Operator: With us today from management are Todd Gipple, President and CEO, and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission.
Operator: As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements, and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website.
Operator: 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 a reconciliation of the GAAP to non-GAAP measures.
Operator: As a reminder, this conference call is being recorded and will be available for replay through 28 October 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.
Todd Gipple: Good morning, everyone. Thank you for joining our call today. I would like to start with the highlights of our Q3 performance and some thoughts about our business, and then Nick will walk us through the financial results in more detail. We delivered record EPS 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.
Todd Gipple: ROAA 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.
Todd Gipple: 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 Q2 and Q3.
Todd Gipple: 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 a 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.
Todd Gipple: 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.
Todd Gipple: 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.
Todd Gipple: 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 Cedar Rapids market is scheduled for next April, and we expect to see operating leverage build throughout the remainder of 2027 and subsequent years.
Todd Gipple: 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.
Todd Gipple: As we continue to expand advisory relationships, wealth management provides a growing source of recurring fee income, deepens client engagement, and further diversifies our revenue mix.
Todd Gipple: 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.
Todd Gipple: Our deep 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 closed funding for projects with 18 of the top 20 developers in the country, and during the first three quarters of the year, closed transactions with 13 new developers.
Todd Gipple: While our Q3 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 Q4 of capital markets production and expect Q4 results to be in a range of $18 million to $20 million. This would put total 2026 production within our historical four quarters guidance range. We are also reaffirming our guidance for $60 million to $70 million of capital markets revenue over the next four quarters.
Todd Gipple: 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 Q4 of 2026.
Todd Gipple: 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% compared to the preceding 12-month period.
Todd Gipple: 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 offtake activity in early 2027.
Todd Gipple: As discussed in prior quarters, changes to Freddie Mac's M-Series securitization program significantly increased the complexity, time, and cost of execution despite favorable pricing on the underlying securities.
Todd Gipple: As a result, we are actively working on other third parties on alternative loan sale structures for our permanent LIHTC loans that we believe will be significantly less complex, take far less time to accomplish, and result in better economics. It is also anticipated that these alternative structures 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.
Todd Gipple: These discussions are advancing, and we are confident that we can achieve alignment on a revised structure and complete our first transaction in the Q1 of 2027. While these LIHTC offtake transactions temper balance sheet growth in the near term, they enhance long-term profitability by creating more capacity.
Todd Gipple: 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.
Todd Gipple: 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.
Todd Gipple: 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.
Todd Gipple: 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%, the highest in our peer group. We have a proven high-performance operating model, and we hold ourselves accountable for consistently driving shareholder value.
Todd Gipple: 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.
Todd Gipple: 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 am 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 Q3 results.
Nick Anderson: Thank you, Todd. Good morning, everyone. I will provide additional details on the key drivers of our Q3 performance and share our outlook for Q4. We delivered strong Q3 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 Q2.
Nick Anderson: NIM TEY expanded 3 basis points to 3.58%, exceeding our guidance. The linked quarter increase in net interest income was driven by margin expansion, supported by disciplined funding costs and higher average non-interest-bearing deposits. Earning assets declined $44 million, reflecting the strategic LIHTC loan offtake transactions completed in Q2, with strong Q3 loan and investment growth partially offsetting the reduction. Looking ahead, we continue to benefit from repricing lower yielding loans into higher market rates.
Nick Anderson: 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 NIM, and we continue to be as transparent as possible.
Nick Anderson: 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.
Nick Anderson: 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.
Nick Anderson: Following the Federal Reserve's 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 the September Fed rate increase to be slightly accretive to NIM in the near term.
Nick Anderson: 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.
Nick Anderson: 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.
Nick Anderson: Accordingly, assuming no additional Federal Reserve rate changes, we expect Q4 NIM TEY to remain relatively static. Our Q4 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.
Nick Anderson: 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 Q2.
Nick Anderson: 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 M-Series 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.
Nick Anderson: Compared with Q3 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.
Nick Anderson: Now turning to expenses. Non-interest expense for Q3 totaled $54.7 million, compared to $53.2 million for Q2, 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.
Nick Anderson: 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.
Nick Anderson: Our efficiency ratio remained solid at 55% for Q3. 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%.
Nick Anderson: 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%.
Nick Anderson: For Q4, 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.
