QCR Holdings, Inc.

Good morning and thank you for joining us today for QCR Holdings, Inc.'s third quarter 2026 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 CAO. 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, Thank you for joining us. 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 call is being recorded and will be available for replay through October 28, 2026, starting this afternoon approximately one hour after the completion of the 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.

Good morning everyone. Thank you for joining our call today. I'd like to start with the highlights of our third quarter performance and some thoughts about our business, and then Nick will walk us through the financial results in more detail. We delivered record earnings per share this quarter, supported by margin expansion, robust loan growth, increased capital markets revenue, Solid Wealth Management Revenue, and further improvement in asset quality to the strongest level in several years. Return on average assets was 1.52%, reinforcing the earnings power, durability, and scalability of our diversified platform. We also continued to deploy capital with a balanced approach, generating 11% year-over-year growth in tangible book value per share, while at the same time returning capital to shareholders through opportunistic share repurchases and dividend increases. Our consistently strong earnings allow us to sustain healthy levels of capital while maintaining optionality with respect to capital deployment. Our traditional banking business continues to deliver healthy organic growth with strong production across our traditional lending platform driving approximately 7% annualized loan growth in each of the second and third quarters. Our multi-charter model is the best of both worlds, combining the autonomy and agility of local decision-making with the scale and resources of our larger organization. This approach creates and strengthens client relationships, helping us consistently take market share and enables us to attract and retain the most talented bankers in our markets who value local autonomy and the opportunity to grow within a high performance organization. Our digital transformation remains a key strategic priority and the completion of our third core conversion in October was another important milestone in that journey. This conversion was another great example of the strength of our multi-charter model with teammates who had been through prior conversions sharing their experience and supporting their colleagues throughout the process. I want to thank everyone involved for their hard work and commitment in making this latest conversion a complete success. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience, and driving further operating leverage. And as a reminder, we are managing these investments within the discipline of our 965 strategic model, Holding non-interest expense growth under 5% as we build our bank of the future while still maintaining our bank of the past in one remaining charter. Our final conversion in the Sea Rapids market is scheduled for next April, and we expect to see operating leverage build throughout the remainder of 2027 and subsequent years. Our wealth management business continued to deliver strong results, with revenue up 12% year-over-year. reflecting sustained new relationship growth and consistent growth in annual revenue. Our success in this business reflects the long-tenured expertise of our team and the power of our local relationship-driven model, which connects high-value clients in each of our communities with our dedicated wealth advisors. As we continue to expand advisory relationships, wealth management provides a growing source of recurring free income Deepens client engagement and further diversifies our revenue mix. Our LIHTC lending business continues to perform exceptionally well, as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. This business is a key differentiator for our company, delivering highly profitable and annually consistent results, across a variety of interest rate environments and market conditions. Our deeper relationships with industry-leading LIHTC developers, combined with sustained market demand, position us well to grow this business and further strengthen our financial performance. We have now developed strong relationships and close funding for projects with 18 of the top 20 developers in the country, and during the first three quarters of the year, close transactions with 13 new developers. While our third quarter capital markets production was strong at 16.9 million, we had a number of transactions actually shift to a Q4 closing date. As a result, we are anticipating a very strong fourth quarter of capital markets production and expect Q4 results to be in a range of 18 to 20 million. This would put total 2026 production within our historical four quarters guidance range. We are also reaffirming our guidance for 60 to 70 million of capital markets revenue over the next four quarters. We continue to see positive momentum across both our traditional and LIHTC lending platforms. With solid loan production trends and a strong pipeline heading into year end, we are reaffirming our gross loan growth guidance of 10 to 15% annualized for the fourth quarter of 2026. Over the past 12 months, we have strategically sold and securitized loans to recycle capital, allowing us to support additional LIHTC originations and generate attractive fee income without requiring corresponding balance sheet growth. By recycling this capital into new originations, we generated over $67 million of capital markets revenue, while increasing net interest income by $24 million, or 10%. This demonstrates our ability to grow both net interest income and capital markets revenue while operating with a smaller balance sheet and deploying capital more efficiently. Looking ahead, we expect additional LIHTC off-tick activity in early 2027. As discussed in prior quarters, changes to Freddie Mac's M-Series securitization program significantly increased the complexity, Thank you for joining us. will result in a complete sale of the underlying loans without the retention of the first loss B tranche, fully removing the loans from risk-based assets and more effectively freeing up regulatory capital. These discussions are advancing, and we are confident that we can achieve alignment on a revised structure and complete our first transaction in the first quarter of 2027. While these LIHTC offtake transactions temper balance sheet growth in the near term, They enhance long-term profitability by creating more capacity. That capacity is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue, creating greater ROAA and ROAE. This is our LIHTC flywheel in action, building an asset-light, capital-efficient, and revenue-heavy business in affordable housing. Creating this flywheel now allows us to work on further growing the business and increasing our levels of loan production and the related capital markets revenue. These offtake transactions 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 will be fully prepared for the associated organizational impacts that would occur in mid-2028 as we continue to build on the planning efforts we began in 2023. The strength of our company is reflected in our performance across all three of our core lines of business. Over the past five years, we have driven a five-year earnings per share CAGR of 14%, a five-year tangible book value per share CAGR of 12.5%, and a 10-year total shareholder return of 266%. We have a proven, high-performance operating model, and we hold ourselves accountable for consistently driving shareholder value. Through continued investments in our people and our technology, combined with disciplined expense management, we are well-positioned to sustain our top-tier financial performance. I want to thank our more than 1,000 teammates for their hard work and their strong commitment to our high-performance culture. They make Relationship Driven come to life each day as they take exceptional care of our clients, our communities, and each other and create exceptional results that deliver long-term value for our shareholders. I'm incredibly proud of them and the high-performance culture that we have created. I will now turn the call over to Nick to provide further details regarding our third quarter results.

