Q1 2021 QCR Holdings Inc Earnings Call
Greetings and welcome to the Q T. R Holdings, Inc. Earnings Conference call for the first quarter of 2021.
Yesterday after market close of the company of distributed its first quarter earnings press release.
And if there's anyone on the call who has not received the copy you may access it on the company's website at Www Dot Q C. R. H Dot Com. In addition, the company has included a supplemental slide presentation with COVID-19 related disclosures and you can refer to during the call. You can also access the slides on the.
The web site.
With us today from management are Larry Helling, CEO, and Todd Gipple, President and C O O and CFO.
Management will provide a brief summary of the financial results and then we'll open up 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 of forward looking statements.
And actual results could differ materially from those projected additional information on these factors is included and 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 through May 12, 2021, starting this afternoon approximately one hour. After the completion of this call will also be accessible on the company's website.
At this time and I will now turn the call over to Mr. Larry Helling at QC Our holdings.
Thank you operator.
Welcome, ladies and gentlemen, and thank you for taking the time to join us today.
I will start with a brief discussion of our first quarter performance tier.
Todd will follow with additional details on our financial results for the quarter.
We are pleased to deliver another quarter of strong net income driven by robust loan growth.
Expanded net interest margin and carefully manage the expenses the.
Despite a competitive lending environment we.
We grew core loans by 14% on an annualized basis, while maintaining disciplined underwriting and excellent credit quality.
We continue to attract new clients and deep and ties with the existing clients, which validates our relationship based community banking model.
For the first quarter adjusted net income was $18.6 million and diluted adjusted earnings per share was a dollar and 16 cents. Both just shy of the record results, we posted for the fourth quarter of last year.
On a year over year basis, our adjusted earnings for the quarter were up 50%.
Our double digit core loan growth and the first quarter was driven by strong production in both of our core commercial business and and our specialty Finance group. There continues to be strong client demand for of niche lending products, particularly in the area of municipal and tax credit finance.
Additionally, our lending teams have been active and providing loans under the second round of P. P. P O.
The two new and existing clients.
We expect to fund over $100 million of P. P. P loans in the second round.
Bringing our total funding for the program to nearly $500 million.
And as a result of our successful execution of this program. We have added many new highly valued commercial client relationships, both on the loan and the deposit side of our business.
Given our strong first quarter production combined with our current pipeline. We are now targeting organic loan growth for the full year of 2021 of between eight and 10% consistent with our long term goal of 9%.
We funded our loan growth and the quarter with excess liquidity combined with growth and our core deposits, which grew by just over 3% on an annualized basis.
For deposit growth was deliberately muted as we successfully shifted some of our excess correspondent banking deposits off balance sheet with the ability to bring them back as needed.
At quarter, and our correspondent banks have total deposits under management of $2.35 billion with over $600 million on our balance sheet and over 1.7 billion being held and reserves at the Federal Reserve Bank.
As we continue to grow loans, we have the ability to move of portion of these deposits back onto our balance sheet.
During the quarter, we continued to reduce higher cost non core funds.
The price deposits lower and increase our non interest bearing deposits. This helped to lower our overall funding costs during the quarter, which was key to our success and growing our net interest margin.
Todd will provide more detail on NIM and his remarks.
Our asset quality remains very strong.
And our banks continue to be well capitalized.
Our loan deferrals remain immaterial with only $7 million on deferral at the end of the quarter.
Our net charge offs continue to be negligible and we feel very good about our current reserve level.
Which when excluding P. P. P loans is approximately 2%.
As always and I want to thank our employees for their efforts and delivering strong financial results their hard work and dedication of building relationships with our clients remains the key to our ongoing success.
In summary, we are optimistic about the rest of the year and have a favorable outlook for our local markets as we emerge from the pandemic and the economy further reopens.
Having supported our clients with financial assistance and exceptional service. During these challenging times, we are well positioned to continue pursuing our long term goal of profitable growth and value creation, both organically and through strategic acquisitions.