Nick Anderson: 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 Q2, including $63 million of new privately placed municipal invest 7.25%. Core deposits, when excluding broker deposits, totaled $7 billion, compared with $7.3 billion at 30 June, while broker deposits remained at approximately 2% of total deposits.
Nick Anderson: 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.
Nick Anderson: 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.
Nick Anderson: Taken together, the return of correspondent balances, continued non-interest-bearing deposit growth, and strong 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.
Nick Anderson: 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.
Nick Anderson: 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.
Nick Anderson: 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 Q2.
Nick Anderson: 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 Q3, we repurchased approximately $9.5 million or 95,000 shares of common stock.
Nick Anderson: 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 30 September, representing 11% year-over-year growth.
Nick Anderson: 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%.
Nick Anderson: These quarterly changes reflect the combined impact of strong earnings, partially offset by share repurchases during the quarter. Finally, our effective tax rate for the quarter was 9%, up slightly from the prior quarter.
Nick Anderson: 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 advantage 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 Q4 2026.
Nick Anderson: In summary, Q3 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 Q4 with solid pipelines and positive momentum across our businesses. With that added context on our Q3 results, let's open the call for your questions. Operator, we are ready for our first question.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis: Thanks. Good morning.
Nick Anderson: Morning, Jeff.
Jeff Rulis: Curious on the LIHTC portfolio as that has historically performed in an uprate cycle. If you could just speak to demand, the credit side, fee generation, just in general if there is anything you pull or glean historically on how that changes, if at all, in the upcoming cycle?
Todd Gipple: Sure. Jeff, thanks for the great question. When longer rates are going up, that is a bit of a headwind for our clients, for developers. They have to go back to the well, if you will, and work on their capital stack a little bit when those financing costs go up. One of the things we love about this business is it is very durable through all rate cycles.
Todd Gipple: We have experienced all different cycles in our time in the affordable space, so it is very durable, but it will tend at times to have a developer need to go back and work on the capital stack a bit to make up for the added interest carry, interest cost. We did see some deals slide from Q3 to Q4.
Todd Gipple: We talked a little bit about that in the prepared comments. It is one of the reasons we are very optimistic about the fourth quarter. At times it can take a little bit longer for deals to get fully baked and the capital stack in place and get the deals closed. But historically, it has not stopped progress and projects.
Jeff Rulis: Appreciate that. Anything on the credit or fee side? It seems like fees is more on rate volatility, I suppose. But anything on those last two items on credit and fee income?
Todd Gipple: No. Really historically, again, we point at this in our investor presentation. There is a slide in there about the 35-plus-year history of this industry through all different economic cycles, and the credit is really unimpacted by this. Jeff, part of the reason is those costs are fully baked at closing. That developer knows what their committed rate is for 15 to 18 years, and they have made the capital stack work with that amount of interest carry. That really does not tend to impact credit.
Todd Gipple: In terms of fees, really the only impact on fees is if we provide somebody a term sheet at a certain rate and then we see a massive move in the long rates during that period between then and close, we can see our revenue impacted a little bit, and I would say slightly At times it can impact that intra-quarter, if that makes sense.
Jeff Rulis: Yeah. No, appreciate it, Todd. Then maybe just hopping over one other question on the expenses really at the low end. You talk about trying to keep those sub 5%. It looks like this year you are headed for almost a flat year-over-year, 2026 to 2025. Just trying to figure out that is outperformed, I suppose, on your expectations and then coupled with that is the conversion impact. If that does, the final one completes in April. Maybe some early thoughts on 2027 growth.
Nick Anderson: Yeah, Jeff, thanks for the question. Yeah, we are pretty proud of the progress we are making on our non-interest expense while we are investing in the business at the same time. When we think about the go forward, much like how we have been preparing to cross the $10 billion asset threshold, where we have been layering in some of those costs over time.
Nick Anderson: We expect the similar impact when it comes to the investments we are making in our core systems where we will start experiencing and already have experienced some cost savings here. When I look at the data processing costs year-over-year, year-to-date, those are down 11%, about $2 million. So you are seeing some of that impact already in our run rate versus a cliff or a spike here when you think about the go forward. Very similar approach.
Nick Anderson: A modest or moderate layering in of cost reductions here as we go through these core conversions. We have the next one here in April, and that will be our final one. We have spent a fair amount of time of optimizing our frontline staff experience as well as our client experience. When we get into 2027, 2028, we will be spending more time optimizing the back office experience.
