Q3 2021 QCR Holdings Inc Earnings Call
Greetings and welcome to the Q T. R Holdings, Inc earnings conference call for the third quarter of 2021.
Yesterday after market close the company distributed its third quarter earnings press release.
If there is anyone on the call who has not received a copy you may access it on the company's website www Dot Q T R H dot com.
With us today from management are Larry Helling, CEO, and Todd Keppel, President CLO and 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 certain of the information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities and Exchange Commission.
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 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.
A reminder, this conference is being recorded and will be available for replay through November 11th 2021, starting this afternoon approximately one hour after the completion of this call.
It will also be accessible on the company's website.
At this time I would like to turn the call over to Mr. Larry Helling at QC are holding.
Thank you operator, welcome ladies and gentlemen.
Thank you for taking the time to join us today.
I will start with a brief discussion of our third quarter performance Todd will follow with additional details on our financial results for the quarter.
We delivered another quarter of record net income driven by exceptional loan growth strong fee income expanded net interest margin and excellent credit quality.
Despite the competitive lending environment, we grew core loans and leases by a very robust 23% on an annualized basis, while maintaining excellent credit quality.
Year to date, our annualized loan growth has been 18%.
<unk>, our long term target of 9%.
We continued to attract new clients and deepen ties with existing clients, which is an ongoing strategic priority of our relationship based community banking model.
Third quarter net income was $31 $6 million and diluted adjusted earnings per share was $1 99.
Both measures are company records and each up more than 40% from the second quarter.
On a year over year basis, our earnings for the quarter were up 82%.
The third quarter performance was due to robust loan growth and was bolstered by very strong capital markets revenue.
Some of which was carried over from the second quarter as indicated on last quarter's call.
We believe this revenue source is sustainable long term.
Todd will provide more detail later in the call.
Our exceptional loan and lease growth in the third quarter was driven by strong production in our specialty finance group and continued growth in our traditional commercial lending and leasing business.
Within S. F G. We continue to experience.
Strong client demand for our niche lending products, particularly in the area of municipal and tax credit finance.
R M. Two equipment Finance group also had an impressive quarter.
Building upon the momentum that they have seen all year lease.
Lease balances grew by 7% on an annualized basis during the third quarter and 10% annualized for the first nine months of the year.
Given our strong loan and lease production year to date combined with our current pipeline. We are now targeting organic loan and lease growth for the full year 2021 of between 16 and 18%.
We funded our loan growth in the quarter with continued growth in our core deposits, which grew $183 million or approximately 16% on an annualized basis.
This growth was driven by strong contributions from our commercial clients.
We also continued to reprice deposits slower while growing our noninterest and interest bearing demand deposits.
This helped reduce our overall funding cost during the quarter and drive growth in our net interest income both in dollars and in margin.
Todd will provide more details on our NIM in his remarks.
Our asset quality remains exceptional as our nonperforming assets improved 32% for the quarter and now represent only 11 basis points of total assets.
We had minimal net charge offs during the quarter.
And we feel very good about our current reserve level, which when excluding PPP loans is now $1 79%.
Our banks continue to be well capitalized and we were able to maintain our capital ratios. Despite our significant growth in loans, while at the same time repurchasing 193000 shares of our stock at an average price of $48 50 per share.
Since we announced the resumption of our share repurchase program earlier. This year, we have repurchased nearly 300000 shares approximately 2% of our outstanding shares as part of our long term capital allocation plan to further build shareholder value.
I would like to thank the entire QC, our holdings team for their hard work and dedication to excellent client service and for delivering another quarter of record earnings performance.
Our employees are the heart of our company and I am very proud of our entire team for all they have accomplished this year.
In summary, we are extremely pleased with this quarter's performance and remain optimistic going into the end of the year.
We continue our pursuit of organic growth and disciplined capital deployment within the markets. We serve with the goal of delivering attractive returns and creating increased value for our shareholders.
I will now turn it over to Todd for further details.
Thank you Larry welcome everyone. Thanks for joining us today.
As I review, our third quarter financial results I will focus on those items, where some additional discussion is warranted all.
I'll start with net interest income.