And now I'll turn it over to Todd for a bit more detail.
Thank you Larry as I review of our first quarter financial results I will focus on those items for some additional discussion is warranted.
I'll start with our the loan growth as Larry mentioned, excluding or a P. P. P loans, our annualized loan and lease growth was 14% during the first quarter, which was driven by new production and our specialty finance group, particularly and tax credit project lending and municipal finance.
Our core commercial lending business was also very solid most notably on commercial real estate loans and some of our clients are funding projects that were previously put on hold due to the pandemic.
We are also seeing increased C&I demand as our client's utilization of revolving lines increased in March which we believe reflects business optimism across our client base as we enter the second quarter.
Our very strong loan and lease growth during the quarter was funded with some of our excess of liquidity as well as with growth and our core deposits.
As Larry mentioned, we proactively managed our deposit growth by shifting of significant amount of our correspondent deposits off our balance sheet to the federal Reserve E. B a program.
Which help reduce excess liquidity and enhance our net interest margin.
Additionally, we continue to grow our noninterest bearing deposits during the quarter as the increased by $124 million or nearly 11% from the prior quarter.
Non interest bearing deposits now represent 27% of our total deposit base.
Now turning to earnings are.
Our net interest income for the quarter was 42 million down 1.7 million from the fourth quarter of 2020. However, after excluding the impact of acquisition related net accretion and P. P. P income net interest income was static on a linked quarter basis.
With respect of P. P. P loans 207 million and balances had been forgiven and through the end of the first quarter of 'twenty. One we recorded P. P. P income of $2 3 million and the first quarter with 3.6 million remaining to be recognized.
New P. P. P clients have resulted in more than $80 million of additional new loan and deposit business to date.
While average loan balances were relatively stable during the quarter, our cash balances declined driving average, earning assets down 2.4 per cent and creating a more efficient balance sheet.
Additionally, the yield on those assets declined by five basis points from the fourth quarter, driven by both rate and mix.
Our deposit costs declined by one basis point and when combined with the strong growth in noninterest bearing deposits, we were able to grow our adjusted net interest margin by three basis points exceeding the guidance, we provided on our year end call.
Looking forward.
Given the ongoing low interest rate environment combined with the possibility of some excess liquidity build from seasonality and expected continued P. P. P forgiveness.
We do anticipate of possible one to three basis points of NIM compression and the second quarter.
However, we will continue to work hard to protect loan yields drive down cost of funds and proactively manage excess liquidity and then attempt to outperform that guidance.
Now turning to our noninterest income.
Noninterest income was $23 5 million and the first quarter, which included $13 6 million and swap fee income effectively right at the lower end of our guidance.
This compares to noninterest income of 32 million and the fourth quarter, which included very strong swap fee income of $21 4 million.
Our pipeline for swap loans continues to be healthy and we fully expect the source of fee income to be sustainable for the long term.
As a result, we are reaffirming our guidance and expect our levels of swap fee income to continue to be approximately 14 to 18 million per quarter for the remainder of 'twenty one.
We generated robust growth and wealth management income during the first quarter, which was up nearly 13% on a linked quarter basis.
Our performance was driven by a 457 million increase and assets under management.
<unk> total AUM to $4 8 billion.
New client generation continues to be strong as well as sizable increases and our existing client portfolios.
Now turning to our expenses.
Noninterest expense for the first quarter totaled $37 2 million down from $46 4 million and the fourth quarter.
The linked quarter decline was primarily due to lower salary and benefits expense of $5 6 million driven by lower commission and incentive compensation expense.
We also experienced modestly lower occupancy and equipment expense advertising and marketing expense and professional and data processing fees.
Additionally, in the fourth quarter of 2020, we booked a loss on liability extinguishment of $1 5 million, which did not reoccur and the first quarter.
We were pleased to outperform our guidance on noninterest expense and the first quarter and we are reaffirming our guidance for the second quarter and the range of $38 million to $40 million.
