Q2 2021 QCR Holdings Inc Earnings Call

Greetings and welcome to the QC, Our Holdings, Inc. Earnings Conference call for the second quarter of 2021, yes.

Yesterday after market close the company distributed its second.

On the mornings press release.

If there's anyone on the call. It was not received a copy you may access it on the company's website www dot QC or H dot com.

With us today from management on Larry Helling, CEO, and Todd Gipple, President and C O N CFO.

Management will provide a brief 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.

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.

As yours.

Press release available on the website contains the financial and other quantitative information to be discussed today.

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 August 10, 2021, starting this afternoon.

Approximately 1 hour after the completion of the call.

Also be accessible on the company's website.

At this time I would like to turn the call over to Mr. Tony.

You see our holdings. Please go ahead.

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 second quarter performance.

Todd will follow with additional details on our financial results for the quarter.

We delivered a record quarter of net income driven by continued robust loan growth an expanded net interest margin improve.

Improved asset quality.

Holiday and carefully manage expenses.

Despite the competitive lending environment, we grew core loans and leases by 15% on an annualized basis, while maintaining disciplined underwriting and excellent credit quality.

We continue to attract new clients and deepen ties.

With existing clients.

Which speaks to the success of our relationship based community banking model.

Second quarter, adjusted net income was $22.5 million and diluted adjusted earnings per share was $1.40.

Both measures are.

Our company records and each up 21% from the first quarter.

On a year over year basis, our adjusted earnings for the quarter were up 60%.

Our double digit core loan and lease growth in the second quarter was driven by strong production in our specialty.

<unk> Finance group and in our core commercial lending and leasing businesses.

Within SSG, we continue to see strong client demand for our niche lending products.

Particularly in the area of municipal and tax credit finance.

Given our robust first half production and.

LTE and with our current pipeline, we are now targeting organic loan growth for the full year of 2021 of between 10 and 12%.

Which is higher than our long term goal of 9%.

We funded our loan growth in the quarter with excess liquidity, which was generated.

Combined continued growth on our core deposits, which grew by $57 million or approximately 5% on an annualized basis.

We continued to reduce higher cost non core funds re.

Reprice deposits lower.

And increase our interest bearing demand deposits.

<unk> bye help lower our overall funding costs during the quarter and drive growth in our net interest margin.

Todd will provide more detail on NIM in his remarks.

Our asset quality remains very strong as nonperforming assets improved 28% for the quarter and now represent only.

Only 17 basis points of total assets.

Our net charge offs continue to be negligible and we feel very good about our current reserve level, which when excluding PPP loans is 185%.

Our banks continue to be well capitalized.

And we.

This has improved several of our capital ratios during the quarter.

While at the same time repurchasing 100000 shares of our stock.

As previously announced on May 24th.

We resumed our share repurchase program as part of our long term capital allocation plan to further build shareholder.

We're able to.

As always I want to thank our employees for their efforts in delivering these record financial results.

Their hard work and dedication to building relationships with our clients remains key to our ongoing success.

In summary, we are optimistic about the second half of the year.

And have a favorable outlook for our local markets and their respective economies.

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 further.

Their value deals.

Thank you Larry.

As I review, our second quarter financial results I will focus on those items, where some additional discussion is warranted ill start with net interest income.

Our adjusted net interest income for the quarter was $45.7 million up $1.9 million from the first.

Further deepen that.

This strong performance was due to an increase from our adjusted net interest margin combined with the strong loan and lease growth that Larry discussed.

With respect to P. P. P loans, we currently hold $148 million in balances as over 90% of the first draw on loans have been from given today.

We expect forgiveness on the second round of PPP loans to ramp up during the second half of the year.

Remaining net PPP origination fees to be recognized or approximately $3.5 million.

During the quarter, we were able to grow our adjusted tax equivalent net interest margin by 4 basis points.

Quarter significantly exceeding the guidance, we provided on our last call.

Our average, earning assets grew by 2% and the yield on those assets increased 1 basis point.

While loan yields declined 6 basis points during the quarter and this very competitive rate environment.

This was more than offset by higher yields on our investment.

<unk> portfolio in.

In addition, we continue to drive our funding costs lower by 3 basis points.

As we look forward, we anticipate a relatively stable NIM in the third quarter, even with the headwinds of the ongoing low rate environment.