Todd Gipple: Jeff, really appreciate the question and allowing Nick to get into the details a little bit there just to point out what is happening. So appreciate the question. I would just tag onto that I mentioned that in our opening comments. We are very optimistic about operating leverage in the back half of 2027 and beyond.
Todd Gipple: We are really pleased with the partners we have selected with our core. Q2 is a huge partner for us in front of our clients. We are just very pleased about the technology stack. We are looking forward to having it done in April. And again, that is one of the reasons that we are very optimistic about continuing to grow ROAA in the traditional bank space. The operating leverage we are going to continue to pick up.
Jeff Rulis: Okay. Appreciate the details. Thanks.
Todd Gipple: Thanks, Jeff.
Operator: The next question comes from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte: Good morning, guys. Thanks for taking my questions. I appreciate as always the detailed insights that you guys provide on these calls. Just a couple questions here. Just wondering when you look at the pipeline, the loan growth pipeline, obviously very robust. How much of that growth is being driven by LIHTC versus the traditional community banking?
Todd Gipple: Sure, Damon. Right now that mix is around 70/30, 70% LIHTC, 30% traditional. I will tell you that we have had the most robust loan growth in the traditional bank space the last two quarters consecutively.
Todd Gipple: We are really pleased that we continue to see great production in the traditional bank space. That helps us achieve that more like a 10% to 15% growth that we have guided to because the traditional banks continue to have a lot of success taking market share and doing more with existing clients.
Damon DelMonte: Great. Okay. I appreciate that. Then, nice to see the reaffirm guide on the capital markets of $60 million to $70 million over the next four quarters. When you take a step back and you look at this business model, where do you think the potential for this to grow over time could go to, just given the strong traction you have in the LIHTC space?
Todd Gipple: Sure. Damon, I am a little reticent to throw specific numbers out at this point. I think you have been on this journey with QCR for a long time and you know our bias to maintaining a strong CET1 ratio. I would just tell you and everyone else, this is where we are going to want to show it and prove it before we talk a lot about it.
Todd Gipple: What I can tell you is that we have spent the last couple of years really working on and investing in the factory so we can go faster. Our expectation is that this business will begin growing. We have got everything in place, we believe to see that happen with now perfecting a better methodology on perm offtake. I think that is going to make us even more nimble in terms of offtake on perm.
Todd Gipple: Solving the construction offtake was huge because it allows us to say yes more often. All signs point to this business growing for us. I am just a little reluctant to say how big and how fast. Apologies on not being more transparent. But as soon as we start seeing that come together, I think we are going to be upgrading our guidance and being a little more articulate about that.
Todd Gipple: I would really expect when we get into either our January call, certainly April, we are going to have more color for all of you on that. I will tell you there is one other reason I am being a little hesitant to move that guidance up more quickly. There is one thing going on in the industry that is a bit of a headwind, and that is that lots of developers and lots of projects and the need for affordable is significant.
Todd Gipple: It is not diminishing, it is growing. The future of this business line is very positive. But right now, equity investment has not caught up. I think some of you might be familiar with what happened in the latest housing bill where the PWI percentage was increased for all the largest banks in the country, and that is where a lot of the equity comes from.
Todd Gipple: I am optimistic, we are optimistic that this shortfall of equity is going to get fixed. Just to be transparent, Damon, when that happens, I think that is when you are going to see this business grow for us. Because right now, developers are struggling to find enough equity to fill all the capital stacks. Fortunately, DC did something positive about that to give the largest banks in the country more powder to do more equity.
Todd Gipple: That just happened this summer, and it is probably a year for that to really take effect. Again, very optimistic about growing this business. How fast and when that starts, we will want to prove it a bit first.
Damon DelMonte: Great. I appreciate that color. Then just maybe one more quick one on kind of the margin and kind of broader speaking. If we do have more Fed increases, just wondering, given the first increase we just saw, kind of how depositor attitudes are today versus the last rate hike cycle.
Damon DelMonte: Are you seeing there more one-on-one discussions for people asking for higher rates? Is it any different than what we saw in 2023? How do you view the beta as we go forward? Thank you.
Nick Anderson: Yeah, Damon. Typically, in rate hiking cycles, we see the greatest near-term benefit early in that cycle because our deposit betas tend to lag. Asset yields reprice more quickly while we can initially hold back on some of the increases on the non-index deposits. Over a full hiking cycle, when we look back eventually deposit pricing does catch up with more of those interest rate sensitive clients getting to us.
