QCR Holdings, Inc.QCRHNASDAQ
LOADING
|||
Operator: 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.
Todd Gipple: 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.
Nick Anderson: 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: [Operator Instructions] The first question today comes from Damon DelMonte with KBW.
Damon Del Monte: 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?
Nick Anderson: Yes, that's right, Damon.
Damon Del Monte: And you had said for each 25 basis points, you could see another 2 to 3 basis point increase on the margin?
Nick Anderson: 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.
Damon Del Monte: 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?
Todd Gipple: 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.
Operator: The next question comes from Nathan Race with Piper Sandler.
Nathan Race: 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?
Todd Gipple: 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.
Nathan Race: 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.
Todd Gipple: 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.
Nathan Race: That's really helpful, add sorry, go ahead Nick.
Nick Anderson: 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.
Nathan Race: 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?
Todd Gipple: 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.
Operator: The next question comes from Daniel Tamayo with Raymond James.
Daniel Tamayo: 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?
Todd Gipple: 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.
Nick Anderson: 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.
Daniel Tamayo: 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?
Todd Gipple: 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.
Operator: The next question comes from Jeff Rulis with D.A. Davidson.
Jeff Rulis: 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?
Todd Gipple: 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.
Jeff Rulis: 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?
Todd Gipple: 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.
Operator: The next question comes from Brian Martin with Janney Montgomery.
Brian Martin: 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.
Nick Anderson: 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.
Brian Martin: 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?
Nick Anderson: 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.
Brian Martin: 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?
Todd Gipple: 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: [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.
Todd Gipple: 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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.