Thank you, Todd. Good morning, everyone. I'll provide additional details on the key drivers of our third quarter performance and share our outlook for the fourth quarter. We delivered strong third quarter results with adjusted net income of $36 million or $2.21 per diluted share, driving an adjusted return on average assets of 1.52%. Net interest income was $69 million, an increase of $800,000 or 5% annualized, from the second quarter. NEM TEY expanded three basis points to 3.58%, exceeding our guidance. The late quarter increase in net interest income was driven by margin expansion supported by disciplined funding costs and higher average non-interest bearing deposits. Average earning assets declined 44 million, reflecting the strategic LIHTC loan offtake transactions completed in the second quarter. with strong third quarter loan and investment growth partially offsetting the reduction. Looking ahead, we continue to benefit from repricing lower yielding loans into higher market rates. We are encouraged by the strength of our lending pipeline and ongoing client demand, which continue to support profitable growth opportunities across our footprint. We recognize the value of clear guidance around NIMH, and we continue to be as transparent as possible. However, given the active management of our balance sheet, including robust earning asset growth, funding mix changes, deposit pricing, and LIHTC offtake transactions, NIM can fluctuate slightly in either direction from quarter to quarter. Our focus remains on managing those dynamics in a disciplined way and ensuring that balance sheet growth translates into stronger net interest income and improved profitability. Our current balance sheet position remains modestly liability sensitive. However, that does not fully capture the timing benefits we expect in the near term. Following the Federal Reserve September rate increase, variable rate assets, new loan production, and investment growth are repricing faster than our deposits, where deposit repricing typically occurs with a lag. As a result, We expect a September Fed rate increase to be slightly accretive to NIM in the near term. After that initial benefit, another 25 basis point increase in the Fed funds rate would likely have a more muted impact that is closer to neutral, depending on deposit repricing, customer behavior, and the shape of the yield curve. We remain focused on maintaining deposit pricing discipline and managing funding costs carefully. While the historical lag in deposit repricing should allow us to retain some near-term benefit from higher rates, continued competition for deposits and changes in our funding mix are expected to largely offset that benefit. Accordingly, assuming no additional Federal Reserve rate changes, we expect fourth quarter NIM TEY to remain relatively static. Our fourth quarter NIM outlook is supported by a strong loan pipeline and the opportunity to reprice approximately $165 million of fixed rate loans, which we expect to move from the low 6% range to the mid 6% range. We also project our non-taxable investment yields to continue expanding, supported by a solid pipeline of new municipal bonds expected to yield between 7.5% and 8% on a tax equivalent basis. Non-interest income totaled $30 million. compared to $29 million in the second quarter. Capital markets revenue increased to $17 million from $15 million in the prior quarter, which included a $1.3 million loss from the Freddie Mac LIHTC securitization. Wealth management revenue totaled $6 million, consistent with the prior quarter benefiting from continued expansion of client relationships and growth in assets under management. Compared with the third quarter of 2025, wealth management revenue increased by 12%. Non-interest income performance continues to highlight the strength of our diversified revenue model. Our capital markets and wealth management platforms provide meaningful earnings diversification, reduced reliance on spread income, and support more consistent profitability across changing interest rate and economic environments. Now turning to expenses. Non-interest expense for the third quarter totaled $54.7 million, compared to $53.2 million for the second quarter, and we're near the lower end of our guidance range. The linked quarter increase primarily reflected higher occupancy and equipment expense, salary and employee benefits, and the timing of advertising and marketing expenses. The increase in occupancy and equipment expense reflected costs associated with our third core system conversion completed in early October. The increase in salary and employee benefits reflected higher incentive compensation driven by strong full-year performance to date. Our efficiency ratio remained solid at 55% for the third quarter. Our year-to-date adjusted efficiency ratio has improved to 56% from 58% in 2025, reflecting our continued focus on operating leverage as year-to-date revenues have increased 9.3%, compared with the expense growth of 4.8%. Expenses remain well controlled, highlighting disciplined execution of our 965 strategic model which targets annual non-interest