Our adjusted net interest income for the quarter was a record $48 5 million and up $2 8 million or six 2% from the second quarter.
This exceptional performance was due to the outstanding loan and lease growth that Larry discussed combined with an increase in our adjusted net interest margin.
During the quarter, we were able to grow our adjusted tax equivalent NIM by nine basis points, our average, earning assets grew two 5% and the yield on those assets increased nine basis points due primarily to higher loan yields.
In addition, we continued to drive our funding costs lower by two basis points as higher cost time deposits are being repriced lower upon renewal or rotating to lower cost non maturity deposits.
Our adjusted NIM also benefited from $64 million of PPP loan forgiveness during the quarter and the associated origination fees that were recorded as a result.
These fees amounted to $1 9 million and positively impacted our NIM by seven basis points.
Excluding the impact of our P. P. P fees, our core NIM expanded by two basis points outperforming our Q3 guidance for a static net interest margin.
With respect to PPP loans, we currently hold $84 million in remaining balances and expect forgiveness on the bulk of these loans to occur in the fourth quarter.
This would result in the recognition of the remaining $2 million of P. P. P origination fees.
As we look forward, we anticipate a slight decline in our core NIM in the fourth quarter, given the headwinds of the ongoing highly competitive and low interest rate environment and a limited amount of room for our funding costs to decline further.
As always we will work hard to continue to protect loan yields and proactively manage excess liquidity in an attempt to outperform that guidance.
Given our strong loan growth, we do expect another quarter of solid growth in net interest income.
Now turning to our noninterest income.
Noninterest income was $34 7 million in the third quarter, including $24 9 million in capital markets revenue from swap fee income.
This very strong quarter included a number of transactions that were scheduled to close in the second quarter and instead carried over into the third quarter as we indicated on last quarter's call.
Capital markets revenue has averaged 16 million per quarter, thus far in 2021.
And $16 3 million for the last eight quarters.
As a result, we expect this revenue source will continue in the range of $14 million to $18 million per quarter going forward.
We believe that our guidance range is sustainable given our strong historical performance and the ongoing and long term demand for our capital markets products.
With respect to our wealth management business, we continue to onboard new client relationships, adding 79, new relationships in the quarter totaling $128 million in AUM.
Year to date, we have gathered $319 million in new client assets, representing a 7% increase in assets under management from the beginning of the year.
Total AUM at quarter end was $5 1 billion down slightly from the previous quarter as our new client assets were offset by portfolio market volatility and some specific client disbursements.
Now turning to our expenses.
Noninterest expense for the third quarter totaled $41 4 million up from $35 7 million for the second quarter.
The linked quarter increase was primarily due to higher performance based salary and benefits expense of $5 2 million.
Driven by strong revenue production and earnings performance during the quarter.
Additionally, we recorded a $1 5 million charge related to the write down of certain fixed assets.
Partially offsetting these increases was a $1 3 million net gain on the sale of other real estate.
Excluding these two one time items and adjusting for a more normalized capital markets revenue of $16 million.
Our core noninterest expense would have been $39 million right at the midpoint of our guidance range of $38 million to $40 million.
Looking ahead to the fourth quarter, we continued to expect our noninterest expense to be in this range.
Our overall asset quality continues to be excellent.
As Larry mentioned, both our nonperforming assets and the ratio of NPA to total assets improved from the prior quarter and there were minimal net charge offs in the quarter.
We also successfully sold in other real estate property, which led to the $1 3 million net gain that I mentioned earlier.
We again did not record a provision for credit losses during the quarter, nor did we release any reserves. This was primarily due to the continued strong asset quality a reduction in nonperforming loans and continued robust loan growth.
With respect to capital we continue to maintain strong capital levels as a result of our solid earnings and excellent credit quality.
Our effective tax rate for the quarter was 20%.
Higher than our expected range of 17% to 18% and was driven by the strong growth in taxable revenue sources, primarily capital markets revenue, which outpaced net growth in our tax exempt revenue.
With that added context on our third quarter financial results, let's open the call for your questions. Operator, we're ready for our first question.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Thank you.
<unk> your phone please pickup your handset before pressing Mickey.
Let's try your question. Please press Star then two.
