QCR Holdings, Inc. Stock

Good morning, and thank you for joining us today for QCR Holdings, Inc.'s Third Quarter 2026 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the third quarter.

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 to non-GAAP measures.

As a reminder, this conference call is being recorded and will be available for replay through October 28, 2026, starting this afternoon approximately 1 hour after the completion of the call. It will also be accessible on the company's website. I will now turn the call over to Mr. Todd Gipple at QCR Holdings.

Good morning, everyone. Thank you for joining our call today. I'd like to start with the highlights of our third quarter performance and some thoughts about our business, and then Nick will walk us through the financial results in more detail.

We delivered record earnings per share this quarter supported by margin expansion, robust loan growth, increased capital markets revenue, solid wealth management revenue and further improvement in asset quality to the strongest level in several years.

Return on average assets was 1.52%, reinforcing the earnings power, durability and scalability of our diversified platform. We also continue to deploy capital with a balanced approach, generating 11% year-over-year growth in tangible book value per share, while at the same time, returning capital to shareholders through opportunistic share repurchases and dividend increases.

Our consistently strong earnings allow us to sustain healthy levels of capital while maintaining optionality with respect to capital deployment. Our traditional banking business continues to deliver healthy organic growth with strong production across our traditional lending platform, driving approximately 7% annualized loan growth in each of the second and third quarters.

Our multi-charter model is the best of both worlds, combining the autonomy and agility of local decision-making with the scale and resources of our larger organization. This approach creates and strengthens client relationships, helping us consistently take market share and enables us to attract and retain the most talented bankers in our markets who value local autonomy and the opportunity to grow within a high-performance organization.

Our digital transformation remains a key strategic priority and the completion of our third core conversion in October was another important milestone in that journey. This conversion was another great example of the strength of our multi-charter model with teammates who had been through prior conversions, sharing their experience and supporting their colleagues throughout the process.

I want to thank everyone involved for their hard work and commitment in making this latest conversion a complete success. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience and driving further operating leverage. And as a reminder, we are managing these investments within the discipline of our 965 strategic model, holding noninterest expense growth under 5% as we build our bank of the future while still maintaining our bank of the past and 1 remaining charter.

Our final conversion in the Sea Rapids market is scheduled for next April, and we expect to see operating leverage build throughout the remainder of 2027 and subsequent years. Our wealth management business continued to deliver strong results with revenue up 12% year-over-year, reflecting sustained new relationship growth and consistent growth in annual revenue.

Our success in this business reflects the long-tenured expertise of our team and the power of our local relationship-driven model, which connects high-value clients in each of our communities with our dedicated wealth advisers. As we continue to expand advisory relationships, Wealth Management provides a growing source of recurring fee income, deepens client engagement and further diversifies our revenue mix.

Our LIHTC lending business continues to perform exceptionally well as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. This business is a key differentiator for our company, delivering highly profitable and annually consistent results across a variety of interest rate environments and market conditions.

Our deeper relationships with industry-leading LIHTC developers, combined with sustained market demand, position us well to grow this business and further strengthen our financial performance. We have now developed strong relationships and close funding for projects with 18 of the top 20 developers in the country, and during the first 3 quarters of the year, closed transactions with 13 new developers.

While our third quarter capital markets production was strong at $16.9 million, we had a number of transactions actually shift to a Q4 closing date. As a result, we are anticipating a very strong fourth quarter of capital markets production and expect Q4 results to be in the range of $18 million to $20 million.

This would put total 2026 production within our historical 4 quarters guidance range. We are also reaffirming our guidance for $60 million to $70 million of capital markets revenue over the next 4 quarters. We continue to see positive momentum across both our traditional and LIHTC lending platforms. With solid loan production trends and a strong pipeline heading into year-end, we are reaffirming our gross loan growth guidance of 10% to 15% annualized for the fourth quarter of 2026.

Over the past 12 months, we have strategically sold and securitized loans to recycle capital allowing us to support additional LIHTC originations and generate attractive fee income without requiring corresponding balance sheet growth. By recycling this capital into new originations we generated over $67 million of capital markets revenue while increasing net interest income by $24 million or 10% compared to the preceding 12-month period.

This demonstrates our ability to grow both net interest income and capital markets revenue, while operating with a smaller balance sheet and deploying capital more efficiently. Looking ahead, we expect additional LIHTC offtake activity in early 2027. As discussed in prior quarters, changes to Freddie Mac's M-Series securitization program significantly increase the complexity, time and cost of execution despite favorable pricing on the underlying securities.

As a result, we are actively working on other third parties on alternative loan sales structures for our permanent LIHTC loans that we believe will be significantly less complex, take far less time to accomplish and result in better economics. It is also anticipated that these alternative structures will result in a complete sale of the underlying loans without the retention of the first loss Betranche, fully removing the loans from risk-based assets and more effectively freeing up regulatory capital.

These discussions are advancing, and we are confident that we can achieve alignment on our revised structure and complete our first transaction in the first quarter of 2027. While these LIHTC offtake transactions temper balance sheet growth in the near term, they enhance long-term profitability by creating more capacity. That capacity is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue, creating greater ROAA and ROAE.

This is our LIHTC flywheel in action, building an asset-light, capital-efficient and revenue-heavy business in affordable housing. Creating this flywheel now allows us to work on further growing the business and increasing our levels of loan production and the related capital markets revenue. These offtake transactions are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year.

We anticipate growing beyond $10 billion sometime in 2027, and we will be fully prepared for the associated organizational impacts that would occur in mid-2028 as we continue to build on the planning efforts we began in 2023. The strength of our company is reflected in our performance across all 3 of our core lines of business. Over the past 5 years, we have driven a 5-year earnings per share CAGR of 14%.

A 5-year tangible book value per share CAGR of 12.5% and a 10-year total shareholder return of 266%, the highest in our peer group. We have a proven, high-performance operating model and we hold ourselves accountable for consistently driving shareholder value.

Through continued investments in our people and our technology, combined with disciplined expense management, we are well positioned to sustain our top-tier financial performance.

I want to thank our more than 1,000 teammates for their hard work and their strong commitment to our high-performance culture. They make relationship-driven come to live each day as they take exceptional care of our clients, our communities and each other and create exceptional results that deliver long-term value for our shareholders.

I'm incredibly proud of them in the high-performance culture that we have created. I will now turn the call over to Nick to provide further details regarding our third quarter results.

Thank you, Todd. Good morning, everyone. I'll provide additional details on the key drivers of our third quarter performance and share our outlook for the fourth quarter. We delivered strong third quarter results with adjusted net income of $36 million or $2.21 per diluted share, driving an adjusted return on average assets of 1.52%.

Net interest income was $69 million, an increase of $800,000 or 5% annualized from the second quarter. NIM TEY expanded 3 basis points to 3.58% and exceeding our guidance. The linked quarter increase in net interest income was driven by margin expansion, supported by disciplined funding costs and higher average noninterest-bearing deposits.

Average earning assets declined $44 million, reflecting the strategic LIHTC loan offtake transactions completed in the second quarter, with strong third quarter loan and investment growth, partially offsetting the reduction. Looking ahead, we continue to benefit from repricing lower-yielding loans into higher market rates.

We are encouraged by the strength of our lending pipeline and ongoing client demand, which continue to support profitable growth opportunities across our footprint. We recognize the value of clear guidance around NIM and we continue to be as transparent as possible.

However, given the active management of our balance sheet, including robust earning asset growth, funding mix changes, deposit pricing, and LIHTC offtake transactions. NIM can fluctuate slightly in either direction from quarter-to-quarter. Our focus remains on managing those dynamics in a disciplined way, and ensuring that balance sheet growth translates into stronger net interest income and improved profitability. Our current balance sheet position remains modestly liability sensitive. However, that does not fully capture the timing benefits we expect in the near term.

Following the Federal Reserve's September rate increase, variable rate assets, new loan production and investment growth are repricing faster than our deposits, where deposit repricing typically occurs with a lag. As a result, we expect the September Fed rate increase to be slightly accretive to NIM in the near term.

After that initial benefit, another 25 basis point increase in the Fed funds rate would likely have a more muted impact that is closer to neutral, depending on deposit repricing, customer behavior and the shape of the yield curve. We remain focused on maintaining deposit pricing discipline and managing funding costs carefully.

While the historical lag in deposit repricing should allow us to retain some near-term benefit from higher rates, continued competition for deposits and changes in our funding mix are expected to largely offset that benefit. Accordingly, assuming no additional Federal Reserve rate changes, we expect fourth quarter NIM to EY to remain relatively static.

Our fourth quarter NIM outlook is supported by a strong loan pipeline and the opportunity to reprice approximately $165 million of fixed rate loans, which we expect to move from the low 6% range to the mid-6% range. We also project our nontaxable investment yields to continue expanding, supported by a solid pipeline of new municipal bonds expected to yield between 7.5% and 8% on a tax equivalent basis.

Noninterest income totaled $30 million compared to $29 million in the second quarter. Capital Markets revenue increased to $17 million from $15 million in the prior quarter, which included a $1.3 million loss from the Freddie Mac LIHTC securitization. Wealth management revenue totaled $6 million, consistent with the prior quarter, benefiting from continued expansion of client relationships and growth in assets under management.

Compared with the third quarter of 2025, Wealth Management revenue increased by 12%. Noninterest income performance continues to highlight the strength of our diversified revenue model. Our capital markets and wealth management platforms provide meaningful earnings diversification, reduced reliance on spread income and support more consistent profitability across changing interest rate and economic environments.

Now turning to expenses. Noninterest expense for the third quarter totaled $54.7 million, compared to $53.2 million for the second quarter, and were near the lower end of our guidance range. The linked quarter increase primarily reflected higher occupancy and equipment expense, salary and employee benefits and the timing of advertising and marketing expenses. The increase in occupancy and equipment expense reflected costs associated with our third core system conversion completed in early October.

The increase in salary and employee benefits reflected higher incentive compensation driven by strong full year performance to date. Our efficiency ratio remained solid at 55% for the third quarter.

Our year-to-date adjusted efficiency ratio has improved to 56% from 58% in 2025 and reflecting our continued focus on operating leverage as year-to-date revenues have increased 9.3% compared with the expense growth of 4.8%. Expenses remain well controlled, highlighting disciplined execution of our 965 Strategic Model, which targets annual noninterest expense growth below 5%. As we have now completed 3 of 4 core conversions, our progress on noninterest expenses demonstrate that we can continue investing in digital transformation while managing annual expense growth below 5%.

For the fourth quarter, we expect noninterest expense to remain well controlled, assuming capital markets revenue and loan growth are within our guidance ranges and reflecting continued investments in digital transformation and initiatives. We are reaffirming our noninterest expense guidance range of $54 million to $57 million.

Moving to the balance sheet. Total loans grew $190 million in the quarter or 11% annualized when excluding the M2 portfolio runoff. We also increased our high-performing securities portfolio by $30 million from the second quarter including $63 million of new privately placed municipal investments added at tax equivalent yields at 7.25%. Core deposits when excluding broker deposits, totaled $7 billion compared with $7.3 billion at June 30, while broker deposits remained at approximately 2% of total deposits.

Noninterest-bearing deposits increased slightly and average noninterest-bearing deposits increased $39 million or 15% annualized. While we experienced typical outflows of correspondent deposit balances during the final few weeks of the quarter, those deposits have since returned to our balance sheet, along with additional deposit growth shortly after the quarter ended.

As of mid-October, total deposits have grown over $500 million since quarter end, including $40 million of noninterest-bearing balances. We also achieved our fourth consecutive quarter of noninterest-bearing deposit growth, demonstrating continued progress on this key strategic priority. Additionally, net new commercial and retail account growth this year is well ahead of the first 9 months of 2025. Taken together, the return of correspondent balances continued noninterest-bearing deposit growth and strong net new account activity reflect positive underlying deposit trends.

These trends reinforce our confidence in the strength of our deposit franchise and our ability to fund future growth. Given the dynamic nature of our balance sheet, quarter end balances can fluctuate more than those of similarly sized banks. This quarter underscores why we remain focused on underlying trends rather than any single quarter end balance. Asset quality improved further during the quarter and is the strongest we've experienced in years. Nonperforming assets totaled $38 million, a decrease of $1.5 million from the prior quarter, and the NPA to total asset ratio improvement to 0.39%, its lowest level since 2024.

Total criticized loans decreased $14 million to 1.67% of total loans and leases, the lowest level as a percentage of total loans and leases since 2019. The improvement reflected a combination of loan payoffs, credit upgrades and charge-offs across several criticized borrower relationships. The company recorded total provision for credit losses consistent with the second quarter. Net charge-offs were $3 million, a decline of $200,000 from the prior quarter and the lowest level recorded all year as we continue to benefit from positive charge-off trends from the wind down of the M2 portfolio.

During the third quarter, we repurchased approximately $9.5 million or 95,000 shares of common stock. The share repurchase program enhances our capital allocation flexibility and allows us to balance organic growth, shareholder returns and capital strength while reinforcing confidence in our long-term outlook. Tangible book value per share increased to $61.79 and at September 30, representing 11% year-over-year growth. Tangible common equity to tangible assets decreased 28 basis points to 10.43%, primarily reflecting the impact of higher interest rates on accumulated other comprehensive income and continued share repurchases, partially offset by strong earnings.

The common equity Tier 1 ratio increased 33 basis points to 11.01% and the total risk-based capital ratio increased 37 basis points to 14.5%. These quarterly changes reflect the combined impact of strong earnings partially offset by share repurchases during the quarter.

Finally, our effective tax rate for the quarter was 9%, up slightly from the prior quarter. Our actively managed very low effective tax rate continues to be influenced by the mix of tax exempt income relative to taxable income, particularly the level and timing of capital markets revenue and tax advantage loan and bond income.

Assuming a revenue mix in line with our guidance ranges, we estimate our effective tax rate to continue to trend in the range of 8% to 10% for the fourth quarter of 2026. In summary, the third quarter reflected the strength of our diversified business model that created robust loan growth, expansion in net interest margin, healthy fee income, disciplined expenses and excellent asset quality. We entered the fourth quarter with solid pipelines and positive momentum across our businesses. With that added context on our third quarter results, let's open the call for your questions. Operator, we are ready for our first question.

[Operator Instructions]

The first question today comes from Jeff Rulis with D.A. Davidson.

Question on the -- curious on the LIHTC portfolio as that's historically performed in an uprate cycle. If you can just speak to demand, the credit side, fee generation, just in general, if there's anything you'd pull or glean historically on how that -- how that changes, if at all, in the upcoming cycle?

Sure. Jeff, thanks for the great question. When longer rates are going up, that is a bit of a headwind for our clients, for developers. They have to go back to the well, if you will, and work on our capital stack a little bit when those financing costs go up. .

One of the things we love about this business is it's very durable through all rate cycles. We've experienced all different cycles in our time in the affordable space. So it's very durable, but it will tend at times to have a developer need to go back and work on the capital stack a bit to make up for the added interest carry -- interest cost.

And we did see some deals slide from Q3 to Q4. We talked a little bit about that in the prepared comments. It's one of the reasons we're very optimistic about the fourth quarter. So at times, it can take a little bit longer for deals to get fully baked and the capital stack in place and get the deals closed. But historically, it has not stopped progress and projects.

I appreciate that. And anything on that credit or fee side, it seems like fees is more on rate volatility, I suppose. But anything on those last 2 items on credit and fee income?

No. Really, historically, again, we point at this in our investor presentation. There's a slide in there about 35-plus year history of this industry through all different economic cycles and the credit is really unimpacted by this. And Jeff, part of the reason is those costs are fully baked at closing.

So that developer knows what their committed rate is for 15 to 18 years, and they have made the capital stack work with that amount of interest carry, and so that really doesn't tend to impact credit. In terms of fees, really, the only impact on fees is if we provide somebody a term sheet at a certain rate and then we see a massive move in the long rates during that period between then and close we can see our revenue impacted a little bit, and I would say slightly. So at times, it can impact that intra-quarter, if that makes sense.

Yes. No. I appreciate it, Todd. And then maybe just hopping over 1 other question on the expenses. Really, at the low end, you talk about trying to keep those sub-5%. It looks like this year, you're headed for almost a flat year-over-year 26% to 25%.

Just trying to figure out kind of the -- that's outperformed, I suppose, on your expectations? And then kind of coupled with that is the conversion impact. If that does the final 1 completes in April, maybe some early thoughts on '27 growth?

Yes, Jeff, thanks for the question. Yes, we are pretty proud of the progress we're making on our noninterest expense while we're investing in the business at the same time. And when we think about the go forward, much like how we've been preparing to cross the $10 billion asset threshold where we've been layering in some of those costs over time. .

