QCR Holdings, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Overall Performance: Delivered record quarterly net income and 26% EPS growth QoQ. Exceeded upper end of guidance range for loan growth, NIM expansion, and capital markets revenue.
• Loan Growth: Loan growth accelerated significantly, increasing by $286 million or 17% annualized, net of M2 equipment finance runoff. Guiding to 10%-15% gross annualized loan growth for Q4.
• Digital Transformation: On track with key milestones, including core operating system conversion for one charter. Expect to unlock operating leverage, improving productivity, service delivery, and cost structure.
• LIHTC Strategies: Utilizing LIHTC permanent loan securitizations and construction loan sale transactions to expand capacity, manage concentration risk, and generate capital markets revenue.
• Asset Quality: Improved with net charge-offs declining, total criticized loans decreasing, and provision for credit losses slightly higher due to loan growth but offset by improved credit quality.

Segment Performance

• Traditional Banking: Delivered robust organic growth and improved profitability. Had strong traditional loan growth, core deposits grew at an annual rate of 6% for the quarter, with $410 million or 8% annualized year-to-date. Digital transformation on track with key milestones achieved, including core operating system conversion for one charter.
• Wealth Management: Year-to-date, added 384 new client relationships and $738 million in new AUM. In Q3, AUM grew by $316 million or 5%, revenue surpassed $5 million (8% QoQ increase). Wealth Management revenue year-over-year is up $1.5 million or 15% annualized.
• LIHTC Lending: Delivered exceptional performance in Q3 with activity rebounding. Capital markets revenue increased by $14 million, exceeding the top end of guidance. Guidance for capital markets revenue over the next 4 quarters revised to $55 million to $65 million.

Guidance

• Loan Growth: Guiding to gross annualized loan growth of 10%-15% for Q4.
• NIM: Anticipating 3-7 basis points of NIM TEY expansion in Q4, including benefit from September Fed rate cut, fixed rate loan repricing, and CD repricing.
• Capital Markets Revenue: Revising guidance for capital markets revenue over next 4 quarters to $55 million to $65 million.
• Share Repurchase: Board authorized repurchase of up to 1.7 million shares, with intention to be opportunistic in share repurchases.

Risks

• No specific detailed risks discussed, but mentions of forward-looking statements as defined by SEC, where actual results could differ materially from projected.

Question and Answer

• Q: Congrats on a really nice quarter. I just wanted to start with the margin in the guidance. I think you're calling for 3 to 7 basis points of expansion. That does not include any rate cuts. Is that correct? A: Yes, that's right, Damon. When we set that guidance range for Q4, 3 to 7, 2 to 3 basis points of that is coming from a full quarter's worth of the September Fed rate cut. We've got a fair amount of fixed rate loan repricing and CD repricing in the fourth quarter in addition to some additional municipal bond purchases that we have in our pipeline.
• Q: And you had said for each 25 basis points, you could see another 2 to 3 basis point increase on the margin? A: Yes. So when we set that guidance range for Q4, 3 to 7, 2 to 3 basis points of that is coming from a full quarter's worth of the September Fed rate cut. We've got a fair amount of fixed rate loan repricing and CD repricing in the fourth quarter in addition to some additional municipal bond purchases that we have in our pipeline.
• Q: Just given the growing capital levels and given the activity in the third quarter, is it fair to assume that you guys will remain active in that regard? A: Yes. Regarding future buybacks, we're very profitable with higher earnings per share, less expected net organic growth as we start using other partners' balance sheets and capital rather than ours to drive higher earnings. So that's going to reduce our need to retain more capital for organic growth. While we're open to M&A and we continue to look for partners, it's really not a priority for us right now as we have the ability to grow TBV and EPS at a faster clip than our peers. So this really reduces our need to retain capital for M&A.