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Edited Transcript of QCRH earnings conference call or presentation 25-Jan-19 4:00pm GMT

Q4 2018 QCR Holdings Inc Earnings Call

Moline Jan 29, 2019 (Thomson StreetEvents) -- Edited Transcript of QCR Holdings Inc earnings conference call or presentation Friday, January 25, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas M. Hultquist

QCR Holdings, Inc. - Co-Founder, President, CEO & Director

* Todd A. Gipple

QCR Holdings, Inc. - Executive VP, COO, CFO & Director

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Conference Call Participants

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* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP & Research Analyst

* Damon Paul DelMonte

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

* Nathan James Race

Piper Jaffray Companies, 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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Good morning and welcome to the QCR Holdings Inc. Fourth Quarter and Year-end 2018 Conference Call. Yesterday, after market close, QCR distributed its fourth quarter press release, and we hope that you've had the opportunity to review the results. If there is anyone on the call who has not yet received a copy, you may access it on the company's website, www.qcrh.com.

With us today from management are Doug Hultquist, President and CEO; and Todd Gipple, Executive Vice President, COO and CFO. Management will provide a brief summary of the quarterly results, and then we will open up the call to your questions.

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 statement 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 8, 2019, 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. Doug Hultquist at QCR.

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [2]

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

We are pleased with our performance in 2018 as we delivered record net income translating into 16% adjusted earnings per share growth. Our strong financial results were driven by strong loan and deposit growth and significantly higher noninterest income.

And while our net interest margin was adversely impacted by the flattening of the yield curve over the course of 2018, we were able to grow adjusted net interest income by 19% from 2017.

Strategically, 2018 was also a good year for us as we added our fifth independent charter with the merger of Springfield Bancshares, the parent company of SFC Bank, which closed in July, and we added the Bates Companies in October, which bolsters our wealth management capabilities. It helps us build scale in the Rockford market and provides incremental noninterest income to the company.

Bates added approximately $700 million in assets under management at acquisition and is a well-respected group of wealth management advisors.

One of our key strategic objectives is to participate as an acquirer in the consolidation occurring within our industry. Our focus is on markets with similar characteristics as our existing MSAs, those exhibiting favorable economic and demographic trends, and relationship-based community banking as valued by clients. Both of our additions in 2018 fit this criteria well.

Now, to our fourth quarter results. We finished 2018 with strong momentum, including solid loan growth, robust deposit growth and record fee income. We were also successful in reducing our nonperforming assets by 1/3 during the quarter.

Fourth quarter net income was $13.3 million and diluted earnings per share was $0.84. Adjusted net income, excluding acquisition-related costs, was $14.5 million and adjusted diluted EPS was $0.91, up from the third quarter when we reported adjusted earnings of $10.4 million and adjusted diluted EPS of $0.65.

Our annualized loan growth of 8.7% during the fourth quarter was stronger than the third quarter.

For the full year, organic loan growth was 9.8%, which is at the low end of our stated goal of 10% to 12%. Loan production in the fourth quarter was at record levels, driven by strong demand for commercial and industrial and owner-occupied commercial real estate loans across our charters. However, we continue to experience an elevated level of payoffs which diluted our net loan growth. The payoffs were the result of a number of factors, including commercial clients experiencing healthy cash flows, clients selling businesses and thus paying off their loans, and some of our real estate developer clients selling completed projects and taking longer to reinvest their capital, given higher market valuations and higher interest rates.

Our markets continue to be very resilient with strong economies and favorable outlooks. However, given the uncertainties surrounding payoffs and a general sense of caution among a number of our clients, combined with our continued disciplined origination and underwriting efforts, we are setting a target for annual loan growth of 8% to 10% for 2019.

We had very strong deposit growth this quarter, which more than funded our net loan growth. Total deposits grew at an annualized rate of 19.8% during the quarter, while wholesale funds as a percentage of total assets declined to 13.8% from 15.9% in the third quarter. This is within our goal of limiting wholesale funding to less than 15% of assets. We have been highly focused on growing our core deposits which tend to have long sales cycles, and we are happy to be reaping the benefits of our efforts.

