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. 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 is being recorded and will be available for replay through August 10, 2021, starting this afternoon, approximately 1 hour after the completion of the call. It will also be accessible on the company's website. At this time, I would like to turn the call over to Mr. Larry Helling at QCR Holdings. Please go ahead.

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 financing. 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. Our asset quality remains very strong as nonperforming assets improved 28% for the quarter and now represent only 17 basis points of total assets. Our net charge-offs continue to be negligible and we feel very good about our current reserve level, which when excluding PPP loans, is 1.85%. Our banks continue to be well capitalized and we are able to improve several of our capital ratios during the quarter, while at the same time, repurchasing 100,000 shares of our stock. As previously announced on May 24, we resumed our share repurchase program as part of our long-term capital allocation plan to further build shareholder value. As always, I want to thank our employees for their efforts in delivering these record financial results. Their hard work and dedication to building relationships with our clients remains key to our ongoing success. In summary, we are optimistic about the second half of the year and have a favorable outlook for our local markets and their respective economies. We are well positioned to continue pursuing our long-term goal of profitable growth and value creation, both organically and through strategic acquisitions. And now I'll turn it over to Todd for further details.

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. Now turning to our noninterest income. Noninterest income was $19.3 million in the second quarter, including $9.6 million in capital markets revenue from swap fee income, which was lower than our guidance. This compares to noninterest income of $23.5 million in the first quarter, which included swap fee income of $13.6 million. Several of our swap loans that were scheduled to close in the second quarter were temporarily delayed. Most of those loans have subsequently closed here in July. We have now experienced very strong activity to start the third quarter, and as of July 23, we have already generated $10 million in swap fees for the month. Our pipeline for swap loans continues to be healthy, and we fully expect this source of capital market revenue to be sustainable for the long-term as it is an essential part of our tax credit lending. As a result, our current expectation is that third quarter swap fee income will be at the upper end of our guidance range of $14 million to $18 million. We once again generated solid growth in wealth management income during the second quarter as it was up 4% on a linked-quarter basis. Our performance was driven by a $730 million increase in assets under management year-to-date, bringing total AUM to $5.1 billion. New client generation continues to be strong in addition to sizable increases in our existing client portfolios. Now turning to our expenses. Noninterest expense for the second quarter totaled $35.7 million, down from $37.2 million for the first quarter and less than our guidance. The linked quarter decline was primarily due to lower salary and benefits expense of $1.8 million, driven by reduced incentive compensation and commission expense. Partially offsetting this decrease were modestly higher professional and data processing fees and advertising and marketing expense, both returning to more normalized levels from their lower levels in the prior quarter. We were pleased to outperform our guidance on noninterest expense in the second quarter, and we are reconfirming our guidance for the third quarter in the range of $38 million to $40 million. Our overall asset quality continues to be very strong. As Larry mentioned, both our nonperforming assets and the ratio of NPAs to total assets improved from the prior quarter and our net charge-offs were once again minimal. We did not record a provision for credit losses during the quarter, primarily due to continued strong asset quality and a reduction in nonperforming loans. We also did not release any reserves during the quarter due to continued strong loan growth. With respect to capital, we continue to build capital through strong earnings and maintain robust capital levels. As Larry mentioned, between May 24 and the end of the quarter, we repurchased 100,000 shares of our stock during the quarter at an average cost of $48 per share and have approximately 600,000 shares remaining available to repurchase under the current program. Our effective tax rate for the quarter was 17.6% and we expect the tax rate to remain in the range of 17% to 18%. With that added context on our second quarter financial results, let's open the call for your questions. Operator, we are ready for our first question.

Operator provides instructions to participants on how to ask a question. And today's first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

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

Yes. We would expect net growth.

And given the guidance through the full year, that would, in the fourth quarter, also reflect continued earning asset growth?

Yes.

Okay. Got you. Todd, on the expenses, given that guide, I imagine we would see an increase in the compensation side with swaps sort of bouncing back. Is there anything else we should be aware of beyond general reopening-related spend? It sounds like some of the data processing and professional fees are coming back to normal. Is there anything underway? I wanted to check how you're feeling about expenses — do you feel like you've underspent or are you launching initiatives to tighten up efficiency? Just wanted to check in on expenses generally speaking.