Nick Anderson: When we look back at the last hiking cycle, earning asset yields they captured approximately 49% of the Fed funds move compared to our deposits were about 56%. I think when we discuss or look forward a little bit I do not know why we would come off of that expectation at this point. Again, this really, as I have mentioned in my earlier comments, creates some early NIM upside, but it also tends to move us more liability sensitive later in the cycle.
Damon DelMonte: Got it. Okay. That is helpful. That is all that I had. I appreciate you answering my questions. Thank you.
Todd Gipple: Thanks, Damon.
Operator: The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race: Good morning. Thanks for taking the questions. Not to beat a dead horse on the margin, but just curious how you are thinking about just deposits on both, I am sorry, betas on both sides of the balance sheet. If in fact we do get a couple more rate hikes in the next year.
Nathan Race: Is the expectation that with hopefully some funding mix improvement, just given some hopefully deposit growth momentum into Q4 into next year that there is some opportunities to remix some of the funding to maybe mitigate what you have repricing on the deposit side of things immediately?
Nick Anderson: Yeah. Nate, I appreciate the question. When we think about NIM and where we sit from a liability sensitivity position, we have really moved to more of a neutral stance. It is just 4% of earning assets today. So we are liability sensitive by 300 to 400 million, so it is very slight.
Nick Anderson: A lot of our expectations when we look ahead here continues to be more of a stable outcome especially when it comes to betas, kind of more of a balance situation for us. Again, as rate hikes, if they were to continue, as I just mentioned to Damon, we would expect ultimately some of that liability sensitivity to start showing up more.
Todd Gipple: Yeah. Nate, I might tag onto that a little bit, too. You asked about mix. We are laser-focused on non-interest bearing. Our NIB percentage is far too low. It is our number one area of focus in traditional banking. I am pleased to say we are making some very good progress. We have had four consecutive quarters of positive momentum in moving our NIB percentage up.
Todd Gipple: We have a target of getting that up to the peer group in the low 20s, 21% to 23%. That is going to take a long time. Our goal internally is to move that 100 basis points a year, every single year. So far so good. The bankers are doing tremendous work in that regard.
Todd Gipple: If you want to know the detail of how it is happening, basically, we allowed our peg balances in our treasury management area to get to zero or near zero, and we just candidly were not getting enough wallet share free money out of our best clients.
Todd Gipple: We now have a program in place where we do not book a new treasury management client without a significant NIB peg balance, and we are now working on existing client relationships to start moving that up. So that is where the benefit is coming from, but I think, Nate, I loved your question because for us, it is really going to be about that mix change that is going to shelter us from rates up.
Nathan Race: Gotcha. Just thinking about what you are seeing from a competition perspective on new loan production, both on the LIHTC and commercial side of things and footprint. Just any thoughts on where you are seeing new loan production come on the portfolio yield?
Nathan Race: I appreciate your comments, Nick, about some of the repricing that you have on the back book. That can help near term as well in terms of loan yields, but just any thoughts on where you are seeing production come on these days?
Todd Gipple: Sure. Nate, thanks. Nick is going to give you a little bit of data here in a minute, on new loan rates. Again, I had mentioned earlier, traditional banking is doing a fabulous job of doing more transactions and building a deeper relationship with existing clients. But right now, we are taking a lot of market share within our markets.
Todd Gipple: Honestly, part of that is just simply having the best bankers in the market. Part of it is having the size in the market that we do, where we can really be viewed as the preeminent bank in the market, so we get an opportunity to bank most anything that moves in the market.
Todd Gipple: In terms of taking market share, one of the things that really helps us is each of our four charters can punch way above their weight in terms of deal size and complexity, with the backbone of the $10 billion organization. I would just give a little bit of recognition to our folks in Central Iowa, our Community State Bank charter there.
Todd Gipple: They have taken some tremendous clients from some of the bigger banks in that community because we can handle it, and we have better people. In terms of competition in local markets, I feel really good about how we're performing there. On the LIHTC side, typically, when we have a great relationship with a developer, the only time we don't get that perm financing is if that perm financing is tied to the equity provider.
Todd Gipple: What happens in the industry is a lot of times the equity provider will come in. They know that equity is already a little scarce, so they can basically say, "We're going to buy the credits. We're going to give you X cents on the dollar.
