QCR Holdings, Inc. Q2 FY2026 earnings call

• Overall Financial Performance

  • Q1 2026 delivered the most profitable first quarter in company history, with net income of $33 million ($1.99 diluted earnings per share), 31% year-over-year EPS growth, and a return on average assets of 1.40%.
  • Five-year EPS compound annual growth rate (CAGR) is 14%, and five-year tangible book value per share CAGR is 12.5%, with tangible book value per share rising 9% annualized to over $59 this quarter.
  • The company returned ~$25 million to shareholders via opportunistic share repurchases between the start of Q1 and April 20, 2026, totaling $46 million in repurchases since August 2025.

• Operational Milestones

  • The company completed the second of four planned core banking system conversions for its digital transformation in early April 2026, with full conversion expected by April 2027. The modernized technology stack is expected to expand service capabilities, improve client experience, and drive operating leverage.
  • The company has begun partnering with private investors for LIHTC construction loan sale transactions, complementing its permanent LIHTC loan securitization program launched in 2023. This strategy creates balance sheet capacity for new originations, manages concentration risk and capital levels, and drives growing capital markets revenue.
  • The company is strategically managing total assets to stay below the $10 billion asset threshold in 2026, with growth past $10 billion expected in 2027 and full preparation for associated changes by mid-2028.

• Capital and Balance Sheet

  • The balance sheet remains liability-sensitive, with $900 million more rate-sensitive liabilities than rate-sensitive assets, positioning the company to benefit from future Federal Reserve rate cuts.
  • Non-interest expense totaled $52 million, an $11 million decrease linked quarter, driven largely by lower variable compensation and timing of digital transformation costs. The adjusted core efficiency ratio was 57.7% for the quarter.
  • Capital ratios remain solid: common equity tier 1 ratio is 10.54%, tangible common equity to tangible assets is 10.31%, and total risk-based capital is 14%. The effective tax rate for Q1 was 7%, supported by large tax-except loan and bond portfolios.

1. Traditional Banking: Generated net interest income of $67 million, with a 1 basis point increase in net interest margin on a tax equivalent yield (NIM-TEY) linked quarter. Excluding runoff of the M2 equipment finance portfolio, total loans grew $145 million (8% annualized) during the quarter. Core deposits grew $409 million (23% annualized), with an improved mix of higher non-interest bearing balances and reduced higher-cost deposits. Asset quality remained strong, with non-performing assets totaling $43 million (0.45% of total assets), and the criticized loans ratio holding near a five-year low at 2.01%. This segment contributed 74.4% of total Q1 revenue.
2. Capital Markets: Generated $11 million in non-interest income, equal to the company's five-year Q1 average. This accounted for 12.2% of total Q1 revenue, with seasonally lower results as expected. A total of $523 million in low-income housing tax credit (LIHTC) loans are scheduled for securitization and sale in Q2 2026, which will support future capital markets revenue growth.
3. Wealth Management: Generated $5 million in non-interest income, with 3% revenue growth linked quarter and 14% annualized revenue growth year-over-year. This segment contributed 5.6% of total Q1 revenue. It added 80 new client relationships and $177 million in new assets under management (AUM) during the quarter, with new client growth offsetting AUM pressure from market volatility.
4. LIHTC Lending: The business saw robust demand driven by nationwide affordable housing supply shortages. The LIHTC lending team closed 13 projects in Q1 2026, 3 of which were with new developers to expand the platform. There are currently $523 million in LIHTC loans (a $207 million construction loan pool and a $316 million permanent loan pool) marked for sale/securitization closing in Q2 2026.

• Gross annualized loan growth for the final three quarters of 2026 is reaffirmed at a target range of 10% to 15%.
• Capital markets revenue guidance for the next four quarters is revised upward: the lower bound is increased by $5 million, for a new target range of $60 million to $70 million.
• Q2 2026 NIM-TEY is guided to a range of flat to a 3 basis point increase, assuming no further changes to the Federal funds rate.
• Q2 2026 non-interest expense is guided to a range of $55 million to $58 million, consistent with the company's long-term target of annual non-interest expense growth below 5%.
• The Q2 2026 effective tax rate is projected to be in the range of 8% to 10%.
• The loan-to-deposit ratio is expected to settle in a 90% to 95% range in Q2, with a longer-term target around 92.5%.

• Actual future results may differ materially from management's forward-looking projections, due to unforeseen market and macroeconomic factors, as disclosed in the company's SEC filings.
• As the Fed rate-cutting cycle matures, the opportunity to benefit from lower cost of funds relative to earning asset yields is naturally moderating.
• Future LIHTC loan sales/securitizations may result in minor margin dilution in some quarters, depending on transaction mix and origination pricing of sold assets.
• Crossing the $10 billion asset threshold in 2027 will require organizational changes that the company is still preparing for through 2028.

Q: How much regulatory capital will Q2's LIHTC securitizations/sales free up, and will the company use this capital for continued opportunistic share repurchases at the current CET1 ratio of ~10.5%? / A: The permanent loan securitization does not free up meaningful regulatory capital, as the company retains the B-piece. The construction loan sale will free up 25 basis points of regulatory capital. Capital ratios are currently above long-term targets, M&A is not a near-term priority, and management believes share repurchases at current valuations are the best use of excess capital, so repurchase activity will continue opportunistically.

Q: Are there any artificial intelligence plans tied to the ongoing digital transformation, and can AI or other new technologies improve the LIHTC business or wealth management? / A: The company partnered with Jack Henry for its new core banking system because Jack Henry is furthest along in integrating AI capabilities for banks, which will primarily benefit retail and commercial banking. There will also be AI benefits for wealth management, while LIHTC operations are more likely to see efficiency gains from blockchain for asset tracking, rather than AI. The core conversion project is halfway complete, with full conversion expected by April 2027.

Q: Is the longer-term bias for net interest margin flat to up, and how will earning assets trend over the next two quarters after the Q2 offtake? / A: Management expects the core margin to grind slowly higher over time, driven by ongoing loan and deposit repricing. Average earning assets are projected to fall ~$200 million in Q2 due to mid-quarter loan offtake, but will stabilize and return to growth after Q2. The Q2 loan offtake is only modestly NIM accretive (~1 basis point), and future transactions are expected to have minimal, near-neutral impact on margin.

Q: What is the outlook for M&A after the digital transformation is complete and the company crosses $10 billion in assets? / A: M&A conversations are increasing, but the company's strike zone for acquisitions remains very small. Organic growth is already delivering strong double-digit CAGR for tangible book value and EPS, so any acquisition would need to be a strong strategic and financial fit that does not dilute long-term value creation. Management remains open to the right opportunity, but there is nothing near-term.