During the fourth quarter, we had particular success with certain C&I customers. We continue to strive for funding all of our loan and lease growth with core deposit growth. But in any given quarter, there may be a mismatch as we don't want to turn down the opportunity to bring attractive and high-quality loans onto the balance sheet. The competition for deposits remains high and thus our cost of funds continues to increase and that combined with the excess liquidity resulting from the strong deposit growth put pressure on our NIM. We were able to offset some of the higher funding costs with higher loan yields, although the positive impact this quarter was somewhat constrained by a combination of factors, including higher competition in certain areas, lower loan fees and the elevated loan payoffs, many of which were attractively priced. As a result, our adjusted NIM was down 5 basis points to 3.4% for the quarter. Todd will discuss our NIM in more detail.

Noninterest income was $15.3 million in the fourth quarter, a $6.5 million increase from last quarter. The increase was primarily driven by record swap fee income of $7.1 million and higher wealth management revenue, primarily due to the addition of the Bates Companies for the full quarter.

Our excellent performance in generating swap fees was due to strong loan production from our Specialty Finance Group.

Wealth management revenue was $3.9 million for the quarter, a 19.0% increase from the third quarter. For the year, wealth management revenue growth was over 21%, which included revenue from the Bates Companies for only one quarter. We are very pleased with our full year wealth management revenue growth, particularly our success in attracting new assets under management despite the fact that the stock market was down for the year.

Overall, we are encouraged by the progress we made in 2018 against our 7 key initiatives that we have shared with you over the last 3 years. We remain committed to the pursuit of these objectives with the overriding goal of delivering consistent upper quartile peer performance.

As we enter 2019, we remain optimistic. Our markets continue to be healthy, and we are making the investments that we believe will lead to further earnings growth and ultimately translate into increased shareholder value.

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. - Executive VP, COO, CFO & Director [3]

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Thank you, Doug. I'll start with net interest margin, as there was a bit of noise that impacted NIM this quarter. Our reported net interest margin for the quarter on a tax equivalent basis was 3.63%, up 3 basis points from the third quarter. However, our adjusted net interest margin was 3.40%, down 5 basis points. This was primarily driven by our funding betas outpacing our loan betas as the yield curve flattened further, but was also adversely impacted by the excess liquidity that we carried during the quarter due to our strong deposit growth. The increase in our cost of funds for the quarter was driven by both rate and mix. The ongoing competition for deposits and a shift in mix to time deposits also drove up our average deposit cost.

As we've significantly grown core deposits over the years, a strong portion of this growth has come from larger deposit customer relationships with some higher rate sensitivity. These deposits tend to have betas that are more closely aligned with market rates. The remaining core deposit franchise has modest rate sensitivity and the related betas have consistently been lower than expected throughout the rising rate cycle.

Adjusted loan yields, excluding acquisition discount accretion on a tax equivalent basis, increased by 11 basis points on a linked-quarter basis. We are increasing the yields on our fixed-rate loans as we are getting paid better on new loans.

Regarding our floating rate loan portfolio, it continues to reprice. However, a significant portion is tied to LIBOR and the volatility and reset timing lag a bit and we did not see a full 25 basis points for the rate hike rate in the third quarter.

Our talented lenders across the company are very focused on increasing our loan yields in an effort to counteract the increasing cost of funds. However, the flattening yield curve and an extremely competitive environment for the high-quality loans and leases we target are very strong headwinds.

Now, turning to our record noninterest income results, which at $15.3 million increased 73% from the third quarter. The majority of this increase was due to very strong swap fee income. For the quarter, our swap fee income, combined with the gain on the sales of government guaranteed portion on loans sold, totaled $7.1 million, bringing the total to $11.2 million for the year, well above our prior guidance of $4 million to $5 million annually. The significantly higher swap fee income in the fourth quarter is correlated to strong production from our Specialty Finance Group in the area of tax credit lending, where our clients are locking in long-term fixed-rate financing.

While we are very pleased with the strong results in the fourth quarter, 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 of the markets and our current visibility, we anticipate this portion of our noninterest income to be between $8 million and $12 million for 2019.

As Doug mentioned, our wealth management fees grew by over 21% for the year. Excluding the acquisition of the Bates Companies, we have continued to organically grow our assets under management, despite a volatile equity market. Growing this part of our business by at least 10% per year on a net income basis remains one of our key strategic goals.

