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Edited Transcript of QCRH earnings conference call or presentation 23-Jan-20 4:00pm GMT

Q4 2019 QCR Holdings Inc Earnings Call

Moline Jan 29, 2020 (Thomson StreetEvents) -- Edited Transcript of QCR Holdings Inc earnings conference call or presentation Thursday, January 23, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Larry J. Helling

QCR Holdings, Inc. - CEO & Director

* Todd A. Gipple

QCR Holdings, Inc. - President, COO, CFO & Director

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Conference Call Participants

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* Brian Joseph Martin

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Nathan James Race

Piper Sandler & Co., Research Division - VP & Senior Research Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the QCR Holdings, Inc. Fourth Quarter and Year-end 2019 Conference Call. Yesterday, after market close, the company distributed its fourth quarter and year-end press release, and we hope that you've had the opportunity to review the results. If there's anyone on the call who has not received a copy, you may access it on the company's website, www.qcrh.com. With us today from management are Larry Helling, CEO; and Todd Gipple, President, COO and CFO. Management will provide a brief summary of the financial results, and then we will open up 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 is being recorded and will be available for replay through February 6, 2020, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website.

At this time, I will now turn the call over to Mr. Larry Helling at QCR Holdings.

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [2]

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Thank you, operator. Welcome, ladies and gentlemen, and thank you for taking time to join us today. I will start with a brief overview of some of the financial highlights for our fourth quarter and full year. Todd will follow with some additional details on our financial results.

We are very pleased with our financial performance in the fourth quarter and for the year, highlighted by record net income and a solid increase in adjusted earnings per share. For the year, our adjusted net income increased to 26%, and we grew our tangible book value per share by 17%. After adjusting for onetime items, our revenues grew by 60% driven by record swap fee income and higher net interest income, while expenses only increased by 24%, demonstrating strong operating leverage.

We capitalized on the ongoing economic strength and healthy business conditions in our footprint to grow loans and deposits organically, both by over 10% for the year. We continue to gain market share across our charters, which is a reflection of the value that our clients place on our commitment to relationship-based community banking.

Additionally, we successfully expanded our net interest margin during the second half of the year as our initiatives in this area gained traction. Our credit quality remains excellent, with net charge-offs near 0 and nonperforming assets declining again in 2019.

Strategically, it was an important year for us as well. We exited the Rockford, Illinois, market with the sale of RB&T as we weren't able to reach acceptable levels of scale in that market, and consequently, a satisfactory level of profitability. We completed the transaction on November 30 and recorded a $12.3 million gain on the sale as well as some significant onetime items that Todd will cover in his remarks.

The vesting of RB&T enables us to redeploy capital in our other more profitable markets and to help drive continued organic growth and acquisitive growth. The transaction also bolstered our capital levels, and we expect to meaningfully improve a number of our key performance metrics going forward as a result of the sale.

Given that it's year-end, I would also like to take a moment to reflect upon the progress we've made over the last 5 years. As we have often stated, one of our key strategic objectives is to be an acquirer of choice amid the consolidation occurring in our industry. Our focus has been on markets with similar characteristics as our existing MSAs, those exhibiting favorable economic and demographic trends and where relationship-based community banking is valued by clients.

Over the last 5 years, we successfully completed 3 separate bank acquisitions, all consistent with our stated criteria, and we more than doubled our branch network to 25 locations. We also nearly doubled our total assets, translating to a compounded annual growth rate of just over 14%. Our diluted EPS grew at a rate of 16% per year. Our ROAA improved by over 80%, and our efficiency ratio improved by over 600 basis points. These significant advances all demonstrate a positive operating leverage inherent in our business model and our consistent execution.

As always, I want to acknowledge the entire QCR Holdings family, who have worked diligently to achieve these strong results for our shareholders, clients and the communities in which we operate. Attracting and retaining top talent has always been a high priority for us and is vital to our long-term success.

While our accomplishments and the legacy that we created over the last 26 years is all very gratifying, we remain keenly focused on the future. I am very excited to lead our team into the next decade and to build upon our traditional success with the overriding goal of driving attractive long-term returns for our shareholders.

