Earnings Call Transcript - QCRH Q4 2025

Operator, Operator

Good morning, and thank you for joining us today for QCR Holdings, Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release. If anyone joining us today has not yet received a copy, it is available on the company's website, www.qcrh.com. With us today from management are Todd Gipple, President and CEO; and Nick Anderson, CFO. Management will provide a 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 and non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through February 4, 2026, starting this afternoon, approximately 1 hour after the completion of this call. And will be accessible on the company's website. At this time, I will turn the call over to Mr. Todd Gipple at QCR Holdings. You may begin.

Todd Gipple, President and CEO

Good morning, everyone. Thank you for joining us today. I'd like to start with an overview of our fourth quarter and full year 2025 performance, followed by some additional color on our business. Nick will then walk us through the financial results in more detail. We delivered our strongest quarter of the year in the fourth quarter and produced record full year results. Performance was strong across all key operating metrics, approaching or exceeding the upper end of our guidance ranges for net interest margin expansion, gross loan growth and capital markets revenue. I am very proud of our 1,000 teammates for their hard work, providing exceptional service to our clients, growing all parts of our business by creating new client relationships, taking exceptional care of the communities in which we live and work and generating superior returns for our shareholders. Their work not only produced record earnings in 2025, but also sets the foundation for continued momentum in 2026. Our exceptional earnings were driven by significant contributions from net interest margin expansion and robust loan and deposit growth, which drove a substantial increase in net interest income, along with continued strong capital markets revenue. In addition, our wealth management business remains a key strategic growth engine, providing a meaningful contribution to our record results. As I have mentioned previously, I view our company as operating through 3 primary lines of business: traditional banking, wealth management and our LIHTC lending platform. Each of these businesses produced outstanding results for the quarter and the year. We continue to deliver strong organic growth and drive enhanced profitability in our traditional banking operations. Our unique multi-charter model anchored by autonomous community banks that attract outstanding talent and high-value clients enables us to consistently outperform competitors and take market share. We continue to grow market share last year as we added significant new clients in all parts of our traditional banking business. Our markets remain very healthy, supported by solid growth, stable economic conditions and very strong commercial and industrial activity. Our digital transformation is also progressing as planned with the successful completion of the first of 4 core system conversions in October. These upgrades are already delivering meaningful benefits for both our clients and our employees. Looking ahead, 2 additional conversions are planned for April and October of this year, further improving and modernizing our technology stack. These investments will expand our service capabilities, enhance the overall client experience, drive productivity gains and improve our operating leverage. Our Wealth Management business continues to be a significant component of our earnings growth. In 2025, we added nearly 500 new client relationships, bringing in over $1 billion in new assets under management. Our strong capabilities in this business have created 5-year compound annual growth rates of 10% for both assets under management and revenue. This success reflects the expertise of our team and the strength of our relationship-based model, which connects our traditional banking clients with dedicated wealth advisers across our markets. As we expand our wealth management business in Central Iowa and Southwest Missouri, we are building momentum, deepening client engagement and taking market share from our larger competitors. Our LIHTC lending business also delivered exceptional performance in the second half of the year, reflecting the sustained demand for affordable housing and the expertise of our talented team. Developers continue to successfully advance their projects despite earlier headwinds, underscoring the resilience of the affordable housing industry. In addition to robust demand for affordable housing, recent legislative actions have expanded available tax credits and further strengthened the outlook for the federal LIHTC program. These enhancements, which continue to receive bipartisan support, represent a significant milestone in the program's 39-year history. Our deepening relationships with leading LIHTC developers across the country, combined with healthy market appetite, position us to further grow this business and deliver meaningful and consistent contributions to our overall financial performance. Having operated in the LIHTC business for nearly a decade, we continue to view this platform as a highly durable, profitable and differentiated growth engine for the company. Our success is anchored in deep relationships with developers nationwide. And in 2025, we added 18 new developer partners to our network. Our relationships with some of the top affordable housing developers in the country position us for continued strong and sustained production. While we continue to punch above our weight class in this business, industry data suggests that our current level of production represents only a small fraction of the total LIHTC market. This highlights the substantial growth opportunity ahead and potential to further scale our platform. Building on our momentum and the depth of our pipeline, we are raising the upper end of our capital markets revenue guidance, resulting in a range of $55 million to $70 million over the next 4 quarters. We also made significant progress on our strategic objective of improving balance sheet efficiency within our LIHTC lending business, particularly during the 2- to 3-year construction phase, which is typical for many LIHTC projects. In the fourth quarter, we successfully sold $285 million of LIHTC construction loans at par to a third-party investor. This strategy expands our capacity for additional permanent LIHTC lending and further enhances our opportunities for additional capital markets revenue. It also strengthens our regulatory capital position by reducing risk-weighted assets, providing greater flexibility to allocate capital more effectively. Having the capability to sell these LIHTC construction loans will allow us to generate capital markets revenue more efficiently with less capital, improving our operating leverage and our financial results. In addition, we used the proceeds from this transaction to retire our highest cost FHLB term advances, further lowering our overall funding costs. Because we are originating new LIHTC loans at such a strong pace, our new loans added during the quarter essentially offset the impact of the construction loan sale, minimizing the impact to NII. In the future, we plan to strategically execute additional LIHTC construction loan sales and securitizations. While the timing will depend on market conditions and other factors, the strong growth in our LIHTC platform is expected to mute the impact of these transactions on net interest income and support opportunities to further grow our capital markets revenue. In addition, LIHTC securitizations and construction loan sales will allow us to cross the $10 billion asset threshold more efficiently and effectively. We began proactively incorporating the costs associated with operating at the $10 billion level into our noninterest expense run rate several years ago. We also recently secured increases in our future interchange revenue and lower debit card processing costs through our digital transformation initiatives and new third-party contracts. As a result, we are well positioned to control the timing of surpassing the $10 billion asset mark with limited financial impact. 2025 was a record-setting year for our company, marked by exceptional growth across all core businesses. We are focused on continuing to deliver top quartile financial results, and we hold ourselves accountable for creating long-term sustainable growth in earnings per share and tangible book value per share. Our team has built a foundation for sustained momentum, supported by investments in talent and technology that enhance our competitive advantage. In our investor presentation released yesterday alongside our Q4 earnings, we showcased several slides that underscore our exceptional long-term performance. One highlight is on Page 5 of the investor presentation, which evaluates the performance of all publicly traded banks with assets between $1 billion and $20 billion. Out of 216 banks, QCRH is 1 of only 7 that achieved a 5-year average ROAA above 130 basis points, a 10-year TBV CAGR exceeding 10% and a 10-year EPS CAGR greater than 15%. Our exceptional performance in all 3 metrics resulted in a 10-year total shareholder return of more than 250%, far exceeding the TSR for our high-performing peer group. Our ability to generate top quartile EPS and TBV per share growth is a result of our unique business model and the strength of our team. We truly have the best bankers in each of our markets, backed up by a shared services team that allows them to focus on providing raving fan service to our clients. As we begin this year, we are focused on advancing our digital transformation to deliver optimized technology to our clients and our team, further expanding our wealth management business and continuing to grow our LIHTC lending platform. Combined with a positive NIM outlook, expanding operating leverage, solid loan and deposit pipelines and a stable credit outlook, the initiatives position us to deliver superior financial performance and create continued strong returns for our shareholders. I will now turn the call over to Nick to provide further details regarding our fourth quarter and full year 2025 results.