We expect the similar impact when it comes to the investments we're making in our core systems where we'll start experiencing and already have experienced some cost savings here, when I look at the data processing costs year-over-year, year-to-date, those are down 11%, about $2 million. So you're seeing some of that impact already in our run rate versus a cliff or a spike here when you think about the go forward.

So very similar approach, a modest -- moderate layering in of cost reductions here as we go through these core conversions. We have the next one here in April, and that will be our final one. We've spent a fair amount of time of optimizing our frontline staff experience as well as our client experience. When we get into '27, '28, we will be spending more time optimizing the back office experience.

Jeff, really appreciate the question and allowing Nick to get into the details a little bit there just to point out what is happening. So I appreciate the question. I would just tag on to that, that I mentioned that in our opening comments, we are very optimistic about operating leverage in the back half of '27 and beyond. We're really pleased with the partners we've selected with our core.

Q2 is a huge partner for us in front of our clients. We're just very pleased about the technology stack. We're looking forward to having it done in April. And again, that is one of the reasons that we're very optimistic about continuing to grow ROAA in the traditional bank space. The operating leverage, we're going to continue to pick up.

The next question comes from Damon DelMonte with KBW.

Appreciate as always the detailed insights that you guys provide on these calls, but a couple of questions here. Just wondering, when you look at the pipeline, the loan growth pipeline and obviously very robust. How much of that growth is being driven by LIHTC versus the traditional community banking?

Sure, Damon. Right now, that mix is around 70-30, 70% LIHTC 30% traditional. I will tell you that we have had the most robust loan growth in the traditional bank space the last 2 quarters consecutively. So we are really pleased that we continue to see great production in the traditional bank space. That helps us achieve that more like a 10% to 15% growth that we've guided to because the traditional banks continue to have a lot of success taking market share and doing more with existing clients. .

Great. Appreciate that. And then nice to see the reaffirmed guide on the capital markets of $60 million to $70 million over the next 4 quarters. When you take a step back and you kind of look at this business model, like where do you think the potential for this to grow over time could go to just kind of given the strong traction you have in the LIHTC space? .

Sure. So Damon, I'm a little reticent to throw specific numbers out at this point. And I think you've been on this journey with QCR for a long time. and you know our bias to maintaining a strong say-do ratio. So I would just tell you and everyone else, this is where we're going to want to show it and improve it before we talk a lot about it. But what I can tell you is that we have spent the last couple of years really working on and investing in the factory so we can go faster. .

So our expectation is that this business will begin growing. We've got everything in place. We believe to see that happen with now perfecting a better methodology on perm offtake. I think that's going to make us even more nimble in terms of offtake on perm.

Solving the construction offtake was huge because it allows us to say yes more often. All signs point to this business growing for us. I'm just a little reluctant to say how big and how fast. So apologies on that being more transparent. But as soon as we start seeing that come together, I think we're going to be upgrading our guidance and being a little more articulate about that.

I would really expect when we get into either our January call, certainly, April, we're going to have more color for all of you on that. I will tell you there's one other reason -- I'm being a little hesitant to move that guidance up more quickly. There is 1 thing going on in the industry that is a bit of a headwind, and that is that lots of developers and lots of projects and the need for affordable is significant, and it's not diminishing, it's growing.

So the future of this business line is very positive. But right now, equity investment has not caught up. And so the -- I think some of you might be familiar with what happened in the latest housing bill where the PWI percentage was increased for all the largest banks in the country, and that's where a lot of the equity comes from. So I'm optimistic. We're optimistic that this shortfall of equity is going to get fixed.

And just to be transparent, Damon, when that happens, I think that's when you're going to see this business grow for us because right now, developers are struggling to find enough equity to fill all the capital stacks. Fortunately, D.C. did something positive about that to give the largest banks in the country more power to do more equity, but that just happened this summer, and it's probably a year for that to really take effect.

So again, very optimistic about growing this business, how fast and when that starts, we'll want to prove it a bit first.

Great. I appreciate that color. And then just maybe one more quick one on kind of the margin and kind of broader speaking. If we do have more Fed increases. Just wondering given the first increase we just saw kind of how depositor attitudes are today versus the last rate hike cycle.

Are you seeing the more one-on-one discussions for people asking for higher rates. Is it any different than what we saw in like 2023? And kind of how do you view the beta as we go forward?

Yes, Damon. Typically, in rate hiking cycles, we see the greatest near-term benefit early in that cycle because our deposit betas tend to lag. Asset yields repriced more quickly while we can initially hold back on some of the increases on the nonindexed deposits.

So over a full hiking cycle, when we look back, eventually, deposit pricing does catch up with more of those interest rate-sensitive clients getting to the -- getting to us. But we look back at the last hiking cycle, earning asset yields, they captured approximately 49% of the Fed fund move compared to our deposits were about 56%.

So I think when we discuss or look forward a little bit, I don't know why we'd come off of that expectation at this point. So again, this really, as I've mentioned in my earlier comments, it creates some early NIM upside, but it also tends to move us more liability sensitive later in the cycle.

That's helpful. That's all that I had. I appreciate you answering my questions.

The next question comes from Nathan Race with Piper Sandler. .

Not to beat a dead horse on the margin, but just curious how you're thinking about just deposits on both -- I'm sorry, betas on both sides of the balance sheet. If in fact, we do get a couple of more rate hikes in the next year.

And is the expectation that with hopefully some funding mix improvement, just given some hopefully deposit growth momentum into the 4Q and into next year that there's some opportunities to remix some of the funding to maybe mitigate what you have repricing on the deposit side of things immediately?

Yes. So Nate, I appreciate the question. When we think about NIM and where we sit from a liability sensitivity position, we've really moved to more of a neutral stance. And so it's just 4% of earning assets today. So we're liability sensitive by $300 million to $400 million. So it's very slight. So a lot of our expectations when we look ahead here continues to be more of a stable outcome when -- especially when it comes to betas, kind of more of a balance situation for us.

Again, as rate hikes, if they were to continue, as I just mentioned to Damon, we would expect ultimately some of that liability sensitivity to start showing up more.

Nate, I might tag on to that a little bit too, you asked about mix. We are laser-focused on noninterest-bearing. Our NIB percentage is far too low. It is our #1 area of focus in traditional banking, and I'm pleased to say we're making some very good progress.

We've had 4 consecutive quarters of positive momentum in moving our NIB percentage up. We have a target of getting that up to the peer group in the low 20s, 21% to 23%. That is going to take a long time. But our goal internally is to move that 100 basis points a year, every single year. And so far, so good. The bankers are doing tremendous work in that regard.

If you want to know the detail of how it's happening. Basically, we allowed our PEG balances in our treasury management area to get to 0 or near 0, and we just, candidly, were not getting enough wallet share free money out of our best clients. And so we now have a program in place where we do not book a new treasury management client without a significant NIB PEG balance and we are now working on existing client relationships to start moving that up.

So that's where the benefit is coming from. But I think, Nate, I loved your question because for us, it's really going to be about that mix change that's going to shelter us from rates up.

Got you. And just kind of thinking about what you're seeing from a competition perspective on new loan production, both on the LIHTC and commercial side of things and footprint. Just any thoughts on kind of where you're seeing new loan production come on the portfolio yield.

I appreciate your comments to think about some of the repricing that you have on the back book that can help near term as well in terms of loan yields, but just any thoughts on kind of where you're seeing production come on these days?

Sure, Nate. Thanks. Nick is going to give you a little bit of data here in a minute on new loan rates. But again, I'd mentioned earlier, traditional banking is doing a fabulous job of doing more transactions and building a deeper relationship with existing clients.

But right now, we are taking a lot of market share within our markets. And honestly, part of that is just simply having the best bankers in the market. Part of it is having the size in the market that we do where we can really be viewed as the preeminent bank in the market. And so we get an opportunity to bank most anything that moves in the market.

And then in terms of taking market share, one of the things that really helps us is each of our 4 charters can punch way above their weight in terms of deal size and complexity with the backbone of the $10 billion organization. So I would just give a little bit of recognition to our folks in Central Iowa or Community State Bank charter there.

They have taken some tremendous clients from some of the bigger banks in that community because we can handle it, and we have better people. So in terms of competition in local markets, I feel really good about how we're performing there. On the LIHTC side, typically, when we have a great relationship with the developer, the only time we don't get that perm financing is if that perm financing is tied to the equity provider. So what happens in the industry is a lot of times the equity provider will come in, they know that equity is already a little scarce so they can basically say we're going to buy the credits.

We're going to give you an ex cents on the dollar. We're going to provide your equity, but you have to use our perm loan product. And so that is when we run into some headwinds in that space. So we are combating that by partnering with a lot of the equity providers that I would say are term loan agnostic, either they don't do any lending or if they do, they prefer construction in that firm.

And so we are really focused on creating relationships with equity providers where when a developer has to tell one of our folks, we really would love to use you guys on this deal, but the equity is driving that, that we can come in with alternatives for equity that we are partnered with. So that's just some of the competitive environment there. Obviously, we're having pretty good success as we are doing 10%, 12%, 15% gross loan growth.

So we're having a lot of success. But those are a couple of the things that we have to be careful about, particularly on the LIHTC side that we need to continue to be partnered with equity providers to make sure that the developers that want us to do their transactions can allow us to do that. And then, Nick, do you want to give a little data?

Yes, Nate, so pricing has firmed up. We continue to target spreads kind of in that 225, 250 basis points over comparable FHLB. So that would imply some yields in the upper 6% range. Certainly, competition isn't as actual pricing starts to run a little bit inside of those targets, but spreads certainly have improved from prior quarters. When we look at what's coming on -- for fixed loans, we're targeting more in that $650 million, 675 range, floating is starting to pierce the 7% to 7.25% range is kind of where we're at today. .

That's very helpful. I appreciate all that color. And Todd, since you mentioned 10 in assets, curious what the thinking is in terms of when you may surpass that threshold. I know you're hesitant to talk about additional offtake transactions, which may unfold next year. And I guess within that discussion, curious if you could maybe just update us on your M&A thoughts.

It seems that that's maybe something you're a little bit more open to these days and you have been seeing some kind of increased conversations. So I apologize for the loaded question, but I would love to just kind of hear your thoughts along those lines?

No worries, Nate. I appreciate both ends of that question. So first on $10 billion, we've been planning for this since 2023. We continue to view it as a managed milestone, not a disruptive event. We expect to stay under $10 billion here in the fourth quarter, but we fully expect to run past $10 billion sometime in '27.

Honestly, it's likely in the first half of the year given our strong loan growth. That allows us to not have the regulatory and Durbin impacts until July '28. So again, further delaying those impacts. Nick has talked pretty extensively from an expense standpoint. We do not see a blip coming in '28 related to $10 billion.

Our folks have done a great job layering in the people and the discipline that we need from a regulatory perspective, we do expect revenue impact from Durbin in middle of '28, that's around $3 million in annual. We are blessed in that we have 2 strong and growing sources of other revenue and LIHTC and Wealth Management to help mute that and fully offset that.

So we really view $10 billion as something we're going to do well planned and fairly gracefully in '27 and then be ready for the impacts in '28. So that does tie into M&A because so many I think so many peers have felt that they are compelled to do a transaction to deal with expenses and interchange and all of that. That is not our approach. And it's not going to be our approach. But we are a bit more open to M&A than we have been in the past few years. We've been really focused on growing EPS and TBV double-digit levels organically.

And because our 3 lines of business are going so well, I would just be very clear, the bar is incredibly high for us to consider an M&A partner because right now, organically, we are driving great results in EPS and TBV growth, so the hurdle rate, the bar is quite high. But we are having more conversations and what's changed in that regard is we're about to wrap up our digital transformation in April.

We really wanted to have that done and done incredibly well before we disrupted that with onboarding an acquisition. So as a result, we're more open. We're having more dialogue. Again, I would tell you the hurdle rate is very high, and we are going to be, what I would say, very picky because it's going to have to further improve ROAA and ROAE and further grow earnings per share.

And we are very reticent to dilute tangible book value per share. I think part of the reason we've seen the 266% growth and value for our shareholders is we have been very careful to make sure we're growing TPV at a fast pace. Typically acquisitions come with some dilution to that, and so it'd have to earn back very quickly. And it would have to be a very impactful transaction for us. So you're right, Nate, in your supposition that we are a little more open to it.

We're having conversations. I would say there's nothing really -- not only on the front burner, nothing really even on the stove yet. So because that bar is pretty high.

Okay. Great. That's super helpful. And just to confirm, Todd, you said Durbin would be $3 million annual hit? Or was that just kind of a back half hit for '28 theoretically? .

Yes, $3 million annual. So half that in '28, $3 million annual. .

The next question comes from Brandon Rud with Stephens Inc. .

If I could just start -- and correct me if I'm wrong here, but my understanding is the new partnerships maybe enter into next year will really accelerate the flywheel on the LIHTC side of things. And I guess this isn't necessarily speaking about '27, but longer term, does this allow you to do maybe 4, 5, 6 offtakes a year versus the 1 or 2 previously? Or is that too ambitious? Or am I thinking about that right?

So Brandon, I think you're thinking about it just right. The new format and the new process we're going to use with our partners on term loan offtake will be much more nimble in that regard. The prior plan and the prior execution with Freddie on these larger securitizations, those things were taking 12 to 18 months to get fully baked. That's part of the reason that we had to move away from that. It's just far too long or too costly, not very efficient.

And so we started going to some of our partners and saying, "Hey, you're buying this asset on the back end of this securitization and you're not getting the full yield because of all the costs. And we're having economics that aren't good for us. Why don't we just take that out of the equation and why don't you look at buying our assets directly.

So, that's where we're headed. I do anticipate us having proof of concept on that in the first quarter. And to your point, Brandon, I would expect that over time, that might, while not fully turning into a forward flow arrangement, I could be much like that in terms of we built some inventory, and we have some offtake. We built some inventory, we have some offtake. So that might smooth things a little bit.

We know it's a -- we know it's a bit disruptive for you and the rest of your peers trying to model our balance sheet and add dollars and all of that when we have less frequent, bigger swings in assets. So that would be a nice outcome. If it was a little more smooth. But what I would tell you is having this in place is one of the final steps we needed to be able to go faster in this business because it will allow us to know that we can say yes more often that we can do some larger deal sizes knowing that actually that's the appetite our partners have is for fewer larger deals with the best developers in the country.

So having this proof of concept, I think, is really going to help that flywheel.

Got it. Okay. Kind of along a similar vein. So without having to hold that first loss tranche I guess, just hypothetically, if you didn't have that for your previous offtake partnerships, what's the capital benefit versus your 11% CET1 ratio this last quarter? Is it like 25, 50 basis points? Or is it multiple -- multiple percentage points improvement.

Great. Brandon, I'm glad you asked because I was hoping somebody would. We have a little over $100 million in B pieces right now. We have not felt compelled to sell those. One of the reasons is our CET1 got over 11% organically even holding on to those. So that's part of it.

The other part is they're tax equivalent yields in the high 8s and allowing those B pieces to season makes them more marketable as well. So for all good reasons, we've held on to them. But when we sell those B pieces, that will free up 100 basis points of regulatory capital, CET1 and total risk-based. So it is a big number. And the reason it's a big number is because we have the B tranche, we have about $1 billion of assets not on the balance sheet that we're still carrying the risk waiting for.

So I'm glad you asked the question and allowed us to be a little more transparent on order of magnitude, but it is very big. It's 100 basis points.

The next question comes from Nicholas Halico with Raymond James.

Maybe just a follow-up on the prior question. It sounds like there will be some pretty significant capital benefits when you get these new structures up and running. I guess when you get to that point, how would that change how you think about the decision between whether it's investing in organic growth or buybacks or as you've alluded to before potential M&A. How does that impact the sort of decision tree that you face when you're thinking about deploying capital?

Sure, Nick, great question. So here's how we think about it. When we look at the 4 uses of capital. So historically, for us, for the vast majority of our 30 years, it's been supporting organic growth. In the last couple of years with offtake, our organic growth NAT has been muted. But we do expect, starting in '27 and '28, we're going to get back to letting the balance sheet grow a little more significantly as we have in the past. So what I would tell you is supporting organic growth is going to become a bit more of a need starting next year.

So in terms of that use of capital that will be elevated a bit more starting in '27. Just talked about M&A. We're open to some conversations. I want to be very clear about 1 thing, got this question from one of our best shareholders, and asked me very directly with all this capital growth, are you feeling compelled to or pressure to do an M&A transaction.

And I would just tell everyone on the call that, that is certainly not the case. We -- we don't feel any pressure to or any urgency to do M&A still an incredibly high bar. So the utilization for M&A will be less about what's going on with our ratios and more about the opportunity that we might find. So that leaves us with the 2 ways we could spend it, not invest it.

