Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Third Quarter of 2021. Yesterday, after market close, the company distributed its third 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, 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 November 11, 2021, starting this afternoon, approximately 1 hour after the completion of this 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.

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 third quarter performance. Todd will follow with additional details on our financial results for the quarter. We delivered another quarter of record net income driven by exceptional loan growth, strong fee income, expanded net interest margin and excellent credit quality. Despite the competitive lending environment, we grew core loans and leases by a very robust 23% on an annualized basis while maintaining excellent credit quality. Year-to-date, our annualized loan growth has been 18%, exceeding our long-term target of 9%. We continue to attract new clients and deepen ties with existing clients, which is an ongoing strategic priority of our relationship-based community banking model. Third quarter net income was $31.6 million and diluted adjusted earnings per share was $1.99. Both measures are company records and each up more than 40% from the second quarter. On a year-over-year basis, our earnings for the quarter were up 82%. The third quarter performance was due to robust loan growth and was bolstered by very strong capital markets revenue, some of which was carried over from the second quarter, as indicated on last quarter's call. We believe this revenue source is sustainable long term, and Todd will provide more detail later in the call. Our exceptional loan and lease growth in the third quarter was driven by strong production in our Specialty Finance Group and continued growth in our traditional commercial lending and leasing business. Within SFG, we continue to experience strong client demand for our niche lending products, particularly in the area of municipal and tax credit finance. Our m2 Equipment Finance Group also had an impressive quarter, building upon the momentum that they have seen all year. Lease balances grew by 7% on an annualized basis during the third quarter and 10% annualized for the first 9 months of the year. Given our strong loan and lease production year-to-date, combined with our current pipeline, we are now targeting organic loan and lease growth for the full year 2021 of between 16% and 18%. We funded our loan growth in the quarter with continued growth in our core deposits, which grew $183 million or approximately 16% on an annualized basis. This growth was driven by strong contributions from our commercial clients. We also continued to reprice deposits lower while growing our noninterest and interest-bearing demand deposits. This helped reduce our overall funding cost during the quarter and drive growth in our net interest income, both in dollars and in margin. Todd will provide more details on NIM in his remarks. Our asset quality remains exceptional as our nonperforming assets improved 32% for the quarter and now represent only 11 basis points of total assets. We had minimal net charge-offs during the quarter, and we feel very good about our current reserve level which, when excluding PPP loans, is now 1.79%. Our banks continue to be well capitalized, and we were able to maintain our capital ratios despite our significant growth in loans while, at the same time, repurchasing 193,000 shares of our stock at an average price of $48.50 per share. Since we announced the resumption of our share repurchase program earlier this year, we have repurchased nearly 300,000 shares, approximately 2% of our outstanding shares, as part of our long-term capital allocation plan to further build shareholder value. I would like to thank the entire QCR Holdings team for their hard work and dedication to excellent client service and for delivering another quarter of record earnings performance. Our employees are the heart of our company, and I am very proud of our entire team for all they've accomplished this year. In summary, we are extremely pleased with this quarter's performance and remain optimistic going into the end of the year. We continue our pursuit of organic growth and disciplined capital deployment within the markets we serve, with the goal of delivering attractive returns and creating increased value for our shareholders. I will now turn it over to Todd for further details.