Now turning to some of the highlights of our fourth quarter financial results. We finished the year strong, building on the momentum that we created throughout the year. During the quarter, we generated solid loan growth, which was more than funded by our growth in core deposits. Strength in both our core Commercial lending business and our Specialty Finance Group drove our loan growth. We ended the year with a strong pipeline, and our markets remain healthy, giving us confidence that we can continue to achieve organic loan growth for the full year 2020 of between 8% and 10%. And we expect to fund our loan growth with corresponding growth in our core deposits.

Solid production from our Specialty Finance Group, particularly in the area of tax credit project lending, generated robust swap fee income and helped us produce another quarter of strong overall noninterest income, albeit shy of our record third quarter.

Additionally, we successfully expanded our net interest margin in the fourth quarter, something that has been a priority for us all year. Our already strong asset quality further improved on both a linked quarter and year-over-year basis. And finally, we ended the year with bolstered capital levels as a result of our solid profitability and the sale of RB&T. Overall, it was a very good quarter, and we're looking forward to continuing the momentum in 2020.

With that, I will now turn the call over to Todd for further discussion on our fourth quarter results.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [3]

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Thank you, Larry. As I review our fourth quarter financial results, I will focus on those items where some additional discussion is warranted. I'll start with our strong loan and deposit growth.

Our annualized loan growth was 8.9% during the fourth quarter and was largely driven by new loan generation in commercial and industrial loans and commercial real estate loans. A key driver was strong production from our Specialty Finance Group. We continue to experience healthy demand in this area and maintain a robust pipeline of opportunities, particularly in tax credit project lending and municipal finance.

We also experienced another quarter of a more normalized level of payoffs, which were relatively consistent with the third quarter of 2019 and down significantly from the fourth quarter of 2018.

We had very strong deposit growth this quarter, which more than funded our net loan growth. As you know, we have placed a strong focus on deposit gathering and we continue to have success in this area, which resulted in an 11.5% annualized increase in total deposits during the quarter. Additionally, our wholesale funding as a percentage of total assets declined to 8.8%, which is down significantly from 11.6% in the third quarter and well within our goal of limiting wholesale funding to less than 15% of assets. And while the strong increase in deposits created some excess liquidity on our balance sheet in the short term, it has laid the foundation for continued loan growth.

Now turning to net interest margin. As we have mentioned before, we are well positioned to benefit from a flat to moderately down short-term interest rate environment as our balance sheet is modestly liability sensitive. This benefited us again in the fourth quarter as interest rates moved lower and our deposit costs declined at a faster pace than the yield on our interest-earning assets.

In addition, our proactive approach to reducing rates on funding by gathering more core deposits and reducing our reliance on higher-cost wholesale funding played a role in our lower overall funding costs. The decline in funding costs was partially offset by lower yields on our loans as well as some excess liquidity, resulting in an adjusted NIM, excluding acquisition-related net accretion, increasing slightly to 3.43%, up from 3.41% in the third quarter.

Notably, and as we forecasted last quarter, our level of onetime interest recoveries of previously charged-off loans was down in the fourth quarter and the decline diluted adjusted NIM by 2 basis points. Excluding this impact, our core NIM actually expanded 4 basis points.

Looking forward, we are well positioned to continue to benefit from reductions in our deposit pricing and higher-cost funding rolling off the balance sheet, which will positively impact our funding costs. Additionally, we will continue to work hard to maintain our pricing discipline on new loan production, which should help ease the downward rate pressure that we have been experiencing in our loan portfolio due to the decline in LIBOR over the past 2 quarters. Finally, we will experience a further pickup in NIM as a result of the sale of RB&T. Therefore, given these factors, we are guiding to an increase of 2 to 4 basis points in our core net interest margin in the first quarter.

Now turning to our very strong noninterest income performance, which, after stripping out the $12.3 million gain on the sale of RB&T, came in at a very solid $17.5 million for the quarter. While this result was somewhat lower than the $19.9 million record set in the third quarter, it exceeded the full year quarterly average of $16.6 million. These impressive results have been mainly driven by very strong swap fee income.