And I've just got to tell you, Nick, we're thrilled to have returned about $66 million of capital, buying 770,000 shares. That was a little under 5% of outstanding, but we made a lot of progress and our weighted average price was $85 per share. So we feel really good about that return of capital to our shareholders. At the same time, we did bump our dividend yield a bit. It's still incredibly modest.

I wouldn't want anyone to expect that we're going to continue to do that as frequently, and we're not chasing a number there in terms of dividend payout ratio, but simply, we could afford it. We thought it was good to reward our retail shareholders with a dividend increase. So those last 2 things, dividends and repurchases, the word, I would give you is opportunistic as we want to be opportunistic in terms of deploying that capital for share repurchases.

One of the benefits we have as we are growing earnings per share in TBB at such a fast clip. When we look at being opportunistic, I would tell you, I think we can be a little more aggressively opportunistic because when we model those buybacks we do it with our internal look at forward earnings. So if we're trying to hit a 5-year earn back on repurchases, we know what we're doing with earnings per share internally, and we can be a bit more aggressively opportunistic there.

So I know that's not got a lot of precision, but that's really how we look at those 4 uses. I think organic growth will go up a bit. M&A, TBD, if we find something that beats that very high bar for us. So then that leaves us with opportunistic share repurchases is probably our biggest focus right now.

Awesome. That's very helpful. And maybe just one more. It sounds like everything is on track and should be an exciting start to next year when we get the first transaction underway. I'm just wondering as we think about higher rates that can have implications for activity levels. But does that put any pressure on the ability to get some of these new style transactions or offtakes rather completed? Or is the pipeline and visibility there to getting those done kind of undeterred by the backdrop at this point?

Sure. Nick, thanks for that question because that allows us to talk about something that I think a handful of folks probably have forgotten or don't realize, but those assets on our balance sheet are floating rate. So the good news is we're going to have a delta or be upside down on fixed rate LIHTC loans on our balance sheet and get caught in that conversation with our partners. Those are floating. When rates are going up, they're going up. And so we don't see any headwinds on that offtake process due to rates up. So appreciate the question. .

The next question comes from Brian Martin with Brean Capital. Brian, your line may be muted.

Sorry for that. The -- I guess, I don't know, maybe for Nick. Just in terms of the bigger picture, at least I appreciate all the guidance and the thoughtfulness you guys have shared this morning. The -- just on the efficiency, as we think about that with the conversions and the $10 billion, I mean, the outlook for the operating leverage next year -- I mean as far as targeting efficiency, I mean, are you kind of in the low 50s is how you're thinking about it as you move into '27 and capture the full benefits and kind of think about this $10 billion level as you move forward from today's mid-50 type of level? Just how should we be thinking about that? Is that right?

Yes, Brian, I think you're on to it. That's how we're viewing where we stand today, kind of in that mid-50s and then taking into consideration everything we've talked about earlier on the call, where we're starting to see some of that benefit from all of the investments we're making work their way into the financials, while at the same time, we're still making some deep investments here.

So I think that's a fair assessment, and we continue on the revenue side as well, having high expectations. So certainly a component there when you think about efficiency.

Yes. Okay. And then, Todd, to your point about the potential use of capital, I mean the high bar that you have on M&A. I mean in terms of priorities for what M&A could bring to you? I mean, is it more about size or scale or deposits? Is there any priorities in terms of that M&A that we should at least know about in terms of how you're viewing that?

Sure. Thanks, Brian. I would say that it's really got to do with the high hurdle in terms of what it would have to do for us and our shareholders. Then it also has to fit into what we call our strength zone. I think we've got a page in our investor deck that gives all the attributes related to what we view to be in our strike zone and kind of keeping with the World Series theme, it's a pretty tight strike zone in terms of what we're looking for.

So right now, really 2 categories for us. We would have a very high degree of interest in doing something in Central Iowa as a bolt-on to our very successful bank in that market. CSB in that market is doing an amazing job growing very quickly, taking great market share 30-plus basis points ROA in our biggest, most competitive market.

So very pleased with that team. I would love to give them a little more scale if we found somebody that made sense in that market. And then it gets to a fifth market with the right characteristics and those characteristics, again, have to do with a market that's very similar to the 4 markets we're in today. We do not want to be in markets smaller than where we're at. And there are a ton of those in Iowa and Missouri.

We want to be in a little larger MSA, but not too large. We -- we like the size of the 4 markets we're in, and that's our sweet spot. So we're looking for a market that has that type of size and then I'll skip all the other 9 or 10 things on that page in terms of strike zone, but -- we would be looking for -- I guess the punchline I would tell you is just like we did when we moved into Central Iowa 2016, what most attracts us to a potential M&A partner is we want to acquire something that we can make better, they can grow faster, make it more profitable.

We want it to be the preeminent bank in the market. And maybe the final punch line is having been around bank M&A for 40-plus years. I really believe the second most important thing you can look for in an M&A transaction is great core deposits. The most important thing you acquire are the people serving those clients and serving that community.

And a lot of people forget that, and they forget that and -- so they do the acquisition and they forget about the people aspect and they fail to grow organically post M&A. They lose the best people, they lose their best clients, and we don't do that. So we are looking for the opposite of that. We're looking for a great franchise that we can help grow.

Got you. That's super helpful, Todd. And maybe just last 1 for me, just 1 housekeeping for Nick and just -- I don't know, a big picture on credit. Just housekeeping kind of the full year tax rate, as we think about '27, any big change from this year, Nick. And then I don't know, for either 1 of you, just on -- I mean, credit quality is so good. Loan growth is still really, really excellent as well. Just how to think about kind of reserves or provisions going forward? Any big change to kind of run rates we've been at? Or just how to think about that as we look forward?

Brian, I'll start on the tax question. Pleased that you pointed out our tax position, and we're very active in managing to a very low effective tax rate and that comes through both our LIHTC and our municipal bond businesses, but also includes us being active in tax credit investments. So assuming -- certainly, as we look to Q4, we've given that guidance in the 8% to 10% range. That's kind of where we've been historically for quite some time. The one major needle mover that can change that dramatically is a significant increase quarter-over-quarter in our capital markets revenues. Obviously, being taxable to the bottom line. So that's how we're thinking about it. Right now, we've had the 8% to 10% range for quite some time, and that looks to be similar for us in the future.

Brian, you asked about asset quality and just to be transparent with everyone. I'm almost hesitant to say it out loud on an earnings call, but we are very pleased with our portfolio. Very pleased to have moved NPAs down under 40 basis points, really thrilled with criticized loans dropping the way they have.

And I will tell you that both special mention and substandard fell $10 million and $4 million, respectively, the right way. We have 3 large upgrades and one large payoff in special mention. We had 2 large payoffs in substandard. So asset quality improved the right way. We were able to work out of those deals and not charging them off. We will continue to maintain fairly robust reserves. Even though we have exceptional asset quality, we like operating in this 123, 124 basis points of CECL. And so maybe the punchline here on asset quality is we expect it to be very good.

And yet, we'll probably continue to keep pace at 123, 124 basis points on CECL and really just provide for growth.

Perfect. All right. Well, thanks for everything, and thanks for the thoughtful comments today. It's always appreciated.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Gipple for any closing remarks.

Thanks, Chloe. Thank you all for joining our call today. We really appreciate your interest in our company. I hope you have a great day, and we look forward to connecting with you sometime soon. Thanks. .

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

Good Morning, and thank you for joining us today for QCR Holdings, Inc.'s Second Quarter 2026 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the second quarter. If anyone joining us today has not yet received a copy, it is available on the company's website at 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 to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through July 30, 2026, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website.

I'd like to turn the floor over to Mr. Todd Gipple at QCR Holdings.

Good morning, everyone. Thank you for joining our call today. I'd like to start with the highlights of our second quarter performance and some thoughts about our business, and then Nick will walk us through the financial results in more detail.

We are pleased to report strong second quarter net income and record quarterly GAAP earnings per share, reflecting the continued strength of our diversified business model and the consistent execution of our strategy. Adjusted earnings per share was also near record levels, exceeded only by the fourth quarter of 2025. Performance in the quarter was supported by robust loan production, a rebound in Capital Markets revenue, higher net interest income, continued strong momentum in Wealth Management and disciplined expense management.

We also continue to strengthen our excellent asset quality, generated meaningful growth and tangible book value per share and returned capital to shareholders through opportunistic share repurchases. Return on average assets was a strong 1.51% and earnings per share increased 28% from the prior year quarter, reinforcing the earnings power, durability and scalability of our diversified platform. Over the past 4 quarters, our strong financial performance has increased tangible book value per share by $8 or 15% since June 30 of last year, while we returned approximately $56 million of capital to shareholders through share repurchases. These results demonstrate our ability to generate attractive returns, meaningfully compound tangible book value and deploy capital in a disciplined manner to support long-term shareholder value creation.

Our traditional banking business continues to deliver healthy organic loan and deposit growth, reflecting strong commercial and industrial activity across our markets. Our multi-charter structure that results in very high levels of responsiveness and creates strong client relationships enables us to consistently take market share from our competitors. Our banking model, that creates local decision-making autonomy where it matters and consistency in operating process everywhere else continues to be a significant competitive advantage, allowing us to make decisions close to the client, while still benefiting from the scale and resources of the broader company. This model also helps us attract and retain talented bankers who value local decision-making, strong client relationships and the opportunity to grow within a larger high-performing organization.

Our digital transformation remains a key strategic priority and the successful completion of our second core conversion in April marks another important milestone in that journey. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience and driving further operating leverage.

Our Wealth Management business also delivered excellent results with AUM growth of 9% and revenue increasing 7% on a linked-quarter basis. Our success in this business reflects the long-tenured expertise of our team and the power of our local relationship-driven model, which connects high-value clients in each of our communities with our dedicated wealth advisers. As we continue to expand advisory relationships, Wealth Management provides a growing source of recurring fee income, deepens client engagement and further diversifies our revenue mix.

Our LIHTC lending business continues to perform exceptionally well as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. This business is a key differentiator for our company, delivering highly profitable and annually consistent results across a variety of interest rate environments and market conditions. Our strong relationships with industry-leading LIHTC developers, combined with market demand, position us well to grow this business and further strengthen our financial performance. Given the robust pipelines in our Traditional and LIHTC lending platforms, we are reaffirming our guidance for gross annualized loan growth of 10% to 15% over the final 2 quarters of 2026. We are also reaffirming our Capital Markets revenue guidance of $60 million to $70 million for the next 4 quarters.

During the quarter, we executed $444 million of LIHTC loan offtake transactions, consisting of a Freddie Mac permanent loan securitization and a construction loan portfolio sale. As we have discussed in prior quarters, Freddie Mac significantly increased the complexity of their M-Series securitization program since our previous M-Series transactions. For example, the length of the offering document increased from a bit more than 100 pages to more than 400. In addition to the added legal costs, this complexity created, there were other costs that were not part of our prior M-Series transactions. While the pricing of the underlying securities was quite strong and actually outperformed our expectations on this securitization, the transaction costs under the revised program increased significantly over prior securitizations, creating the loss on this transaction.

As a result, we are working with other third parties on alternative loan sale structures for our permanent LIHTC loans that we believe will be significantly less complex, take far less time to accomplish and result in better economics. It is also anticipated that these alternative structures will result in a complete sale of the underlying loans without the retention of the first loss B-Tranche, fully removing the loans from risk-based assets and more effectively freeing up regulatory capital. We are actively working on these alternatives and are expecting an execution in early 2027 for our first transaction under this revised structure. The construction loan portfolio transaction this quarter marked our second successful sale to a private investor, further demonstrating the strong demand for these assets. The ability to sell LIHTC construction loans allows us to support our developer clients throughout the entire project life cycle, by providing both construction and permanent financing solutions. This capability strengthens our value proposition to our clients, driving market share gains and incremental Capital Markets revenue.

While these LIHTC offtake transactions temper balance sheet growth in the near term, they enhance long-term profitability by creating more capacity. That capacity has been rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our Capital Markets revenue, creating greater ROAA and ROAE. The second quarter demonstrates our LIHTC flywheel in action, building an asset-light, capital-efficient and revenue-heavy business in affordable housing. These LIHTC offtake transactions are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year. We anticipate growing beyond $10 billion sometime in 2027, and we will be fully prepared for the associated organizational impacts that would occur in mid-2028 as we continue to build on the planning efforts we began back in 2023.

The strength of our franchise is reflected in our performance across all 3 of our core lines of business. Over the past 5 years, we have driven a 5-year earnings per share CAGR of 14%, a 5-year tangible book value per share CAGR of 12.5% and a 5-year total shareholder return of 268%, the highest in our peer group. We have a proven high-performance operating model, and we hold ourselves accountable for consistently driving shareholder value.

Through continued investments in our people and our technology, combined with disciplined expense management, we are well positioned to sustain our top-tier financial performance. I want to thank our more than 1,000 teammates for their hard work and their strong commitment to our high-performance culture. They take exceptional care of our clients, our communities and each other as they deliver long-term value for our shareholders.

I will now turn the call over to Nick to provide further details regarding our second quarter results.

Thank you, Todd. Good morning, everyone. We delivered strong second quarter results with net income of $36 million or $2.19 per diluted share. Net interest income remained solid at $68 million, increasing $500,000 or 3% annualized from the first quarter. Robust earning asset growth more than offset the impact of the LIHTC offtake transactions, driving higher interest income as average earning assets increased $46 million.

Our NIM TEY declined 3 basis points from the first quarter of 2026 and came in below our guidance range. However, the underlying drivers reflect the strength and momentum of our franchise. We continue to maintain deposit pricing discipline in a competitive environment, driving a further decline in our cost of deposits during the quarter. This progress, along with the accretive impact of the LIHTC offtake transactions was more than offset by a shift towards higher cost non-core funding and lower loan yields, primarily due to reduced loan discount accretion and nonaccrual activity.

Looking ahead, we continue to benefit from repricing lower-yielding loans into higher market rates with new loan origination yields exceeding loan payoff yields by 19 basis points when excluding the LIHTC offtake transactions. While we have already captured a meaningful portion of deposit cost relief since the Fed began cutting rates in 2024, we continue to focus on improving our funding costs through mix optimization and disciplined pricing. Since 2024, our cost of funds has declined 83 basis points compared to a 61 basis point decline in earning asset yields. Our quarterly NIM TEY declined modestly from the first quarter. However, the monthly trend was more positive. After early quarter pressure, NIM improved and stabilized in May and June, with June exceeding the quarterly average by 1 basis point.

As a result, we view the second quarter NIM as more of an improving intra-quarter story than a continuation of downward NIM pressure. We are encouraged by the strength of our lending pipeline and ongoing customer demand, which continue to support profitable growth opportunities across our footprint. Combined with our disciplined approach to deposit costs, this positive momentum supports our guidance for a relatively static third quarter NIM TEY, assuming no Federal Reserve rate changes. We recognize investors value clear guidance around NIM, and we want to be as transparent as possible.

Given the active management of our balance sheet, including robust earning asset growth, funding mix changes, deposit pricing and LIHTC offtake transactions, NIM can fluctuate in either direction from quarter-to-quarter. Our focus remains on managing those dynamics in a disciplined way and ensuring that balance sheet growth translates into stronger net interest income and improved profitability. Our current balance sheet position remains modestly liability-sensitive. Based on that positioning, we would expect each 25 basis point decrease in the Fed funds rate to increase NIM TEY by 1 basis point and NII by approximately $1 million. Conversely, a 25 basis point increase in rates would be expected to have a similar but more muted impact in the opposite direction as our historical lag in deposit repricing would likely keep the near-term effect closer to neutral.

Upside to our third quarter NIM is supported by our strong loan pipeline and repricing opportunities on approximately $127 million in fixed rate loans. Those fixed rate loans scheduled to reprice currently yield 5.81%, which we would project to reset nearly 40 basis points to 50 basis points higher. We also project our nontaxable investment yields to continue expanding, supported by a solid pipeline of new municipal bonds yielding between 7% and 7.5% on a tax-equivalent basis.

Noninterest income totaled $29 million in the second quarter, including $15 million from Capital Markets revenue and $6 million from Wealth Management. WAC fee Capital Markets revenue of $17 million increased $6 million or 56% from the prior quarter, partially offset by a $1.3 million loss from the Freddie Mac LIHTC securitization. Our LIHTC lending team closed 22 projects during the quarter, including 4 new developers as we continue to expand our LIHTC platform. Our Wealth Management team delivered strong results with revenue up 7% from the prior quarter. The strong market performance, combined with the addition of 170 new client relationships and $483 million in new assets under management year-to-date.

Noninterest income performance this quarter highlights the strength of our diversified revenue model. Over the past 5 years, about 33% of our total revenue has been generated from noninterest income compared to 23% for our proxy peer group. The breadth of our Capital Markets and Wealth Management platforms provide a meaningful source of earnings diversification, reduces reliance on spread income and supports more consistent profitability across changing interest rate and economic environments.