Nick Anderson, CFO

Thank you, Todd, and good morning, everyone. We delivered record adjusted net income of $37 million or $2.21 per diluted share for the quarter and record full year adjusted net income of $130 million or $7.64 per diluted share. These exceptional results were driven by significant growth in net interest income from increased average earning assets and net interest margin expansion. In addition, we had solid wealth management revenue growth, strong capital markets revenue and improved asset quality. Net interest income increased $4 million or 22% annualized in Q4 and $23 million or 10% for the year, driven by continued margin expansion. The LIHTC construction loan sale late in Q4 did not materially impact net interest income. On a tax equivalent yield basis, NIM increased 6 basis points from the third quarter, near the upper end of our guidance range. This expansion was supported by a 14% increase in average earning assets, a significant improvement in our cost of funds and a favorable mix shift to noninterest-bearing deposits. Our disciplined approach to deposit pricing, combined with a liability-sensitive balance sheet, has driven cost of funds betas that are more than double those of our earning assets in the current rate cutting cycle. Since the Fed began cutting rates in 2024, our deposit costs have declined by 56 basis points compared to a 32 basis point decline in loan yields. We continue to experience the repricing of lower-yielding loans into higher market rates as new loan yields added during the quarter exceeded loan payoff yields by nearly 30 basis points. As we move further into the rate-cutting cycle, however, we expect that positive arbitrage to moderate. We still remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $700 million, providing meaningful upside to margin in a declining rate environment. For future cuts in the Fed funds rate, we expect 1 to 2 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect NIM expansion at the top end of that range. And if the yield curve remains relatively flat, we would expect NIM expansion at the lower end of the range. Our NIM to EY has expanded 32 basis points over the past 7 quarters, reflecting disciplined execution and favorable balance sheet positioning. We expect this momentum to continue and are guiding to additional core margin expansion in the first quarter between 3 to 7 basis points, assuming no further federal rate cuts. Further upside in our first quarter NIM is supported by repricing opportunities on approximately $140 million in fixed rate loans currently yielding 5.55%, which are expected to reset nearly 50 basis points higher. We also anticipate continued CD repricing during the first quarter with approximately $390 million of maturities, currently costing 3.94%, which we expect to retain and reprice nearly 50 basis points lower. We also expect investment yields to continue to expand, supported by a solid pipeline of new municipal bonds priced in the high 6% range on a tax equivalent basis. In addition, the retirement of the FHLB term debt is expected to contribute nearly 2 basis points of incremental margin improvement. Noninterest income totaled $39 million for the fourth quarter, driven primarily by $25 million in capital markets revenue. Despite the slower first half of the year, capital markets revenue reached $65 million in 2025, surpassing the upper end of the $50 million to $60 million annual guidance range we established to start the year. Our Wealth Management business delivered $5 million in revenue for the fourth quarter, a 4% increase compared to the prior quarter. For the full year, wealth management revenue grew $2 million or 11%, underscoring the strength of this business. Continued growth in assets under management across our markets not only enhances our platform but also provides stability and diversification in our revenue mix. Now turning to our expenses. Core noninterest expenses increased $4 million in the fourth quarter when excluding the $2 million nonrecurring prepayment fee associated with retiring higher cost FHLB term funding. The linked quarter increase was primarily due to elevated variable compensation resulting from strong capital markets performance and record earnings. Higher professional and data processing expenses related to our first core system conversion as part of our digital transformation also contributed to this increase. Our variable compensation structure is designed to maximize operating leverage and provide expense flexibility across changing revenue cycles, aligning employee incentives with shareholder returns. Despite the increase in noninterest expenses, our adjusted core efficiency ratio came in at 56.8%. We continue to prudently manage expenses while investing in talent and technology to support our operations team with initiatives that enhance future operating leverage to strengthen the scalability of our multi-charter community banking model. Even with continued investments in our business during 2025, we maintained strong discipline over core noninterest expenses, which were up