Todd Gipple: We're going to provide your equity, but you have to use our perm loan product." That is when we run into some headwinds in that space. We're combating that by partnering with a lot of the equity providers that I would say are perm loan agnostic. Either they don't do any lending, or if they do, they prefer construction and not perm.
Todd Gipple: We are really focused on creating relationships with equity providers, where when a developer has to tell one of our folks, "Hey, we really would love to use you guys on this deal," but the equity is driving that we can come in with alternatives for equity that we are partnered with. That's just some of the competitive environment there.
Todd Gipple: Obviously, we're having pretty good success as we are doing 10%, 12%, 15% gross loan growth, so we're having a lot of success. But those are a couple of the things that we have to be careful about, particularly on the LIHTC side that we need to continue to be partnered with equity providers to make sure that the developers that want us to do their transactions can allow us to do that. Nick, you want to give a little-
Nick Anderson: Yep.
Todd Gipple: ... data?
Nick Anderson: Yep. Nate, so pricing has firmed up. We continue to target spreads kind of in that 225, 250 basis points over comparable FHLB. That would imply some yields in the upper 6% range. Certainly, competition is intense.
Nick Anderson: Actual pricing starts to run a little bit inside of those targets. But spreads certainly have improved from prior quarters. When we look at what's coming on, for fixed loans, we're targeting more in that 6.50%, 6.75% range. Floating is starting to pierce the 7% to 7.25% range is kind of where we're at today.
Nathan Race: That's very helpful. I appreciate all that color. Thanks. Todd, since you mentioned $10 billion in assets, curious what the thinking is in terms of when you may surpass that threshold. I know you're hesitant to talk about additional update transactions, which may unfold next year.
Nathan Race: Within that discussion, curious if you could maybe just update us on your M&A thoughts. It seems that's maybe something you're a little bit more open to these days, and you have been seeing some kind of increased conversation. I apologize for the loaded question, but would love to just hear your thoughts along those lines.
Todd Gipple: Yep. No worries, Nate. I appreciate both ends of that question. First on $10 billion, we've been planning for this since 2023, where we continue to view it as a managed milestone, not a disruptive event. We expect to stay under $10 billion here in Q4, but we fully expect to run past $10 billion sometime in 2027.
Todd Gipple: Honestly, it's likely in the H1 of the year, given our strong loan growth. That allows us to not have the regulatory and Durbin impacts until July of 2028. So again, further delaying those impacts. Nick's talked pretty extensively from an expense standpoint. We do not see a blip coming in 2028 related to $10 billion. Our folks have done a great job layering in the people and the discipline that we need from a regulatory perspective.
Todd Gipple: We do expect revenue impact from Durbin in the middle of 2028. That's around $3 million in annual. We are blessed in that we have two strong and growing sources of other revenue in LIHTC and wealth management to help mute that and fully offset that. We really view $10 billion as something we're going to do well-planned and fairly gracefully in 2027, and then be ready for the impacts in 2028.
Todd Gipple: That does tie into M&A because I think so many peers have felt that they are compelled to do a transaction to deal with expenses and interchange and all of that. That is not our approach, and it's not going to be our approach. But we are a bit more open to M&A than we have been the past few years. We've been really focused on growing EPS and TBV double-digit levels organically.
Todd Gipple: Because our three lines of business are going so well, I would just be very clear, the bar is incredibly high for us to consider an M&A partner because right now, organically, we are driving great results in EPS and TBV growth. So the hurdle rate, the bar is quite high. But we are having more conversations and what's changed in that regard is we're about to wrap up our digital transformation in April.
Todd Gipple: We really wanted to have that done and done incredibly well before we disrupted that with onboarding an acquisition. As a result, we're more open. We're having more dialogue. Again, I would tell you the hurdle rate is very high and we are going to be, what I would say, very picky because it's going to have to further improve ROAA and ROAE and further grow earnings per share.
Todd Gipple: We are very reticent to dilute tangible book value per share. I think part of the reason we have seen the 266% growth in value for our shareholders is we have been very careful to make sure we are growing TBV at a fast pace. Typically, acquisitions come with some dilution to that, so it would have to earn back very quickly, and it would have to be a very impactful transaction for us.
Todd Gipple: You are right, Nate, in your supposition that we are a little more open to it. We are having conversations. I would say there is nothing really, not only on the front burner, nothing really even on the stove yet because that bar is pretty high.
Nathan Race: Okay, great. That is super helpful. Just to confirm, Todd, you said Durbin would be a $3 million an annual hit, or was that just kind of the back half hit for 2028, theoretically?