For the quarter, our swap fee income, combined with the gain on the sale of the government-guaranteed portion of loans sold, came in at $7.6 million, a bit higher than we had guided to for the quarter, bringing the total to $29 million for the year. The higher swap fee income this year has primarily been driven by strong production from our core business and our Specialty Finance Group where our clients are locking in long-term fixed-rate financing.

While we are very pleased with the strong results in the fourth quarter and for the year, we don't view this as a sustainable run rate. As we've indicated in the past, significant variability in these fees can and will occur from quarter to quarter. However, given the strength in the markets and our current visibility, we anticipate this portion of our noninterest income to be between $24 million and $26 million for the full year 2020.

Our pipeline of loans at our Specialty Finance Group remains strong, so we anticipate another solid quarter of swap fees as we enter the year. Our current expectation is that this fee income source will be in the range of $5 million to $7 million for the first quarter.

Now turning to our expenses. Our noninterest expenses for the fourth quarter had a number of significant noncore items that impacted the linked quarter increase. First, we recorded $3.3 million of disposition costs due to the sale of RB&T. Second, there was a $3 million goodwill impairment charge related to the Bates Companies as a result of the decision to exit the Rockford market. And finally, post-acquisition transition and integration costs were $1.9 million due to the completion of the conversion of our core processing system at SFC Bank.

Other factors that impacted fourth quarter noninterest expenses were higher advertising and marketing and other expenses, which were more than offset by lower costs of operating of the real estate. You may recall that last quarter, we recorded a $2 million write-down on an OREO property, which drove that line item higher. We also had reduced professional and data processing fees during the fourth quarter. After taking into account all of these factors, a more normalized core noninterest expense for the quarter would have been $37.5 million.

Looking ahead to 2020 and given that we no longer have RB&T, we anticipate that our quarterly run rate level of spending will be in the $33 million to $34 million range for the first half of the year. This is based on increased staffing and investments in technology that we will be making in 2020 to keep pace with our strong organic growth. We do anticipate further improvements in operating leverage and our efficiency ratio and expect a core efficiency ratio in the range of 61% to 63% for the full year.

Our asset quality continues to be excellent with no material additions to NPAs in the fourth quarter. Our nonperforming assets declined slightly from the third quarter, and our loan loss provision decreased on a linked quarter basis, primarily due to the strength in our overall portfolio quality and $488,000 of provision taken in the third quarter related to an RB&T nonperforming loan held for sale.

Our effective tax rate for the quarter came in at 29.2%. The rate was impacted by some significant onetime items this quarter related to the sale of RB&T as well as the goodwill impairment charge, which is not deductible for tax. Our tax rate for the full year was 20.3%, and we expect that the tax rate for the full year 2020 will be in a range of 19% to 20%, not including the beneficial impact of stock options and RSAs.

I'd like to wrap up my comments with some observations regarding the sale of RB&T. As mentioned on last quarter's call, as a result of the sale, we anticipate significant improvement in a number of our profitability metrics, including a meaningful lift in net interest margin and ROAA as well as a 150 basis point improvement in our efficiency ratio. From a capital perspective, the transaction has significantly strengthened our capital levels, and we ended the year with a total risk-based capital ratio of 13.48% and a tangible common equity to tangible assets ratio of 9.25%.

Again, the strategic decision to exit the Rockford market makes great sense for our company as it frees up capital to redeploy in our existing and more profitable markets and significantly improves our go-forward financial performance.

With that, let's open up the call for your questions. Operator, we are ready for our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Nathan Race of Piper Sandler.