Great question, Jeff. I think more of the latter. We're 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 a jump there. The increase would be more in the line of incentives and commissions related to swaps.

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

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 the most likely at this point, given what we can see today. But if we have continued loan growth, we're not anxious to release reserves quickly either.

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

Just hoping to start on the loan growth trends in the quarter. Obviously, you're really impressive with the growth overall. It looks like a lot of the growth was in commercial real estate. Could you parse out where that growth is coming from between tax credit finance, municipal finance and also more footprint commercial business, and how the pipeline looks by segment into the back half of the year?

So I'll start with the pipeline in reverse order. The pipeline still looks very solid and has grown in the last quarter. 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, we'd 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. As you all know, shortage of labor is an issue in every market these days. For our clients in the manufacturing and distribution space, that probably means investments in plant and equipment to try and get more production with the same number of people. Municipal finance continues to grow at a steady pace. And in the tax credit space, historic tax planning has been steady, but 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 was in the light tech space, which grew close to $100 million in the last quarter.

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

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

Okay. Great. And a housekeeping question: Todd, I apologize if it came up, but I appreciate the guidance on the remaining PPP fees. Do you have the amount of PPP fees that were realized in the second quarter?

Yes, sure. No worries on the housekeeping. In Q2, we had about $1.1 million recognized. We've got $3.5 million left and I would expect that to really ramp up during the second half of the year.

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

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

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. We continue to have ongoing discussions. Size-wise, we'd probably like it to be a $250 million bank or larger, up to $1.5 billion or so because that would be a natural fit for us, size-wise. So that's our continued focus, and we continue to have ongoing dialogue.

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

I'm on for Brian Martin. A lot of my questions have been asked, but I thought I'd start on the margin. You gave some color about Q3. Looking forward the next three to four quarters, any color on the puts and takes to the margin that would be helpful?

Sure. Certainly, the headwind would be continued pressure on loan yields. We've been very successful holding that off for the most part. Larry and I would like to compliment our bankers across the company for doing a fabulous job with client service and pricing, but it's 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 liquidity to work, which goes hand-in-hand with strong loan growth. As we guided, we expect to continue to have double-digit loan growth, which is helping quite a bit. Another tailwind would be some continued ability to reduce cost of funds. We're getting close to some floors in some areas, but our correspondent bank team has done a fabulous job managing cost of funds. We're pretty optimistic about a static margin in Q3, and that was our guidance. I don't want to get too far over our skis into next year, but the expectation for the rest of this year would be close to static, and we're comfortable with that.

Okay. That's very helpful. And on M&A and share repurchases: you resumed share repurchases this quarter. How do you see that moving forward? How are you thinking about capital deployment as we move through the year?

As we've done our modeling, our goal on the buyback side is to be consistent at these relative price levels. That gives us the capacity to also do a meaningful M&A transaction. We've been thoughtful about striking the right balance between those two.

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

Charge-offs were a little higher than we've seen from you over the last several quarters. Could you provide color on how you see charge-offs trending in the back half of this year? I know it's difficult to compare apples-to-apples with CECL implementation, but any thoughts on the outlook for additional reserve releases and where you see the reserve trending as a percentage of loans over the next several quarters would be helpful.

We had one larger deal that we had well reserved that we cleaned up during the quarter, so nothing from a trend standpoint. We're striving in this extraordinarily good credit environment to get ourselves really clean for the day when things normalize. We don't have an exact timeline for that. Over the longer term, our average reserve over our 25-year existence has been around 145 basis points. We think 145 to 150 basis points is probably where it needs to be long term, even with the new methodology, and that's probably where we would migrate to over a longer period of time.

Very helpful. On the appetite for additional share repurchases going forward: it's nice to see you get back in the market. Any updated thoughts on continuing buybacks or stepping up the pace, particularly given the downtrend in sector-wide valuations recently?

Our focus is to be consistent. If we stay at these relative price levels, we'll probably keep our activity consistent. Depending on which direction the price goes, that could change our approach in one direction or the other.

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.

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

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.