-tax income and an increase in the mix of our tax exempt income relative to our taxable income. Our tax exempt loan and bond portfolios have continued to support a low effective tax rate. Assuming a revenue mix in line with our guidance ranges, we estimate our effective tax rate to be in the range of 8% to 10% for the second quarter of 2026. 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.