Our overall asset quality continues to be very strong book.
Our nonperforming assets and the ratio of N. P. H. The total assets remained consistent with the prior quarter and our net charge offs for once again very minimal.
And we successfully implemented Cecil and the first quarter, which translated into a modestly lower credit loss provision on a linked quarter basis, and and ACL to total loans and leases of $1, 99% excluding P. P P loans.
With respect to capital, we continue to build capital through strong earnings and maintain robust capital levels.
Our tangible common equity at the tangible assets ratio improved to 967% as compared to 9.4% at year and if you exclude the impact of the P. P P loans.
Our effective tax rate for the quarter came in at $16 five per cent. The rate was lower on a linked quarter basis due to a higher ratio of tax exempt of revenue.
With that added context on our first quarter financial results, let's open up the call for your questions. Operator, we're ready for our first question.
And I will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing Nicky.
First of all of your question. Please press Star then.
True.
Our first question today comes from Jeff really with the D. A Davidson.
Yeah.
Thanks, Good morning, Larry and Todd.
Good morning, John and Jeff.
Was hoping to get.
Our sense of the.
The commissions tied to the swap income if we do kind.
Kind of bounce between $14 million to $18 million of quarter.
Is there any hum.
And kind of key that you could offer in terms of the what.
What the comp expense would do and or the variable commissions.
And those levels.
Sure Jeff.
The question so when we get to the low end or maybe even the midpoint of our guidance range typically around 75% of that is going to get to the bottom line pre tax so and 25%.
Gary on on commissions and other costs.
As we approach the higher end of guidance and if we are of a quarter, where we have the outsized swap revenue and we get above that guidance, that's probably going to get more like 65, 70% getting to the bottom line at that point of.
We're starting to impact broad based incentives as.
More of the midpoint of our guidance would be built into our incentive targets are targeted incentives, we get stronger performance and that were going on.
Little bit more incentive comp around that so probably 65% to 70 as we get past the midpoint.
That makes sense.
Yeah, that's great I appreciate it Todd.
Turning to the loan growth looked like it was really backend loaded in the quarter and and very strong at that.
<unk> does that is that pull forward on.
Growth and in the second quarter or and as you said, the C&I lines Perking up and March.
And through April here, I guess, the expectations on you've kind of reset the the eight to 10 for the full year, but I'm just curious as to the.
Near term are low.
Momentum of the second quarter.
Yes, Jeff the positive part of this was the.
The growth was really pretty broad based.
So on our core business.
I think because of our really strong PPP activity, we moved a lot of relationships or debt, we'd worked on for years and may be decades debt.
That helped our core business grow.
And secondly, if you look at the unemployment in our markets. The unemployment rate is and the threes and the southern Missouri, where of Springfield market debt that's in the threes.
So our clients maybe are feeling better than some other places and the country.
And thats translated to.
Our clients, particularly in the manufacturing and assembly space those kind of things.
Being willing to spend money on capital good plant and equipment.
And just anecdotally one of the spaces, where we would have seen that we have and equipment finance company and to the inside.
And the Quad City Bank charter they had a record.
Loan and lease.
Production and the.
The month of March.
So I think our markets are generally feeling more positive. So that's why we.
<unk>, adjusted our guidance and that 8% to 10% range for the year.
In addition, the the specialty finance niche, which has been strong for us historically and continues to be very solid.
Really across all of those sectors. The light tech the historic tax credit and the municipal on.
All grew on the first quarter and so on.
It's really broad based and so we feel good about that barring something that we can see today with the pandemic.
Sounds good I'll step back thanks, guys.
Thank you.
Our next question comes from Nathan race with Piper Sandler.
Yeah, Hi, guys good morning.
David.
And so hoping to kind of dive into the outlook for the provision and just overall reserve or I should say that level going forward at this point.
The decline and the <unk> provision versus for Q wasn't media is substantial as we've seen from some of your so just trying to get them understand in terms of the drivers and the per.