only 4% for the year, in line with our strategic goal to hold noninterest expense growth below 5%. Looking ahead, we expect noninterest expenses to be in the range of $55 million to $58 million for the first quarter of 2026, assuming capital markets revenue and loan growth are within our guided ranges. This outlook reflects our continued commitment to disciplined expense management aligned with our 965 strategic model, which targets noninterest expense growth below 5%, while driving operating leverage and strong profitability. Looking ahead, our continued investments in technology, combined with the flexibility of our variable compensation structure will enhance scalability and efficiency, positioning us to deliver sustained operating leverage as we grow. Moving to our balance sheet. During the quarter, total loans grew by $304 million or 17% annualized before the impact of the construction loan sale and the planned runoff of the M2 portfolio. Our traditional loan portfolio demonstrated strong growth, increasing $92 million or 8% annualized in the fourth quarter and $185 million or 4% for the year when excluding the runoff of the M2 portfolio. Looking forward to 2026, we have a solid pipeline and expect to sustain this momentum as we are guiding to gross annualized growth in a range of 8% to 10% for the first quarter, with growth ramping up to a range of 10% to 15% for the remainder of the year. Complementing our loan growth, total core deposits grew $64 million or 4% annualized in the fourth quarter. Average deposit balances rose by $237 million or 13% annualized when compared to the third quarter. For the full year, core deposits increased by $474 million or 7%. Our deposit mix improved for the full year with an increase in noninterest-bearing balances and a 34% reduction in higher cost broker deposits, further strengthening our funding profile. Strong deposit growth across our markets highlights the success of our relationship-driven approach and validates our efforts to expand our deposit market share while providing a stable core funding base for future growth. Asset quality remains excellent. Net charge-offs were static compared to the third quarter, while provision for credit losses increased by $1 million. Total criticized loans continued to improve, decreasing $5 million in the quarter and $20 million for the full year, reflecting a 12% reduction. Total criticized loans, a key leading indicator of loan quality, are at their lowest level since June of 2022. As a percentage to total loans and leases, total criticized loans declined 7 basis points to 1.94% during the quarter, the lowest level in more than 5 years and remains well below the company's long-term historical average. Our total NPAs to total assets ratio remained constant at 0.45%, which is approximately half of our 20-year historical average. Our allowance for credit losses to total loans held for investment increased 2 basis points to 1.26%. While our asset quality remains very strong and our criticized loans continue to decline to record low levels, we increased our provision at year-end to bolster our already strong level of ACL. This is consistent with our long-standing credit culture of maintaining robust reserves even during times when credit quality is favorable. We executed additional share repurchases in the fourth quarter, repurchasing approximately 163,000 shares, returning $13 million of capital to shareholders. For the full year, we returned nearly $22 million to shareholders, repurchasing approximately 279,000 shares at roughly 1.3x our current tangible book value. Through last week, we repurchased approximately 32,000 additional shares, increasing total repurchases under the program to more than 310,000 shares since commencing in the third quarter of last year. Our tangible common equity to tangible assets ratio rose by 27 basis points to 10.24% at quarter end, driven by strong earnings and improved AOCI, partially offset by share repurchases. Our common equity Tier 1 ratio increased 18 basis points to 10.52% and our total risk-based capital ratio increased 16 basis points to 14.19% due to our strong earnings growth and the construction loan sale, partially offset by share repurchases. We delivered another quarter of exceptional growth in tangible book value per share, which rose $2.08 to approximately $58, reflecting 15% annualized growth for the quarter. Over the past 5 years, tangible book value has grown at a compound annual rate of 13%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Finally, our effective tax rate for the quarter was 8%, down from 10% in the prior quarter, reflecting lower pretax income and an increase in the mix of our tax-exempt income relative to our taxable income. Our tax-exempt loan and bond portfolios have continued to support a low effective tax rate. Assuming a revenue mix in line with our guidance ranges, we expect our effective tax rate to be in the range of 8% to 10% for the first quarter of 2026. With that added context on our fourth quarter and full year results, let's open the call for your questions.