Now turning to our expenses. Noninterest expense for the second quarter was $53 million compared to $52 million for the first quarter. The $1 million linked quarter increase primarily reflected higher salary and benefits expense associated with increased capital markets activity as well as higher professional and data processing expense related to investments in our digital transformation. The increase in salary and benefits expense was partially offset by an $825,000 linked-quarter decline in stock-based compensation expense as most of this expense is recognized in the first quarter as well as higher deferred loan origination costs associated with strong loan growth.

Even with the modest increase in noninterest expense this quarter, our expenses were below our guided range as other expense categories came in better than anticipated, including the timing of digital transformation investments. Our results this quarter drove a 310 basis point improvement in our efficiency ratio to 54.6%.

For the third quarter, we are lowering our noninterest expense guidance to be in the range of $54 million to $57 million, assuming Capital Markets revenue and loan growth are within our guided ranges and includes our continued investments in our digital transformation initiatives. This outlook reflects our disciplined approach to expense management under our 965 strategic model, which is designed to keep annual noninterest expense growth below 5%, driving operating leverage, improving efficiency and enhancing profitability.

Moving to our balance sheet. Total loans grew $217 million for the quarter or 12% annualized, excluding the impact of the LIHTC offtake transactions and the planned runoff of the m2 portfolio. The robust loan growth was fueled by strong production across both our LIHTC and traditional lending businesses and was in line with our guidance. Our 7% annualized traditional loan growth, excluding the m2 portfolio runoff, indicates healthy client demand and continued strength across our markets. We also increased our high-performing securities portfolio by $77 million linked-quarter, including $45 million of privately placed municipal investments at tax equivalent yields [ near ] 7%. In connection with the LIHTC securitization, we retained the BP's tranche of $33 million at a tax equivalent yield of 8.5%.

Total core deposit activity in the second quarter normalized from the exceptional first quarter performance, decreasing $324 million. The decline primarily reflected the company's intentional reduction of higher cost correspondent and public fund balances supported by liquidity generated from the LIHTC offtake transactions and a steady increase in noninterest-bearing deposits. On a year-to-date basis, core deposits have increased by $85 million or 2% annualized. We also delivered our third consecutive quarter of noninterest-bearing deposit growth, reflecting continued progress on a key strategic priority for our team. We remain focused on growing core deposits, optimizing our funding mix and maintaining disciplined deposit pricing in a competitive environment.

Our strong asset quality further improved during the quarter. Nonperforming assets totaled $40 million, a decrease of $3.4 million from the prior quarter, which resulted in the NPA to total asset ratio improving by 4 basis points to 0.41%. The ratio of criticized loans to total loans and leases also improved to 1.91%, the lowest level since the fourth quarter of 2019. The company recorded total provision for credit losses of $4.7 million during the quarter compared to $2.5 million in the first quarter, which reflected a benefit from the reversal of credit loss expense related to loans transferred to held for sale. Net charge-offs were $3.3 million during the second quarter, a decline of $600,000 from the prior quarter as we continue to benefit from the positive trends in charge-off activity from the wind down of the m2 Equipment Finance portfolio.

During the second quarter, we returned almost $13.5 million of capital to shareholders with approximately 150,000 common shares repurchased. We continue to deploy capital through opportunistic share repurchases during the quarter at an attractive multiple relative to tangible book value. Since we began repurchasing shares last year, we have repurchased 675,000 common shares, approximately 4% of total shares outstanding, returning a total of nearly $56 million to our shareholders. The share repurchase program authorized in October 2025 enhances our capital allocation flexibility and allows us to balance organic growth, shareholder returns and capital strength while reinforcing confidence in our long-term outlook.

Our performance resulted in another quarter of strong growth in tangible book value per share, which rose $2.17 or 15% annualized. This growth was driven by strong earnings during the quarter, partially offset by share repurchases. Our tangible common equity to tangible assets ratio increased 40 basis points to 10.71%. The common equity Tier 1 ratio increased 14 basis points to 10.68% and our total risk-based capital ratio increased 13 basis points to 14.13%. These quarterly changes reflect the combined impact of strong earnings, loan sales and share repurchases during the quarter.

Finally, our effective tax rate for the quarter was 8%, up from 7% in the prior quarter, reflecting stronger capital markets activity, which impacted 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 estimate our effective tax rate to continue to trend in the range of 8% to 10% for the third quarter of 2026. With that added context on our second quarter results, let's open the call for your questions.

Operator, we are ready for our first question.

[Operator Instructions] Our first question today comes from Nathan Race from Piper Sandler.

Todd, I was hoping you could just elaborate a little bit more on some of the nuances to the offtake transactions on the LIHTC side of things that you're planning for next year and how that's going to free up some balance sheet and capital capacity and also how that translates into kind of the buyback appetite going forward in light of kind of where the stock trades today?

Sure. Thanks, Nate. Yes, we talked about over the last couple of calls that Freddie Mac significantly increased the complexity of the 10 Series program since the two transactions we had done earlier. For example, the length of that offering document went from a little over 100 pages to more than 400. So several quarters, I would say, ago, when we knew that these expenses were really growing in the M-Series, we started exploring other alternatives. And we're very pleased that we're working with some other third parties on an alternative loan sale structure, that would really take those loans completely off our balance sheet. We would not be securitizing them. We expect that those alternatives will result in a complete sale of the loan, which gets us out of the business of retaining the B Tranche.

So to your point, it really will help us more effectively free up regulatory capital. We expect to be able to do that sometime in early '27. I don't really anticipate that we're going to be doing much in the way of offtake for the remainder of this year other than we may do another modest construction loan sale, if we need to just to be comfortably under $10 billion at year-end. We don't want to cut that too close. The perm early in '27 will, in fact, free up rate cap. That's going to allow us to continue to be opportunistic with respect to share repurchases. We're very pleased to have done 4% of outstanding shares. We're very happy about that. That was at a blended average weighted average cost of around $83 per share. So very effective repurchase. And we do have about 1.2 million shares yet available. So we will continue to be opportunistic as we run a little more capital-light in the LIHTC business. So Nate, I hope that gives you the answers you're looking for.

Yes. That's really helpful. And it sounds like the LIHTC pipeline kind of remains consistently strong. So I was wondering if you could just kind of speak to kind of the trajectory for Capital Markets revenue in the back half of the year? I think just given the guidance, that would imply a decent ramp-up in that revenue over the next few quarters. So I just want to confirm that. And of course, I appreciate that you'll have some seasonality in 1Q of '27 as well.

Nate, I really appreciate the question. Excited to talk about the LIHTC business a bit more. We had a very strong second quarter with that $16.7 million of Capital Markets revenue. Really proud of the team. They closed 22 projects during the quarter. That's really in the normal wheelhouse for us somewhere in the 22, 25, 27 range is typical. Really happy that 4 of those projects were with new developers as we continue to expand our reach. And over the last few quarters, we've created relationships with and financed projects for 3 of the most successful LIHTC developers in the country. And we're already working on additional projects with these developers, some that will happen even yet this year.

So we now have relationships with 18 of the top 20 affordable housing developers in the country. We've added 7 new developers to the client list thus far in '26, and we expect those to create additional projects in the future. So we have a tremendous team. The developers love working with us. Once they have that experience from our team, they tend to come back to us on future deals. Pretty exciting to share this data point. We actually have one developer that has now completed 60 projects with us since we've been in this business. So incredibly pleased with the team's performance. They are working really hard to grow the business and very proud of what they're creating.

In terms of the future, our future pipeline at the midpoint of the year here is really strong. Actually, it's similar to this time last year, which created some great results in the back half of the year. I think, Nate, that's probably the basis of your question. Are we expecting that again? I do want to be clear, this isn't guidance. This is really just a data point in terms of how we feel about the business. But I would say we feel very good about the growth in the business and the growth in new developers.

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions, that will conclude today's question-and-answer session. Actually, we do have a follow-up question from Nathan Race from Piper Sandler.

Just figure I'd follow up if there's no other questions in the queue. Maybe, Todd, you can just touch on the near term or Nick, the expense run rate, I appreciate that. But just assuming you guys kind of hit the guidance for the next 12 months on Capital Markets revenue, it sounds like we're squarely within that kind of sub-5% expense growth range for next year. I know it's a little early to be thinking about '27, but is that still a reasonable estimate along those lines?

Nate, really appreciate the follow-up. We have heard from several analysts that today is the biggest day in releases and a lot of folks are distracted on other calls. So Nate, we really appreciate the questions. We certainly anticipate staying in our guardrail of 5% in terms of expense growth next year. We talked a little bit about the fact, Nick talked on the call, our early opening comments that we really expect to stay in the guardrails, both in '27 and even into '28 when we expect to have Durbin and some of the rigor of the regulators really rolling into our structure.

So we're very committed to that. It's been a challenge, I would say, to do that while we're building the bank of the future and still paying for the bank of the past, but our people are doing a tremendous job with that project. And all of our folks are very mindful about efficiency and effectiveness in terms of cost. So long answer to your short question, but we intend to stay in there. Nick, I think you might have an add.

Yes. So Nate, I would just maybe highlight a little bit some of the work we're doing in the digital transformation area. So we do expect some significant cost savings from lower licensing costs of the new core, efficiency and staffing and processing costs from the operating of our banks on a single core, and we also have negotiated some payment and interchange economics on our debit card and interchange fees that should pay off here. So all of this will create some operating leverage as a result of the investments that we're making today.

So the way to think about this and its not necessarily a single step down immediately after we get through these conversions in April of '27, but more of a gradual improvement in the expense run rate. And so that improvement, again, is going to come from the duplicate systems that get decommissioned, our legacy contract costs start rolling off, processes get standardized and our staffing efficiency improves. So we expect those benefits to build through 2027 with more of a visible impact here in 2028. So I appreciate the question and the opportunity to elaborate a little bit.

And Nick, do you think some of those cost synergies around the cores around those conversions. Is that going to be largely absorbed by maybe some incremental investments to get prepared to be over $10 billion at some point?

I'm sorry, Nate. Our line cut out a little bit. Would you mind repeating that?

Yes. I was just curious if some of the cost synergies from converting the remaining charter systems, if that's going to be mitigated to some degree by maybe just some additional investments as you guys prepare to cross over $10 billion down the road?

Yes. No, fair question and actually should be timely in that regard. Now I would highlight that we've been building in some costs for $10 billion, approaching $10 billion over the last 2 to 3 years. So we've been adding some incremental staff to support that initiative or that hurdle. And so it's -- again, I would point back to my earlier comment that not necessarily an immediate change in overall expense run rate, but should be a nice offset, if you will, when it comes to thinking about some of the additional staffing that we've been absorbing through the process here.

So fair comment, fair way to think about it. I think our approach has been -- we're optimistic. We've built in under our 5%, 965 model in terms of keeping our noninterest expenses under that 5% over the last several years, and we intend to continue doing that. And again, as you start modeling some of this out, 5% would be the high-end. Now as we get some chance post-conversion to start optimizing some of additional processes, I would expect us to likely have an opportunity to be below 5% in our annual run rate there.

Great. And then just given that the LIHTC offtake transaction seemingly occurred late in the second quarter, Nick, can you help us with just maybe a better starting point for earning assets in 3Q?

Yes. So when I -- overall, when I think about the moving pieces, I think when we're modeling-out for the Q3 here, we do expect average earning assets to be approximately about $100 million lower, just given the lower starting point here for Q1. But we do expect to add about $200 million of earning assets period-over-period by the time we get to the end of Q3. So that really is reflecting the strong loan growth that we put out in the guidance range and reaffirmed and then also continuing to have some success in growing our municipal bond portfolio. So hopefully, that helps you kind of model that out here in Q3.

And then just with some of those moving pieces on the left side of the balance sheet, can you kind of just speak to kind of the trajectory for borrowings? It looked like they're up a bit in the quarter and just what you're seeing in terms of the deposit gathering pipeline and what kind of the prevailing cost to add core deposits are these days?

Yes. So certainly, deposits normalized after a very strong Q1. A lot of that decline was largely intentional as we let some of the higher cost correspondent public and brokered balances roll off. We were anticipating, as you clearly are aware, the liquidity that would come in from the LIHTC offtakes. And then we also wanted to stay disciplined on our pricing. So year-to-date core deposits are still up. Broker balances actually are down 50% since last June.

We also marked our third consecutive quarterly increase in noninterest-bearing deposits, which is a key strategic priority for us. And so here, as we've already entered Q3, we have already seen some deposit growth here through July and continue to feel good about our overall funding position. So while our level of borrowings at the end of Q2 was up from Q1, a lot of that really just related back to the exceptional $400 million growth in deposits that we had in Q1. And again, a lot of that being driven from correspondent.

Okay. Understood. And then maybe just one last one, if there's no other questions. Todd, I think last quarter, you were a little bit more upbeat on kind of the M&A environment and what that could portend for QCRH going forward. So just curious how you're thinking about acquisition opportunities these days? I know you guys got a lot on your plate in terms of the core systems conversions and getting everything on one platform. But just curious on how you're kind of thinking about the M&A environment and what opportunities may or may not be more actionable for you going forward?

Sure. Nate, thanks for the great question on that. Yes, as we've said over the past couple of years, M&A hasn't been a big priority because of this digital transformation project. But candidly, by next April, we'll be done with our last conversion. And as you know, M&A conversations take time to come together. So we have been a little more intentional about visiting with folks about opportunities. I just want to reiterate, though, our strike zone is very tight for M&A. We have incredible organic momentum growing EPS and TBV per share. So the hurdle, the bar for M&A is pretty high because of our organic performance.

But as you well know, banks in this size range of what we would be looking at $1.5 billion to $5 billion, a fair amount of opportunities there. And some of those banks for one reason or another, are looking for great partners. And we feel that we are a great partner. For those on the call, I would just refer to Page 27 in the investor deck we released alongside our 8-K. On Page 27, we show what we were able to do in Central Iowa with the CSB acquisition, buying a $500 million bank and turning it into a $1.3 billion bank organically 10 years later and improving profitability from the 1% ROA to 1.3%. So that's why we think we are a good landing spot for some folks that may want to join forces.

So we are hearing from some people that are thinking about that. Nothing imminent, nothing on the front burner, maybe not even anything technically on the back burner. But as you know, those talks are heating up a little bit, and we will be through with this huge project next April. So our capacity for it is opening back up. Our interest in it is opening up a bit more as a result, but I just want to end where I started. The strike zone is really tight. It's going to have to be a really great fit for us because we have so much going on organically that's rewarding shareholders. So thanks for the great question, Nate.

And once again, at this time, I'm showing no additional questions. I'd like to turn the floor back over to Todd Gipple for any closing comments.

Thanks for joining us on the call today. We really appreciate your interest in our company, and we look forward to seeing you in person sometime soon. Have a great rest of your day. Thank you.

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

Good morning, and thank you for joining us today for QCR Holdings, Inc.'s First Quarter 2026 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the first quarter. 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 a reconciliation of the GAAP to non-GAAP measures.

As a reminder, this conference call is being recorded and will be available for replay through April 30, 2026, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Todd Gipple at QCR Holdings. Please go ahead.

Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our first quarter performance, and then Nick will walk us through the financial results in more detail. We are pleased to deliver the most profitable first quarter in our company's history. This performance was driven by healthy loan and deposit growth, significantly lower noninterest expense and modest margin expansion. We maintained excellent asset quality and generated meaningful growth in tangible book value per share while returning capital to our shareholders through opportunistic share repurchases.

We also continue to make further investments in our digital transformation as we build a more modern, scalable bank for our clients and employees. Strong performance in our traditional banking and wealth management businesses partially offset the linked quarter reduction in our capital markets revenue. Capital Markets results were in line with our expectations given typical first quarter seasonality and were equal to our 5-year average for Q1 production. As a result, we delivered a very strong return on average assets of 1.40% and earnings per share growth of 31% compared to the same period last year, highlighting the strong earnings potential of our diverse business model.

Our traditional banking business continues to deliver solid organic growth supported by healthy commercial and industrial activity across our markets. Our multi-charter model enables us to consistently gain market share with locally led community banks to build deep relationships with high-value clients and communities where they live and work. Our digital transformation remains on track with the successful completion of the second of 4 core system conversions in early April. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience and driving operating leverage.

Our Wealth Management business also delivered very strong results with annualized revenue growth of 14%. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model, which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisers across our markets. We are deepening client engagement and reinforcing wealth management as a key driver of our sustained top-tier financial performance.

Our LIHTC lending business also continues to perform as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. We view LIHTC lending as a highly profitable, annually consistent and differentiated line of business for QCRH, anchored by our deep network of developer relationships, and historically high-quality assets our platform delivers. Our LIHTC business has consistently delivered strong results, demonstrating our success in navigating various interest rate cycles and dynamic market conditions.