And this quarter and just maybe where you guys see the reserve yeah, that's true.
And out to over the next few quarters.
And you guys are kind of going into a lousy on the allocated reserves that were built.
<unk> built up over the course of last year.
Sure. Good question, let me start kind of broadly and maybe led card talked a little more specifically certainly.
As you know we've been what we perceive to be prudent and billing our reserves and maintaining is given.
And the newness of dealing with the pandemic.
Certainly the.
<unk> under which we build our reserve are certainly looking better, but we're trying to take a.
Thoughtful approach before we would release of reserves.
Particularly given the 14% loan growth we had on the first quarter. So.
We've tried to be thoughtful about how we approach that.
As we look forward long term, we are 2% adjusted reserves. After PPP long term, we think where do we run of normal time.
All of 150 day.
On the road sometime but we wouldn't plan to get there necessarily very quickly because we want to make sure. We're.
Being prudent and.
And how we think about that.
And hopefully that speaks volume to the consistency of our earnings as we look towards the rest of the year.
So we certainly do believe that our provision expense will be more modest and the next few quarters, given what we see and our analytics and the unemployment rates and the other things going on and our economy. So we think we're well positioned.
Yes understood.
Larry nailed that and in terms of.
Our philosophy around reserving I think you and the other analysts have come to know that.
Our credit culture has of getting on top of reserving.
Very quickly when circumstances dictate that we do.
<unk> tend to be very conservative about how we approach reserving.
And.
And we would expect to stay on top of the here and not declaring victory just yet over the pandemic, but our expectation would be for lower level of provisioning.
Going forward.
We know that some of our peers were taking reserves back already.
We're just not entirely comfortable with that given our credit culture, and we think it rewards shareholders better over the long term and we have that approach.
Understood and that's really helpful. I appreciate that guys.
She says the following in terms of the provision that we saw this quarter was that in any way of reflection of the increase and classified loans that we saw on the quarter or any other thing or any other items from the underlying credit quality perspective or more so just providing for the growth that we saw there was a pretty impressive here and <unk>.
Yes, Nate Great question. It was the ladder it was really around loan growth no degradation really of any.
Yes, we did see a little bit of a shift and the composition of criticized assets, but no growth there asset quality continues to be very strong. So really just 14% annualized loan growth was what's driving that.
Okay, great and if I could just ask one more were on capital and your reserve is still I would argue nicely. Both years just on 2% ex PPP you guys of building capital on a pretty strong clip just given the profitability profile.
But yet the stock is still trading somewhat below peers. These days on tangible of.
Book basis of I would just love.
Of the here any thoughts on just thoughts around buybacks over the near term and kind of within the context of other capital deployment priorities.
Hum.
Yes, I'll start and then let Todd wrap up of he's got other thoughts certainly because we've had really strong organic growth.
And we expect as we've indicated the continue to have good growth, we've probably been a little more deliberate and how we analyze our capital levels and.
And particularly given the newness of the pandemic and how the economy is going to react and is it going to continue to grow at the kind of pace that we've experienced and then.
Lending niches that we have so our first priority would be to fund growth with capital.
After that it's really M&A and as you know the M&A market is getting more active and we certainly are having more discussions.
But do we will.
We really can't predict when discussions will turn into activity, but there's certainly more activity. So it's probably made us be more deliberate on how we think about buybacks, but we will be continuing to.
Analyze buybacks and consider it and the future when we think it's prudent given our capital build which.
Is substantial and so.
No.
It's something we'll continue to look that and the next quarter and quarters in the future.
Yeah Nate agree.
We continue to have solid M&A discussions and certainly on our.
To do list to look for partners and des Moines, and Springfield and in particular, we want to remain well positioned to take advantage of those when they happen. So between M&A preparedness for a good transaction and perhaps some buyback if we continue to be undervalued and we believe that.
Today and be the case I guess, so we'll be looking at those with our.
With our holding company board here.
Through the rest of the year.
Got it agreed on the undervalued.