Our first question today comes from Damon Delmonte with K B W.
Yeah.
Hey, good morning, guys hope everybody's doing well today.
Good morning, Jamie are.
Okay, great well congrats on a nice quarter.
Good numbers, you guys put up I guess.
You know I guess with regards to the loan growth.
How much of this is being generated from the U S. F. G. A division versus just your normal community commercial bankers and throughout the footprint.
I'll tackle that one Todd.
Certainly we've gotten growth really from all of our sectors, our core loan growth.
From our traditional businesses.
Are probably growing in the.
Two to three 4% range, depending on which location. We're in so we're starting to see some growth, but there is still a tremendous amount of liquidity in our and our clients' businesses and so that is suppressing our historic growth rate there.
Our leasing business.
Active.
And our growth there has really been run in the 7% to 10% range as the demand for equipment is high.
So that's been a real positive variance and then the remaining of the growth is really coming in our specialty niches, which are well positioned certainly in this environment to continue to do well.
Got it and does that does this.
Specialty group is that just out of like the Cedar Rapids area or is that throughout the entire footprint.
<unk>.
Originated in the Cedar Rapids area, but we certainly originate business from around our footprint.
And so it's a mix of things tax credit municipal finance and then a couple of other specialized niches where we.
Thank a certain expertise is required to effectively do those kinds of transactions.
Got it okay. That's good color. Thank you.
And then with respect to credit and the reserve levels.
Christine.
Christine.
No no no real losses in the formation of.
Nonperforming loans, how do we look at the provision level going forward Todd do you feel you're at a point now where you can start to release some of those reserves I think you ended the quarter at like $1 79.
X P P P, which is extremely healthy.
What would your thoughts on that would be.
Yeah.
We certainly did and in really good shape and it is pristine.
We do not believe that we will be releasing reserves more growing into them the pace of loan growth that we've been putting up.
And really I think Damon you know us quite well our credit culture, we're very conservative when it comes to our reserve levels and for those reasons just as we did in Q3.
Say short term at least start with our expectations.
One would be to hold on to the reserves, we have and not necessarily release.
Got it.
Good color. Thank you I'll.
I'll step back and I. Thank you very much for the color today.
Thanks, David Thanks, David.
Our next question comes from Nathan race with Piper Sandler.
Yes, hi, guys good morning.
Good morning.
I appreciate the commentary in the release around.
Kind of core loan yields ex PPP and accretion holding steady.
Still the outlook at least into the fourth quarter that we can kind of defend.
Loan yields right around 4% even at this point or have you guys kind of seen the competitive competitive environment excuse me evolved.
Across the various specialties that you guys cater to.
Yeah.
We certainly expect to be able to hold on loan yields were doing a fine job.
Larry and I would compliment all of our teams across all of the footprints doing a fabulous job of holding onto to yields and doing a fantastic job with the cost of funds.
We feel very good about our loan yields and where they planted I don't know that we are expecting any significant.
Moves there our guidance is really we use the word slight.
Our comments I would say, one or two basis points, perhaps expectation on some margin compression that would come in the form of pressure on loan yields. We do think we have a little bit of room to go on the cost of funds and deposit pricing.
And the real issue will be can we keep pace with continued pressure on loan pricing.
Very optimistic for a relatively stable margin we've outperformed.
Guidance here, so far this year and again compliments to all of our bankers for helping with that but.
When we say a slight margin compression it would be in that one to two basis points and yes. It would come from continued pressure on loan yields.
Understood that's great color.
Changing gears, a little bit of kind of thinking about the expense trajectory and I appreciate the kind of consistent guidance for the fourth quarter, but as we kind of think about the variability in capital markets and swap revenue into next year.
What's like the baseline personnel costs that we should be layering on top the kind of 30% implied efficiency ratio with that segment in particular.
Revenue fluctuates.
Sure I can try to give a little bit of color around that so we were pretty transparent on the jump in noninterest expense here in the third quarter that it was almost exclusively due to the significant outperformance on capital market. So do you think about that in terms of how you should view it and I think how we should all.
You have to model it.
We had about a 15 million dollar jump on a linked quarter basis and capital markets.