As always we will work hard to continue to protect loan yields.

Down cost of funds and proactively manage excess liquidity in an attempt to outperform that guidance.

Now turning to our noninterest income.

Noninterest income was $19.3 million in the second quarter, including $9.6 million in capital markets revenue from swap fee income, which was lower than.

Dragons.

This compares to non interest income of $23.5 million in the first quarter, which included swap fee income of $13.6 million.

Several of our swap loans that were scheduled to close in the second quarter were temporarily delayed.

Of those loans have subsequently closed here in July.

We have now experienced very strong activity to start the third quarter and as of July 23, we have already generated $10 million on swap fees for them on.

Our pipeline for swap loans continues to be healthy and we fully expect this source of capital market revenue to be sustainable for the long term as it is in the central.

Our guide part of our tax credit lending.

As a result, our current expectation is that that third quarter swap fee income will be at the upper end of our guidance range of $14 million to $18 million.

We once again generated solid growth in wealth management income during the second quarter as it was up 4% on a linked quarter.

Basis.

Our performance was driven by a $730 million increase in assets under management year to date, bringing total AUM to $5.1 billion.

New client generation continues to be strong in addition to sizable increases in our existing client portfolios.

Now turning to our expenses.

Central noninterest expense for the second quarter totaled $35.7 million down from $37.2 million for the first quarter and less than our guidance.

The linked quarter decline was primarily due to lower salary and benefits expense of $1.8 million driven by reduced incentive compensation and commission expense.

Partially offsetting this decrease were modestly higher professional and data processing fees and advertising and marketing expense, both returning to more normalized levels from their low levels in the prior quarter.

We were pleased to outperform our guidance on noninterest expense in the second quarter and we are reconfirming.

Our overall asset quality continues to be very strong.

As Larry mentioned, both our nonperforming assets and the ratio of NPA to total assets improved from the prior quarter and our net charge offs were once again minimal.

<unk> already did not record a provision for credit losses during the quarter, primarily due to continued strong asset quality and a reduction in nonperforming loans.

We also did not release any reserves during the quarter due to continued strong loan growth.

With respect to capital, we continue to build capital through strong earnings and maintain robust capital.

Capital levels.

As Larry mentioned between May 24th and the end of the quarter, we repurchased 100000 shares of our stock during the quarter at an average cost of $48 per share.

We have approximately 600000 shares remaining available to repurchase under the current program.

Our effective tax rate for the quarter was 17, 6% and we expect the tax rate to remain in the range of 17% to 18%.

With that added context on our second quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.

Thank you we will now.

A question and answer session.

To ask a question you May press Star then 1 on on touched on so if.

If you're using a speaker phone we'd ask you. Please pickup your handset before pressing the keys to withdraw the question. What is your question. Please press Star then 2.

And today's first question comes from Jeff <unk> with D. A Davidson. Please go ahead.

I'll begin on X.

Good morning, Todd.

Morning, John Good morning, Jeff.

First as a balance sheet question would you anticipate still.

Growing earning asset balances in the third quarter. Despite TTP run off I guess similar to what you.

What you saw in the second quarter.

Yes.

Yes, we would expect net growth.

Gotcha.

And.

I guess, given the guide through to the full year.

That would in the fourth quarter also kind of at this point seeing continued earning asset.

<unk> growth.

Yes, yes, Okay got you.

Todd on the on the expenses.

Given our guide I imagine.

Would see an increase in the comp side with swaps sort of bouncing back is there any other.

We were just talking big picture, maybe beyond third quarter or is there other spend that we should be aware of beyond maybe just general growth of reopening the economy. It sounded like some of the data processing and professional fees kind of coming back to normal but is there anything.

Under way I just wanted to check.

Other with you guys on.

How are you feeling about expenses do you feel like you're.

You've underspent or <unk>.

Is it launching any kind of initiatives to tighten up efficiency just wanted to kind of check in on the expenses generally speaking.

Yeah, Great question, Jeff I think more of the ladder.

Back in really working hard too.

Look at processes and spend.

And we expect to continue to gain some efficiencies.

Through our best in Class program, where we're looking at processing and approach across the <unk>.

The entire company, we don't really.

Have any spend that we deferred during the pandemic necessarily so.

I wouldn't be looking for any big jump in any areas. We've spent a fair amount on talent, but thats.