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Nathan James Race, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [2]

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I was hoping just to start on the core NIM outlook. Todd, I believe your guidance for the first quarter was a 2 to 4 basis points of expansion with the full impact of Rockford going away. And if I just kind of look back to the deck, when you guys announced the transaction in August, I thought we were thinking more in the 7 to 9 basis point range. So just trying to reconcile the differences there?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [3]

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Sure, Nate. Well, actually, because that divestiture occurred 2/3 of the way through the quarter, we got a little bit of that pickup in Q4. So part of the reason we were up 4 basis points linked quarter in Q4 was that lift from RB&T. And then going into Q1, we certainly have some very significant tailwinds that we're happy about. Our funding continues to roll off and repricing down. RSAs, we still have a bit to fall there, modest amounts. We've taken most of the cost advantage already. We do have some strong liquidity. Of course, we got to put that to work, and we're at the lowest level of wholesale in our history at 8.8%. And then that impacted the RB&T divestiture that you mentioned.

Counter to that, loan pricing continues to get tougher to hold on to. We did see some continued drop in LIBOR here since the end of the year. We have to put that liquidity to use here in Q1. And as a result of all that, our guidance is coming in at that 2 to 4 basis points for the quarter. So that's really the pros and cons, puts and takes in terms of how we get to that.

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Nathan James Race, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [4]

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Understood. That's very helpful. And if I could just ask on the swap revenue side of the equation. Obviously, another strong quarter here, and 2019 was pretty impressive as well along that front. So just curious if you guys can kind of speak to the drivers there. I know you guys have specialties within your guys' franchise that's driving some of that growth. So I'm just curious if it's new clients or some existing clients that are refinancing and using that swap product. And just any other kind of commentary as we can maybe think about the run rate for swap fee income in 2Q and 3Q and 4Q of this year as well? And I appreciate your guidance for 1Q as well along those lines.

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [5]

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Okay. This is Larry. I'll take a shot at that one. First of all, a lot of this is coming from our Specialty Finance Group. There would certainly be some existing clients, but some new business. So I think a healthy blend of where that's coming from. The pipeline there continues to be solid. As you know, we're guiding to slightly lower fees in that space. That's really because -- not because of pipeline because that seems consistent with the past, but we were aided a little bit with the falling yield curve throughout 2019 from a pricing standpoint and how we structured those. Now that the rates have kind of been a little more stable, we think the pricing will narrow just a little bit there, so that's having a little bit of impact on the fees for similar transactions in the last year versus now.

So the run rate, as we talked about, we think, a rational run rate is 5% to 7% in the first quarter. If you look at our 4-quarter trailing average on that, it's, I think, in the 7.5% range. We don't think this is an aberration. So we don't expect that to grow meaningfully beyond that, but we think those are kind of reasonable ranges to operate in.

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Nathan James Race, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [6]

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Understood. That's very helpful. And if I can just sneak one more in on the goodwill impairment charge tied to Bates. And I -- if I remember correctly, I think you guys are going to be retaining the Bates wealth management presence in Rockford going forward. So just curious what drove that goodwill charge. And then how we should think about wealth fees as 2019 -- I'm sorry, as 2020 progresses as well?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [7]

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Yes. Sure, Nate. Happy to take that. So Bates' AUM is up and has grown year-over-year. Revenue is strong, has grown slightly year-over-year. However, given our exit from the Rockford market, our synergies and our integration plan with RB&T is no longer available, that's been eliminated, which, as you might guess, impacts our short-term forecasted profitability for Bates. That's really the cause behind the goodwill impairment. We're now working on opportunities to restructure operations to regain our expected profitability, but that's going to take some time. We thought it was prudent to take the goodwill charge considering the change. Hope that makes better sense.

And then -- Nate, you asked about outlook for next year. The divestiture of Rockford will take a little bit of wealth management revenue out, but candidly, a pretty modest number, less than $2 million annual. And we still expect strong traction in wealth management, another 8% to 10% growth in wealth management year-over-year. In 2019, we actually grew new AUM at $352 million and another 273 relationships in our other charters. So strong traction there in wealth management. Very good folks in that business for us, and we continue to expect 8% to 10% growth there.