Operator, Operator

Our first question today comes from Damon DelMonte from KBW.

Damon Del Monte, Analyst

First question, just appreciate the guidance on the capital markets revenues, $55 million to $70 million over the next 4 quarters. Just curious, do you guys expect any seasonality kind of in the beginning part of the year? Just trying to kind of model out a cadence for expected revenues.

Todd Gipple, President and CEO

Damon, thanks for asking that question. We certainly did want to set expectations a bit for the first quarter. And this is a chance to remind everyone that our first quarter is historically our slowest quarter of the year for capital markets revenue. It's really not just us. The entire affordable housing industry gets off to a bit of a slow start each year. I really think developers push themselves and their teams to get things closed by 12/31, then maybe take a little breather for a month or so. So as a result, we expect our first quarter here in '26 to be far better than it was the first quarter of last year. But I do want to make sure we set expectations. We should not all expect another $20 million-plus quarter here. Our Q1 capital markets revenue has averaged $11 million in the past 5 years. We had last year $6 million in there. We've had a $13 million. We've even had a $16 million. But yes, Damon, I'm grateful you asked the question. Q1 is a bit slower start. It's one of the reasons we're so focused on providing rolling 12-month 4-quarter guidance. That's really how we evaluate our performance. That's how we evaluate the strength of our business. And yet we know the first quarter can be a bit seasonally slow.

Damon Del Monte, Analyst

Got it. Great. Okay. That's helpful. And then in the past, you've talked about the securitization of moving some of the loans off the balance sheet. And I think last quarter, you kind of talked about midyear here in '26. Is that still on the table to be done? And if so, do you have a kind of an updated target size of loans to securitize and move off?

Todd Gipple, President and CEO

Yes, Damon, thank you for your question. We are still aiming for sometime in the first half of this year. I expect the permanent loan securitization to occur before June 30. We are working with Freddie Mac on this, and while they are a government-sponsored enterprise and not a full government agency, they can sometimes operate like one. They are currently making changes to their securitization program for the M Series program we utilize. These changes mean the process is becoming more challenging and taking longer. However, we still anticipate a securitization in the range of $300 million to $350 million before June 30.

Operator, Operator

Our next question comes from Nathan Race from Piper Sandler.

Nathan Race, Analyst

Could you provide some guidance on a starting point for earning assets in the first quarter, considering the changes with the securitization in the fourth quarter and the expectation of reducing some wholesale borrowings?

Todd Gipple, President and CEO

Yes. So earning assets heading into the first quarter would be very consistent with where we ended earning assets. That construction offtake happened very late in the quarter, actually December 22. So that's why NII was really not impacted by that. So where we ended 12/31 in terms of earning assets is where we're going to begin. We talked about a very robust loan growth plan for this year. We do feel like we're going to be 12%-ish for the full year, but that's going to be a little backloaded as well. That's why we're guiding to more like 8% to 10% gross loan growth in the first quarter. We think that will accelerate in the last 3 quarters of the year, closer to 12-15. We feel really good about loan pipelines, both traditional and LIHTC. So we'll be ramping earning assets up here throughout the quarter, but starting point would really be the 12/31 number.