Turning to our expenses. Our noninterest expenses for the fourth quarter increased $5.9 million as a result of several factors: first, salaries increased by $1.1 million with approximately $630,000 due to the addition of the Bates Companies and the remainder split between headcount additions and both business development and operations, all to support our growth. We also had a $1.4 million increase in incentives and commissions, due primarily to the strong swap fee income in the quarter. We also reduced the carrying value of an OREO property by $2 million and sold another OREO property at a loss of around $400,000, which contributed to the higher expenses. In addition, we had a $1.2 million increase in professional and data processing fees. Approximately $400,000 of the increase was related to vendor credits we had received in the third quarter. Some of the more notable increases in the current quarter were due to onetime legal and accounting cost, and we also initiated the outsourcing of our help desk function in the fourth quarter.

Finally, acquisition and postacquisition compensation, transition and integration cost totaled $1.4 million in the fourth quarter. These costs were mostly related to the conversion of our core processing system at Community State Bank in Ankeny, which was converted in late October.

After taking into account all of these factors, a more normalized noninterest expense for the quarter would have been $30.5 million. We expect the run rate on noninterest expenses to be in a range of $31 million to $32 million per quarter for 2019.

Our effective tax rate for the quarter came in at 21% and 17% for the full year, and there were not any material unusual items impacting it.

The inflated effective tax rate in the fourth quarter was primarily driven by the higher taxable income reported for the period.

As we stand now, we expect that our tax rate for 2019 to be in the range of 17% to 18%.

Now turning to asset quality. We had a significant decline in nonperforming assets in the fourth quarter, which were down 33% from the third quarter as we monetized a number of positions, including both nonaccrual loans and other real estate owned.

Our NPAs to total assets ratio was 0.56% at the end of the quarter, down from 0.87% at the end of the third quarter and 0.81% from the end of 2017.

Our provision for loan and lease losses was lower than normal due to a more favorable outcome than expected on a large credit that was added to NPAs in the third quarter of this year.

Since that time, we received payments totaling $1.4 million and the remaining balance was charged off.

Net charge-offs were $4.8 million for the quarter. The higher level was driven by charge-offs on loans that we exited during the quarter, which also contributed to the overall reduction in our NPAs. We made strong improvements in our nonperforming assets during the fourth quarter, and we are pleased with our asset quality as we wrapped up 2018.

With that, operator, let's open up the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Rulis with D.A. Davidson.

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Unidentified Analyst, [2]

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This is actually Chris Keith on for Jeff. My question is related to your SBA business. How was the government shutdown impacting that business?

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [3]

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Yes, that's a great question, Chris. And I actually went through that with our Chief Credit Officer last night in preparing for this, and he said in all 5 charters there's just very little activity right now. And not sure when that'll pick back up, but it's really shut it down.

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Unidentified Analyst, [4]

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Okay. Great. Awesome. And then just another follow-up question. With the NIM compression, are you expecting to see that continue on throughout 2019? Or we...

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [5]

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Yes, Chris. Sure, Chris. Great question. Might help to just give a little more color on the compression that we experienced in the fourth quarter. I know a little bit of this will be a review, but I think it helps set the stage for your question. So obviously, our yield on earning assets for the quarter were up 14 basis points from 465 to 479. Unfortunately, that was matched by the increase in cost of funds, also up 14 basis points from 135 to 149. So our spread was flat at 330 linked quarter. Our net interest margin, when you figure in the impact of the non-interest-bearing, of course, was actually up 2 basis points from 346 to 348. Tax equivalent basis, up 3 basis points from 360 to 363. So all of that is in the table on 9. Of course, we always net out the accounting accretion to get to more of a core margin, taking out that accretion impact. And since net accretion was up 900k in the fourth quarter, when you net that out in both quarters, our core NIM was down at 5 basis points from 345 to 340. So to get to the root of your question, that 5 bps of compression in the quarter, roughly half of that was the impact of excess liquidity during portions of the quarter. We had very significant deposit growth and very happy about that for the quarter. Virtually all of that came early in the quarter. In fact, much of it came in the month of October. And our loan growth lagged, our loan growth was later in the quarter. So that excess liquidity for a significant part of the quarter was probably 2 to 3 basis points of the compression. The remaining compression -- our reported loan yields were up 17 bps, but again, when you take out the net accretion, they were up only 11. And so our beta on loans lagged, and that is primarily due to the fact that many of our floating rate loans are LIBOR based, and LIBOR in the fourth quarter lagged a bit. And so our loans repriced closer to 21 basis points versus the full 25 with the Fed move. And that and the flat yield curve really is continuing to hurt us on new loan rates and new loan pricing. So probably half of the compression in Q4 was pressure on loan pricing, the other half, the excess liquidity. So that gets me to 2019. We're working really hard to hold on to margin. Unfortunately, we would expect some additional compression, perhaps 3 to as much as 5 basis points, like we experienced this quarter. We're going to fight hard to prevent that, but just being realistic, we do continue to see deposit pricing pressure lagging from the Fed increase at the end of '18. And loan pricing is just not proven to be easy to get. And with prime at 550, we're still seeing some term loans less than that. And so just to be realistic and transparent, we could continue to see a little bit more margin compression in '19, perhaps 3 to 5 bps. Sorry for the long answer to your short question, Chris. But...