Our strong relationships with industry-leading LIHTC developers, combined with market demand position us well to grow this business and further strengthen our financial performance. Given the strength of our pipeline in our traditional and LIHTC lending platforms, we are reaffirming our guidance for gross annualized loan growth of 10% to 15% over the final 3 quarters of 2026. We are also increasing the lower end of our capital markets revenue guidance by $5 million, now targeting a range of $60 million to $70 million for the next 4 quarters.

In combination with our LIHTC permanent loan securitizations launched in 2023, we have also begun partnering with private investors and LIHTC Construction loan sale transactions. These transactions enable us to expand our permanent LIHTC lending capacity, which will drive increased capital markets revenue. The ability to sell off these LIHTC construction loans allows our team to say, yes, when our developer clients would like us to provide the construction financing for their projects, in addition to the permanent financing that generates our capital markets revenue. This is allowing us to grow our market share in the affordable housing space.

During the quarter, we identified a total of $523 million in LIHTC loans, both construction and permanent for securitization and sale. The transactions are planned to close during the second quarter and will mark our fifth permanent loan securitization and our second construction loan sale. This is our LIHTC flywheel in action. Strong demand for affordable housing, reinforced by the federal government's commitment to increase LIHTC tax credits, combined with our deep developer relationships and our exceptional client service, positions us to capture market share from the larger competitors in this space.

LIHTC Industries proven long-term performance drives investor demand for these assets, enabling us to execute LIHTC loan securitizations and sales. These transactions allow us to proactively manage concentration risk, balance sheet growth, liquidity and capital levels while generating increased capital markets revenue. We are building an asset-light, capital-efficient and revenue-heavy business in affordable housing. While securitizations and LIHTC construction loan sales temper near-term on balance sheet growth, they enhance long-term profitability by creating more capacity. The balance sheet capacity created by these transactions is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue to more than offset the foregone interest income over time.

These loan sales and securitizations are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year. We anticipate growing beyond $10 billion sometime in 2027, and we plan to be fully prepared for the associated organizational impacts by mid-2028. Building on the planning efforts we began in 2023. Our company is executing at a high level across all 3 of our core lines of business. Our team has driven a 5-year earnings per share CAGR of 14% and a 5-year tangible book value per share CAGR of 12.5%.

Our continued investments in talent, technology and strategic growth, combined with disciplined expense management, position us to sustain this top-tier financial performance. I am grateful for our 1,000 teammates that take exceptional care of our clients, our communities and each other as they deliver long-term value for our shareholders. I will now turn the call over to Nick to provide further details regarding our first quarter results.

Thank you, Todd, and good morning, everyone. We delivered net income of $33 million or $1.99 per diluted share for the quarter. Net interest income was $67 million and increased slightly on a linked quarter basis when adjusted for fewer days in the first quarter. Our NIM TEY increased 1 basis point from the fourth quarter of 2025, which was below the low end of our guidance range. Our robust deposit growth came early in the quarter from our correspondent business, which carries higher pricing.

And when combined with loan growth occurring very late in the quarter, margin expansion was muted. The increase in our margin was driven by significant improvements in the cost of funds, partially offset by a reduction in our earning asset yields. We continue to have a disciplined approach to deposit pricing. And combined with the liability-sensitive balance sheet, our cost of funds betas are more than 1.5x those of our earning assets during the current rate-cutting cycle. Since the Fed began cutting rates in 2024, our cost of funds have declined by 79 basis points compared to only a 47 basis point decline in earning asset yields. While we continue to benefit from repricing lower-yielding loans into higher market rates, the opportunity is naturally moderating as the rate cutting cycle matures.

During the quarter, new loan origination yields exceeded those on loan payoffs by 22 basis points. However, loan growth arrived very late in the quarter and average loan balances were down $109 million contributing to the decline in the loan yield compared to the prior quarter. While our balance sheet has moved closer to neutral since the rate cutting cycle began, we remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $900 million, providing upside to margin in a declining rate environment.

For future cuts in the Fed funds rate, we estimate 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. Supported by our late first quarter loan growth, we are guiding second quarter NIM TEY ranging from static to an increase of 3 basis points, assuming no further Fed funds rate changes.

Upside in our second quarter NIM is supported by repricing opportunities on approximately $163 million and fixed rate loans currently yielding 6.2%, which we would project to reset nearly 25 to 30 basis points higher. We also anticipate continued CD repricing during the second quarter, with approximately $400 million of maturities, currently costing 3.7%, which we expect to retain and reprice nearly 25 to 30 basis points lower. We project investment yields to expand, supported by a solid pipeline of new municipal bonds priced well above 7% on a tax equivalent basis.

Additionally, we are planning to offtake approximately $523 million of LIHTC loans through the securitization and loan sale in the second quarter, which should be moderately NIM accretive and is reflected in our NIM guidance. Noninterest income totaled $23 million in the first quarter, including $11 million from Capital Markets revenue and $5 million from Wealth Management. Our LIHTC lending team closed 13 projects during the quarter, including three with new developers as we continue to expand our LIHTC platform.

Our wealth management team delivered strong results this quarter, adding 80 new client relationships and $177 million in new assets under management. While market volatility pressured AUM levels, new client growth largely offset that impact. Wealth Management revenue was up 3% from the prior quarter. This business continues to provide stability, recurring fee income and meaningful diversification to our overall revenue mix.

Now turning to our expenses. Noninterest expense for the first quarter was $52 million compared to $63 million for the fourth quarter. The $11 million decrease was primarily driven by a $5.5 million reduction in salaries and benefits expenses associated with variable compensation related to earnings performance. In addition, we experienced lower professional and data processing costs due to the timing of digital transformation activities and the impact of the debt extinguishment loss in the prior quarter.

Our flexible cost structure, particularly variable compensation tied to performance is designed to support operating leverage while preserving flexibility through various revenue cycles. As a result, expenses were well below our guided range, highlighting our expense flexibility. This structure closely aligns our underlying cost base with performance, supporting a pay-for-performance culture and value creation for shareholders. Our significantly lower noninterest expenses resulted in an adjusted core efficiency ratio of 57.7% for the first quarter. For the second quarter, we are guiding noninterest expenses to be in the range of $55 million to $58 million, which assumes capital markets revenue and loan growth are within our guided ranges, while also continuing to invest in our digital transformation initiatives.

This outlook reflects our disciplined approach to expense management aligned with our 965 strategic model, which targets noninterest expense growth of less than 5% annually while enhancing operating leverage and profitability. Moving to our balance sheet. Total loans grew $145 million for the quarter for 8% annualized, excluding the planned runoff of the M2 equipment finance portfolio. There are $523 million of LIHTC loans identified for securitization and sale included in the held-for-sale category. These loans consist of a $207 million pool of LIHTC construction loans identified for sale to a new private investor and a $316 million Freddie Mac LIHTC tax-exempt permanent loan pool securitization.

Continued execution of our LIHTC offtake strategies has increased our confidence to supporting larger transactions and a broader range of developer opportunities. Complementing our loan growth, core deposit growth accelerated during the quarter, increasing $409 million or 23% on an annualized basis. Average deposit balances only rose by $31 million or 2% annualized compared to the fourth quarter as we actively managed our excess liquidity off balance sheet to optimize balance sheet efficiency. We remain highly focused on expanding core deposits and improving the deposit mix across our markets.

Our deposit mix improved this quarter, driven by higher noninterest-bearing balances and a reduction in higher cost CD and broker deposits, further strengthening our funding profile. Asset quality remained excellent during the quarter. Nonperforming assets totaled $43 million, a decrease of $439,000 from the prior quarter, which resulted in the NPA to total asset ratio remaining static at 0.45%. The ratio of criticized loans to total loans and leases was 2.01%, remaining well below the company's long-term historical average and near the 5-year low of 1.94% established in the prior quarter.

The marginal increase in criticized loans was primarily driven by one large credit, which is expected to be resolved favorably later this year. The company recorded total provision for credit losses of $2.5 million during the quarter. down from $5.5 million in the prior quarter, primarily due to the reclassification of Light Tech construction loans to the held-for-sale category as these loans are expected to be sold at par. Net charge-offs were $4 million during the first quarter of 2026, a decline of $300,000 from the prior quarter.

Between the start of the first quarter and April 20, we returned almost $25 million of capital to shareholders with about 288,000 common shares repurchased at opportunistic valuations. Since we began repurchasing shares in August of last year, we have repurchased 566,000 common shares, returning a total of $46 million to our shareholders. These repurchases demonstrate our capital allocation flexibility, enabling opportunistic repurchases when they create value and align with our strategic and financial priorities. We delivered another quarter of strong growth in tangible book value per share, which rose $1.33 to over $59, reflecting 9% annualized growth.

Over the past 5 years, tangible book value has grown at a compound annual rate of 12.5%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Our tangible common equity to tangible assets ratio decreased 2 basis points to 10.31%. The common equity Tier 1 ratio increased 2 basis points to 10.54%, and our total risk-based capital ratio decreased 19 basis points to 14%. These quarterly changes reflect the combined impact of strong earnings and share repurchases during the quarter. The total risk-based capital ratio was also impacted by a reduction in subordinated debt capital treatment on our 2019 issuance and lower ACL balances.

Finally, our effective tax rate for the quarter was 7%, down from 8% 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 estimate our effective tax rate to be in the range of 8% to 10% for the second quarter of 2026.

With that added context on our first quarter results, let's open the call for your questions. Operator, we are ready for our first question.

[Operator Instructions]. Today's first question comes from Daniel Tamayo with Raymond James.

Thank you. Good morning, guys. Yes. Maybe first on the capital front. You've got the two securitizations planned for the second quarter. I apologize if I missed it, but do you have a sense for how much capital that will add to the stack. And then the follow-up is on the buyback side. Just do you plan to use that in buybacks? Or you're at, I think, 10.5% CET1. Is that a good bogey for you guys to settle near going forward? Or do you want to keep growing?

Yes. Thanks, Danny. Appreciate the question. Actually, through the term loan securitization, we don't really free up regulatory capital because we're retaining B pieces historically. And that's okay, but it does free up GAAP capital. As you noted, we're getting into the mid-10s in terms of total risk base and CET1. And so 25 basis points gets freed up from the construction loan participation and that will allow us to continue to be fairly opportunistic with respect to buybacks. So we're getting up to really above our long-term target in terms of capital ratios.

And so we would continue to be opportunistic. As you know, there's really 4 things to do with capital, retain it for organic growth, and that's a little less demand for us as we're going more asset-light and capital efficient in the LIHTC business. M&A is not a current priority for us. So then you get to returning capital. We did raise our dividend modestly and it remains a modest dividend because we believe at current valuations, the stock repurchases, buybacks are really the best use of capital.

And so we're very pleased to have accomplished what we have already -- and really the answer is we would continue to be opportunistic when it comes to buybacks at current valuation levels that makes sense. And we tend to not just look at where we're at on a current price to tangible book or price to earnings, we really look at where earnings in TBV are headed. And considering we're growing those that are more than 10% CAGR. And gives us even more confidence to be buying shares. So kind of a long answer to your short question, but frees up about 25 bps, and we would continue to be opportunistic in share buybacks.

That's great, Todd. I appreciate all the color there. And then maybe one on the margin. So we've got the guidance for the second quarter. Feels like maybe we're approaching stability. Curious for your thoughts on that. And then longer term, do the securitizations continue to be kind of modestly accretive every time you do them? Or is there a point where they are breakeven or don't impact the margin as much as we look forward for future securitizations.

Thanks, Danny. I'll answer several data points here, maybe for that question. And when you think about our Q1 average earning assets, we were about $8.6 billion, considering the Q1 loan growth being back-end loaded. And then assuming we hit the midpoint of our loan growth, call it, 12.5% here for the rest of the year. I assume roughly middle of the quarter for offtakes. We expect average earning assets would be down about $200 million. So I'm going to translate that then into NII and NIM. Our core margin, we continue to expect to grind higher by a couple of basis points with loan and CD repricing plus.

And then to your other question, the offtakes here in Q2, they are expected to be slightly accretive, and I'm going to call that about a basis point here for Q2. In addition, when it comes back to full circle to NII, we've got an extra day in Q2, and all of that leads us. I think we're going to feel pretty confident about holding Q2 NII static. When you think on the go-forward picture on future offtakes, I don't think we're going to anchor every transaction to being perfectly neutral quarter-to-quarter. Future LIHTC rotations likely to be less dilutive than it was in Q4.

Q4 was -- we had a fair amount of well-priced assets that were part of that package transaction. Some of the transactions here in at lower yields. And so we also are combining that with our securitization. So we get a little bit of upside between the two transactions. So I think any time we're taking decent assets off the books. If we can hold neutral grade, I think our expectations might be a little dilutive, but certainly not to what we experienced during Q1 with the impact from the Q4 transaction.

And our next question comes from Damon DelMonte at KBW.

This is [ Matt Rank ] filling in for Damon. Hope everybody is doing well today. My first question, thanks for the comments on the digital transformation. But just curious if any of that modernization includes anything with artificial intelligence. And maybe if you guys have identified any use cases, like could that technology speed up the LIHTC flywheel, so to speak, or help with wealth management, anything like that?

Sure. Matt, thanks for joining. Give our best to Damon. We are really excited about the digital transformation that we're undergoing here, and I'll give you a little background to get to your AI answer, but we're halfway done. The first or conversion was candidly our most simple, and that was last October when we went from a Jack Henry product to another Jack Henry product, where we've landed at Jack Henry Silver Lake.

The one we accomplished just after the end of the quarter, first weekend in April is candidly our most rigorous one. It was the first one going from Pfizer signature, the Jack Henry Silver Lake. It went really, really well. and we really wanted to accomplish that first one and have it go well, of course, we've got another one coming up in October and April. So in April 27, we expect to be all done.

And the answer to your AI automation question is really about the decision we made a couple of years ago to partner with Jack Henry for our new core. We believe them to be the furthest along with respect to AI with respect to automation opportunities, the open architecture that they have has allowed us to integrate it with roughly 30 other -- a little over 30 other products that link to our core. That's gone really well. It's been a lot of hard work. But they are, we believe, furthest along in terms of giving us and their other bank clients a lot of capabilities when it comes to AI.

That will come from our large third-party vendors. We're not going to be standing that up ourselves, but they are well down the path. With respect to how that impacts us in the future. I think it's going to be more about our retail and commercial banking. I do think there will be some artificial intelligence, certainly, that will help us in the wealth management space. When it comes to LIHTC assets, there are some conversations more around blockchain with respect to tracking those assets and the securitization and sale of those assets being more efficient with blockchain. So it's more about blockchain when it comes to LIHTC. So thanks for the great question. We are really excited about our digital future and we're about halfway down -- a little over halfway done with the core conversions.

Okay. Great. And then just one more question for me. The loan loss reserve came down this quarter. So just wanted to get your thoughts on how we should think about that level going forward.

Sure. So Matt, while provision was down, that was really due to the reclassification of the LIHTC loans to held for sale. So we used some of the provision in -- or the ACL in that regard. But we did, and we believed it was important, we did hold our coverage ratio static at 1.26%. So while our provision was down we maintain the same level of reserves that we had previously. So just -- I appreciate the question because it will help be clear that we didn't soften reserves. We didn't light and reserve levels. We kept those static. The reduction in provision was about reclassifying a fair amount of loans to held for sale.

[Operator Instructions]. Our next question today comes from Nathan Race at Piper Sandler. Hello, Nathan, is your line on mute perhaps? All right. It appears that we're not receiving any audio from Mr. Race's line here. So we're going to move on to our next questioner, which is Brian Martin at Janney Montgomery.

Guys, good morning. Can you just -- maybe I missed what you were saying there in terms of just -- I think I got the big picture on the being kind of neutral, but just kind of with the earning assets land in the next couple of quarters as you kind of roll through the growth and the offtake in terms of -- it sounded like it might be down 20 or so next quarter in the second quarter, given what happens? And then thereafter, it's stable to growing with the balance of the portfolio? Or just second and third quarter, just as you -- if it happens mid-quarter, just kind of how to think about those next 2 quarters from an average earning ascent standpoint.

Yes. Thanks, Brian. Certainly, a lot of noise, here in Q2 as you think about the transaction and trying to model some of that out. But yes, you are correct. When you think about Q2 average earning assets, we're thinking about that being down about $200 million. But that assumes we're hitting a pretty strong loan growth for the quarter. And then we also then have the offtake kind of pegged up for mid-quarter of Q2. Now when you get to Q3, when we think about some of the noise, that temporary noise associated with the transaction, you'd start to see that to stabilize and to see some growth from there.