Nathan Race, Analyst

Okay. So not necessarily the average balance in the fourth quarter for earning assets, right?

Todd Gipple, President and CEO

Correct. Correct. Average balance is far greater because that loan sale happened 12/22.

Nathan Race, Analyst

Understood. Okay. And then, Todd, can you just update us in terms of what inning you're in, in terms of having the cost and the expense run rate around the transformation and the investments you're making? And then just any thoughts in terms of how that translates in terms of the expense run rate over the second quarter and back half of this year relative to the guidance you provided for 1Q?

Todd Gipple, President and CEO

Yes. Nate, I think I'm going to let Nick talk a little bit about NIE run rates, and I might tag on a little bit about how we're thinking about $10 billion.

Nick Anderson, CFO

Looking ahead here, obviously, you saw we increased our guidance range for NIE, the $55 million to $58 million. The midpoint of the $55 million to $58 million range is just about 5% increase over our core NIE year-over-year. So what's making up some of that increase, I would kind of lay it out this way, about $4 million of digital transformation spend, another $4 million in salary benefit costs and a couple of million in occupancy related. So, despite the increase in the 26% range, we still expect to create more operating leverage and pushing that efficiency ratio lower as we see some expansion in our revenues that outpace our NIE here.

Todd Gipple, President and CEO

Yes. So Nate, I'm going to go ahead and tag in on this with the $10 billion thoughts. We ended the year right on top of $9.5 billion. We still expect to stay under $10 billion here at the end of '26. That will have a lot to do with the timing of some of our construction loan offtake later in the year. I don't know that we'll be as precise as doing that almost near the end of the year. But certainly, we're going to be very mindful of the impact on NII when we do term loan securitizations and construction loan sales. Many of you are familiar with our 965 strategy, and we want to grow NII close to that 9% for the full year. And because of a strong organic gross loan growth, we're going to be able to do both. But we certainly expect to come in just under $10 billion at the end of calendar '26. We will go above $10 billion in '27. And as a result, starting in July of '28, we're going to have the rigor of $10 billion and the Durbin impact. But we are layering in, in that 5% guide that Nick gave everyone, that is not just digital transformation, that is building for the infrastructure we need for $10 billion at the same time. So we're building it in. We don't expect there to be a blip in '28 as a result of going over. And that's really important to us. The 5% and 965, we are very diligent about making sure we don't have expense creep so we can continue to improve EPS and TBV per share. So sorry for the long answer to your short question, but thought we'd give a little bit of current color and a little bit of future.

Nathan Race, Analyst

That's great and very helpful. Just a question in terms of the deposit gathering expectations. Obviously, you have a pretty robust loan growth outlook out there for this year. Just curious kind of what you're seeing in terms of opportunities to continue the momentum on the deposit gathering front. And just as you look at kind of the balance sheet growth outlook for this year, if we just assume maybe a flat rate environment or a static rate environment, do you see kind of incremental balance sheet growth accretive to the margin? And just within that context, curious what kind of opportunities you're seeing to continue the deposit gathering efforts within the clients that you work with on the low-income housing tax credit side of things.

Todd Gipple, President and CEO

Sure, Nate. Thanks. Great question. I'll talk a little bit about how we're looking at deposit growth, and Nick can give you a little bit more of the margin and NII implication after that. But the one thing that all 1,000 of our teammates universally understand is we have to continue to improve the right side of our balance sheet, both core deposit growth and improving our mix. So everyone is focused on that. And there's really 3 underlying strategies. We continue to lean in hard to net new retail checking accounts. That doesn't move the needle in dollars. But over 10 and 20 and 30 years, that is incredibly meaningful in terms of the stability of our funding costs. So we are very focused on growing net new retail checking accounts and it only counts in our scorecard if we get their direct deposit and really become their bank. We're really leaning hard into private banking, that top 10% to 15% of retail in each of our markets. It's a big part of our Quad City and Cedar Rapids and Southwest Missouri markets. I'm proud of our leadership in Central Iowa. They've added some really great talent in private banking in Central Iowa, which happens to be our largest MSA. So that's going to help us with core deposits and wealth management pipeline. And then where we can move the needle more significantly each year is treasury management. We have a great technology platform. We have great people. We are just being more precise and intentional on non-borrowing targets. Typically, bankers tend to focus on lending, and we're getting them all focused on gathering deposits. We've got to get NIB back up. That's going to take a while, but we're really focused on the right side of the balance sheet. And I would just end before I turn it over to Nick, we expect our growth to be funded with core deposits, not wholesale. And we've worked that down a fair amount during the year. So that's our continued focus.