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Operator [8]

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The next question will come from Damon DelMonte of KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [9]

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So first question, just wondering if you could talk a little bit about CECL and expectations for how that's going to impact the loan loss reserve.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [10]

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Sure. Damon, as you know, most of the industry is not yet completed here. I would tell you that this guidance and our take on this right now, again, would be in draft form. But we spent a lot of time on this over the last 2 years. Right now, we are expecting a very modest impact on our reserves in the range of 5% to 10%. Given our reserve levels at the end of the year at $36 million, that's $1.8 million to $3.6 million onetime adjustment impact. That's about a 5 basis points drag on total risk-based capital. So a very modest impact on total risk base. Total risk base reported at 12.31% is 13.48%, so we'd still be in the mid-13s on total risk-based capital.

And just -- yes, a little color behind that. I mean certainly, a modest impact that we're projecting here. A couple of big reasons for that. One, we've had very good historical loss rates here at QCR for our entire history, even during the tough credit cycle. And we've historically had a pretty conservative approach to reserving under the prior methodology. Typically carried stronger reserves than most of our peers. So those 2 factors really contribute to that 5% to 10% impact.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [11]

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Got it. Okay. And then how about like kind of the day 2 impact as we look at the provision expense during 2020?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [12]

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Sure. Candidly, a little bit more of an impact there given its current expected credit loss. So given the run rate of loan growth that we're guiding to, that 8% to 10%, we would really expect provisioning in the $2.5 million per quarter range, plus or minus. That's up from prior guidance that we've given at around $2 million per quarter. So safe to say about a $2 million impact on the same volume of loan growth.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [13]

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Okay. That's helpful. And then just kind of as you noted with the kind of the reset to the capital levels with the divestiture of RB&T, what are your updated thoughts on capital management? Any thoughts on a buyback or a dividend policy? Or how do you expect to kind of leverage some of that excess capital that you guys have now?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [14]

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Yes. We're still just kind of getting to the medium of our peer group. So we believe that, additionally, we're still a growth story. So certainly, we will be thoughtful before we started given back any of that capital at this point. The other thing that we would say is we are going to likely consider a stock buyback plan but more as a defensive mechanism in case there'd be a major movement in the stock price.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [15]

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Got it. Okay. And then just one last final question M&A related. Just kind of update us with your thoughts on M&A? And have you seen an increase in discussions across your footprint? And what are your thoughts on 2020?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [16]

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Yes. We continue to be active lookers for opportunities. And we have multiple discussions kind of in very early stages, but it's very hard to tell what that means. And so probably nothing imminent. And -- but for the right opportunity, we would be prepared certainly to react to that if one of those becomes more active.

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Operator [17]

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The next question will be from Jeff Rulis of D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [18]

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Pretty good detail on some of that line item, I appreciate that. I guess the -- back to the swap business, so if we were to look at -- and you guys kind of walked us through just kind of the puts and takes there and I guess the threats to that business line outside of kind of rates, the -- kind of the curve and what you think has helped you in the -- in trailing quarters. But I guess, are you seeing any increased competition in that line item? More customers, I guess, suggesting that other banks offering a similar product, anything coming online there that would make you be a little more conservative on that figure?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [19]

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I would say that we believe our pipeline of activity is consistent with the last several quarters. The pricing pressure, mostly because -- not as much because of competition but mostly because of the yield curve stabilizing has taken away a little bit of pricing power as we've executed on those swaps. So hence, our kind of slightly lower guidance as we look forward compared to the last couple of quarters.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [20]

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Yes. I think still really good deal flow. We did get a pricing advantage on some of the swaps we actually performed in 2019. We don't expect and we're not guiding for that to continue, but really strong deal flow, a very sustainable business model there.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [21]

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And just to clarify, the $24 million to $26 million guide, that's swap alone? Does that include the -- I mean, it's becoming a de minimis relative number on the sale of government-guaranteed loans, but you've coupled that in the past. But is -- I guess, is the $24 million, $26 million, is that swap alone?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [22]

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Yes, yes.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [23]

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Great. And maybe one last question. You touched on the edges of this is just the strategic decision on kind of the disposition of Rockford and the reprioritizing of capital. I guess kind of the near- and long-term use of that deployment is that in different markets backfill just to try to get a little more specific as to -- you mentioned you're having multiple or active lookers on M&A. But ideally, how does that sort of play out in terms of redeployment of that capital? Outside of just saying that Rockford, you weren't getting scale and you'd like to go elsewhere, if you could kind of frame that up a little in more detail?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [24]