Thank you, Larry. Welcome, everyone. Thanks for joining us today. As I review our third 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 a record $48.5 million and up $2.8 million or 6.2% from the second quarter. This exceptional performance was due to the outstanding loan and lease growth that Larry discussed combined with an increase in our adjusted net interest margin. During the quarter, we were able to grow our adjusted tax equivalent NIM by 9 basis points. Our average earning assets grew 2.5%, and the yield on those assets increased 9 basis points due primarily to higher loan yields. In addition, we continue to drive our funding costs lower by 2 basis points as higher-cost time deposits are being repriced lower upon renewal or rotating to lower-cost nonmaturity deposits. Our adjusted NIM also benefited from $64 million of PPP loan forgiveness during the quarter and the associated origination fees that were recorded as a result. These fees amounted to $1.9 million and positively impacted our NIM by 7 basis points. Excluding the impact of our PPP fees, our core NIM expanded by 2 basis points, outperforming our Q3 guidance for a static net interest margin. With respect to PPP loans, we currently hold $84 million in remaining balances and expect forgiveness on the bulk of these loans to occur in the fourth quarter. This would result in the recognition of the remaining $2 million of PPP origination fees. As we look forward, we anticipate a slight decline in our core NIM in the fourth quarter given the headwinds of the ongoing highly competitive and low interest rate environment and a limited amount of room for our funding costs to decline further. As always, we will work hard to continue to protect loan yields and proactively manage excess liquidity in an attempt to outperform that guidance. Given our strong loan growth, we do expect another quarter of solid growth in net interest income. Now turning to our noninterest income. Noninterest income was $34.7 million in the third quarter, including $24.9 million in capital markets revenue from swap fee income. This very strong quarter included a number of transactions that were scheduled to close in the second quarter and instead carried over into the third quarter as we indicated on last quarter's call. Capital markets revenue has averaged $16 million per quarter thus far in 2021 and $16.3 million for the last 8 quarters. As a result, we expect this revenue source will continue in the range of $14 million to $18 million per quarter going forward. We believe that our guidance range is sustainable given our strong historical performance and the ongoing and long-term demand for our capital markets products. With respect to our wealth management business, we continue to onboard new client relationships, adding 79 new relationships in the quarter, totaling $128 million in AUM. Year-to-date, we have gathered $319 million in new client assets, representing a 7% increase in assets under management from the beginning of the year. Total AUM at quarter end was $5.1 billion, down slightly from the previous quarter as our new client assets were offset by portfolio market volatility and some specific client disbursements. Now turning to our expenses. Noninterest expense for the third quarter totaled $41.4 million, up from $35.7 million for the second quarter. The linked-quarter increase was primarily due to higher performance-based salary and benefits expense of $5.2 million driven by strong revenue production and earnings performance during the quarter. Additionally, we recorded a $1.5 million charge related to the write-down of certain fixed assets. Partially offsetting these increases was a $1.3 million net gain on the sale of other real estate. Excluding these two one-time items and adjusting for a more normalized capital markets revenue of $16 million, our core noninterest expense would have been $39 million, right at the midpoint of our guidance range of $38 million to $40 million. Looking ahead to the fourth quarter, we continue to expect our noninterest expense to be in this range. Our overall asset quality continues to be excellent. As Larry mentioned, both our nonperforming assets and the ratio of NPAs to total assets improved from the prior quarter, and there were minimal net charge-offs in the quarter. We also successfully sold other real estate property, which led to the $1.3 million net gain that I mentioned earlier. We again did not record a provision for credit losses during the quarter nor did we release any reserves. This was primarily due to the continued strong asset quality, a reduction in nonperforming loans and continued robust loan growth. With respect to capital, we continue to maintain strong capital levels as a result of our solid earnings and excellent credit quality. As Larry mentioned, we repurchased 193,000 shares of our stock during the quarter at an average cost of $48.50 per share and have approximately 400,000 shares remaining available to repurchase under the current program. Our effective tax rate for the quarter was 20%, a bit higher than our expected range of 17% to 18% and was driven by the strong growth in taxable revenue sources, primarily capital markets revenue, which outpaced net growth in our tax-exempt revenue. With that added context on our third quarter financial results, let's open the call for your questions. Operator, we're ready for our first question.

Our first question today comes from Damon DelMonte with KBW.

Hope everybody is doing well today. Congrats on a nice quarter, some really good numbers you guys put up. I guess with regards to the loan growth, how much of this is being generated from the SFG division versus just your normal community commercial bankers throughout the footprint?

I'll tackle that one, Todd. Certainly, we've gotten growth really from all of our sectors. Our core loan growth from our traditional businesses are probably growing in the 2% to 3%, 4% range, depending on which location we're in. So we're starting to see some growth. But there's still a tremendous amount of liquidity in our clients' businesses, and so that's suppressing our historic growth rate there. Our leasing business is active. And our growth there has really been running in the 7% to 10% range as the demand for equipment is high. So that's been a real positive variance. And then the remaining of the growth is really coming in our specialty niches which are well positioned certainly in this environment to continue to do well.

Got it. And does the specialty group, is that just out of like the Cedar Rapids area? Or is that throughout the entire footprint?

It's predominantly originated in the Cedar Rapids area, but we certainly originate business from around our footprint. And so it's a mix of things, tax credit, municipal finance and then a couple of other specialized niches where we think certain expertise is required to effectively do those kinds of transactions.

Got it. Okay. That's good color. And then with respect to credit and the reserve levels, credit is pristine. No real losses and no formation of nonperforming loans. How do we look at the provision level going forward, Todd? Do you feel you're at a point now where you can start to release some of those reserves? I think you ended the quarter at like 1.79% ex PPP, which is extremely healthy. What would your thoughts on that be?