For the most part baked in already in terms of spend.

And it's saving us.

Us.

In terms of some of the software spend so no.

No real expectations for jump there the increase would be more on the line of.

Incentives and commissions related to swaps.

Okay.

Great.

And then last 1 I guess if loan growth kind of hits you talk.

Target on the.

Credit quality in house, and maybe the macro.

Picture is stable to better.

Would you anticipate a provision meeting the post to provision in the third and fourth quarters based on kind of what you know the day.

Given what we're seeing.

Now certainly there's no degradation.

Either from a macro standpoint are in our portfolio. So I think probably a replay of the second quarter would be.

Maybe the most likely at this point given what we can see today.

But we have continued loan growth.

We.

Range is probably to release reserves quickly either.

Fair enough, okay, well thank you.

Thanks, Jonathan on it and our next question today comes from Nathan race Piper Sandler. Please go ahead.

Yes, Hi, guys. Good morning morning, Nate Nate.

So bill maybe.

Just start on the loan growth trends in the quarter.

Obviously really impressive growth overall.

It's like a lot of the growth was in commercial real estate. So I was wondering if you guys could just kind of parse out.

Where that growth with some of them coming from between tax rate finance.

Municipal finance and also on our mortgage book.

Okay.

Commercial basis, as well and kind of how the pipeline looks.

By segment into the <unk>.

Half of the year.

So I'll start with pipeline in reverse order to kind of hear the pipeline still looks very solid.

And has grown in the last quarter, so activity appears to be.

Continuing.

Our core commercial lending growth.

I'll start with line of credit usage really hasnt changed a lot of our clients are still sitting on a lot of liquidity, we haven't seen a lot of growth and line usage, but at some point when those clients burned through that excess liquidity caused by PPP, we'd expect some usage.

Just to start increasing in the next few quarters.

So on our core business the growth has really come in.

Term loan funding on equipment finance buildings facilities.

And as you all know shortage of labor is an issue and everybody's market. These days and so for our clients that are in the manufacturing.

On distribution space that probably means investments in plant and equipment to try and get more production with the same numbers of people.

The municipal finance continues to grow at a steady pace.

And then on the tax credit space to historic tax planning has been steady.

But there is those are shorter lived assets.

It takes a fair volume of activity just to replace those thats been fairly steady.

Our real growth.

And the biggest outlier would've been in the light tech space, which grew.

Close to $100 million from last quarter.

Okay great.

And along those lines in terms of the mitek growth.

So we updated thoughts from a concentration perspective you.

You guys have considered a securitization or something along those lines.

Manage overall concentration levels on balance sheet within that portfolio.

Yes, we continue to feel good about the levels. We're at today longer term as you.

Alluded to.

And we will maybe want to move some of this off balance sheet long term.

But at this point, we feel comfortable with our hold levels and the light Tech portfolio is performing spectacularly right now so we really like the asset class and its performance in this.

Sector.

It's.

<unk> consistent for 30 years, and so we really like the quality of the assets.

Feel comfortable.

Okay, Great. If I could just ask 1 housekeeping question on I apologize will be chemo.

I appreciate the guidance on the remaining of Pvp, but do you have the amount of PPP.

<unk> excuse me.

It's been realized in the second quarter.

Yes sure do.

No worries on the housekeeping so.

In Q2, we had about 1.1 recognized we've got 3.5 left.

And I would expect that to really.

For the most part.

Get accreted in over the Q3 and Q4 periods. So about 1.7 or 1.8 per quarter next couple of quarters.

Okay, perfect I'll step back I appreciate all the color.

Thanks, Dave Thanks Nate.

Our next question today comes from Damon Delmonte with Covid.

Please go ahead.

For David.

Well.

Just was hoping to get your thoughts on M&A.

Any thoughts on location and size.

Yes.

As we've said historically we.

We positioned ourselves to be an acquirer at the right time.

We continue to be focused on the markets we're in.

Because we think the execution risk is less and so we continue to be having ongoing discussions.

Certainly size wise.

We.

Hopefully probably likely to be $250 million in size bank or larger.

Up to a $1 billion 5 or so because of that would be a natural fit for us size wise.

So that's our continued focus and we continue to have ongoing dialogue.

Okay, great. Thank you.

Okay.

Okay.

