QCR Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Second Quarter of 2021. Yesterday, after market close, the company distributed its second quarter earnings press release. If there is anyone on the call who has not received a copy, you may access it on the company's website www.qcrh.com. With us today from management are Larry Helling, CEO; and Todd Gipple, President, COO and CFO. Management will provide a brief 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.

[Larry Helling:]

Thank you, operator. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. I will start with a brief discussion of our second quarter performance. Todd will follow with additional details on our financial results for the quarter. We delivered a record quarter of net income driven by continued robust loan growth and expanded net interest margin, improved asset quality and carefully managed expenses. Despite the competitive lending environment, we grew core loans and leases by 15% on an annualized basis, while maintaining disciplined underwriting and excellent credit quality. We continue to attract new clients and deepen ties with existing clients, which speaks to the success of our relationship-based community banking model. Second quarter adjusted net income was $22.5 million, and diluted adjusted earnings per share was $1.40. Both measures are company records and each up 21% from the first quarter. On a year-over-year basis, our adjusted earnings for the quarter were up 60%. Our double-digit core loan and lease growth in the second quarter was driven by strong production in our Specialty Finance Group and in our core commercial lending and leasing business. Within SFG, we continue to see strong client demand for our niche lending products, particularly in the area of municipal and tax credit financed. Given our robust first half production, and combined with our current pipeline, we are now targeting organic loan growth for the full year of 2021 of between 10% and 12%, which is higher than our long-term goal of 9%. We funded our loan growth in the quarter with excess liquidity, which was generated by continued growth in our core deposits, which grew by $57 million or approximately 5% on an annualized basis. We continue to reduce higher cost noncore funds, reprice deposits lower and increase our interest-bearing demand deposits. This helped lower our overall funding cost during the quarter, and drive growth in our net interest margin. Todd will provide more detail on NIM in his remarks.

[Todd Gipple:]

Thank you, Larry. As I review our second quarter financial results, I will focus on those items where some additional discussion is warranted. I'll start with net interest income. Our adjusted net interest income for the quarter was $45.7 million, up $1.9 million from the first quarter. This strong performance was due to an increase in our adjusted net interest margin, combined with the strong loan and lease growth that Larry discussed. With respect to PPP loans, we currently hold $148 million in balances as over 90% of the first round loans have been forgiven to date. We expect forgiveness on the second round of PPP loans to ramp up during the second half of the year. Remaining net PPP origination fees to be recognized are approximately $3.5 million. During the quarter, we were able to grow our adjusted tax equivalent net interest margin by 4 basis points, significantly exceeding the guidance we provided on our last call. Our average earning assets grew by 2%, and the yield on those assets increased 1 basis point. While loan yields declined 6 basis points during the quarter in this very competitive rate environment, this was more than offset by higher yields on our investment portfolio. In addition, we continue to drive our funding costs lower by 3 basis points. As we look forward, we anticipate a relatively stable NIM in the third quarter, even with the headwinds of the ongoing low rate environment. As always, we will work hard to continue to protect loan yields, drive down cost of funds and proactively manage excess liquidity in an attempt to outperform that guidance.

[Operator:]

And today's first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

[Jeff Rulis:]

First is a balance sheet question. Would you anticipate still growing earning asset balances in the third quarter despite PPP runoff, I guess, similar to what you saw in the second quarter?

[Todd Gipple:]

Yes. Yes. We would expect net growth.

[Jeff Rulis:]

Got you. And I guess, given the guide through the full year, that would, in the fourth quarter, also kind of, at this point, seeing continued earning asset kind of growth?

[Todd Gipple:]

Yes. Yes.

[Jeff Rulis:]

Okay. Got you. Todd, on the expenses, given that guide, I imagine we would see an increase in the comp side with swaps sort of bouncing back. Is there any other -- I was just talking big picture and maybe beyond third quarter. Is there other spend that we should be aware of beyond maybe just general growth of reopening economy? It sounds like some of the data processing and professional fees kind of coming back to normal. But is there anything underway? I just wanted to check back in -- with you guys on how you're feeling about expenses? Do you feel like you've underspent or -- and/or is it launching any kind of initiatives to tighten up efficiency? Just wanted to kind of check in on the expenses, generally speaking.