Got you. Okay. And just the margin, obviously, you gave some comments about next quarter's margin. But just the longer term, I think the -- maybe the question earlier just about it before in a period of stability here. The bias would be trending upward. I mean, you had some nice improvement on the funding side this quarter with the deposits. I don't know that -- just the timing of the loan growth coming on and I guess, any additional improvement on that funding side, but it feels like the margins kind of flat to up rather than down. Is that -- as you kind of look in the out quarters without putting words in your mouth, does that seem like how we should be thinking about it?

Yes, Brian, that is how we're thinking about it, and we continue to grind out every basis point from our core margin. And as you mentioned, a lot of that is coming from our loan and deposit repricing. We continue to DRIP loans -- or sorry, DRIP deposit pricing on our nonindex deposits DRIP lower here as we can. But yes, our expectation is that we can continue to grind out every basis point here. even into Q2 with all the activity going on, but beyond that into Q3. I think something else that will contribute to that is our expectation on the stronger loan growth as well.

Got you. And the loan-to-deposit ratio, I guess, as you kind of move through all the noise here, I guess, where do you expect that to kind of settle out over the next couple of quarters given the dynamics here. There's a lot of moving parts in there.

Yes. So we did drop quite a bit to 87% this quarter. Certainly, that's below our historical. When you think about Q2, we're expecting that to fall more into a range between 90% and 95%. I'd probably land at 92.5% longer term here.

Got you. Okay. And then last two, just -- I know you talked about the buybacks being the most opportune based opportunity short term. But as you kind of roll through the modernization of the technology and you're more asset-light or, I guess, does M&A become a bit more important or more interesting, I guess, are more likely as you kind of look out into 2017? And you managed below $10 billion this year, but going over, I know it doesn't have a big cost negative to you guys, given the planning you've done, but just in terms of going over with more size. Is that something you would think about as you go into '27?

Yes, Brian, that's a fair question. I appreciate you asking. Our interest in M&A will grow a bit after we get all the way through this digital transformation. I've been careful to say in the past, we're not necessarily in blackout with respect to that because of the conversions we're doing, we would certainly have the ability to do something if it made a lot of sense.

I would tell you our interest in M&A would be less about the gyrations of going over $10 billion. I continue to feel very good about that. But as you know, a lot of conversations are starting these days, and there certainly is more chatter around M&A. We think we are a really great partner for the right potential partner. But I would just say activity around that is ramping up in terms of conversations, but our strike zone remains very, very small. There's a whole host of metrics with respect to a potential partner that we would have to hit.

Probably the main one would be at the pace we are accreting TBV and earnings per share it's going to have to be a very good strategic and financial transaction because we do not want to go backward. And so that means it would have to be an excellent partner, and there are some out there. it'd have to be a really well-done financial transaction because we have great momentum organically, and we really don't want to take a step backward in M&A. So probably the punchline there is open to it, but very tight strikes out.

Yes. And then nothing near term, more -- a little bit more in the out years -- or out quarters.

Sure.

[Operator Instructions]. Our next question comes from Nathan Race from Piper Sandler.

Sorry about the technical difficulties earlier.

No worries.

I apologize, I hopped on late, but just in terms of kind of the cadence of capital markets revenue and just kind of some of the impacts you saw from a revenue perspective this quarter, I mean, how much did count the volatility in rates versus maybe some seasonality impact, what you saw in terms of capital markets transactions closing. And then do you also expect as you look out over the next 12 months to has some seasonally kind of lighter volumes as well in the first quarter. I guess I'm just trying to understand is the updated guidance is going to be kind of more loaded over the next 3 quarters.

Sure. No, Nate. I appreciate the ability to clarify some of that. So in Q1, we saw very typical seasonality for Light tech, and it really didn't have anything to do with rates or any macroeconomic headwinds or candidly, even the war, just the affordable industry tends to work really hard to close a lot of deals at year-end. And then we have a pretty slow start to the new year. And actually, we did 13 projects right on top of historical Q1 average of $11 million.

So landed about where we expected. We'll tell you that over the last couple of quarters, we've raised our guidance range, and that's because of all that we're able to do with some of these transactions on perm securitizations and construction loan participations. So back in Q3, we raised our guide from $50 to $60 million up to $55 million to $65 million in the Q4 call in January, we raised the top end of the range to $70 and left the bottom. Now this quarter, we're moving that floor up as we've become more confident about future pipelines I would just say I wouldn't get too focused on the precision of those guidance ranges. It's more about the direction that they're going up, you know us really well.

We have a very strong say-do ratio, and we want to keep it that way. But again, the gist of this is our pipeline is shaping up as strong as it's ever been as we get further into the year. So Q1 seasonality was really just about the industry seasonality. We're very optimistic about the pipeline we have. We're good at closing deals these 13 projects we did in Q1, even though it was a slower quarter, three of those projects were with first-time new developers. So we continue to expand our roster too. So we're very excited about the future of LIHTC, having construction offtake allows us to say yes more often to clients. and to consider candidly slightly bigger deals.

So we are very excited about the future of that. That's why we've gotten to the $60 million to $70 million guidance range.

Understood. That's really helpful. And just going back to the margin outlook and just with the expectations for some additional construction LIHTC securitizations or sales. Curious what pricing is on that product. I imagine it's higher than what you see on a perm basis or maybe even across some other commercial segments. So just trying to get a sense of what these additional securitizations, how that's going to impact loan yields, not only in the second quarter, but as you perhaps do additional construction sales or securitizations in the future.

Yes. When we look at the impact on margin for future loan sales, I mean, we continue to expect to overcome any dilution that might come from additional loan sales certainly, pricing on some of the loans that we sell are going to vary depending on tax or tax exempt.

Yes, it's probably more deal dependent, if you will. And also when you think about the timing of some of these transactions, these are both of the light tech construction transactions were with our first -- with first-time partners. And so we are focused on getting deals done and not that we took the ball off the economics, but we -- some of the deals that we are doing the offtake for have been in the portfolio for a minute. So those come with prices that were higher as they were originated in a higher rate environment. Now our speed to execution in the future is likely to be much shorter. And so I would expect the disconnect between the portfolio that we are offtaking to current rates would be smaller.

And Nate, I guess I'd just tag on here and say the upshot of both transactions that we'll close here in Q2 is just a slightly improved margin, maybe a basis point. And that will fluctuate from time to time. There will be times where depending again on the mix of the other side of the balance sheet, we could see a little bit of margin accretion. We could see a little bit of margin contraction but it's all going to be really tight to static. We do not anticipate having to take significant margin pressure when we're taking these off the balance sheet.

So yes, I really appreciate the question, just to be able to be clear about that, that we don't expect significant impact on margin when we're doing this.

Got it. That makes sense. And just as these securitizations play out and just given the loan growth outlook, curious if we can expect some additional reserve releases going forward going forward, similar to what we saw this quarter. or kind of how you guys are thinking about kind of just the reserve trajectory, maybe on a dollar basis, just as some of these loans are offloaded?

Sure. So I guess what I would say is there may be another construction loan participation at the end of the year. that's really going to be based on where we land on gross loan growth. If we're more in the lower end of our guide at 10%, we probably don't need it. If loan growth is more robust, and we're closer to the 15% in the guide, we're likely to do another construction offtake later in the year. And if we did that, there would be another bit of lightening of provision when we have that happen.

Absent that, provision would really come down to something a lot more consistent with what we've done over the last 6, 8 quarters. were in that $4 million or $5 million range. And I would tell you, my expectation on provision would be what would vary there would just be the pace of loan growth. We really aren't seeing any challenges in terms of the portfolio. So any modification in that kind of steady rate of provisioning would really be more about the level of loan growth.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Todd Gipple for any closing remarks.

Thank you all for joining us today. We really appreciate your interest in our company, and we look forward to connecting with you sometime soon. Have a great rest of your day.

Thank you, sir. That 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.

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.

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.

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, we are ready for our first question.

[Operator Instructions]

Our first question today comes from Damon DelMonte from KBW.

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.

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.

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?

Yes, Damon, thanks for asking about that as well. We do continue to target sometime in the first half of this year. I expect us to have that perm loan securitization happen prior to June 30. We do that with Freddie Mac. And Freddie is not -- well, they're a GSE and not a full government agency, but they can sure act that way sometimes. So they're undergoing some changes in their securitization program for the M Series program we use. And what I mean by changes is they're making it harder and it's taking longer. But we still expect something in the $300 million to $350 million range prior to June 30.

Our next question comes from Nathan Race from Piper Sandler.

Could you just help us with some guideposts in terms of a starting point for earning assets in the first quarter, just some of the -- just given the moving pieces with the securitization in 4Q and then just the expectation of pay down some wholesale borrowings as well?

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 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.

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

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

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?

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.

Looking ahead here, obviously, you saw we increased our guidance range for NIE, the $55 million to $58 million. Updated range continues to assume that we make further investments in the digital transformation. The approximate 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.

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 TPV 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.

That's great and very helpful. Just a question in terms of kind 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.

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, maybe talk about -- and both NIM and NII.

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.

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.

Sure. yes, Nate, we are already on top of the MOFG sale. It is really adjacent to the Cedar Rapids market. We have great leadership in that market, very focused on taking clients and taking market share. We don't have to be located in that market to do so. And we already have a target list and are working it pretty effectively. We expect to take some of the best clients out of that platform. [ Nikolai ] is an incredibly good performer, but we're pretty certain that some of the folks in Iowa City, Iowa are not going to be all that thrilled that all the decisions are made out of state, and they're certainly going to lose some talent. So we view it as an opportunity.

Again, our entire company was founded on the backs of not very good M&A in the Quad Cities and Cedar Rapids. So we know how to take advantage of that, and we certainly expect to.

Our next question comes from Daniel Tamayo from Raymond James.

Maybe starting on the LIHTC business. So you gave the updated guidance increase from last year's guidance. It would be kind of flat to down a bit if we took the midpoint from -- on a year-over-year basis. And then that would be kind of a, I guess, 2- or 3-year trend of just a little bit down on the revenue side. Obviously, longer term, it's up. It seems like there's great opportunities there. You've been growing it a ton. Just curious kind of long term, how you think about growth opportunities within the LIHTC business. Are there bankers that you would need to add to do that? Are your current bankers at capacity or near capacity? You talked about the developer relationship opportunities. But I'm just curious kind of as we take a step back on this LIHTC business, which continues to be more important for your business overall, kind of what the growth opportunities might look like on a longer-term basis?

Thanks for the great question, Danny. We are very excited about the future of this business. If anything, I would just ask everyone to focus less on the top end number of our range and more on the direction that we here in the last 2 quarters have moved it up a couple of times. We understand that might look a little light considering the back half of this year. candidly, I'm okay with that if maybe the biggest concern folks might have is we're being a little conservative with our guidance. I think what it has to do with Danny, is we have worked really hard on this business this year.

And while we've all worked hard on making this a better business, our LIHTC team is incredibly talented, and I don't know that they've ever worked harder. And so we're just trying to be realistic about the fact that we need to operate in this space a little bit with the new construction offtake that we have, make sure we're fully prepared and ready to grow that business. But certainly, we expect to be able to take the new developer relationships, the new third-party relationships on construction offtake and continued strong performance by this team and further grow the business. So we do have expectations for further growth. I think I'd just say let's operate in this environment a little bit, let's prove the numbers up. We want to maintain our [indiscernible] ratio here. That's always been important to us. So we think the future is quite bright.

Understood. I appreciate that. I guess from an efficiency perspective, you talked about the expectation for positive operating leverage in the business and certainly contributing to the overall franchise. How should we think about that 5% kind of expense target that you've had for a long time. What does that contemplate from a LIHTC growth perspective? Is that kind of the range of fee income growth that you've provided, so somewhere around the midpoint and then you would perhaps be above 5% if the LIHTC revenue got better?

And then sorry for a long question here, but wrapping that into a profitability discussion, how do you think you -- how much further do you think you can take this thing? I mean you're over 1.50% ROA last couple of quarters. Does that -- do you think that can continue to move higher?

Danny, first, I'll just say your assessment of the guide on NIE is very accurate that when Nick is providing that guide, we're assuming we're kind of down the middle in terms of guidance on loan growth, on capital markets revenue, on performance. So you've got that nailed. We're quite proud of the back half of this year and finishing with core ROA at 150. But we expect to continue to grow earnings per share and tangible book value per share at a better than average clip and stay in the double digits there.

And so for us to do that, we have to continue to move up ROAA, and it's pretty frothy already at 150%. But the way we get there, Danny, is -- and so I'm really glad you asked the long question because I think it's important to me that people understand we are not going to achieve greater ROA simply by further growing the LIHTC business. that will help, and we expect that to happen, and we expect that to add tremendously to profitability.

But at the same time, we have to improve the ROAA performance of our traditional banking space, and we have to get continued 10% growth in wealth management. We do not want to grow earnings solely on the back of our LIHTC business. It's really important to us. Our team is really good at it. We expect it to grow. It's a tremendous ROA and EPS engine, but we're not just focused on that. We have to get traditional banking to improve and wealth management to continue to grow at 10%.

So we want all 3 to grow ROAA in the future, and we expect that to happen. So on the traditional side, really 2 things, improving the right side of the balance sheet and how we fund. As we get better at that, that will help earnings. And then the operating leverage we're going to get from digital transformation and some other things. We expect that in really starting in '27, more fully in '28. So those 2 things will help traditional.

So Danny, I answered your long question, a long answer, but I wanted to take everyone down that path that while we expect great things out of the future of our LIHTC business, we really need all 3 segments to continue to improve performance.

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?

Yes. Danny, when we look at our effective tax rate, obviously, very high performing, very low effective tax rate there. We did -- I think full year, we landed around 6.5%, and that was compared to 7% in '24. And both those years had some pretty decent performance, both of those years were record years. To your point, though, the percentage of our tax-exempt business on our balance sheet that drives our income statement, it's about 30%. So when it hits the income statement. So that's -- I think that's probably pretty consistent of where we're expecting that to head. We did give guidance for the next quarter, 8% to 10%, but I think that makes sense given some of the lighter activity we're expecting here in Q1.

So I think, hopefully, that helps to answer your thoughts there. Can that continue to trend lower over time? I guess my short answer is it depends a little bit on the makeup of our balance sheet. But we continue to off balance sheet some of our LIHTC business, so that's going to moderate. And I think kind of the level we're at and have been at here more recently is what you should assume.

Our next question comes from Brian Martin from Janney.

Nick, maybe I just missed the end of that on the tax rate. But just the tax rate over the balance of the year, just -- do you expect it to change materially off the first quarter level? Or I guess, did you suggest otherwise? Maybe I just didn't catch that.

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.

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 period than the average? Do you have that?

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

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.

Below it. Okay. Got you. I just want to make sure that. And then, Todd, your comments about just getting better elsewhere. I mean, do you see an opportunity on -- I mean, it sounds like there's an opportunity on the funding side, certainly with the DDA at around 13%. I mean, do you expect to be able to -- do you see an opportunity to move that up? Or is that -- I guess, do you have targets kind of on where that may trend over time? And then just kind of how you're thinking about the loan-to-deposit ratio here?

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.

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?

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.

Got you. No, that's helpful, and it makes sense. Maybe just last 1 or 2 for me. Just on the loan guide or just kind of the loan outlook. In terms of -- it sounds like there's obviously a securitization and maybe potentially later in the year, a couple more of these construction offtakes. Just when we think about the loan growth of the guide, I mean, is this a number that's net of kind of all the activity that you're anticipating here in terms of the sales and the securitizations? Or how do we think about the net loan growth kind of as you go through with all the actions you expect here over the next couple of quarters?

Yes. Brian, that's a fair question. It's kind of a difficult answer simply because the exact timing of some of this offtake is not real precise just yet, and that's not because it's uncertain. That's because it's going to depend on how fast our loan growth is and when we think the right time is to sell some of that off. We're blessed to have a tremendous partner in the construction aspect of this business, and they are very anxious to have more of our construction loans, and we're anxious to do that with them.

But -- so I apologize that's a little choppy. So what we can talk about is our gross loan growth. We think that's going to be very strong. What I'm really thrilled about is last quarter was the best quarter of the year in terms of loan growth. And while 70% of that was LIHTC, traditional bank was 30%, and that's the best traditional bank growth we've had in a long time, and our pipelines on traditional bank growth are very strong. What I will tell you is because I know what you really need to do, Brian, is figure out the impact on NII. And I know that's why some more precision would help. What I will tell you is we are very focused on doing all this with the balance sheet, but also growing NII. And we are going to target that 9% and 9.65%. So the offtake will mute loan growth year-over-year. But during the year, we expect it to help produce NII growth.

Got you. That's understood. That's super helpful, Todd. I guess you know what we're trying to get to. So -- and just the last one for me was just on the capital management and just the buyback. You talked about M&A not being an issue or not being really a factor. It certainly sounds like that continues to be the case. But in terms of the buyback, how do you think about -- is this opportunistic here? Or I guess, is it ongoing? -- you plan to be in the market kind of regularly? Or just how are we thinking about the repurchases?