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Unidentified Analyst, [6]

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No, no. That was perfect. I appreciate the color.

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

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Yes. I'm guessing all the analyst wanted a fair amount of color on both Q4 and guidance.

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Operator [8]

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Our next question comes from Nathan Race with Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [9]

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Todd, just continuing on the discussion on the margin from here. So I appreciate your commentary in terms of 3 to 5 bps additional compression. Is that just for the first quarter with the December rate hike? And do you expect some stability thereafter, assuming the Fed's kind of on pause for the remainder of 2019?

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

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Yes, that would really be for the first quarter, Nate. And I think our sentiment is, right now, it's maybe less about the Fed pausing or not and more about the slope of the curve. What's really creating the pressure on increasing loan pricing is just that flatness in the yield curve. Based on that, should the Fed pause, we probably are able to perform a little bit better, seeing a little less pressure on deposit pricing. So a pause could, in fact, help us weather any future compression after that. Yes, I think that's fair, Nate.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [11]

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Okay. Got it, that's helpful. So in -- just in terms of thinking about pricing on new loans, I think you mentioned that 5.50% was kind of on the high end and kind of new loans are coming on the portfolio around 5%, if I heard that correct?

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

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Yes. Sorry. We're still seeing our weighted average rate on new loans being probably closer to 5.25% to 5.50%. But we're just troubled that, that's not even north of prime. But we are bringing in new loans higher than the current portfolio yield.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [13]

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Okay. Got it. And then just on expenses. I think you guided to $31 million to $32 million for the remainder of 2019. Does that contemplate swap fees and the related incentive compensation coming back down towards to more normalized levels, so to speak, from what we saw the first 3 quarters of the year?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [14]

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Yes. Nate, great question and very perceptive. That guidance in that $31 million to $32 million range is a little higher. And that is because we will pay bigger incentives with that higher rate of fee income. In addition, we are really focused on incentives for deposit generation. We know that we have to continue to fund more significantly with core deposits. We're very focused on deposits and the pricing on deposits to help us with cost of funds. So between those 2 things, we do have a little bit more incentive comp baked into that guidance.

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Operator [15]

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Our next question comes from Terry McEvoy with Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [16]

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I'm just trying to get maybe a higher level of comfort around the loan growth guidance, particularly given the paydown activity that you've seen and then just some of the commentary in the press release around cautiousness from clients. So I guess the question is, what is going into that outlook? Are there any specific markets that stand out? And now that we're 1 month into the year, are you starting to see some activity in pipelines, et cetera?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [17]

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Sure, I'll start there. We actually saw an incredible amount of new loan production in Q4, $309 million. Just to put that in context, Q2 was $225 million, Q3 was $226 million. So loan production was very strong. We've talked a fair amount lately about payoffs and that really was exacerbated in Q4. Payoffs were $230 million. They've been averaging around $165 million the prior 2 quarters. So I would say tempering our expectations for loan growth, a big factor there, it really is those accelerated payoffs. And we're not losing clients, but we are having clients have some financial success, pay down their lines, pay down their loans. We've had a couple of significant clients sell their entire business. We have -- had a large homebuilder, probably the largest one on our books in Des Moines, sell their entire business and we lost that funding. So we're not losing clients to the competition, but we are seeing some pretty significant paydowns. We still feel very good about the economies. The economies are very robust, very strong. But again, we are growing loans and we have over the last 5 years at a 10% to 12% clip in markets that are probably growing more organically in the 3%, 4%, 5%. So we are taking market share, and we'll continue to do that and pipelines are quite strong. But I think we wanted to be realistic with the headwinds of paydowns. Doug, any color to add to that in terms of the markets?