Todd Gipple: Yeah. $3 million annual. Half that in 2028. $3 million annual.
Nathan Race: Okay, great. Good stuff. I appreciate all the color. Thanks, guys.
Todd Gipple: Thanks for the great questions, Nate.
Operator: The next question comes from Brandon Rud with Stephens Inc. Please go ahead.
Brandon Rud: Morning. Thanks for taking my questions. If I could just start, and correct me if I am wrong here, but my understanding is the new partnerships maybe enter into next year will really accelerate the flywheel on the LIHTC side of things. I guess this is not necessarily speaking about 2027, but longer term, does this allow you to do maybe 4, 5, 6 offtakes a year versus the 1 or 2 previously, or is that too ambitious? Or am I thinking about that right?
Todd Gipple: No, Brandon, I think you are thinking about it just right. The new format and the new process we are going to use with our partners on perm loan offtake will be much more nimble in that regard. The prior plan and the prior execution with Freddie on these larger securitizations, those things were taking 12 to 18 months to get fully baked.
Todd Gipple: It is part of the reason that we had to move away from that. It is just far too long, far too costly, not very efficient. We started going to some of our partners and saying, "Hey, you are buying this asset on the back end of this securitization, and you are not getting the full yield because of all the costs. We are having economics that are not good for us.
Todd Gipple: Why don't we just take that out of the equation, and why don't you look at buying our assets directly? So that's where we're headed. I do anticipate us having proof of concept on that in Q1. To your point, Brandon Rud, I would expect that over time, that might, while not fully turning into a forward flow arrangement, it could be much like that in terms of we build some inventory and we have some offtake, we build some inventory, we have some offtake.
Todd Gipple: That might smooth things a little bit. We know it's a bit disruptive for you and the rest of your peers trying to model our balance sheet and NII dollars and all of that when we have less frequent, bigger swings in assets. So that would be a nice outcome if it was a little more smooth.
Todd Gipple: What I would tell you is having this in place is one of the final steps we needed to be able to go faster in this business, because it will allow us to know that we can say yes more often, that we can do some larger deal sizes knowing that actually that's the appetite our partners have, is for fewer larger deals with the best developers in the country. So, having this proof of concept, I think, is really going to help that flywheel.
Brandon Rud: Got it. Okay. Thank you very much for that. Kind of along a similar vein, so without having to hold that first loss tranche, I guess just hypothetically, if you didn't have that for your previous offtake partnerships, what's the capital benefit versus your 11% CET1 ratio this last quarter? Is it like 25, 50 basis points or is it multiple percentage points improvement?
Todd Gipple: Great. Brandon Rud, I'm glad you asked because I was hoping somebody would. We have a little over $100 million in B pieces right now. We have not felt compelled to sell those. One of the reasons is our CET1 got over 11% organically even holding onto those, so that's part of it. The other part is their tax equivalent yields in the high eights. Allowing those B pieces to season makes them more marketable as well.
Todd Gipple: For all good reasons, we've held onto them. But when we sell those B pieces, that will free up 100 basis points of regulatory capital, CET1 and Total Risk-Based Capital Ratio. So it is a big number.
Todd Gipple: The reason it's a big number is because we have the B piece tranche, we have about $1 billion of assets not on the balance sheet that we're still carrying the risk weighting for. I am glad you asked the question and allowed us to be a little more transparent on order of magnitude, but it is very big. It is 100 basis points.
Brandon Rud: Got it. Okay. Awesome. Thanks Rush for taking my questions.
Todd Gipple: Thanks, Brandon.
Operator: The next question comes from Nicholas Holowko with Raymond James. Please go ahead.
Nicholas Holowko: Good morning. Thanks for taking my questions. Maybe just to follow up on the prior question. Sounds like there will be some pretty significant capital benefits when you get these new structures up and running. I guess when you get to that point, how would that change how you think about the decision between whether it is investing in organic growth or buybacks or, as you alluded to before, potential M&A? How does that impact the sort of decision tree that you face when you are thinking about deploying capital?
Todd Gipple: Sure, Nick. Great question. So here is how we think about it when we look at the four uses of capital. So historically for us, for the vast majority of our 30 years, it has been supporting organic growth. In the last couple of years with offtake, our organic growth net has been muted.