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Sure. Our near-term focus is really fill-in acquisitions in our current markets really because of 2 factors: ease of execution and the scale that it would bring to us, particularly in Springfield and Des Moines. We were #1 market share in Quad Cities, Cedar Rapids. And so there's less opportunities when you get to #1 market shareholder, can be some. There's more likely opportunities in Des Moines and Springfield. That would be our first choice because that would get us to meaningful scale in those markets. And those are already substantially bigger than we were in the Rockford market. And so if we can build those out. And if you look at the ROAAs and our bank levels, Cedar Rapids and Quad would be the highest because they've got more scale, more operating leverage. That would be our first priority. So our near-term focus is that. And then longer term, markets that look like the ones we're in today.

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Operator [25]

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(Operator Instructions) The next question will come from Terry McEvoy of Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [26]

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First question. Good news, the loan payoffs normalized again here in the fourth quarter. So I guess my question is, do you expect that to change at all over the near term, meaning elevated payoffs? And what are your assumptions for payoffs as you were putting together your loan growth outlook for full year 2020?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [27]

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Yes. The payoffs, I think, have been consistent here in the last couple of quarters, so we don't see a big trend in that one way or the other. Payoffs are hard to predict, so consistent would probably be the theme that we would think is appropriate at this point.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [28]

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And then as a follow-up, I guess, I'm a little bit surprised maybe on the margin outlook not being a bit higher, just given the interest-bearing deposit costs still over 1%, CDs over 2%. So could you just talk about the opportunity, not only in the first quarter but throughout 2020, to really reduce the funding costs? And whether you think the margin expansion can improve from the first quarter as you reduce your overall funding costs.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [29]

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Sure. Great question, and fair one. Our guidance in that 2% to 4% for the first quarter, really, again, based on those puts and takes I've talked about here a few minutes ago. We would expect for some continued improvement in margin, at least through the first half of the year. The back half of the year, that may flatten out and become more static. So we're optimistic about margin in Q1. If our guidance is a little less optimistic maybe than some of you might expect, guilty as charged. But we still feel very bullish about margin here in the first half of the year, and we think we're a bit of an outlier in that regard. But we did see some very nice improvements in the last half of '19. I think our caution might be that we're not sure just how much further we can go and have to go on deposit pricing.

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [30]

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One of the things that I think is important is we're probably running a little more liquidity than we planned on. And so that's probably having a little drag, and until we can figure out how to burn through that in a profitable way, that will -- that's probably muting our initial expectation of debt.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [31]

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Yes.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [32]

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And then just one last question. Any additional cost expenses for the Rockford exit expected in 2020? Or is it going to be pretty clean from an expense standpoint, starting in the first quarter?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [33]

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Yes. We've taken those costs out. We are still providing some support services to that charter until Heartland executes their conversion, which actually is in 2 weeks. But all of our costs have been accounted for.

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Operator [34]

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The next question will come from Brian Martin of Janney Montgomery.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [35]

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Todd, just going back to the margin for a minute. Just on the loan pricing still being pretty competitive, can you just talk about where new production is coming on? I don't mean -- whether you differentiate that between the specialty or kind of the core finance, but just kind of where that's coming out? And are you seeing it begin to stabilize? Or is there still pressure where you expect that to continue to trend lower?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [36]

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Yes. We're still seeing new loans in the 4.30%, 4.50% range, weighted average. We certainly are continuing to see pressure on that. Then again, that's part of the caution we have about margin accretion in Q1, just how rigorous the challenge will be on loan pricing. Right now, doing a very good job. Our lenders are doing a fantastic job across the footprint in new loan production, both the amount and pricing, so we feel good about it, but would be in the 4.30% to 4.50% blended range.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [37]