expense growth below 5%. As we have now completed three of four core conversions, our progress on non-interest expenses demonstrate that we can continue investing in digital transformation while managing annual expense growth below 5%. For the fourth quarter, we expect non-interest expense to remain well controlled Assuming capital markets revenue and loan growth are within our guidance ranges and reflecting continued investments in digital transformation initiatives, we are reaffirming our non-interest expense guidance range of $54 to $57 million. Moving to the balance sheet. Total loans grew $190 million in the quarter, or 11% annualized, when excluding the M2 portfolio runoff. We also increased our high-performing securities portfolio by $30 million from the second quarter, including $63 million of new privately placed municipal investments added at tax-equivalent yields at 7.25%. Core deposits, when excluding broker deposits, totaled $7 billion, compared with $7.3 billion at June 30, while broker deposits remained at approximately 2% of total deposits. Non-interest-bearing deposits increased slightly, and average non-interest-bearing deposits increased 39 million or 15% annualized. While we experienced typical outflows of correspondent deposit balances during the final few weeks of the quarter, those deposits have since returned to our balance sheet along with additional deposit growth shortly after the quarter ended. As of mid-October, total deposits have grown over 500 million since quarter end. including 40 million of non-interest bearing balances. We also achieved our fourth consecutive quarter of non-interest bearing deposit growth, demonstrating continued progress on this key strategic priority. Additionally, net new commercial and retail account growth this year is well ahead of the first nine months of 2025. Taken together, the return of course line of balances, continued non-interest bearing deposit growth, and Strong's Net New Account Activity reflect positive underlying deposit trends. These trends reinforce our confidence in the strength of our deposit franchise and our ability to fund future growth. Given the dynamic nature of our balance sheet, quarter end balances can fluctuate more than those of similarly sized banks. This quarter underscores why we remain focused on underlying trends rather than any single quarter end balance. Asset quality improved further during the quarter and is the strongest we've experienced in years. Non-performing assets totaled $38 million, a decrease of $1.5 million from the prior quarter. And the NPA to total asset ratio improved to 0.39%, its lowest level since 2024. Total criticized loans decreased $14 million to 1.67% of total loans and leases. the lowest level as a percentage of total loans and leases since 2019. The improvement reflected a combination of loan payoffs, credit upgrades and charge-offs across several criticized borrower relationships. The company recorded total provision for credit losses consistent with the second quarter. Net charge-offs were 3 million, a decline of 200,000 from the prior quarter and the lowest level recorded all year as we continue to benefit from positive charge-off trends from the wind-down of the M2 portfolio. During the third quarter, we repurchased approximately 9.5 million or 95,000 shares of common stock. The share repurchase program enhances our capital allocation flexibility and allows us to balance organic growth, shareholder returns, and capital strength while reinforcing confidence in our long-term outlook. Tangible book value per share increased to $61.79 at September 30, representing 11% year-over-year growth. Tangible common equity to tangible assets decreased 28 basis points to 10.43%, primarily reflecting the impact of higher interest rates on accumulated other comprehensive income and continued share repurchases, partially offset by strong earnings. The Common Equity Tier 1 ratio increased 33 basis points to 11.01%, and the total risk-based capital ratio increased 37 basis points to 14.5%. These quarterly changes reflect the combined impact of strong earnings partially offset by share purchases during the quarter. Finally, our effective tax rate for the quarter was 9%, up slightly from the prior quarter. Our actively managed, very low effective tax rate continues to be influenced by the mix of tax-exempt income relative to taxable income, particularly the level and timing of capital markets revenue and tax-advantaged loan and bond income. Assuming a revenue mix in line with our guidance ranges, we estimate our effective tax rate to continue to trend in the range of 8% to 10% for the fourth quarter of 2026. In summary, The third quarter reflected the strength of our diversified business model that created robust loan growth, expansion in net interest margin, healthy fee income, disciplined expenses, and excellent asset quality. We enter the fourth quarter with solid pipelines and positive momentum across our businesses. With that added context on our third quarter results, let's open the call for your questions. Operator, we are ready for our first questions.