QCR Holdings Inc (QCRH) 2025 Q3 法說會逐字稿

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 we will be available for replay through October 30th, 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 thirdquarter 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 ALL1,000 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% late 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 light tech 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 as operating through 3 primary lines of business traditional banking, wealth management, and our light tech lending platform.

I am pleased that each of these delivered improved performance this past quarter. We continue to deliver robust organic growth and improve 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 four 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 revenues 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 advisors across our markets.

As we expand into Central Iowa and Southwest Missouri, we're gaining momentum and deepening client engagement, reinforcing wealth management as a key driver of our long-term strategy.

Our light tech lending business delivered exceptional performance in the thirdquarter. 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 li tech 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 the recent legislation has expanded access to affordable housing tax credits.

Our strong relationships with industry leading light tech 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 litech 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 a range of $55 million to $65 million over the next four 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 four 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 four quarters capital markets guidance a total of eight times.

Our actual capital markets revenue results are perfect 8 and 0 in those 8 periods.

Capital markets revenue for those next four quarters was within the guidance range once and actually exceeded the upper end of the guidance range the remaining 7 times.

During this two-year period, our life tech 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 four quarter horizon.

This is not a transactional business, but one built on relationships with some of the best white tech 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 light tech lending business, especially during the typical two to three year construction phase for many of our light tech clients.

One strategy includes partnering with third parties in Litech construction loan sale transactions, which will enable us to expand our permanent loan litech lending capacity and drive increased capital markets revenue.

Additionally, a light tech construction loan sale transaction strengthens our regulatory capital position by reducing risk-weighted assets, resulting in increased total risk-based and common equity tier one capital that improves our capital flexibility and allows us to more effectively deploy capital.

Li tech construction loan sale transactions build on the momentum of our successful Litech 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 life tech 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 light tech 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 litech 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 light tech construction loan sales strategies reduce on balance sheet growth, they offer greater long-term value to our bottom line.

We've consistently grown our light tech 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 securitizations, 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 light tech 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 light tech 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 Durban 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 thirdquarter and October 20th, we have returned $10 million of capital to shareholders with 129,000 common shares repurchased at opportunistic valuation levels.

On October 20th, 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 three 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 thirdquarter 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've achieved deposit betas nearly 2.5 times 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 basis points to 3 basis points of ne 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 basis points to 3 basis points of ne accretion for every 25 basis points cut in rates.

If the yield curve steepens, we'd expect performance at the top end of that range, and if the U curve remains flat or modestly inverted, then we would expect performance at the lower end of the range.

RIM TEY has now expanded by 26 basis points over the past six quarters.

We anticipate continued core margin expansion and are guiding to an increase in fourth quarter NIM TEY ranging from 3 basis points to 7 basis points, assuming no further Federal Reserve rate cuts during the quarter.

The NEM TEY guidance range reflects a full quarter benefit from the September rate cut.

In addition, we have pricing opportunities on approximately $168 million in fixed rate loans yielding 5.5%, resetting nearly 100 basis points higher.

And continued CD pricing in the fourth quarter with maturities of nearly $400 million.

CCDs are currently yielding 4.13% and are expected to be retained and repriced at rates between 3.45% to 3.75%. Non-interest income totaled $37 million for the third quarter, driven primarily by $24 million in capital markets revenue.

We saw robustly tech activity, which led to a $14 million dollar 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. Non-interest expenses grew $7 million for the thirdquarter, 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 non-interest 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 is 55.8%, the lowest in four years.

Compared to the first nine months of 2024, we've maintained strong discipline over core non-interest 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 non-interest expense guidance, which is projected to be in the range of $52 million to $55 million for the fourth quarter.

This includes cost for a 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 light tech 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 decrease $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 points 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 asset quality across all business lines as part of our historically strong credit culture.

As we have passed the one 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 my tech 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 approved AOCI as interest rates declined, partially offset by exceptional loan growth and share repurchases.

Our common equity tier one 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 two 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 health to maturity, non-rated municipal bonds in exchange for term borrowings of $134 million at a rate of 4.05%, which we will reprice in three years.

Our nearly $1 billion dollar 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 five 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 late quarter increase is primarily due to $10 million in higher pre-tax 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 thirdquarter results, let's open the call for your questions. Operator, we are ready for our 1st question.

We will now begin the question-and-answer sessions.

(Operator Instructions)

The first question today comes from Damon DelMonte with KBW. Please go ahead.

Hey, good morning guys. Congrats on a really nice quarter. Just wanted to start with the, good morning, I just wanted to start with the margin, in the guidance. I think you're calling for 3 basis points to 7 basis points of expansion, that does not include any rate.

Cuts, is that correct?

Yeah, that's right, Damon.

And you said for each 25 basis points you could see another 2 basis points to 3 basis points increase on the margin.

Yeah, so when we set that guidance range for Q4, [3] to 72basis points 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 in the fourth quarter, in addition to some additional, municipal bond purchases that we have in our pipeline. So combination of all that gives us some confidence in that 3 to 7 range.

Got it. Okay, that's.

Helpful.

Thank you. 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 you guys will remain active in that regard?

Yeah, David, 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 that 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 we have a modest dividend. Historically, that's because we are 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 were growing TCE near the upper end of our preferred range. We became comfortable. We were going to be executing some light tech 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 for when or how much and at what price. As it's more art than science, but we would intend to be opportunistic with buybacks based on.