Todd Gipple: We do expect starting in 2027 and 2028, we are going to get back to letting the balance sheet grow a little more significantly as we have in the past. So what I would tell you is supporting organic growth is going to become a bit more of a need starting next year. So in terms of that use of capital, that will be elevated a bit more starting in 2027. Just talked about M&A. We are open to some conversations. I want to be very clear about one thing.
Todd Gipple: Got this question from one of our best shareholders and asked me very directly, "With all this capital growth, are you feeling compelled to or pressured to do an M&A transaction?" And I will just tell everyone on the call that that is certainly not the case. We do not feel any pressure to or any urgency to do M&A. It is still an incredibly high bar.
Todd Gipple: The utilization for M&A will be less about what is going on with our ratios and more about the opportunity that we might find. So that leaves us with the two ways we could spend it, not invest it. And I have just got to tell you, Nick, we are thrilled to have returned about $66 million of capital by buying 770,000 shares. That was a little under 5% of outstanding, but we made a lot of progress, and our weighted average price was $85 per share.
Todd Gipple: We feel really good about that return of capital to our shareholders. At the same time, we did bump our dividend yield a bit. It is still incredibly modest. I would not want anyone to expect that we are going to continue to do that as frequently, and we are not chasing a number there in terms of dividend payout ratio.
Todd Gipple: It was simply we could afford it. We felt it was good to reward our retail shareholders with a dividend increase. So those last two things, dividends and repurchases. The word I would give you is opportunistic. We want to be opportunistic in terms of deploying that capital for share repurchases.
Todd Gipple: One of the benefits we have as we are growing EPS and TBV at such a fast clip, when we look at being opportunistic, I would tell you, I think we can be a little more aggressively opportunistic because when we model those buybacks, we do it with our internal look at forward earnings.
Todd Gipple: If we are trying to hit a five-year earn back on repurchases, we know what we are doing with EPS internally, and we can be a bit more aggressively opportunistic there. I know that is not got a lot of precision, but that is really how we look at those four uses. I think organic growth will go up a bit. M&A, TBV, if we find something that meets that very high bar for us. That leaves us with opportunistic share repurchases is probably our biggest focus right now.
Nicholas Holowko: Awesome. That is very helpful. Thank you. Maybe just one more. It sounds like everything is on track, and it should be an exciting start to next year when we get the first transaction underway.
Nicholas Holowko: I am just wondering, as we think about higher rates that can have implications for activity levels, but does that put any pressure on the ability to get some of these new style transactions or offtakes rather completed? Is the pipeline visibility there to getting those done undeterred by the backdrop at this point? Thank you.
Todd Gipple: Sure. Nick, thanks for that question because that allows us to talk about something that I think a handful of folks probably have forgotten or do not realize, but those assets on our balance sheet are floating rate.
Todd Gipple: The good news is we are not going to have a delta or be upside down on fixed-rate LIHTC loans on our balance sheet and get caught in that conversation with our partners. Those are floating. When rates are going up, they are going up. We do not see any headwinds on that offtake process due to rates up. Appreciate the question.
Nicholas Holowko: Great. Thank you.
Todd Gipple: Thanks, Nick.
Operator: The next question comes from Brian Martin with Brean Capital. Please go ahead. Brian, your line may be muted.
Brian Martin: Yeah. Sorry. Good morning, guys.
Todd Gipple: Good morning.
Brian Martin: Sorry for that. I do not know, maybe for Nick, just in terms of the bigger picture, at least, I appreciate all the guidance and the thoughtfulness you guys have shared this morning. Just on the efficiency as we think about that with the conversions and the $10 billion. The outlook for the operating leverage next year.
Brian Martin: As far as targeting efficiency, are you in the low 50s is how you are thinking about it as you move into 2027 and capture the full benefits and think about this $10 billion level as you move forward from today's mid-50 type of level? Just how should we be thinking about that? Is that right?
Nick Anderson: Yeah, Brian. I think you are onto it. That is how we are viewing where we stand today, in that mid-50s. Then taking into consideration everything we have talked about earlier on the call, where we are starting to see some of that benefit from all of the investments we are making work their way into the financials, while at the same time, we are still making some deep investments here. I think that is a fair assessment and we continue on the revenue side as well, having high expectations. Certainly a component there when you think about efficiency.
Brian Martin: Yeah. Okay. Then Todd, to your point about the potential use of capital. The high bar that you have on M&A. In terms of priorities for what M&A could bring to you. Is it more about size or scale or deposits? Is there any priorities in terms of that M&A that we should at least know about in terms of how you are viewing that?