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Okay. That's helpful. And maybe just jumping to the loan kind of the pipeline you talked about at this point. When you look -- when you think about the growth -- or kind of model what you guys are factoring in for growth in 2020, I mean, can you talk about where that growth comes from, whether it be by kind of geography how you're thinking about it? Is it kind of strong across all markets? And then maybe the contribution of the Specialty Group, kind of how much that weighs into the growth equation as you kind of think about it in 2020?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [38]

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Yes. I would say, first of all, the kind of the core business, C&I and commercial real estate, it would be pretty consistent across our markets from -- all the markets are healthy. We seem to be gaining market share in all of those places. But those are markets that are, on average, probably growing 3%. And so if we're getting from 3% to 10% loan growth, we're probably getting 5% of that increased loan growth from the core business, and the last 5% is probably coming from our Specialty Finance Group, which is, again, municipal lending, historic and like tax credit lending.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [39]

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Okay. And that Specialty Group, the footings at year-end, Larry, where are those at today?

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [40]

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Let me look at the rate schedule here.

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [41]

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Yes, total loans for specialty finance at the end of the year are little over $700 million across the entire company.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [42]

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Okay. And Todd, just keeping things in perspective, where that level was at a year ago? Was -- how much of the growth this year came from that Specialty Group?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [43]

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Yes. I would say probably very close to what Larry portrayed that about half of our organic growth came from Specialty Finance this year.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [44]

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Okay. Perfect. That's helpful. And just maybe the last 2 housekeeping things for me. I appreciate all the color and the difficulty in forecasting the swap income. Just as we think about it, bigger picture, I guess, assuming this is a sustainable business over time that when we think about 2021 and beyond, I mean, we should be factoring in some level of stability or growth in that number without -- I know you guys aren't providing any guidance that far out, but just your level of -- we should still expect it to be a meaningful contributor in the out years. Is that fair to say?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [45]

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Yes. Brian, that's a great question. We didn't really -- I mean, we gave some very specific guidance about Q1 and good range for 2020 of $24 million to $26 million, but this business model, we believe to be, is sustainable for all the reasons we just discussed. We took the edge off the $29 million and are guiding to something a little less than that, lack of that yield curve advantage here in this year. But when you do those out years, we believe this to be a solid $25 million, $26 million a year business.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [46]

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Okay. That's helpful, Todd. I appreciate it. And just the -- with CECL, is there any change in your outlook on the accretion, Todd? I mean is it -- I guess a -- it's diminishing in size, but just how you're thinking about the maybe full year accretion for 2020?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [47]

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Brian, that's actually a great question because it has really rolled off. Our total -- and I'm not talking about net accretion, this is just the loan number, but accretion for '19 across the 3 acquisitions was a little over $4.5 million. That's scheduled to be only about $2 million here in 2020. As you know, that rolls downhill fairly quickly. So that will have an impact on net interest income dollars. We expect to overpower that with growth and some margin accretion.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [48]

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Okay. That's helpful. And you did say, Todd, that the margin, your outlook is maybe in rate environment -- if we're in a stable rate environment, I guess, your outlook today is that the margin is up in the first half and then begins to flatten out in the second half. Is that kind of what I heard? Maybe I missed that?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [49]

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No. Brian, that's consistent with our thoughts that we expect some accretion in that 2% to 4% range in Q1. We'll talk more in April about expectations for Q2, but we're optimistic about it. But we do expect a more static margin in the back half.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [50]

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Okay. And that -- is -- that flattening out is driven by what, Todd, just at least as you think about it today?

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Todd A. Gipple, QCR Holdings, Inc. - President, COO, CFO & Director [51]

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Yes. Well, running out of powder on the cost of funds repricing, primarily. We have jumped on that with vigor here at the last half of '19. We were operating at least 100 beta, if not more, in terms of taking costs out. And at some point, we're going to hit some floors there. That's really what it's about.

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Operator [52]

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

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Larry J. Helling, QCR Holdings, Inc. - CEO & Director [53]

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Okay. Thank you, operator. I'd like to thank all of you for joining us on our call today. We look forward to speaking with you all again soon. Have a great day.

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Operator [54]

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Thank you, sir. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.