[Todd Gipple:]

Yes. Great question, Jeff. I think more of the latter. We're really working hard to look at processes and spend, and we expect to continue to gain some efficiencies through our best-in-class program where we're looking at processing and approach across the entire company. We don't really have any spend that we've deferred during the pandemic necessarily. So I wouldn't be looking for any big jump in any areas. We've spent a fair amount on talent, but that's, for the most part, baked in already in terms of IT spend, and it's saving us in terms of some of the software spend. So no real expectations for jump there. The increase would be more in the line of incentives and commissions related to swaps.

[Jeff Rulis:]

Right. And then last one, I guess if loan growth kind of hits your target in the credit quality in-house and maybe the macro picture is stable to better, would you anticipate a provision -- meeting to post a provision in the third and fourth quarters based on kind of what you know today?

[Larry Helling:]

Yes. Given what we're seeing right now, certainly, there's no degradation either from a macro standpoint or in our portfolio. So I think probably a replay of the second quarter would be maybe the most likely at this point, given what we can see today. But if we have continued loan growth, we're not anxious probably to release reserves quickly either.

[Operator:]

And our next question today comes from Nathan Race at Piper Sandler. Please go ahead.

[Nathan Race:]

Just hoping to maybe just start on the loan growth trends in the quarter. Obviously, you're really impressed with the growth overall, PPP. It looks like a lot of the growth was in commercial real estate. So I was wondering if you guys could just kind of parse out where that growth is some coming from between tax credit finance, municipal finance and also more footprint commercial basis as well and kind of how the pipeline looks by segment into the back half of the year?

[Larry Helling:]

So I'll start with pipeline in reverse order kind of here. The pipeline still looks very solid and has grown in the last quarter. So activity appears to be continuing. Our core commercial lending growth, I'll start with line of credit usage, really hasn't changed a lot. Our clients are still sitting on a lot of liquidity. We haven't seen a lot of growth in line usage. But at some point, when those clients burn through that excess liquidity caused by PPP, would expect some usage to start increasing in the next few quarters. So in our core business, the growth has really come in term loan funding, on equipment finance, buildings, facilities. And as you all know, shortage of labor is an issue and everybody's market these days. And so for our clients that are in the manufacturing and distribution space, that probably means investments in plant and equipment to try and get more production with the same numbers of people. The municipal finance continues to grow at a steady pace. And then on the tax credit space, the historic tax planning has been steady. But there's -- those are shorter-lived assets. So it takes a fair volume of activity just to replace those. That's been fairly steady. Our real growth and the biggest outlier would have been in the light tech space, which grew close to $100 million in the last quarter.

[Nathan Race:]

Okay, great. And along those lines, in terms of the light tech growth, any updated thoughts from a concentration perspective? You guys are considering a securitization or something along those lines just to manage overall concentration levels on balance sheet within that portfolio?

[Larry Helling:]

Yes. We continue to feel good about the levels we're at today. Longer term, as you've alluded to, we will maybe want to move some of this off-balance sheet long term. But at this point, we feel comfortable with our whole levels and the light tech portfolio is performing spectacularly right now. So we really like the asset class. And its performance in this sector, it's been consistent for 30 years. And so we really like the quality of the assets and feel comfortable where we're at.

[Nathan Race:]

Okay. Great. And if I could just ask one housekeeping question. And Todd, I apologize if it came up, but I appreciate the guidance on the remaining of PPP fees. But do you have the amount of PPP fees -- excuse me, that were realized in the second quarter.

[Todd Gipple:]

Yes, sure do. And no worries on the housekeeping. So in Q2, we had about 1.1 recognized. We've got 3 5 left and I would expect that to really,

[Operator:]

And our next question today comes from Damon DelMonte with KBW. Please go ahead.

[Unidentified Analyst:]

for Damon. Just was hoping to get your thoughts on M&A. Any thoughts on location and size?

[Larry Helling:]

Yes. As we've said historically, we have positioned ourselves to be an acquirer at the right time. We continue to be focused on the markets we're in because we think the execution risk is less. And so we continue to be having ongoing discussions. Certainly, size-wise, we'd probably like it to be $250 million in size bank or larger, up to $1.5 billion or so because of -- that would be a natural fit for us, size-wise. So that's our continued focus, and we continue to have ongoing dialogue.

