QCR Holdings, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance Overview: Delivered adjusted net income of $29 million or $1.73 per diluted share. Net interest income increased $2 million driven by net interest margin expansion and strong loan growth. Noninterest expense for Q2 was $49.6 million, below the guidance range. Asset quality remains excellent with net charge-offs tied to previously identified and fully reserved credits.
• Business Segments:
  • Traditional Banking: Utilizes a multi-charter business model, with focus on digital transformation (core conversion of 4 banks to a unified system expected by H1 2027) and growing the core deposit base to enhance profitability.
  • Wealth Management: Strategic expansions in Central Iowa and Southwest Missouri are attracting new client relationships. AUM growth supports revenue and provides a buffer during market volatility.
  • LIHTC Lending: Durable through various challenges, with a strong pipeline. Capital markets revenue is expected to normalize over the next 4 quarters.
• Expense Control: Noninterest expense was well controlled, supporting an adjusted ROAA of 1.29%. Variable compensation is tied to value delivery, enhancing operating leverage.

Segment Performance

• Traditional Banking: Holds #1 market share in Quad Cities and Cedar Rapids, IA; #2 in Southwest Missouri; #6 in Des Moines, IA. Loan growth rebounded to an annualized 8% when excluding the planned runoff of M2 equipment finance loans and leases. Focus on growing the core deposit base.
• Wealth Management: Generated $5 million in revenue in Q2, consistent with Q1; wealth management revenue has grown 8% year-over-year compared to the like period in 2024. AUM growth strengthens the foundation and mitigates revenue pressure during market volatility.
• LIHTC Lending Platform: Capital markets revenue improved 51% quarter-over-quarter, with a strong pipeline. Guided capital markets revenue to be in the range of $50 million to $60 million over the next 4 quarters and $13 million to $16 million for the third quarter.

Guidance

• Loan Growth: Guides gross loan growth in the range of 8% to 10% for the second half of 2025.
• Capital Markets Revenue: Reaffirms capital markets revenue guidance of $50 million to $60 million over the next 4 quarters and $13 million to $16 million for the third quarter.
• Margin: Guides NIM TEY to be static to up 4 basis points in Q3, assuming no further Fed rate cuts. Anticipates potential margin lift with future rate cuts.
• Securitization: Next securitization expected in early 2026, targeting $350 million notional to free up capital.

Risks

• Economic/Political Uncertainty: Impact on LIHTC and traditional banking operations.
• HUD Budget Cuts: Potential delay in LIHTC deal closings, though primarily affecting Section 8 and workforce housing not heavily related to QCR's portfolio.
• Durbin Amendment: Estimated $3 million impact on interchange revenue, mitigated by other noninterest income sources.
• B Piece Sales: Potential modest losses from selling existing B pieces of securitizations, though focus is on future securitizations to address decoupling of capital ratios.

Question and Answer

Q: Congrats on a nice quarter. Just related to the margin and the outlook. I guess the guide was for flat to up 4 basis points here in the third quarter. Can you just talk about some of the dynamics behind that, that give you confidence that, that can continue to kind of grind higher?

A: Damon, thank you for the question. We are guiding static to up 4 basis points, and this assumes no Fed rate cuts. So as you think about Q2 about 50 basis points on that fixed portfolio. The floating portfolio, what is scheduled to mature, we believe we can replace at similar rates. So not a big change there. So when you take into account also on the funding side, pretty -- I think we're going to continue to manage our interest-bearing nonmaturity deposits. The team is doing a great job of fighting for every basis point there. I think the biggest impact we'll see in that space here in Q3 is more related to our CD portfolio that's scheduled to mature. We've got about $350 million of CDs maturing in the third quarter. That's a weighted average rate of about 4.30%, and we think we can shave about 30 basis points off of that. So a similar amount in Q4 scheduled on the CD portfolio to roll off, not quite a 30 basis point delta on those, but closer to 10 basis points. So we think we can continue to move the needle here, especially as we look at Q3.

Q: Curious just on kind of the appetite for buybacks going forward. Obviously, you guys are building capital and have securitization teed up for early next year. So just curious in terms of maybe the appetite to be in the market to buy back the stock and maybe provide some downside support during certain periods of volatility that we've seen year-to-date?

A: Sure. Thanks for the great question, Nate. So TCE is at 9.92%, CET1 at 10.43%. Both of those are up around 40 bps since the end of last year. So we are building capital at a fast clip with solid earnings and our low dividend payout. So we are accumulating capital nicely. Really, the issue for us, while we've been on the sidelines a bit here is TCE and CET1 decoupled a bit as we were securitizing. We weren't selling the B piece on our 4 prior securitizations. So we were getting GAAP capital relief, which is why TCE has grown so significantly, but we weren't getting regulatory capital relief, and that was holding CET1 down. We do expect to sell that B piece in the next securitization. I already mentioned we'd get a pretty big lift in CET1 at that point. So we see a path to where those are getting back more in alignment, the GAAP capital and CET1 reg cap. So we do see some optionality with capital coming back into the picture for us. I don't think that we necessarily have to actually achieve it in the first part of next year, but we can now see it and have a clear path to getting there. So we are going to be evaluating this here in the back half of the year in terms of deployment of capital. We know our TCE is going to creep up over 10%. That's a good thing. We are clearly able to take care of our organic growth. We don't really have M&A on the short-term horizon. So then it comes to dividends and buybacks, and we're going to be evaluating that here back half of the year.