Yes. We certainly did and in really good shape, and it is pristine. We do not believe that we will be releasing reserves, more growing into them the pace of loan growth that we've been putting up. And really, I think, Damon, you know us quite well. Our credit culture, we're very conservative when it comes to reserve levels. And for those reasons, just as we did in Q3, I would say short term at least, our expectation would be to hold on to the reserves we have and not necessarily release.

Our next question comes from Nathan Race with Piper Sandler.

I appreciate the commentary in the release around kind of core loan yields ex PPP, and accretion holding steady. Is that still the outlook at least into the fourth quarter that we can kind of defend loan yields right around 4% even at this point? Or how are you guys kind of seeing the competitive environment evolve, particularly across the various specialties that you guys cater to?

Yes. We certainly expect to be able to hold loan yields. We're doing a fine job. Larry and I want to compliment all of our teams across every footprint for doing a fabulous job holding on to yields and managing the cost of funds. We feel very good about loan yields and where they've landed and don't expect any significant moves there. Our guidance is that we expect slight compression, perhaps 1 to 2 basis points of margin compression, which would come from pressure on loan yields. We do think we have a little bit of room on the cost of funds and deposit pricing. The real issue will be whether we can keep pace with continued pressure on loan pricing. We are very optimistic about a relatively stable margin and have outperformed guidance so far this year. Again, compliments to all of our bankers for helping with that. But when we say slight margin compression, we mean on the order of 1 to 2 basis points, and yes, it would come from continued pressure on loan yields.

Understood. That's great color. Changing gears a little bit and kind of thinking about the expense trajectory. And I appreciate the kind of consistent guidance for the fourth quarter. But as we kind of think about the variability in capital markets and swap revenue into next year, what's like the baseline personnel costs that we should be layering on top the kind of 30% implied efficiency ratio with that segment in particular, as the revenue fluctuates?

Sure. I'd try to give a little bit of color around that. So we were pretty transparent on the jump in noninterest expense here in the third quarter that it was almost exclusively due to the significant outperformance on capital markets. So if you think about that in terms of how you should view it and I think how we should all view it and model it, we had about a $15 million jump on a linked-quarter basis in capital markets, around a $5 million increase in performance-based comp around that, so around 34%. I think we talked in the past that a lot of times, that range will be 25% to 35%, and it really depends on the level of underperformance or outperformance. So this time, it was on the higher end of the scale simply because we significantly outperformed the 14% to 18% range, which we've said last quarter we likely would do. And then going forward, when we talk about our noninterest expense being in this $38 million to $40 million range, you would think about capital markets results being in the midpoint of our guidance. So when we talk about being in this 38% to 40% range for this following quarter here, Q4, our expectation is our result would be based on a $16 million capital markets number, right in the middle of the guidance range. And when we outperform that significantly, we might have another 30% or so in terms of comp and noninterest expense as a result. When we're right on that guidance, we're probably going to be in the middle of the guidance range, around $39 million. And I think that's going to, for the most part, hold true here going forward. We're obviously going to have some pressure on expenses, comp and other things going into the new year. We'll try to give you some guidance on 2022 sometime in January. But that's really how I would view our comp run rate.

Got it. Makes sense. And maybe one last topic for me on just the capital outlook. You guys have remained active on the buyback this quarter. Stock's obviously appreciated above kind of where you guys were buying back stock in the quarter. So just would love to get some updated thoughts on the appetite for additional buybacks within the context of what you guys are seeing from an M&A perspective. And obviously, there's the outlook for capital levels to likely build next year, absent an acquisition or continued activity on the share repurchases.

Yes, the M&A markets are active, as you know, and we certainly want to keep our capital position in a place to execute on something if it becomes available. On the buyback, certainly, we will continue to consider that because, as you know, we are a low dividend payer, and we will accumulate capital fairly rapidly. So we'll continue to evaluate that. Certainly, it depends on market price and how we feel about other alternative uses of our capital.

Okay. I appreciate all the color. Congrats on a great quarter.

Thanks, Nate.

Our next question comes from Jeff Rulis with D.A. Davidson.

Todd, thanks for the expense guide. That's as clear as I've heard that dynamic, so I appreciate the tie to the swap side of things. I wanted to go into a bit more detail on loan growth — it's really strong. I also wanted to talk about the other side of net versus gross growth, payoff activity, and ask Larry, since I think you mentioned liquidity: can you narrow it down for the quarter? Do you have levels showing payoff activity against gross production?

Sure do, Jeff. And I can give you some color around that. I know Larry has some thoughts in terms of loan growth overall. But our payoff number here in Q3 was roughly $390 million, pretty healthy number there, but actually down on a linked quarter from Q2 where it was $425 million. It was right at the same level in Q1, about $390 million. So $390 million, $425 million, $390 million here in this quarter, certainly some challenge with respect to swimming upstream against those payoffs. And as Larry shared earlier, that's part of the benefit of our Specialty Finance Group, providing outsized growth in assets. Well, it's nontraditional part of our lending. It's very core to us and very important to us, and we expect to continue to have success with that.

