QCR Holdings Inc 2026 Q3 Earnings Call

Good morning, and thank you for joining us today for QCR Holdings, Inc.'s third quarter 2026 earnings conference call. Following the close of the market yesterday, the company issued its earnings press release for the third quarter. If anyone joining us today has not yet received a copy, it is available on the company's website, www.qcrh.com. With us today from management are Todd Gipple, President and 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.

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. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through October 28, 2026, starting this afternoon, approximately one hour after the completion of the call. It will also be accessible on the company's website.

I will now turn the call over to Mr. Todd Gipple at QCR Holdings.

Good morning, everyone. Thank you for joining our call today. I'd like to start with the highlights of our third quarter performance and some thoughts about our business, and then Nick will walk us through the financial results in more detail. We delivered record earnings per share this quarter, supported by margin expansion, robust loan growth, increased capital markets revenue, solid wealth management revenue, and further improvement in asset quality to the strongest level in several years. Return on average assets was 1.52%, reinforcing the earnings power, durability, and scalability of our diversified platform. We also continued to deploy capital with a balanced approach, generating 11% year-over-year growth in tangible book value per share, while at the same time returning capital to shareholders through opportunistic share repurchases and dividend increases. Our consistently strong earnings allow us to sustain healthy levels of capital while maintaining optionality with respect to capital deployment.

Our traditional banking business continues to deliver healthy organic growth with strong production across our traditional lending platform, driving approximately 7% annualized loan growth in each of the second and third quarters. Our multi-charter model is the best of both worlds, combining the autonomy and agility of local decision-making with the scale and resources of 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. Our digital transformation remains a key strategic priority, and the completion of our third core conversion in October was another important milestone in that journey.

This conversion was another great example of the strength of our multi-charter model with teammates who had been through prior conversions, sharing their experience and supporting their colleagues throughout the process. I want to thank everyone involved for their hard work and commitment in making this latest conversion a complete success. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience, and driving further operating leverage. As a reminder, we are managing these investments within the discipline of our 9-6-5 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.

Our wealth management business continued to deliver strong results, with revenue up 12% year-over-year, reflecting sustained new relationship growth and consistent growth in annual revenue. Our success in this business reflects the long-tenured expertise of our team and the power of our local relationship-driven model, which connects high-value clients in each of our communities with our dedicated wealth advisors. As we continue to expand advisory relationships, wealth management provides a growing source of recurring fee income, deepens client engagement, and further diversifies our revenue mix. Our LIHTC lending business continues to perform exceptionally well as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. This business is a key differentiator for our company, delivering highly profitable and annually consistent results across a variety of interest rate environments and market conditions.

Our 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. While our third quarter capital markets production was strong at $16.9 million, we had a number of transactions actually shift to a Q4 closing date. As a result, we are anticipating a very strong fourth quarter of capital markets production and expect Q4 results to be in a range of $18 million-$20 million. This would put total 2026 production within our historical four quarters guidance range. We are also reaffirming our guidance for $60 million-$70 million of capital markets revenue over the next four quarters.

We continue to see positive momentum across both our traditional and LIHTC lending platforms. With solid loan production trends and a strong pipeline heading into year-end, we are reaffirming our gross loan growth guidance of 10%-15% annualized for the fourth quarter of 2026. Over the past 12 months, we have strategically sold and securitized loans to recycle capital, allowing us to support additional LIHTC originations and generate attractive fee income without requiring corresponding balance sheet growth. By recycling this capital into new originations, we generated over $67 million of capital markets revenue while increasing net interest income by $24 million or 10% compared to the preceding 12-month period. 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.

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. 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. These discussions are advancing, and we are confident that we can achieve alignment on a revised structure and complete our first transaction in the first quarter of 2027.

While these LIHTC offtake transactions temper balance sheet growth in the near term, they enhance long-term profitability by creating more capacity. That capacity is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue, creating greater ROAA and ROAE. This is our LIHTC flywheel in action, building an asset light, capital efficient, and revenue-heavy business in affordable housing. Creating this flywheel now allows us to work on further growing the business and increasing our levels of loan production and the related capital markets revenue. These offtake transactions are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year.

We anticipate growing beyond $10 billion sometime in 2027, and we will be fully prepared for the associated organizational impacts that would occur in mid-2028 as we continue to build on the planning efforts we began in 2023. The strength of our company is reflected in our performance across all three of our core lines of business. Over the past five years, we have driven a five-year earnings per share CAGR of 14%, a five-year tangible book value per share CAGR of 12.5%, and a 10-year total shareholder return of 266%, the highest in our peer group. We have a proven high-performance operating model, and we hold ourselves accountable for consistently driving shareholder value. Through continued investments in our people and our technology, combined with disciplined expense management, we are well positioned to sustain our top-tier financial performance.

I want to thank our more than 1,000 teammates for their hard work and their strong commitment to our high-performance culture. They make relationship driven come to life each day as they take exceptional care of our clients, our communities, and each other, and create exceptional results that deliver long-term value for our shareholders. I 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 third quarter results.

Thank you, Todd. Good morning, everyone. I will provide additional details on the key drivers of our third quarter performance and share our outlook for the fourth quarter. We delivered strong third quarter results with adjusted net income of $36 million or $2.21 per diluted share, driving an adjusted return on average assets of 1.52%. Net interest income was $69 million, an increase of $800,000 or 5% annualized from the second quarter. NIM TEY expanded three 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. Average earning assets declined $44 million, reflecting the strategic LIHTC loan offtake transactions completed in the second quarter, with strong third quarter loan and investment growth partially offsetting the reduction. Looking ahead, we continue to benefit from repricing lower yielding loans into higher market rates.