A round of $5 million increase in performance based comp around that so around 34%.
I think we've talked in the past that a lot of times that range will be 25 to 35 and it really depends on the level of underperformance or outperformance. So at this time. It was on the higher end of the scale simply because we significantly outperformed the 14 to 18 range, which we.
Said last quarter, we likely would do.
Then going forward when we talk about our noninterest expense being in this $38 million to $40 million range.
You would think about capital markets results being in the midpoint of our guidance. So when we talk about being in this 38% to 40 range for this following quarter here Q4, our expectation is.
Our result would be based on a $16 million capital markets number right in the middle of the guidance range and when we outperform that <unk>.
Significantly we might have another 30% or so in terms of comp in noninterest expense as a result, when we're right on that guidance.
Probably going to be in the middle middle of the guidance range around 39 million.
And I think that's going to for the most part.
Hold true here going forward, we're obviously going to have some.
Pressure on expenses comp and other things going into the new year, we'll try to give you some guidance on 2022 sometime in January but.
That's really how I would view our comp run rate.
Got it makes sense and maybe one last topic from me on just the capital.
Look you guys are my remained active on the buyback.
This quarter stocks, obviously appreciated above kind of where you guys were buying back stock in the quarter. So just would love to get some updated thoughts on the appetite for additional buybacks within the context of what you guys are seeing from an M&A perspective, and obviously.
Outlook for capital levels like we build next year absent an acquisition or continued activity on the share repurchases.
Sure sure Larry you want to take that one.
Okay.
It's literally on mute by chance.
I'm sorry, there we go.
Yes, the M&A markets are.
Active as you know and we certainly want to keep our capital position.
In a place where we're in a in a place to execute on something if it becomes available.
On the buyback certainly we will continue to consider that because as you know we are a low dividend payer and we will accumulate capital fairly rapidly. So we will continue to evaluate that certainly it depends on market price and how we feel about other alternative uses of our capital.
Okay.
I appreciate all the color. Thank you guys and congrats on a great quarter.
Thanks Gene.
Our next question comes from Jeff <unk>.
D a davidson.
Thanks, Good morning, good morning, Jeff.
Good morning, Jeff.
Todd Thanks for the the expense guide that's as clear as I've heard that dynamic so I appreciate that.
Tied to the to the swap side of things.
Very clear the.
Just wanted to jump a little more detail into the loan growth.
Really strong here and I guess I wanted to maybe talk about the other side of <unk>.
Net growth of gross growth. This is payoff activity and wanted to alright.
Alright, I think he mentioned some some liquidity but.
Do you have maybe just narrowing it down to the question here.
Payoff activity linked quarter do you have those those levels of what maybe what against gross production.
Sure sure do Jeff and I can give you some color around that I know Larry has some thoughts in terms of.
Loan growth overall, but our payoff number here in Q3 was roughly $390 million.
Pretty.
Pretty healthy number there, but actually down on a linked quarter from Q2, where it was $4 25.
Was right at the same level in Q1 about 390, 390 425 390 here in this quarter.
Certainly some challenge with respect to swimming upstream against those payoffs and.
As Larry shared earlier, that's part of the benefit of our specialty finance group providing.
Outsize growth in assets.
While it's non traditional part of our lending, it's very core to us and very important to us and we expect to continue to have success with that.
Yes, Jeff I'd add that.
Certainly we were hitting on all cylinders in the third quarter on our loan growth but.
Our history of loan growth.
Growing in the 8% to 10% range for a long time.
So we would continue to expect to grow at those kind of relative numbers.
As we look forward and as.
As Todd alluded to the specialty finance niche is a part of our core business.
And we expect that to be available for us.
To supplement our growth.
Through ups and downs in the interest rate cycles and long into the future. So we certainly feel good about the contribution it made in.
As our traditional lending clients burned through some of that liquidity over time, we'd expect.
Just normal advances on commercial companies lines of credits to grow over time, but as you know there is certainly still a lot of liquidity out there because of the PPP program.
Yes.
I'm shocked at those payoff levels were pretty elevated given the net growth that you're putting up.
Well I'll keep nudging you along here I guess in 'twenty, two than you've talked pretty clearly about reverting to the 9% loan growth with the upper teens expected in 'twenty, one I guess.