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.

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

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?

Sure. Yes. Thanks for the question. What I would tell you is in terms of competition in the LIHTC space, -- we talked a little bit about this in our scripted comments, but what makes us really encouraged about the future growth of LIHTC is we have really -- our team is tremendous. And we hear that from our developer clients directly about how much they appreciate our team. And we've grown this business pretty nicely. But based on industry data that we can get, we only have around 2% of the market. And that obviously makes us very encouraged about potential for future growth.

So in terms of headwinds and competition in that space, -- the candid about it, the only time we really end up losing deals is when the equity provider to that developer also has either an in-house perm loan or a relationship with someone on the perm side because developers, first and foremost, need equity. And so equity sometimes will drive the selection. Not to be cavalier about it, but that's about the only time we lose transactions is if an equity player comes in and says, I'm only going to give you the equity if you do the perm with us.

So to combat that, we are working with equity providers that are perm loan agnostic, where they would love to partner with us because they know developers like our program. So we are working really hard to further our relationships with equity providers that can be partners with us on the firm. So that's why the future growth of LIHTC, we're optimistic about it. In terms of local competition for traditional banking, in several of our markets, there is not a transaction that happens in the market without us knowing about it. And candidly, maybe all 4 markets. We tend to be at the table for most anything of substance in our 4 markets. It's because of our structure and our great team. So sometimes what we're deciding is are we willing to do it at a certain price.

And so pricing is tough right now. We're doing a great job. Our bankers are doing tremendous work, maintaining relationships and getting paid as well as we can. But typically, the competition for deals is going to be more about pricing and whether we can make it or not.

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.

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.

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.

Good morning, and thank you for joining us today for QCR Holdings, Inc. Third Quarter 2025 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the third quarter. 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 to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through October 30, 2025 starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I would now turn the call over to Mr. Todd Gipple, at QCR Holdings.

Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our third quarter performance, and then Nick will walk us through the financial results in more detail. We delivered exceptional third quarter results, achieving record quarterly net income and strong earnings per share growth of 26% compared to the second quarter. I would characterize this as a return-to-form quarter for our company as we have internal expectations to drive sustained top-tier financial performance for our shareholders and we hold ourselves accountable to achieve this level of success. We delivered across the board on our key operating metrics and exceeded the upper end of our guidance range for loan growth, NIM expansion and capital markets revenue. I would like to thank all 1,000 of our team members for their hard work delivering these exceptional results.

Our record earnings were driven by a rebound in capital markets revenue as well as robust loan growth and continued net interest margin expansion that drove a substantial increase in net interest income. Also contributing to our strong results was an 8% linked-quarter increase in wealth management revenue as this business continues to perform at a high level. We are pleased to report continued margin expansion again this quarter, driven by strong earnings asset growth and higher loan and investment yields while maintaining a static cost of funds. Our loan growth accelerated significantly, increasing by $286 million or 17% annualized and was 15% net of the planned runoff from M2 equipment finance loans and leases. This growth was fueled by strong new loan production from both our LIHTC and traditional lending businesses. Looking ahead, we have a solid pipeline and remain optimistic about sustaining this momentum and are guiding to gross annualized loan growth in a range of 10% to 15% for the fourth quarter.

As I discussed in our last earnings call, I view our company is operating through 3 primary lines of business: Traditional banking, wealth management and our LIHTC lending platform. I am pleased that each of these delivered improved performance this past quarter. We continue to deliver robust organic growth and improved profitability in our traditional banking business. Our multi-charter community banking model built around separate autonomous banks that attract top-tier talent and the best clients in our markets allows us to consistently capture market share from our competitors. We had strong traditional loan growth and core deposits grew at an annual rate of 6% for the quarter, and $410 million or 8% annualized year-to-date. Additionally, our digital transformation remains on track with key milestones achieved this year, including foundational work toward our Bank of the Future, and the successful conversion of the core operating system for the first of our 4 charters earlier this month.

By streamlining and improving our technology stack, we expect to unlock significant operating leverage in the future as we convert our banks into a unified, more modern and efficient operating system. These upgrades are expected to drive measurable improvements in productivity, service delivery and cost structure while empowering both our bankers and our shared services support teams with better tools to serve clients more efficiently and effectively. Looking ahead, we anticipate continued progress on this initiative with each conversion bringing us closer to a fully integrated agile platform that enhances efficiency and reduces long-term operating costs. This will further improve the profitability of our traditional banking business.

Wealth management also remains a strategic growth engine. Year-to-date, we've added 384 new client relationships and brought in $738 million in new assets under management. In the third quarter alone, AUM grew by $316 million or 5% and revenue surpassed $5 million, an 8% increase over the prior quarter. Wealth Management revenue year-over-year is up $1.5 million or 15% annualized. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisers across our markets.

As we expand into Central Iowa and Southwest Missouri, we are gaining momentum and deepening client engagement, reinforcing Wealth Management as a key driver of our long-term strategy. Our LIHTC lending business delivered exceptional performance in the third quarter. Activity rebounded sharply, underscoring the continued demand for affordable housing and the strength of our seasoned team. Developers are actively navigating the broader macroeconomic challenges from earlier in the year. demonstrating resilience and a commitment to advancing their projects. We continue to view LIHTC lending as a highly durable, highly profitable and differentiated line of business for QCRH, anchored by our deep network of developer relationships and the historically high-quality assets, our platform consistently delivers.

The demand for affordable housing remains high and recent legislation has expanded access to affordable housing tax credits. Our strong relationships with industry-leading LIHTC developers, combined with persistent market appetite, positions us well to grow this business and further strengthen our financial performance. In addition to winning more deals with our existing developer clients, our team has created new relationships with 10 experienced LIHTC developers this year with several of these being among the best developers in the country. Given the strong momentum and the resulting strength of our pipeline, we are increasing our guidance for capital markets revenue to be in the range of $55 million to $65 million over the next 4 quarters.

On the topic of annual guidance for Capital Markets revenue, I wanted to share some facts about our past performance that will provide some strong evidence on the durability of this business. We first provided next 4 quarters guidance for Capital Markets revenue in January of 2023 as part of our Q4 2022 earnings call. Since then and through our earnings call in October of '24, we provided next 4 quarters Capital Markets guidance a total of 8x. Our actual capital markets revenue results are perfect 8 and 0 in those 8 periods. Capital Markets revenue for those next 4 quarters was within the guidance range once and actually exceeded the upper end of the guidance range, the remaining 7 times. During this 2-year period, our LIHTC team has navigated a variety of interest rate environments and other challenges to deliver consistently strong rolling 12-month results. We believe that this clearly demonstrates the durability of this highly profitable business. We do not evaluate our success or the value of this business by a single quarter, but rather our performance over a 4-quarter horizon. This is not a transactional business, but one built on relationships with some of the best LIHTC developers in the country and their projects have a long production cycle. We will work hard to continue to demonstrate the durability of this business in order to drive the high valuation that we believe it deserves. We also continue to work on our strategic goal of improving the balance sheet efficiency of our LIHTC lending business, especially during the typical 2- to 3-year construction phase for many of our LIHTC clients.

One strategy includes partnering with third parties in LIHTC construction loan sale transactions, which will enable us to expand our permanent loan LIHTC lending capacity and drive increased Capital Markets revenue. Additionally, LIHTC construction loan sale transaction strengthens our regulatory capital position by reducing risk-weighted assets, resulting in increased total risk-based and common equity Tier 1 capital that improves our capital flexibility and allows us to more effectively deploy capital.

LIHTC construction loan sale transactions build on the momentum of our successful LIHTC permanent loan securitizations launched in 2023, which has opened significant growth opportunities for this portion of our business. We remain committed to finding innovative ways to expand our LIHTC lending capacity and support our developer clients who are making a meaningful difference in the lives of those that need affordable housing.

Our continued focus on innovation within our LIHTC business will not only strengthen our financial position, but also reinforces our long-term commitment to scalable growth that benefits our shareholders. Our use of LIHTC permanent loan securitizations and construction loan sale transactions enable us to balance concentration risk, asset growth, liquidity and capital levels while generating capital markets revenue that significantly exceeds the impact of the loan sales on net interest income. Although securitizations and LIHTC construction loan sales strategies reduce on-balance sheet growth, they offer greater long-term value to our bottom line.

We've consistently grown our LIHTC business both in terms of portfolio size and the capital markets revenue it generates. By freeing up balance sheet capacity, we can accelerate new loan production and unlock additional Capital Markets revenue opportunities. Since 2024, our average quarterly net loan growth has been $160 million, excluding securitization, and we expect this momentum to continue. As a result, even when we securitize loans in a given quarter, the go-forward impact on NII is muted. We rapidly redeploy that capacity into new originations, generating capital markets revenue that exceeds what we would earn by retaining those loans on balance sheet.

We continue to manage our LIHTC business with agility and execute on strategies to enhance its sustainability and begin growing this business in order to drive long-term value for our shareholders. As we capitalize on significant growth opportunities, we are also strategically managing our approach to surpassing the $10 billion asset threshold.

Our use of LIHTC permanent loan securitizations and the construction loan sale transactions provide meaningful flexibility in navigating this milestone. Our preparation for crossing $10 billion began several years ago, and we have proactively layered the associated costs into our current run rate. As part of our Bank of the Future digital transformation, we've also successfully secured higher interchange revenues and reduced debit card processing costs, helping to partially offset the anticipated Durbin Amendment impact. Thanks to our proactive planning and strategic execution, we are well positioned across the $10 billion asset threshold with confidence and modest financial impact.

Moving to asset quality, which improved this quarter with overall credit metrics remaining excellent. Net charge-offs declined compared to the second quarter, and our provision for credit losses was slightly lower than the prior period. Additionally, total criticized loans improved during the quarter and have decreased 9% year-to-date. Between the start of the third quarter and October 20th, we have returned $10 million of capital to shareholders with 129,000 common shares repurchased at opportunistic valuation levels. On October 20, the Board approved a new share repurchase program, authorizing the repurchase of up to 1.7 million shares of outstanding common stock. The new share repurchase program authorization equips us with a flexible capital allocation tool, enabling us to be opportunistic and repurchase shares when it aligns with our strategic and financial objectives, underscoring our ongoing commitment to shareholder value.

In summary, QCR Holdings is executing at a high level across all 3 core business lines. We continue to invest in technology, talent and strategic growth initiatives while maintaining disciplined expense management. We remain confident in our ability to sustain top-tier financial performance and deliver long-term value to our shareholders. I will now turn the call over to Nick to provide further details regarding our third quarter results.

Thank you, Todd. Good morning, everyone. We delivered record quarterly adjusted net income of $37 million or $2.17 per diluted share, driven by strong performance across our core businesses. Capital markets revenue rebounded to $24 million, up $14 million from the prior quarter. Net interest income increased $3 million or 18% annualized, supported by continued net interest margin expansion and exceptional loan growth. Our NIM on a tax equivalent yield basis increased by 5 basis points from the second quarter, exceeding the high end of our guidance range. This expansion was driven by strong growth in both loans and investments, coupled with higher asset yields. By leveraging our liability-sensitive balance sheet and maintaining disciplined deposit rate management, we have achieved deposit betas nearly 2.5x higher than our earning asset betas. We have reduced our cost of funds by 43 basis points since the Fed began cutting rates in 2024.

While the most recent rate cut occurred just 2 weeks before quarter end, we expect to realize the full benefit of that rate cut in the fourth quarter of approximately $500,000 of additional net interest income or 2 to 3 basis points of NIM accretion. We also remain well positioned to benefit from any future rate reductions as rate-sensitive liabilities exceed our rate-sensitive assets by $1.1 billion. In the near term, if there are additional Fed rate cuts, we expect 2 to 3 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect performance at the top end of that range. And if the yield curve remains flat or modestly inverted, then we would expect performance at the lower end of the range. Our NIM TEY has now expanded by 26 basis points over the past 6 quarters. We anticipate continued core margin expansion and are guiding to an increase in fourth quarter NIM TEY ranging from 3 to 7 basis points, assuming no further Federal Reserve rate cuts during the quarter. The NIM TEY guidance range reflects a full quarter benefit from the September rate cut.

In addition, we have repricing opportunities on approximately $168 million in fixed rate loans, yielding 5.5%, resetting nearly 100 basis points higher and continued CD repricing in the fourth quarter with maturities of nearly $400 million. These CDs are currently yielding 4.13% and are expected to be retained and repriced at rates between 3.45% to 3.75%.

Noninterest income totaled $37 million for the third quarter. driven primarily by $24 million in capital markets revenue. We saw robust LIHTC activity, which led to a $14 million increase in capital markets revenue and exceeded the top end of our guidance range. Our Wealth Management business generated $5 million in revenue for the third quarter, an increase of 8% compared to the second quarter. On a year-over-year basis, Wealth Management revenue has grown by 15% annualized reflecting the strength and momentum of this business. Significant AUM growth across our markets not only strengthens our foundation but also helps mitigate revenue pressure during periods of broader market volatility.

Now turning to our expenses. Noninterest expenses grew $7 million for the third quarter, primarily from robust capital markets revenue and loan growth, which drove variable compensation higher. Professional and data processing expenses and occupancy and equipment expenses related to our digital transformation also contributed to the increase in noninterest expense. Our highly incentivized variable compensation structure is designed to enhance operating leverage and provide expense flexibility across changing revenue cycles, rewarding our employees only after value has been delivered to our shareholders. For the third quarter, our efficiency ratio was 55.8%, the lowest in 4 years. Compared to the first 9 months of 2024, we have maintained strong discipline over core noninterest expenses, which are up less than 1% on an annualized basis, while adjusted net income has grown by 9% annualized. We continue to manage our operating expenses with discipline while making strategic investments in technology and automation to further empower our high-performing operations team. These investments are key to enhancing our future operating leverage and supporting the scalability and profitability of our multi-charter community banking model. We are retaining our quarterly noninterest expense guidance, which is projected to be in the range of $52 million to $55 million for the fourth quarter. This includes costs for our digital transformation, including the successful completion of our first core operating system conversion in the fourth quarter. It also reflects assumptions that both capital markets revenue and loan growth are within our guided ranges.

Moving to our balance sheet. During the quarter, total loans grew by $254 million or 15% annualized. When adding back the impact from the planned runoff of the M2 equipment portfolio, total loans grew by $286 million or 17% annualized. Since 2023, loan securitizations have played a key role in supporting the continued success of our LIHTC business, which remains a significant driver of capital markets revenue. Year-to-date, core deposits have increased by $410 million or 8% annualized. We continue to generate strong deposit growth across our markets. These results reflect the success of our relationship-driven strategy of growing core deposits, providing a solid funding base that supports future growth.

Turning to our asset quality, which remains excellent. Total criticized loans decreased $6 million or 15 basis points to 2.01% of total loans and leases. Net charge-offs decreased by $2 million from the second quarter, driven by lower charge-offs from our M2 equipment portfolio. Our total NPAs to total asset ratio declined 1 basis point to 0.45%, which is the lowest level since September of 2024, and approximately half of our 20-year historical average.

Total provision for credit losses of $4 million was up slightly from the previous quarter and was due to loan growth, partially offset by improved credit quality of the loan portfolio. The allowance for credit losses to total loans held for investment was 1.24%. We continue to closely monitor our asset quality across all business lines as part of our historically strong credit culture. As we have passed the 1-year mark since announcing our exit from the equipment financing business, we are pleased to report that the runoff of this portfolio is progressing as planned. The portfolio has declined by nearly 40% and is on track to fall below $200 million or less than 3% of our total loan portfolio by year-end. Credit loss expenses for this business are down 45% or $4 million year-over-year. NPAs are also down 29% year-over-year, reflecting both the runoff of the higher-risk assets and the improved seasoning of the remaining portfolio. These positive trends support our expectation for continued softening in future charge-offs from this portfolio and enable us to redeploy capital into our core traditional and LIHTC lending businesses.

Our tangible common equity to tangible assets ratio rose by 5 basis points to 9.97% at quarter end, driven by record earnings and improved AOCI as interest rates declined, partially offset by exceptional loan growth and share repurchases. Our common equity Tier 1 ratio decreased 9 basis points to 10.34% and our total risk-based capital ratio decreased 23 basis points to 14.03%, due to our strong earnings growth that was overpowered by our exceptional 15% loan growth and opportunistic share repurchases.

We remain committed to maintaining strong regulatory capital and consistently assess our capital structure to support our business model and growth objectives. Our goal is to maximize capital flexibility while benchmarking against industry peers.

In September, we successfully completed the replacement of $70 million of subordinated debt originally issued in 2020 that became callable. The new issuance for the same amount was structured in 2 privately placed tranches at highly competitive rates. This transaction further supports our Tier 2 capital levels.