Todd Gipple: Sure. Thanks, Brian. I would say that it has really got to do with the high hurdle in terms of what it would have to do for us and our shareholders. It also has to fit into what we call our strike zone. I think we have got a page in our investor deck that gives all the attributes related to what we view to be in our strike zone and keeping with the World Series theme. It is a pretty tight strike zone in terms of what we are looking for.
Todd Gipple: Right now, really two categories for us. We would have a very high degree of interest in doing something in Central Iowa as a bolt-on to our very successful bank in that market. CSB in that market is doing an amazing job. Growing very quickly, making great market share, 130-plus basis points ROA in our biggest, most competitive market.
Todd Gipple: Very pleased with that team. Would love to give them a little more scale if we found somebody that made sense in that market. Then it gets to a fifth market with the right characteristics. Those characteristics, again, have to do with a market that is very similar to the four markets we are in today.
Todd Gipple: We do not want to be in markets smaller than where we are at, and there are a ton of those in Iowa and in Missouri. We want to be in a little larger MSA, but not too large. We like the size of the four markets we are in, and that is our sweet spot. So we are looking for a market that has that type of size. Then I will skip all the other 9 or 10 things on that page in terms of strike zone.
Todd Gipple: We would be looking for. I guess the punchline I would tell you is just like we did when we moved into Central Iowa in 2016. What most attracts us to a potential M&A partner is we want to acquire something that we can make better, make it grow faster, make it more profitable. We want it to be the preeminent bank in the market.
Todd Gipple: Maybe the final punchline is, having been around bank M&A for 40-plus years, I really believe the second most important thing you can look for in an M&A transaction is great core deposits. The most important thing you acquire are the people serving those clients and serving that community.
Todd Gipple: A lot of people forget that, so they do the acquisition, and they forget about the people aspect, and they fail to grow organically post M&A. They lose the best people. They lose their best clients. We do not do that. So we are looking for the opposite of that. We are looking for a great franchise that we can help grow.
Brian Martin: Got you. That is super helpful, Todd. Maybe just last one for me, just one housekeeping for Nick and just, I do not know, big picture on credit. Just housekeeping, kind of the full-year tax rate, we think about 27%. Any big change from this year, Nick? Then, I do not know, if either one of you just on.
Brian Martin: Credit quality is so good. Loan growth is still really excellent as well. Just how to think about reserves or provisions going forward. Any big change to kind of run rates we have been at? Or just how to think about that as we look forward. Thanks for taking the questions.
Nick Anderson: Yeah, Brian, I will start on the tax question. Pleased that you pointed out our tax position, and we are very active in managing to a very low effective tax rate. That comes through both our LIHTC and our municipal bond businesses. It also includes us being active in tax credit investments. Certainly, as we look to Q4, we have given that guidance in the 8% to 10% range. That is kind of where we have been historically for quite some time.
Nick Anderson: The one major needle mover that can change that dramatically is a significant increase quarter over quarter in our capital markets revenues, obviously being taxable to the bottom line. So that is how we are thinking about it right now. We have had the 8% to 10% range for quite some time, and it looks to be similar for us in the future.
Todd Gipple: Brian, you asked about asset quality, and just to be transparent with everyone, I am almost hesitant to say it out loud on an earnings call. But we are very pleased with our portfolio. Very pleased to have moved NPAs down under 40 basis points. Really thrilled with criticized loans dropping the way they have. I will tell you that both special mention and substandard fell $10 million and $4 million respectively the right way.
Todd Gipple: We had three large upgrades and one large payoff in special mention. We had two large payoffs in substandard. So asset quality improved the right way. We were able to work out of those deals and not charging them off. We will continue to maintain fairly robust reserves. Even though we have exceptional asset quality, we like operating in this 123, 124 basis points of CECL.
Todd Gipple: Maybe the punchline here on asset quality is we expect it to be very good, and yet we will probably continue to keep pace at 123, 124 basis points on CECL, and really just provide for growth.
Brian Martin: Perfect. All right. Thanks for everything, and thanks for the thoughtful comments today. It is always appreciated.
Todd Gipple: Thanks, Brian.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Todd Gipple for any closing remarks.
Todd Gipple: Thanks, Chloe. Thank you all for joining our call today. We really appreciate your interest in our company. Hope you have a great day, and we look forward to connecting with you sometime soon. Thanks.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