On the there and I appreciate all of the color. Thank you guys.
Thanks, Dan and thank you.
Our next question comes from Damon Delmonte with K B W.
Good morning, Guy and I hope everybody's doing well good morning, hope everybody's doing well.
So first question I just wanted to circle back on the margin Todd.
And he kind of I think you said, you're talking about a one to three basis point of headwind.
Headwind on the core margin.
Potentially and I was wondering if you could just go over the the.
And the drivers of that potential headwind.
Sure Yeah. Thanks for the question David Good to hear from you.
And so so some of the headwinds of course would be decline and loan yield.
Just to give you a little color around that challenge and the first quarter pay offs were.
Net yield of around for 24 29.
New came on at $3 90, so continue a bit of of burn down there. The good news is our Q1 yield was four O for so not not of.
Huge delta there in terms of where new.
Coming on but certainly we're going to continue to see some roll down and loan yield.
The excess liquidity is maybe perhaps the biggest wildcard and that one to three.
We're doing it and really good job our bankers are doing a great job of keeping that pretty well under control, but that would be another headwind and the liquidity and the market's only going to get a little more significant here with continued PPP forgiveness.
And so some tailwind from some good things for US we will be able to continue to drive down our cost of funds, but we're getting very close to some floors and certain cases I would just applaud our bankers across the entire company for doing a great job with loan yields and and deposit cost.
Fantastic bankers and fantastic people and on a leasing company and they are battling for every basis point they can get.
We will continue to try to push the liquidity down and if we can do a little bit more of that that will help us with a bit of a tailwind in Q2, and then maybe the the big wildcard in terms of us, suggesting and our scripted comments that we might try to.
Do all we can to outperform that guidance, if we can continue to grow loans.
The strong clip and we will continue to move.
Move our mix on the asset side and.
Kris loans to total assets, we went from $74 eight loans to total assets at the end of the year to little over 77 in Q1.
So if we can continue to do that that will provide.
<unk> provided a bit more help to margin, but when you put all of that.
Together, we think it's prudent to be transparent about the fact that we're going to continue to have to fight on fight offs and margin pressure, we may see a bit of.
The decline in margin.
And here in Q2.
Great I appreciate that color and could you remind us what what the PPP impact was this quarter on the margin.
Sure so.
<unk>.
In.
Q4, actually provided about $3 5 million, both fees and interest and Q1 that was down about $1 2 million to 22 two.
So a decline here on the first quarter, that's a big driver.
Related to the drop in NII and of course between that and the <unk>.
Reduction in the discount accretion so.
Right now I wouldn't anticipate maybe further declines and the PPP number perhaps a further drop a little under $2 million in Q2, as we start earning through those fees.
And as those loans get forgiven.
Got it okay. That's great stuff. Thank you and then just the kind of follow up on the on the M&A discussion.
And exciting to hear the there is some discussions and maybe we could see how the happen. Later this year can you just kind of give us some.
And the parameters or remind us of of the parameters of of kind of what the characteristics of that youre looking for both from a lack of size and the location and some of those factors.
Yes, certainly.
And then consistent.
Excuse me and the <unk>.
Indicating that our first focus is building out our franchises and des Moines.
And and the Springfield market and so that's our first priority we've talked about that for a couple of years now we continue to make sure that we're positioning and the appropriate places to be ready for one of those opportunities when they become available and.
And so we'd consider certainly anything and the three for $100 million size range all of all the way up to probably of 1 billion and of half year. So the.
These are kind of the range is of the size of opportunities that could present themselves.
And hopefully as soon as later this year.
Excellent and stuff that's the.
All of that I had thank you lots of thanks, a lot guys appreciate it.
Thanks, Tim.
And again, if you have a question. Please press Star then one.
Our next question comes from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Hi, Brian and Brian Hey, guys. Most of the most of my stuff was asked there, but just one thing Todd just on that on the PPP.
I know you mentioned second quarter, just kind of big picture, how are you thinking about the.