Nick Anderson, CFO

Yes. So Nate, I'll probably reference a little bit our success in '25 in moving the deposit mix shift. We did have some success in reducing brokerage. We lowered that by $120 million. That's just 3% of our total deposits today, and that's helping reduce some of our cost of deposits. As Todd said, NIB continues to be an area where we need to move the needle further faster. We did increase that $24 million. They're about 13% of our total deposits. So when I look at the growth for '25, and this kind of leads into maybe how you can think about the growth in '26, about half our growth came from the correspondent network. So about $238 million. That's more priced probably at the market, if you will. There are some noninterest-bearing deposits inside of that business that do help. We also saw the other half of the growth then really came from a couple of hundred million in commercial and $32 million in retail. So I would highlight there our success in really continuing to drive into our markets, getting those operating accounts on the commercial side over time, that should continue helping our noninterest-bearing deposits. So I think the short answer is a lot of our success in '25 is similar to how we move into '26 and think about the growth there.

Nathan Race, Analyst

Okay. Got it. If I could just sneak one more in along those lines. Obviously, a notable M&A announcement involving a long-time Iowa competitor recently. So just curious if there's any kind of early indications on opportunities for share gains, particularly on the deposit gathering front in light of that announcement and potential disruption.

Todd Gipple, President and CEO

Sure. Yes, Nate, we are already addressing the MOFG sale, which is closely related to the Cedar Rapids market. We have strong leadership in that area who are dedicated to acquiring clients and increasing our market share. We don’t need to be physically present in that market to achieve this. We already have a target list and are effectively working through it. We anticipate attracting some of the top clients from that platform. Although Nikolai is an outstanding performer, we believe that some individuals in Iowa City may not be pleased that decisions are being made from out of state, which could lead to a loss of talent. Therefore, we see this as an opportunity. Our company was originally founded in response to subpar mergers and acquisitions in the Quad Cities and Cedar Rapids, so we understand how to capitalize on this situation, and we expect to do so.

Operator, Operator

Our next question comes from Daniel Tamayo from Raymond James.

Daniel Tamayo, Analyst

Starting with the LIHTC business, you provided updated guidance which is an increase from last year's expectations. If we look at the midpoint on a year-over-year basis, it appears somewhat flat to slightly down. This seems to reflect a 2- or 3-year trend of modest revenue decline, although the long-term outlook remains positive with significant opportunities for growth. I'm interested in your long-term perspective on growth within the LIHTC sector. Would you need to recruit additional bankers to support that growth, or are your existing bankers already at or nearing their capacity? You've mentioned opportunities with developer relationships, but I'm eager to hear your broader thoughts on growth prospects for the LIHTC business as it becomes increasingly vital to your overall operations.

Todd Gipple, President and CEO

Thanks for the great question, Danny. We are very excited about the future of this business. I would ask everyone to focus less on the upper end of our range and more on the positive direction we've moved it in over the last two quarters. We understand that it may seem a bit conservative compared to the latter half of this year, but I'm okay with that if the main concern is that we're being a bit cautious with our guidance. We have put a lot of effort into this business this year, and our LIHTC team is incredibly talented; I don't think they've ever worked harder. We're trying to be realistic about operating in this space with the new construction offtake we have, ensuring we're fully prepared and ready to grow. We expect to leverage new developer and third-party relationships in construction offtake, alongside the strong performance from our team, to further expand the business. We do anticipate additional growth and would prefer to operate in this environment for a while to validate the numbers. It's important for us to maintain our ratio, and we believe the future looks bright.

Daniel Tamayo, Analyst

Understood. I appreciate that. From an efficiency perspective, you mentioned the expectation for positive operating leverage in the business, which certainly contributes to the overall franchise. How should we consider the 5% expense target that you've maintained for a long time? What does that imply for LIHTC growth? Is that within the range of fee income growth you've indicated, around the midpoint, and could it potentially exceed 5% if LIHTC revenue improves? Sorry for the lengthy question, but in terms of profitability, how much further do you believe you can push this? You're over 1.50% ROA for the last couple of quarters. Do you think that can keep moving higher?