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [18]

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No, I think that's fair. I think the markets are doing well. Iowa's got the lowest unemployment rate in the country. But I think there is some caution because of some of the political uncertainty that's out there, including the shutdown.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [19]

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No. That's helpful. And then, could you just remind me on the Bates transaction, how that was structured, so people, assets don't walk out the door. It contributed nicely here in the fourth quarter. And just want to make sure as I look at that revenue line, it's out to grow from here.

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

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Sure. So the Bates transaction was roughly a $6 million total purchase price, 2x revenue. I'll let Doug give some color on the strategy there with George Bates and his staff in terms of retention. But the vast majority, over half of the consideration, was earnout. So pretty significant focus on earnout in the purchase price and I think that's gone very well so far. We talked in Q3 about the fact that there would not be a significant pop to the bottom line from that during '19. Certainly, we expect the earnout to happen and to pay some of that compensation as a result, probably closer to 10% net to gross business now. We expect to integrate that more fully into our wealth management platform. We expect, over time, for that net to gross to grow and get closer to what we see in the rest of our charters. Doug, if you want to maybe give some color on George?

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [21]

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Yes. So George, biggest producer, obviously, and he's under contract as is the next largest producer, his successor. And then we had recently brought an experienced professional into the wealth management group at Rockford that has a fair amount of capacity. And he is working with those 2 on succession and transition planning. So we know that business is all about the people. And so that's why we do it on an earnout basis and get the key revenue producers under contract.

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Operator [22]

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Our next question comes from Damon DelMonte with KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [23]

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So first question regarding the strong deposit growth this quarter. Could you just go into a little bit more detail as to what was driving that growth and kind of what your outlook is for 2019 on deposit growth?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [24]

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Sure. We were very pleased with the deposit growth. And actually, of the $187 million linked-quarter deposit growth, we actually did a little more than that in the month of October. We started very fast. We came into the quarter extremely focused on generating core deposit growth. We actually had a little bit of runoff in December, that's not unusual for us in the last month of the quarter. Damon, I think you know that about us. We have fair amount of those correspondent bank deposits run off right at the end of the quarter. And that's even more significant at the end of Q4, with some of the window dressing the smaller banks do. They tend to pull the cash back on their balance sheet. So we're really focused on bringing bigger wallet share of existing clients on to our balance sheet, Damon, is probably the start of our strategy there. We have all of our markets focused on going to our best C&I clients and best big clients -- big deposit clients and trying to gain even more wallet share from them and bringing those on. That can work more quickly, of course, than the sales cycle with a brand-new client. We're still focused on those. And I had mentioned previously on the call some incentives around deposits. We're working on some plans to target specific individuals in each of the charters that have a real strength in deposit gathering. We like to think all of our commercial bankers are commercial bankers, not commercial lenders, but obviously some of them are better than others at deposit gathering. And we're really focused on having those folks spend an awful lot of their time on core deposits and trying to bring in fairly large amounts in doing that. We did see a jump in time deposits in the quarter, that's not retail time deposits, that's not CDs, fair amount of that might be public funds where we're going to some of the relationships we have with public funds. And again, getting a bigger share of their deposits. So Damon, that's really the core of the strategy that we're implementing there.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [25]

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Got it. Okay, that's helpful. And then, obviously, a huge improvement in credit this quarter as you guys work through some lingering issues. How does that impact your outlook for the provision in the upcoming quarters in 2019? And also, I guess, coupled with maybe a little tempered outlook on loan growth, could you give us some parameters around what you might be looking at for a quarterly provision rate?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [26]