Forgiveness, and I guess as you get later in the year I mean, if he does most of it gets kind of baked in this year I guess are you expecting some of that the bleed into next year.
Any thoughts on that would be helpful.
Sure Brian Great question.
So in terms of remaining fee, we've got about $3 6 million.
I would anticipate.
About one five of that and Q2, and then probably the remaining $2 million or so would be Q3, and Q4 I would expect the vast majority of that to the.
Washed through NII by the end of the calendar year.
Okay. So most of it coming through Okay and then.
On the on back of the loan yields tied for just the questioning how can you remind us how much of your portfolio has floors at it and kind of talk about the competitive environment and there's a lot of the strong growth you saw in the quarter and just with all of the liquidity and the market. If you can just give a little context on the competitiveness and does that it doesn't certainly doesn't sound like it.
Prevented you from achieving your goal of especially with the great growth this quarter.
Sure Yeah, Brian about 20% would have floors.
And the.
A fair amount of that spread among prime floors and LIBOR floors.
We're really I would tell you having a fair amount of success, obviously growing loans, but.
All of holding on to yield to the extent we can.
Of that 390 of new production that is.
The watered down a fair amount of of course with the amount of floating rate debt, we're doing so.
And I don't want everyone to it.
I think we're doing a whole lot of fixed at the $3 90, but.
And I'm pretty optimistic that we are getting closer to really the for in terms of what loan yields will be for us.
Certainly if we could.
Get some slope and.
And help ourselves there in terms of loan yields and we'd love to see that happen but.
Yeah, Brian and Brian Ive been doing this a long time and I would say.
Every year the bankers talk about how competitive the pricing is and it is and it's probably accentuated because of the current conditions.
But probably the biggest driver as Todd mentioned, the slope to the yield curve and we've already seen when the long and of the <unk>.
And the yield curve ticked up a little a little pressure come off if we'd get a little more slope. There certainly that would allow us to get better pricing down the yield curve.
It's always competitive maybe incrementally more competitive the day than normal because of all of the excess liquidity that's been pumped into the economy that you can see flowing through our numbers as we talked about.
Off balance sheet deposits and all of the things that we've got going on but.
Over time, we should eat through some of that and hopefully a little steepness of the yield curve will help all of the bankers feel a little better.
Yeah, Okay perfect. Okay. That's all I had guys I appreciate it thanks nice quarter. Thank.
Thank you thank you Brian.
Our next question comes from David Long with Raymond James.
Good morning, everyone any of it.
Good morning, just really quick on the off balance sheet deposits can you can you give us a little bit of color of the economics behind that and.
What should we you know what and what are you guys getting for you know and you move those off of your balance sheet from a financial perspective.
Sure Great question.
So just to give a little color around the order of magnitude here.
At 331, we had roughly $350 million of correspondent bank deposits.
And noninterest bearing.
We had about another $290 million and money market and right now we have really driven that pricing down near floors.
Single digit pricing on that money market account.
So roughly $640 million total on balance sheet at the end of the quarter, we had $1 7 billion.
And of correspondent deposits that were moved off to the fed the excess balance account program.
We actually manage the.
Those funds for our downstream correspondent.
We manage the level of noninterest bearing and they need targeted for their earnings credit and we.
Manage how much will be and the money market product and then the balance we manage into the fed EBITDA to really keep it off of our balance sheet and.
And not be faced with trying to put $1 7 billion of work hit very low spread.
You get a fee for managing that it's very modest one.
And we're talking a few basis points.
And so really how we view it David is more.
Really good solid access to continued liquidity.
When we continue to grow loans at the 8% to 10% clip that we've guided to.
I'm very confident we will continue to fund that with core deposits.
Got it thanks for the color I appreciate it thanks for that.
Thank you.
This concludes our question and answer session I'd like to turn the call back over to Mr. Larry Helling for any closing remarks.
Thank you operator, I'd like to thank all of you for joining our call today have a great day, and we look forward to speaking with you again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.