Yes, Jeff, I'd add that, certainly, we're hitting on all cylinders in the third quarter on our loan growth. But our history on loan growth, we've grown in the 8% to 10% range for a long time. And so we would continue to expect to grow at those kind of relative numbers as we look forward. And as Todd alluded to, the specialty finance niche is a part of our core business, and we expect that to be available for us to supplement our growth through ups and downs in the interest rate cycles and long into the future. So we certainly feel good about the contribution it's made. And as our traditional lending clients burn through some of that liquidity over time, we expect just normal advances on commercial companies lines of credits to grow over time. But as you know, there's certainly still a lot of liquidity out there because of the PPP program.

Yes. I guess I'm shocked at those payoff levels. Those are pretty elevated given the net growth that you're putting up. Well, I'll keep nudging you along here. I guess in '22 then you've talked pretty clearly about reverting to the 9% loan growth, with upper teens expected in '21. I guess I would think you got some momentum into '22. Is it safe to say there's some upward bias in '22 to that historical 8% to 10%?

Yes, I think that's fair, Jeff. The world and the economy is such an uncertain place, we kind of hate to make predictions that are different than what we've done over a long period of time. So certainly, maybe towards the top end of that 8% to 10% would certainly be appropriate.

Okay. Fair enough. And last question just on the swap income, it seems like you've got growing comfort or visibility now on when that's coming in. And really just a timing thing, it sounds like quarter-to-quarter, but interested in the competitive side of that. Is that something that's kind of a core competency that, call it, that $16 million a quarter run rate is pretty sustainable or you look a different interest rate environment out beyond '22 that that's threatened? Or anything that you'd comment on that income stream even longer term?

Yes. We believe that the $16 million is a sustainable number in the long run. There are certainly differences in all of our businesses; competitors react differently in up-rate environments or down-rate environments. But we believe that we have the engine built to make that pretty sustainable. There will be some variability and some seasonality in that business just because of the nature of the business. But we feel good about that being a solid contributor to our income for a long time into the future.

Jeff, just to tag on to Larry's color around that, we did think it was important to point out that the midpoint of our guidance range, the $16 million, is, in fact, what we've averaged this year, very close to what we've averaged in the last 2 years. It's really the basis of our guidance that we're giving. We think that is, as Larry said, the sustainable run rate. It's fairly choppy at times. But I think it's important that the actual business and the transactions and the volume and the pipeline is not as sensitive to market rates. Sometimes the amount of revenue or capital markets revenue that we'll get out of each transaction is impacted by the rates. But it's a very sustainable business and would be here for us if rates go up, if yield curve gets steeper. It's not so much about the volume of the transactions, it's more a little bit around the edges on the pricing we can get, if that makes sense.

Yes, Jeff, the other thing I'd add is the underpinnings for that tax-advantaged business, whether it's historic LIHTC and other kinds of tax credit financing, are really good. The demand in activity in that space continues to grow. If you look at the tax-advantaged housing, the low-income tax credit housing, the demand in that space, the growth in that space is real. So it's not like we even have to carve out a bigger chunk of business. We really just need to keep doing what we're doing as the business grows.

Our next question comes from Daniel Tamayo with Raymond James. One other thing I'd add is the underpinnings for that tax-advantaged business, whether it's historic LIHTC or other kinds of tax credit financing, are really strong. Demand and activity in that space continue to grow. If you look at tax-advantaged housing, the low-income housing tax credit space, the demand and growth are real. So it's not like we even have to carve out a bigger chunk of business — we really just need to keep doing what we're doing as the business grows.

Just one for me, the rest of my questions have been answered. But given the very strong loan growth that you're seeing, you still got a loan-to-deposit ratio in the 90s here. Do you expect to see deposit growth keep pace with loan growth from here? Or given where we are in the cycle, do you think that, that continues to go up? And then how high are you comfortable with the loan-to-deposit ratio getting?

Yes, Danny, one of the things we haven't talked about on the call yet, so I'm glad you asked the question. And we feel very good about keeping pace with loan growth and funding it with core deposits. We are very pleased to be sitting here with really no wholesale funding left. The only thing wholesale on our balance sheet would be TRUPS and sub-debt. And that's, in large part, because we have kept pace with funding it with core deposits. And we haven't talked about it on the call yet, but correspondent bank deposits that are off-balance sheet for us that we would have access to are right now bouncing around in a range of $1.2 billion to $1.5 billion that are in the excess balance accounts with the Fed. So that gives us the just-in-time inventory for core deposits. And we feel really good about having that available to us at a reasonable cost.