Valuations.

Great. Appreciate.

That caller.

Thank you very much.

Thanks, David.

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hey guys, good morning. Thanks for taking the questions and congrats on a great quarter.

Yeah.

I, 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 four of them. This would be our 5th. We are finding it is significantly more beneficial to have a larger securitization. The, order of magnitude really does matter and 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 light tech, so that's. Really our game plan there.

Okay, great. And how should we think about the, excuse me, 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 and I 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, 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 them 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 firm 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. 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 term financing, which is where we make our capital markets revenue. And any give up and 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 light tech 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're 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 constrains 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 light tech portfolio, it's more, we want to change the mix over time. We want to have the ability to off-take.

Construction so we can say yes to clients and free up more capacity to do per 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 I might add, Nate, I might add a few things here to 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 H1stly preferred by them.

They appreciate. When 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 that play that make kinda the.

And I I look a bit opaque, I suppose if we, were to exclude, loans, 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% of 4Q, but just given the partners that you've added on the late tech side of things recently, curious if you can kind of just like frame up any loan growth expectations on a gross basis in the next year.

Yeah, sure, Nate, I appreciate the question. I'm probably going to be a little less transparent here, 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 light tech. 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 will be more.

Accurate about it, but I would expect double-digits going forward.

Okay, great.

Thank you for all the color, guys.

Thank you, Nate.

Nate.

The next question comes from Doug Mayo with Raymond James. Please go ahead.

Thank you, good morning guys. Maybe starting on the on the conversions and on the expense side, just curious, how much it one time costs or, costs that are specifically related to 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 dollar 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 multi-year project started in 23 with evaluation selection, setting, or digital transformation strategy.

We have accomplished a lot here, in this year, 25, we converted all four 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. On the consumer platform as well and NPS net promoter scores are actually up post conversion. So I feel good about all that. So we did our first core conversion at the bank in Southwest Missouri, Guaranty Bank, it went incredibly well.

Basically on day one 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.

I've 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.

Probably came through a bit in our prepared comments, but I just want to share two 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 one of our staff email the CEO of the bank on Monday morning and. Said he booked a new business client and that and the old system used to take him around 40 minutes.

He got it done in 16, the very first time he used the system. So, we are very high on the The new core. The second one's 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're doing this. We're leaving an antiquated Pfier 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 two 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 let Nick talk about the numbers a little more deeply.

Yeah, 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. 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, and I expense here in 2025.

We'd expect to see that come down into a range of three to four next year. And then, as Todd mentioned in 207, 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, that's.

Really helpful caller. Thanks for all of that. Maybe maybe one on credit here so.

You've had reserves come down in the last couple of quarters, I think you called out some specific reserves that came out this quarter.

You've you've got this strategy to to push some construction loans off the off the balance sheet. You're going to still have the lower loss like that 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.

Yeah, Danny, I don't think we expect that 124 basis points to necessarily keep dropping. We 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 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, we're really pleased to see that fall off pretty significantly in the third quarter. Our projections indicate the velocity of MPAs and charge-offs from M2 are slowing, and we expect that to continue next year. So, that and the fact we did get one MPA 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 one MPA off the books, 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 like tech construction loans come off, we'll 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.

Okay, all right, very helpful. Thanks guys, appreciate the color.

Thank you, David. Thanks.

Danny.

The next question comes from Jeff Bruli with DA Davidson. Please go ahead.

Thanks. Good morning. Todd, I wanted to circle back to your, the initial view of growth in 206, maybe not something you wanted to chat on, but it kind of referenced it more of a double-digit pace. I wanted to see if that's, is that net of of securitizations and construction sales?

No, Jeff, I appreciate the ability to clarify that 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 that.

Gotcha. 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 that 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 why tech loan sales real time? Is that where we're headed, in a sense?

Yeah, Jeff, what you're talking about is really I think called a forward flow arrangement where it's 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 like tech 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.

Appreciate it. Thanks, Todd. Thanks. That's it for me.

Thanks Jeff, thanks.

Jeff.

The next question comes from Brian Martin with Janie Montgomery. Please go ahead.

Hey, good morning, guys.

Morning. Good morning.

Congrats on the quarter. Just the, maybe Nick, just one question on the on the margin just for the the the the fixed rate loans that are be pricing in 26, can you just give an idea on on how much is there and then what kind of what the the rate is on those?

I think you gave 4.

Yeah.

Yeah, Brian, as we look into 2026, we've got about $560 million of fixed rate loans.

They're currently yielding about a 590. And so, in today's rates, we're seeing, new pricing coming in at like 625 to 650 range, so we'll have some positive uptick there.

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

Yeah, 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.

It's, 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 sale cycles, but they see our involvement in the community, they see our market presence, and leadership in the community, and so, yeah.

We continue to just drive, new relationships that lead to new deposits and so yeah, 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.

Yeah, 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 cap?

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 some buybacks where you think capitals, where you want to maintain kind of a minimum level or target level.

Yeah, Brian, I'm, 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.

But my long answer to the shorter question. Early on repurchase is the four uses of that capital, right now buybacks are probably our highest and best use.

Gotcha.

Okay.

That's all I had. I appreciate you guys taking the questions.

Thank you, Brian. Thanks, Brian.

(Operator Instructions)

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