Additionally, in August, we secured a new source of funding, which will further enhance our available sources of liquidity to support our growth. We pledged a portion of our held-to-maturity nonrated municipal bonds in exchange for term borrowings of $134 million at a rate of 4.05%, which will reprice in 3 years. Our nearly $1 billion investment portfolio of HTM municipal bonds is a differentiator for us and is a strong high-quality earning asset with tax equivalent yields near 6%, and new bond issuances in the mid-7% range. This recent transaction highlights our ability to strategically unlock liquidity from long-term investments to support growth. We delivered another quarter of exceptional growth in tangible book value per share, which rose $2.50, approaching nearly $56 per share, reflecting 19% annualized growth for the quarter. Over the past 5 years, TBV has grown at a compound annual rate of 12%, highlighting our continued financial performance and long-term focus on creating shareholder value.

Finally, our effective tax rate for the quarter was 9.5%, up from 5% in the prior quarter. The linked quarter increase is primarily due to $10 million in higher pretax income that increased the mix of our taxable income relative to our tax-exempt income. Our tax-exempt loan and bond portfolios have consistently supported a low tax liability. Given a mix of revenue in line with our guidance range, we expect our effective tax rate to be in the range of 7% to 8% for the fourth quarter of 2025.

With that added context on our third quarter results, let's open the call for your questions.

Operator, we are ready for our first question.

[Operator Instructions] The first question today comes from Damon DelMonte with KBW.

Congrats on a really nice quarter. I just wanted to start with the margin in the guidance. I think you're calling for 3 to 7 basis points of expansion. That does not include any rate cuts. Is that correct?

Yes, that's right, Damon.

And you had said for each 25 basis points, you could see another 2 to 3 basis point increase on the margin?

Yes. So when we set that guidance range for Q4, 3 to 7, 2 to 3 basis points of that is coming from a full quarter's worth of the September Fed rate cut. We've got a fair amount of fixed rate loan repricing and CD repricing in the fourth quarter in addition to some additional municipal bond purchases that we have in our pipeline. So a combination of all that gives us some confidence in that 3 to 7 range.

Got it. Okay. That's helpful. And then I guess my second question here would be on the buyback. Just given the growing capital levels and given the activity in the third quarter, is it fair to assume that you guys will remain active in that regard?

Yes. Damon, thank you for the question. Regarding future buybacks, I'd say this, we're very profitable with higher earnings per share, less expected net organic growth as we start using other partners' balance sheets and capital rather than ours to drive higher earnings. So that's going to reduce our need to retain more capital for organic growth.

While we're open to M&A and we continue to look for partners, it would be a great fit strategically and financially, it's really not a priority for us right now as we have the ability to grow TBV and EPS at a faster clip than our peers. So this really reduces our need to retain capital for M&A. As you know, we have a modest dividend. Historically, that's because we were prioritizing organic growth and M&A. So that leaves us with a significant amount of capital available for repurchases and that's why we got started in Q3. We are growing TCE near the upper end of our preferred range. We became comfortable we are going to be executing some LIHTC offtake and freeing up more capital. So we could be opportunistic in buying shares at what we believe are unreasonably low valuations. And so we expect to continue to be opportunistic, really no algebraic formula for when or how much and at what price. As you know, it's more art than science, but we would intend to be opportunistic with buybacks based on valuation.

The next question comes from Nathan Race with Piper Sandler.

Congrats on a great quarter. Todd, I'm not sure if you touched on it in your prepared remarks, and I apologize if you did. But in terms of the appetite for additional securitizations and the timing of which you would expect to complete the larger one that we've discussed in the past, would love maybe if you could just update us on that front?

Sure. We are anticipating doing a large permanent loan securitization in the first half of next year. We've delayed that a bit to really build a bigger inventory. We have found -- we've done 4 of them. This would be our fifth. We are finding it as significantly more beneficial to have a larger securitization the order of magnitude really does matter in profitability. So we're building a bigger portfolio by waiting a bit. It takes some time to get through all the machinations that Fannie and Freddie to get this done. But next year sometime, we're targeting something around $350 million. And that will, again, just like the construction loan sales we're contemplating here a little sooner, it frees us up to continue to grow the business and go a little more quickly in LIHTC. So that's really our game plan there.

Okay. Great. And how should we think about the NII impact from the construction loan sales and the larger permanent loan securitizations that you're contemplating for next year? I mean is it a meaningful NII give up just given the lower balances on the sheet? Or just any thoughts along those lines would be appreciated.

Sure. And Nate, I understand it's a bit difficult as we're not being real precise on the construction loan sales. We're not being very precise on timing or amount. We'll have a lot more detail for all of you in the January call. So to be candid, I'd stick with using our guide on NIM and loan growth, the gross loan growth to model NII for Q4. We'll have a lot more precision in January in terms of NII impact of construction loan sales or offtake and the perm loan securitization. So we can be a little bit more precise likely in January. So I do apologize. It's a little harder for you guys to navigate.

What I would say is that we are incredibly pleased to be on the verge of finding partners to buy our construction loan portfolio and not all of it certainly, but to get started. What it really does is it frees us up to do more perm financing which is where we make our capital markets revenue. And any give up in NII, I would expect more than that to be replaced by improved capital markets revenue. That's really the game plan here is to grow revenue by using other folks' balance sheet and capital and not our own. And maybe the other data point I'd give around this we can get into more detail offline with any of you that want to do the math more distinctly. But we've got about $2.5 billion in LIHTC on the balance sheet. And that's still well within our policy limits, internal policy limits, our percentage of capital and other limits that we have self-imposed. So we certainly have room, but what I would tell you is nearly $1 billion of that is construction.

In construction, we are doing to accommodate our clients. They love our program, they love our people, they love our say-do ratio. So they often want us to do both. But that construction lending burns up capital even when it's not funded yet as unfunded commitments. So it really constrained how often we can say yes to clients, and we want to say yes to clients more often. So the way all of you should think about it is not necessarily a big drag on our total LIHTC portfolio. It's more -- we want to change the mix over time. We want to have the ability to offtake construction, so we can say yes to clients and free up more capacity to do perm financing where we make the capital markets revenue. So I know that's a very long answer to a short question, but that's really what we're shooting for here. Once we get these sales completed, we'll have a lot more data in January to talk about the impact on both NII and capital markets revenue.

That's really helpful, add sorry, go ahead Nick.

Nate, I might add a few things here, too, just from the client perspective, while we say loan sale, these really are going to be accounted for as a loan sale but a participation, loan participation, if you will, where the client really is not necessarily affected or impacted. And that's honestly preferred by them. They appreciate, as Todd said, the say-do ratio that our SFG team delivers. And so really a transparent event for them.

Okay. That's really helpful. And I appreciate all the dynamics at play that make kind of the NII outlook a bit opaque. I suppose if we were to exclude loan sales and securitizations from the outlook. I mean how do you guys kind of think about the loan growth prospects next year? I know you're targeting 10% to 15% in 4Q, but just given the partners that you've added on the LIHTC side of things recently, curious if you can kind of just like frame up any loan growth expectations on a gross basis into next year?

Yes. Sure, Nate, I appreciate the question. I'm probably going to be a little less transparent here, as we'll have a lot more in January. But I would tell you that based on the pipelines we see in both traditional bank and LIHTC, I do think our growth rate is going to be more in the double digits. It was a bit softer, certainly first half of this year. We do not expect that to be a problem going forward. I think this 10% to 15% guide in Q4 in January, we'll be more accurate about it. But I would expect double digits going forward.

The next question comes from Daniel Tamayo with Raymond James.

Maybe starting on the conversions and on the expense side. Just curious how much onetime costs or costs that are specifically related to the conversions are going to be happening in the fourth quarter. I think you called out that those are included in the $52 million to $55 million guidance. And then as we think about '26 expenses, if you're expecting savings from those conversions or how we can kind of think about the jumping off point for the run rate next year?

Sure, Danny. I'll tee it up a little bit with some of the strategy and higher-level stuff. Nick will have a little bit more for you on NIE. Multiyear projects started in '23 with evaluation selection, setting our digital transformation strategy. We have accomplished a lot here in this year, '25. We converted all 4 banks to a new online banking platform with Q2. That went very well. We've been using Q2 for commercial online banking and treasury management for some time. We love their software, so do our clients, very good feedback from clients on the consumer platform as well and NPS, Net Promoter Scores are actually up post conversion. So we feel good about all that. So we did our first core conversion at the bank in Southwest Missouri, Guarantee Bank. It went incredibly well.

Basically on day 1 had really no system issues. Call volumes were at normal levels. So our strategy of doing the consumer online banking platform first, which is what clients really see the bank through was a good strategy. Just got a couple of things to share, and then I'll let Nick talk a little bit about the expenses. But I want to share this because I'm very excited about it. I probably came through a bit in our prepared comments, but I just want to share 2 stories about the impact long term of our digital transformation because while we talk about expenses, getting it in place, the offset opportunity in the future is significant. We actually had 1 of our staff e-mail the CEO of the bank on Monday morning and said he booked a new business client and that in the old system used to take them around 40 minutes. He got it done in 16, the very first time he used the system. So we are very high on the new core.

The second one is maybe a bit more funny. One of the staff said it was like going from Pong on Atari to the newest version of Xbox. So just a little bit of color around why we are doing this. We're leaving an antiquated Fischer core going to Jack Henry SilverLake. It's going to be at a much lower cost, far more efficient. To your bigger question, Danny, of how soon we're going to see that. We still have 2 conversions to go in April and October of '26. Our final one will be in April of '27. So it's really going to be the back half of '27 and beyond that we're going to see these efficiencies. And we've been managing this investment effectively. We really don't expect to fall outside those guardrails on NIE of 5% growth. So with that, I'll step back and I'll let Nick talk about the numbers a little more deeply.

Yes. Danny, so significant team effort on this project, and they're doing a fantastic job of keeping us on schedule. And as Todd quoted some examples, creating those efficiencies with each of these conversions. So certainly, in 2025 here, there's some overlap in the cost component of these. I'm going to borrow a quote from Larry Helling, he would often say "We're paying for the bank of the future while we're still paying for the bank of the past." So we're experiencing some of that here today. Much of the expenses are centered around specifically the decommissioning and termination costs associated with our legacy core and some data conversions.

So this year, we're laying the foundation for Bank of the Future, standardizing those configurations. And so this requires several other conversions of secondary applications, and all of this is a little bit front loaded, if you will, in 2025. So it's about a range of $4 million to $5 million of expense -- NIE expense here in 2025. We'd expect to see that come down into a range of $3 million to $4 million next year. And then as Todd mentioned in '27, we would expect to see some real efficiencies come to the bottom line, creating that operating leverage that we're looking for.

Great. That's really helpful color. Maybe one on credit here. So you've had reserves come down the last couple of quarters. I think you called out some specific reserves that came out this quarter. You've got this strategy to push some construction loans off the balance sheet. You're going to still have the lower loss [indiscernible] coming on. Is it safe to assume that I guess, all else equal from a macro perspective, we might see reserves continue to trend down as a percentage of loans over the next several quarters?

Yes, Danny, I don't think we expect that 124 basis points and necessarily keep dropping. We have dropped at about 6 basis points over the last several quarters. And I would tell you, it's really for good reasons. Our charge-offs from M2, which at times were 80% to 100% of the charge-offs we were having in the business over the last several years. We were really pleased to see that fall off pretty significantly in the third quarter. Our projections indicate the velocity of NPAs and charge-offs from M2 are slowing and we expect that to continue next year. So that and the fact we did get one NPA resolved in Q3 and that charge-off was around $1.2 million less than we had reserves. So we actually freed up some reserve on a really good outcome on getting on NPA off the book.

So I guess what I'm trying to say is a lot of the reduction in the reserve level has been -- we've been resolving NPAs and sometimes with great outcomes, sometimes with just charge-offs in the M2 portfolio, but it's really been that we've been using that reserve for what it's intended to clean up deals, clean up the portfolio. So when we do have LIHTC construction loans come off, will free up some reserves, but we expect to rebuild that portfolio quite quickly. So I don't know that I have any expectations. Our coverage ratio is really going to drop much more.

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

Todd, I wanted to circle back to your maybe initial view of growth in '26, maybe not something you wanted to chat on. But you kind of referenced it more of a double-digit pace. I wanted to see if that's -- is that net of securitizations and construction sales?

No, Jeff, I appreciate the ability to clarify that. That 10% to 15% range continuing into '26 would be gross production. And then in January on the fourth quarter call, I think we're going to be able to have a lot more color for you and everyone else in terms of what we're expecting net.

Got you. Okay. And then the follow-on is just to further -- as you talk about the partnerships on the securitization side, would that sort of replace you talked about the $350 million potentially targeted. Does that -- is the partnerships that are developing, does that make it less lumpy, more like kind of a fluid channel of LIHTC loan sales real time? Is that where we're headed in a sense?

Yes, Jeff, what you're talking about is really, I think, called a forward flow arrangement where it's almost real time where those loans are getting moved to someone else's balance sheet. We're not really interested in that for a couple of reasons. One, it's a little difficult for operations to handle versus these participations that Nick mentioned. And the other is we really want to retain the flexibility. We want to be able to use this as a very effective tool to manage our LIHTC business, to grow that business, to improve capital markets revenue pull-through and to manage concentration and capital and everything else.

So we really want it to be something that we can use as a tool when the time is right. So that, again makes it more lumpy. I know that makes your job and everyone else's more difficult. We will do our best to be as transparent as possible when we know we're doing those things, and we know that they are coming. But ultimately, the straightforward answer is, Jeff, we want the flexibility to manage it the best we know how for our shareholders.

The next question comes from Brian Martin with Janney Montgomery.

Congrats on the quarter. Just the -- maybe, Nick, just 1 question on the margin. Just for the fixed rate loans that are repricing in '26, can you just give an idea on how much is there and then what -- kind of what the rate is on those? I think you gave forth.

Yes. Brian, as we look into 2026, we've got about $560 million of fixed rate loans. They're currently yielding about $5.90. And so in today's rates, we're seeing new pricing coming in at like $6.25 to $6.50 range. So we'll have some positive uptick there.

Okay. And then just in terms of just deposit growth kind of funding maybe a bit stronger loan growth going forward? And I guess, just trying to think about how to think about deposit growth and some of that, I guess, is be dependent on the sales and the securitization, but just the general outlook on deposit growth here and level of borrowings is kind of how we think about that going forward?

Yes. So Brian, I was looking the other day, we've added 1,500 new accounts year-to-date. And certainly, in Q4, we tend to have some seasonality with some public deposits from property tax payments in our area. But what I'm most impressed with is every quarter when I get the updated list of new accounts added and the relationships, I'm always very impressed. Its our private bankers, our treasury management teams, our senior leadership teams. They're out pounding the pavement in their markets, our markets. And it's something we don't often see from the bigger banks or some of our competition. So I think in some cases, I was discussing with one of our bank CEOs, we're chasing some of these larger clients that may not necessarily be borrowing clients.

So they may not be on everybody's radar. And we're working those relationships over 15 years at times, and he shared a few opportunities that he's landed this quarter that were just that very long sales cycles, but they see our involvement in the community. They see our market presence and leadership in the community. And so yes, we continue to just drive new relationships that lead to new deposits. And so yes, but you also mentioned too, we have some opportunity with some of the construction loan sales and/or securitization that help take care of some of our funding needs, too.

Yes. Okay. Stay tuned for the January call. And just in terms of -- on the capital, is there kind of a target when we think about how much capacity you have to do these buybacks, where you kind of want to maintain the capital? I mean you talked about it's gotten to a level and it's going to continue to build quickly. But is there kind of a base to think about if we model in some buybacks where you think capital -- where you want to maintain kind of a minimum level or target level?

Yes, Brian, I appreciate the question. I'm reluctant to give any guidance on just how many shares we might buy and when. But I understand that it does have a very positive impact on EPS when we can do it at the right valuation levels from that perspective. What I would tell you is we're at TCE at 10%, basically even with some buyback activity this past quarter. So we do have capacity. And what I would tell you is the key word I would use is opportunistic that at current valuation levels, we feel like it's attractive to the company and our shareholders for us to use this maybe even excess capital to repurchase shares. So we intend to continue to be opportunistic when it comes to that. But we're going to have to balance the other needs for capital as well.

My long answer to the shorter question early on repurchases the 4 uses of that capital right now, buybacks are probably our highest and best use.

[Operator Instructions]

There are no further questions at this time, which concludes our question-and-answer session. I would like to turn the conference back over to Todd Gipple for any closing remarks.

Thanks to all of you for joining our call today. We appreciate your interest in our company. Have a great day, and we look forward to connecting with you sometime soon. Thank you.

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