Our next question comes from Brian Martin with Janney Montgomery.

Todd, maybe just give a little thought on this. I know you talked about the margin being relatively stable, up or down a little bit, maybe down slightly in the fourth quarter. But do you see potential for upside, bigger picture, as you get into next year? How are you thinking about beyond the fourth quarter? I appreciate you’ll give more color in the next quarter earnings, but just at a high level, what are the puts and takes on the future margin outlook?

Sure. Absolutely. Yes, longer term, we're very optimistic about margin because we are asset sensitive at this point. And we've been able to improve margin here over the last 4 to 6 quarters and, at the same time, really pivot our income statement to much more asset sensitivity. Right now, our RSAs are around $2.2 billion, our RSLs are around $1.3 billion. So we have about a $900 million delta on our RSAs to RSLs and feel very good about that in terms of some tailwinds that could provide if we see some rate increases. So longer term, that's really something that we hope to be able to take advantage of, the question being when that might happen and how steep a curve it might get at the same time. And I think that's why Larry and I would really defer much more in 2022 guidance until we have another quarter or so under our belts in terms of what might be happening with rates and where those things might be headed. But that's really more of a long-term view. And in terms of the short-term puts and takes, certainly, continued pressure on loan yields. Actually, we've tightened up the delta between our payoff rates and our new funding rates. And that's gotten a little bit tighter lately, so that's a good sign. Can we keep growing loans at the strong pace? We do believe we can. And then excess liquidity, we've done a lot of hard work to keep the excess liquidity pushed off our balance sheet to the extent we can, and that's been another reason we've outperformed guidance recently. And then, of course, the opportunity to continue to improve our funding cost still exist, but it's starting to get down to what we might consider as floors. And then what really happens with the rates, what the Fed might do, what LIBOR or SOFR might do and what the long-term rates and the yield curve ends up looking like. So lots going on there. I think we'll have some more color for you with full year results in January.

Yes. Okay, I appreciate it. That's helpful, Todd. Two last things on expenses. Is wage inflation something we should be thinking about as you look at next year and your comments about how to think about expenses? Is it tougher now to maintain the historical expense growth rate? Does that seem fair given current market conditions? So if your normal expense growth rate was x percent, might it be a little higher today given where wage inflation is?

Sure. I might start on that and then I know Larry has got some comments in terms of what we expect to do there. But I think everyone's familiar with our 9%, 6%, 5%. And the 5% in that is, of course, noninterest expense. And over the last several years, we've significantly outperformed that. Our growth in noninterest expense has been closer to 2% than 5%. And so we've had a lot of success with that. Our entire company is focused on doing the right things there. But it's going to get more difficult, certainly. And I think maybe Larry would have some comments for you in terms of people cost and other things there.

Yes, Brian, we're certainly feeling the same hiring and wage pressures we see across our markets around the country. There's probably a good chance of that, but we're not giving guidance yet. As we're doing our budgeting for next year, which we're deep in right now, holding to a 5% increase in expense rates will be a challenge, but we haven't given up on it. It will be more difficult to hire people, and there's certainly upward pressure, so I think you're seeing it about right.

Yes. Okay. And then last one for me, Larry, just your comment about M&A. I appreciate that. Have you seen any? I mean, there's been a lot of activity in the Midwest. Have you guys seen an uptick in dialogue? Or I guess I know you guys have certain markets you're targeting and sizes and whatnot. But just within your group of what you're considering or potentially would consider, has there been any uptick in conversations? Or has it just been static here and a wait-and-see?

Yes. A couple of things. Certainly, we've been consistent in saying that our first preference for our next M&A transaction would be to be in the either Des Moines or Springfield markets. We've already got a presence in those markets with good management that we think helps our opportunity to execute efficiently and effectively in those markets. We like the markets, the quality of the economic environments in those markets. So that's certainly our first priorities. I'd say discussions have been more active. But as I tell our employees, just because we're ready to buy, it doesn't mean somebody is ready to sell. So we're just trying to be in a position so that we can execute when those become available.

Got you. Okay. Makes sense. I appreciate the color. And great quarter, guys.

Thank you.

Thanks, Brian.

This concludes our question-and-answer session. I'd like to turn the call back over to Larry Helling for any closing remarks.

Thanks to everyone who joined us on our call today. Have a great day. We look forward to speaking with you all again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.