I would think you've got some momentum into 'twenty two.
Safe to say, there's some upward bias in 'twenty two to that historical eight to 10.
Yeah, I think that's fair Jeff.
You know the world when the economy is such an uncertain place, we kind of hate to.
Make predictions that are different than what we've done over a long period of time, but so certainly may be towards the top end of that eight to 10 would certainly be appropriate.
Okay fair enough.
Last question just on that on the swap income it seems like you've got growing comfort or visibility now.
And when Thats coming in and it really just a timing thing it sounds like quarter to quarter, but.
Interested in the competitive side of that and is that something that's kind of a core competency that.
That call it $16 million a quarter run rate as is pretty sustainable or you look at it.
Interest rate environment.
Beyond 'twenty two that.
Threatened or anything that you could comment on.
That income stream even longer term.
Yes, we believe that the $16 million.
It is a sustainable number in the long run.
You know theres certainly in all of our businesses, there's competitors react differently in up rates environments are down rates environments, but we believe that we have the engine built to make that pretty sustainable there'll be some variability and some seasonality in that business just because of the nature of the business.
But we feel good about that being a solid contributor to our income for a long time into the future.
Jeff.
Just to tag on to Larry's color around that.
We did think it was important to point out that the midpoint of our guidance range. The $16 million is in fact, what we've averaged this year very close to what we've averaged the last two years.
Really the.
The basis of our guidance that we're giving we think that as Larry said, the sustainable run rate, it's fairly choppy at times.
But I think it's important that.
The actual business in the end.
Transactions and the volume and the pipeline is not as sensitive to market rates.
Sometimes the amount of revenue or capital markets revenue that we'll get out of each transaction is impacted by the rates, but its a very sustainable business and would be here for us if rates go up if yield curve gets steeper.
It's not so much about the volume of the transactions, it's more a little bit around the edges on the pricing we can get if that makes sense.
Yeah, Jeff the other thing I'd add is the underpinnings for that tax advantaged business, whether its historic latex and other kinds of tax credit financing.
Our really good the demand.
And the activity in that space continues to grow.
If you look at the tax advantaged housing the low income tax credit housing the demand in that space the growth in that space is real so it's not like we even have to carve out a bigger chunk of business, we really just need to keep doing what we're doing as the business grows.
That sounds good thank you.
Thanks, Jeff.
And again, if you have a question. Please press Star then one to join our Q.
Our next question comes from Daniel Tamayo with Raymond James.
Hey, Good morning, guys just one for me.
The rest of my questions have been answered but.
Given the very strong loan growth that Youre seeing you still got a a loan deposit ratio in the ninety's here.
Do you expect to see deposit growth keep pace with loan growth from here or.
Given where we are in the cycle do you think that that continues to.
To go up and then and then how how high are you comfortable with the loan deposit ratio getting thanks.
Yeah, Danny wheat.
One of the things, we havent talked about it onto the call yet so I'm glad you asked the questions and we feel very good about keeping pace with loan growth and funding it with core deposits we are.
Very pleased to be sitting here with really no wholesale funding left only thing wholesale on our balance sheet would be.
Trups and <unk>.
Sub debt.
And.
That's in large part because we have kept pace with funding it with core deposits and we.
We haven't talked about it on the call yet but.
Correspondent bank deposits that are off balance sheet for us that we would have access to our right now a bunch of bouncing around in a range of 1.2 to $1 5 billion.
That are in the excess balance accounts with the fed so that gives us the just in time inventory for core deposits and we feel really good about having that available to us at a reasonable cost.
Okay I appreciate the color.
Our next question comes from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Good morning, Brian.
Hey, Todd.
Todd maybe just give a little thought on I know you talked about the margin being relatively stable up or down a little bit maybe down a little bit in the fourth quarter, but just and you see that there is potential for upside I mean bigger picture as you get into next year. I guess, just how are you thinking about beyond the fourth quarter and I. Appreciate you guys will give more color as you get into.
Next quarter earnings, but just kind of high level, just kind of what youre thinking about as far as what can be the puts and takes there on the future margin outlook.