Todd Gipple, President and CEO

Danny, I think your assessment of the guidance on NIE is spot on. When Nick provided that guidance, we assumed a balanced outlook regarding loan growth, capital markets revenue, and overall performance. We're proud of the second half of this year, finishing with a core ROA of 150. We expect to grow earnings per share and tangible book value per share at a pace that exceeds the average, remaining in double digits. To achieve this, we need to continue increasing our ROAA, which is already strong at 150%. It's important to clarify that we won't boost ROA solely by growing the LIHTC business, though we anticipate significant contributions to profitability from it. Simultaneously, we need to enhance the ROAA of our traditional banking sector and maintain consistent 10% growth in wealth management. We do not want our earnings growth to rely exclusively on LIHTC. Although our team excels in that area and we expect its growth to continue, we must also focus on improving our traditional banking and wealth management. Our goal is for all three areas to advance ROAA moving forward. On the traditional side, we need to focus on enhancing the funding side of the balance sheet. As we improve in these areas, it will positively impact earnings, along with the operational efficiency gains from digital transformation expected to start fully in 2027 and more in 2028. So in response to your extensive question, I wanted to emphasize that while we look forward to the future of our LIHTC business, we need all three segments to enhance their performance.

Daniel Tamayo, Analyst

Understood. That's helpful, Todd. And then maybe just a cleanup one, although also a little longer term in nature, but for you, Nick, just on the effective tax rate. Obviously, the tax-exempt portion of the balance sheet has been growing as you indicated. I mean, should we expect the effective tax rate to continue to trend downward in coming years or quarters and years as that business continues to be a bigger part?

Nick Anderson, CFO

Yes. Danny, when we review our effective tax rate, it's performing very well with a low rate. For the full year, we ended up around 6.5%, compared to 7% in 2024. Both years saw strong performance and were record years. To your point, the tax-exempt portion of our balance sheet, which affects our income statement, is about 30%. So when it reflects on the income statement, it's likely consistent with our expectations. We have provided guidance for the next quarter, estimating an effective tax rate between 8% to 10%, which makes sense given the lighter activities we anticipate in Q1. I hope this clarifies your questions. Will the rate trend lower over time? My brief answer is that it somewhat depends on the composition of our balance sheet. We are continuing to off-balance sheet some of our LIHTC business, which will moderate that rate. I believe the current level is what you should expect moving forward.

Operator, Operator

Our next question comes from Brian Martin from Janney.

Brian Martin, Analyst

Nick, I may have missed the conclusion of your comments on the tax rate. Could you clarify whether you expect it to change significantly from the level in the first quarter? Or did you imply something different that I might not have understood?

Nick Anderson, CFO

Yes. I think it will continue to be pretty static. So I think your 8% to 10% or the 8% to 10% we guided to, I think that's a fair assumption to use for the '26 model.

Operator, Operator

Got you. Okay. That's helpful. And just one other housekeeping on the earning asset number. What was the end-of-period earning asset number versus the average? How much lower was the end of the period than the average? Do you have that?

Todd Gipple, President and CEO

Nick has that, and he is pulling that up right now, Brian.

Nick Anderson, CFO

Yes. No worries, Brian. It really was right on top, slightly under where we ended the average. So average was like $8.872 billion. So it's, call it, $20 million, $30 million below that.

Brian Martin, Analyst

I just want to clarify something. Todd, you mentioned opportunities for improvement in other areas. Do you see a chance to enhance the funding side, especially with the DDA around 13%? Are you anticipating any movement in that regard? Do you have any targets for how that might trend in the future? Additionally, I'm curious about your perspective on the loan-to-deposit ratio.

Todd Gipple, President and CEO

Sure. Yes, Brian, we know we have to improve the right side of our balance sheet for us to continue to improve the performance of our traditional banking space. So we're right now at about 13% NIB. We've been in the 20s. And we know that the rapid increase in rates previously changed the behavior of virtually every deposit client in the country, and they became rate sensitive after spending well over 10 years being non-rate sensitive. And so that has impacted our NIB. We have to have a clear path to improving that, and I do expect it to improve. I would certainly expect us over time to move that up to be more peer like, something in the high teens and maybe even 20%. That is not going to happen in a couple of quarters. Candidly, that's not going to happen in a couple of years. That's just going to take a lot of hard work over a long period of time. We're going to have to see some of our clients become less rate sensitive and allow us to have higher PE balances of noninterest-bearing because of our relationship. And we think over time, we'll have some success with that. But that is not going to happen quickly. It's going to take a lot of work. And the other thing is, over time, we want to be better funded with core deposits and be able to lower our loan-to-deposit ratio. It will never get, I don't anticipate it's ever going to get below 90%, but we'd like to operate more in the low 90s than the high 90s. And I think over time, we'll get there. But again, our big focus on the traditional banking space is 2 main things, and that is our funding mix and our operating leverage. And we have plans to improve both.