[Operator:]

And our next question comes from Evan Lisle with Janney Montgomery Scott. Please go ahead.

[Evan Lisle:]

I'm on for Brian Martin. Yes. So a lot of my questions have been asked, but just thought I'd start on the margin. I know you guys obviously gave some color about 3Q. I was just wondering, looking forward the next 3 or 4 quarters, I was just wondering if you have any color on that, just what are the puts and takes to the margin looking forward for the next couple of quarters? That would be helpful.

[Todd Gipple:]

Sure. Yes. Thanks, Evan. Well, certainly, the headwind would be continued pressure on loan yields. We've been very successful holding that off for the most part. I know Larry and I would like to complement our bankers all the way around the company for doing such a fabulous job with client service and pricing, but we're holding that off best we can. But certainly, that would be a headwind. Liquidity continues to be a bit of a challenge. One of the reasons we've held on to margin and actually expanded margin is we've been very successful about putting it to work, and that goes hand-in-hand with a strong loan growth, of course. So tailwinds would be continuing that strong loan growth and putting that liquidity to work. And as we guided, we expect to continue to have double-digit loan growth. So that's helping quite a bit. And then maybe another tailwind would be some continued ability to reduce cost of funds. We're getting close to some floors in some areas. But again, testament to our talented bankers all the way around the company, our correspondent bank team has done a fabulous job managing cost of funds in that area. So we're pretty optimistic about a static margin here in Q3, and that was our guidance. I don't want to get too far over our skis core into next year. But I think the expectation certainly for the rest of this year would be close to static, and we're comfortable with that.

[Evan Lisle:]

Okay. Awesome. That's very helpful. And then I think just touching, obviously, there's just a question on M&A, but you guys resume share repurchase this quarter. Are you guys -- I'm just curious on how you see that moving forward? Or how you're thinking about capital deployment as we move through the year?

[Larry Helling:]

Yes. Certainly, as we've done our modeling, our goal on the buyback side is to be consistent in that space at these relative price levels. And that gives us the capacity to also do a meaningful M&A transaction. And so we've been thoughtful about trying to strike the right balance between those 2.

[Operator:]

Our next question is a follow-up from Nathan Race from Piper Sandler. Please go ahead.

[Nathan Race:]

Just a question on credit. Charge-offs were a little higher than what we've seen from you guys over the last several quarters. So I was just hoping to get maybe a little bit of color there on kind of how you see charge-offs trending in the back half of this year. And I know it's difficult to kind of think about getting back to a pre-pandemic reserve level just given that it's not apples-to-apples with you guys implementing CECL fairly recently. So just any thoughts on kind of the outlook for additional reserve releases here and kind of where you see the reserve trending to as a percentage of loans over the next several quarters.

[Larry Helling:]

So yes, we had one larger deal that we had well reserved that we kind of just cleaned up during the quarter. So nothing from a trend standpoint. We're certainly striving in this extraordinarily good credit environment to get ourselves really clean for the day when the world goes back to normal, which we don't have the answer to when that's going to be. But certainly, we think, like in the next year, things may make closer to normal about credit costs and those kinds of things. Long term, our average reserve over our 25 years existence, I think, has been 145 basis points, 145 to 150 is probably where we think it needs to be long-term still, even with the new methodology. And so that's probably where we would migrate to over a longer period of time.

[Nathan Race:]

Okay. Very helpful. And then just on the appetite for additional share repurchases going forward. It's nice to see you guys get back in the market during the second quarter. Just any updated thoughts on continuing with buybacks or stepping up the pace, particularly just given the down growth in the sector-wide valuations recently?

[Larry Helling:]

Yes. I mean, we -- our focus is to be consistent. And if we stay at these relative price levels, we'll probably keep our activity consistent and depending on which direction the price goes, that would certainly change our attitude on one direction or the other.

[Operator:]

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Larry Helling:]

Okay. Thanks to everyone for joining our call today. Have a great day. We look forward to speaking to you all again soon.

[Operator:]

And ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.