And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then 1 to join the question queue and our next question comes from Evan Lisle with Janney Montgomery Scott. Please go ahead.

Hey, guys. Good morning, I'm on for Brian Martin.

Good morning, gentlemen.

Yes, so a lot of my questions been asked but just thoughts on the margin I know you guys. Obviously you gave some color on about <unk>.

I was just wondering.

Looking forward next 3 or 4 quarters.

I was just wondering if you have any color on that just what are the puts and takes to the margin looking forward from next couple of quarters.

That'd be helpful.

Sure Yeah. Thanks, Kevin.

Well certainly the headwind would be.

Continued pressure on loan yields we've been very successful on hold.

On that offer the most part I know, Larry and I would like to complement our bankers all the way around the company for doing such a fabulous job with.

<unk> net service and pricing, but we're holding that off.

Best we can but certainly that would be a headwind liquidity continues to be a bit of a challenge.

1 of the reasons, we've held on to margin and actually expanded margin.

We've been very successful about putting it to work.

That.

Client in hand, with the strong loan growth of course so.

<unk> would be continuing that strong loan growth and putting that liquidity to work and.

As we guided we expect to continue to have double digit loan growth. So that's helping quite a bit.

And then maybe another tailwind would be.

It goes him continued ability.

<unk> ability to reduce cost of funds.

We're getting close to some floors in some areas, but again testament to our talented bankers all the way around the company.

Our correspondent bank team has done a fabulous job managing cost of funds in that area.

Sure.

So we're pretty optimistic about a static margin here in Q3 and that was our guidance.

I don't want to get too far over our skis core into next year, but I think the expectation certainly for the rest of this year would be close to static.

And we're comfortable with that.

Okay.

Very helpful. And then I think just touching obviously, there's just a question on M&A.

You guys.

Share repurchase this quarter.

Are you guys just curious on how you see that moving forward or how youre thinking about capital deployment as we move through the year.

Yes, certainly as we've done our modeling.

Our goal on the.

Buyback side is to be consistent in that space at these relative price levels.

And that gives us.

The capacity to also do a meaningful M&A transaction.

We've been.

Also about trying to strike the right balance between those 2.

Awesome very helpful.

That's it from me thanks for the thanks for the answers guys.

Thanks Evan.

And our next question is a follow up from Nathan race with Piper Sandler. Please go ahead.

Yes.

Thanks for taking the follow up just a question on credit.

Charge offs were a little higher than what we see from you guys are the low.

Every quarter. So we're just hoping to get maybe a little bit of color, there and kind of how you see charge offs turning on the back up this year and I know, it's difficult to kind of think about getting back to the pre pandemic, Brazil reserve level, just given that its non.

On an apples to apples with you guys implementing diesel fairly recently, so just any thoughts on kind of.

The outlook for additional reserve releases here and kind of where you see the reserve trending too.

As a percentage of loans over the next several quarters.

So yes, we had 1 larger deal that we had well.

Reserve that we kind of just cleaned up during the quarter. So.

Nothing from a trend standpoint, we're certainly striving to in this.

Extraordinarily good credit environment to get ourselves really clean.

For the day when the World goes back to normal, which we don't have the answer to 1 thats.

Is going to be but.

Certainly we think like on the next year things may make closer to normal about credit costs and those kinds of things.

Long term.

Our average reserve over our 25 years of existence I think has been on 145 basis points 145 to 50 is probably.

Where we think it needs to be long term still even with the new methodology.

So that's probably where we would migrate to over.

A longer period of time.

Okay very helpful. Thanks, Larry and then just just on.

The appetite for additional share repurchases going.

Forward.

You guys get.

Get back from the market during the second quarter.

Thoughts on continuing with buybacks are stepping up the pace on particularly.

Particularly just given the downdraft.

Thank you Ryan.

Valuations recently.

Yes.

Our folks.

Focus to be consistent on it.

Stay at these relative price levels will probably keep our activity consistent then.

Depending on which direction the price goes that would certainly change our attitude on 1 direction or the other.

Okay perfect.

Thanks again guys.

Thank you ladies and gentlemen. This concludes the question and answer session I would like to turn the conference back over to the management team for any final remarks.

Okay. Thanks to everyone for joining our call today have a great day, we look forward to speaking to you all again soon.

Good day, ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's.

Presentation, you may now disconnect your lines and have a wonderful day.

Sure.