Brian Martin, Analyst

Got you. And that operating leverage, Todd, I mean, in terms of getting that lower, I mean, you're targeting kind of getting to the low 50s from where you're at today, that's kind of where the trend line is moving toward or the hockey puck moving to?

Todd Gipple, President and CEO

Exactly, Brian. That is not going to happen here for a couple of years while we're investing in the bank of the future and still paying for the bank of the past or current. We're going to stay within that 5% growth on expenses and have that discipline, but it's really going to start more in '28 and beyond where we think that efficiency ratio can drop from the mid-50s to the low 50s.

Brian Martin, Analyst

Got you. That's helpful, and it makes sense. Just last one or two for me regarding the loan outlook. It seems there will be a securitization and possibly a couple more construction offtakes later in the year. When we consider the loan growth guidance, is this number net of all the activities you anticipate in terms of sales and securitizations? How should we view the net loan growth as you proceed with the expected actions over the next couple of quarters?

Todd Gipple, President and CEO

Yes, Brian, that's a reasonable question. The answer is a bit complex mainly because the exact timing of some of this offtake isn’t clear at the moment. This uncertainty isn't due to any lack of clarity but rather depends on our loan growth pace and when we determine the optimal time to sell some of it. We are fortunate to have an excellent partner in the construction side of this business, and they are eager to take on more of our construction loans, which we are equally keen to pursue. I apologize for the lack of clarity. Regarding our gross loan growth, we expect it to be very robust. I'm particularly pleased that last quarter was our best of the year in terms of loan growth. While 70% of that was in LIHTC, the traditional bank segment made up 30%, marking the strongest traditional bank growth we've seen in quite a while, and our pipelines in that area look very solid. I know that what you really need to gauge is the impact on net interest income. I understand that more precise details would be beneficial. We are very committed to managing this with our balance sheet while also growing net interest income. We aim to target growth of 9% to 9.65%. The offtake will slightly dampen year-over-year loan growth, but we anticipate it will assist in driving net interest income growth throughout the year.

Brian Martin, Analyst

Got it. That's clear and very helpful, Todd. I think you understand what we’re aiming for. My final question is about capital management and the buyback. You mentioned that M&A isn't a significant factor, and it seems that remains true. Regarding the buyback, do you see this as an opportunistic move? Will it be ongoing? Are you planning to be active in the market consistently? How should we consider the repurchases?

Todd Gipple, President and CEO

Yes. Brian, thanks for asking about that. We hadn't really talked about the buybacks. And I would beat your word, opportunistic. That's how we've always felt about it. At current valuations, even today's, buybacks are an attractive use of capital for us. We know it benefits our shareholders. There's no real algebraic formula on when, how much, what price. It's certainly more of an art than a science. But we would intend to be opportunistic. And when we think about buying shares back, we tend to think forward about where TBV and EPS are headed. So sometimes we get a little more confident about buying shares at these valuations, knowing where EPS and TBV are headed in the future. So a good example of that. We spent $25 million so far under the current authorization. That's 312,000 shares. And what's lovely about that is that was at a weighted average price of $78. So we feel really, really good about having done that for our shareholders. And we'll remain opportunistic and try to do that when it makes sense.

Operator, Operator

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

Ryan Payne, Analyst

This is Ryan Payne on for Jeff Rulis. Just one for me here. Revisiting the loan growth and LIHTC side, what kind of competition are you seeing in LIHTC and maybe the reasons it feels isolated? And then anything you're seeing on loan competition in general?

Todd Gipple, President and CEO

Sure, thanks for the question. Regarding competition in the LIHTC space, we feel optimistic about future growth because our team is exceptional, and our developer clients often express their appreciation for us. We've experienced solid growth in this business, but according to industry data, we currently hold only about 2% of the market, which encourages us about potential future expansion. When it comes to headwinds and competition, we typically lose deals only when a developer's equity provider has an established relationship with an in-house permanent loan provider. Developers primarily need equity, which can influence their choice of partners. To address this, we are collaborating with equity providers who are open to working with us, recognizing that developers value our program. As for local competition in traditional banking, we tend to be informed about most significant transactions in our markets. We're usually involved in substantive deals because of our robust team and structure. However, we're often faced with the decision of whether to proceed based on pricing. Currently, pricing is challenging, but our bankers are doing a great job maintaining relationships and achieving favorable outcomes. Overall, competitive dynamics revolve more around pricing at this stage.

Operator, Operator

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Todd Gipple for any closing remarks.

Todd Gipple, President and CEO

Thank you for joining our call, everyone. We very much appreciate your interest in our company. Have a great day, and we look forward to connecting with you soon. Thank you.

Operator, Operator

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.