Sure sure absolutely yeah longer term.
We're very optimistic about margin because we are asset sensitive at this point.
We've been able to improve margin here over the last two.
Four to six quarters and at the same time really pivot our income statement to a much more asset sensitivity.
Right now our.
RSA as are around 2.2 or ourselves or about 1.3, so we have about a $900 million delta.
On RSA used ourselves and feel very good about that in terms of some.
He'll wins that could provide if we see some rate increases so longer term that that's really something that.
We hope to be able to take advantage of question being when that might happen and how steep the curve might get at the same time and I think that's why Larry and I would.
Really differ much more in 2022 guidance until we have another <unk>.
Or so under our belts in terms of what might be happening with rates and where those things might be headed but.
That's really more of a long term view and in terms of the short term puts and takes.
Certainly continued pressure on loan yields.
Actually we've tightened up.
The delta between our payoff rates and our new funding rates and that's gotten a little bit tighter lately. So that's a good sign.
Can we keep growing loans at the strong pace, we do believe we can.
And then excess liquidity we've done.
A lot of hard work to keep the excess liquidity pushed off our balance sheet to the extent, we can and that's been another reason we've outperformed guidance recently and then.
Of course the.
Opportunity to continue to improve our funding cost still exists, but it's starting to get down to what we might consider as floors.
And then what really happens with the with.
With the rates.
What the fed might do what LIBOR sofa might do.
But look what the long term rates and the yield curve ends up looking like so lots going on there.
We'll have some more color from you with full year results in January.
Yeah, Okay and I appreciate that's helpful that and hit on the <unk>.
Two things.
The expenses I.
I guess it is wage inflation is something I guess, just kind of thinking about it. If you look at next year Todd in your comments about how to think about expenses I guess tougher now to kind of maintain the growth rate in expenses that you have historically been running then.
Does that seem fair based on kind of what the current market conditions are like so if you're a normal expense growth rate was ex.
X percent, it's maybe a little bit more today given where.
Wage inflation is that.
Sure I might start on that and then I know Larry has got some comments around what we expect to do there but.
I think everyone's familiar with our 96, five and the five and that is of course noninterest expense and over.
Over the last several years, we've we significantly outperformed that our growth in noninterest expenses has been closer to 2% than 5% and so we've had a lot of success with that our entire company is focused on doing the right things there, but you know it's going to get more difficult certainly in <unk> right.
Maybe Larry would have some comments where are you in terms of people cost and other things there.
Yes, Brian we're certainly feeling the same kinds of hiring pressure and the wage pressure that we see kind of throughout certainly our markets that youre seeing around the country.
We probably good chance, we're not giving guidance yet, but as we're doing our budgeting for next year, which were deep in the middle of right now.
Holding on to a 5% increase in <unk>.
Expense rate is going to be a challenge, but we certainly haven't given up yet on that but.
It's going to be more difficult to hire people and well there is certainly upward pressure. So I think youre seeing it about right yeah.
Yeah, Okay, and then last one from me Larry just to your comment about M&A I appreciate that.
Have you seen any I mean, theres been a lot of activity in the Midwest. I mean have you guys seen an uptick in dialogue or I guess I know you guys have certain markets youre targeting in sizes and whatnot, but just within kind of your group of kind of what you are considering or potentially would consider.
Has there been any uptick in conversations or is it just kind of been static herein.
Kind of wait and see.
Yeah.
A couple of things certainly we've been consistent in saying that our our first preference for our next M&A transaction would be to be in the either des Moines, our Springfield markets. We've already got a presence in those markets with good management that we think helps our opportunity to execute efficiently and effectively in those markets.
We like the markets the quality of the economic environments in those markets. So that's certainly our first priorities.
I'd say discussions have been more active.
But as I tell our employees just because we are ready to buy it doesn't seem it doesn't mean somebody is ready to sell so we're just trying to be in a position. So that we can execute when those become available.
Okay makes sense I appreciate the color and great quarter guys.
Thank you thanks, Brian.
This concludes our question and answer session I'd like to turn the call back over to Larry Helling for any closing remarks.
Thanks to everyone, who joined us on our call today have a great day, we look forward to speaking with you all again soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.