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Sure. I would expect, Damon, for that to be a little more modest than we had last year. We feel really good about asset quality ending '18. As you can tell from the numbers and the results, we were very aggressive and very focused on reducing NPAs. We did have some significant charge-offs in the quarter, no doubt about it, roughly $4.9 million in charge-offs. But we also had $6 million in cash paydowns on NPAs. The other 2 things we did: we were very aggressive in writing down 1 large other real estate property by $2 million. Reason being, we'd had it for about a year, things weren't improving. We'd not yet received an offer on that property. And we really wanted to start '19 being in a position to liquidate that property. So we all know that asking price and beat of sale are directly correlated. So we took a write-down here at the end of the year to put us in a better position on that property. And then the other OREO write-down really was a result of bulk sale on some condos. We've been selling those at a little -- and a little bit better price, but slowly. And we took a bulk sale on those to exit that. So that helped us a fair amount. In terms of guidance for next year, on provisioning, I do think it should be -- with asset quality holding up, should be a little less than we've seen through '18. We obviously saw a big jump in the third quarter with the 1 credit. But I would like to think we'd be more in the 2 to 2.5 range per quarter for '19.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [27]

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Okay, great. And then I guess my last question. I think, Doug, you had mentioned this in your prepared remarks about key initiative strategy of being a consolidator in a very fragmented market in the Midwest. Could you talk a little bit about your current capital levels, and how that may play into your ability to do more deals in the next 12 to 24 months?

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [28]

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Yes, a great question, Damon. And obviously, with the stock price doing what it did over the last couple of quarters, the metrics on putting deals together just was not there. And so we've really focused on integrating what we have. We completed a very successful conversion of the CSB core system, brought on SFC and Bates. We'll convert SFC in the third quarter of 2019. So we're really focused on setting up our structure so that we can continue to grow organically. And hoping that stock price performance allows us to be back in the game in terms of what sellers expect in terms of M&A transactions.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [29]

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Got you. Okay. And are you guys comfortable with your current level of capital?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [30]

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Yes, we are. And Damon, we accrete capital pretty significantly. We did not do that in the fourth quarter due to booking Bates. When you buy a practice like that, it's virtually all intangible. So that didn't help us accrete in Q4. But we would expect to be above TCE -- or I'm sorry, above 8% TCE organically in '19 and get total risk base up over 11%, organically. So we're not concerned about our current level of capital, the constraint on M&A right now is really much more about stock price.

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Operator [31]

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(Operator Instructions) Our next question comes from Brian Martin with FIG Partners.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [32]

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Todd -- I guess, Doug, just the payoffs you talked about and kind of gave a little color behind those numbers. I mean, in your expectations for growth in '19, and I guess are you assuming you stay at this -- I think -- I thought you said the payoffs were around $200-plus million in fourth quarter kind of at that level. Are you expecting to kind of back off and maybe still be high but just not at this level? Just kind of wondering, what's in your kind of more cautious guidance on loans?

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

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Sure, Brian. I think that we would certainly like to believe this $230 million in the fourth quarter is a peak. But it has been trending up and we think that many of our good longtime customers have pretty strong balance sheets right now. And given the uncertainty in the economy and the marketplace, they may choose to sit on a little more cash these days. So I don't know that our guidance is totally about the payoffs and the increased level of payoffs. It does have something to do with it. We've managed over the last 5 years to grow between 10% and 12%, but the payoffs is really a new issue for us. It's really been much more significant in '18, and we just think with the uncertainty facing many folks and the economic situation, that we're not certain it's going to abate just yet. So that's why we're dialing it back 200 basis points each end of the range.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [34]

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Okay, that's helpful, Todd, and just on your deposit strategy, you talked about, you kind of mentioned Todd that the higher balance funds usually come at a little bit more competitive rates. It sounds like your strategy at least is moving more share from your current guys, but at bigger dollar amounts in the -- so just kind of wondering, the deposit strategy, and if we see may be a bit more CD growth. Does that come at a bit more competitive rate, if you're trying to move bigger dollar amounts? Is that -- and is that what's in your guidance as far as how you're thinking about the margin?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [35]

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It is, Brian. It's baked in on the cost of deposit side that, when you go after those large deposits, the rates are very competitive. So that is cooked into that guidance and it's got a lot to do with it. I will tell you, we haven't gotten to this on the call yet, so I'll use your question as a reason to talk about it. Our reliance on what we call our rate-sensitive funds, our most rate-sensitive funds are those that probably have a beta of 80 to 100. Our reliance on that in the quarter did drop. So our reliance on our most rate-sensitive funds actually dropped by almost $100 million. And so in addition to the strategy I talked about, what we're trying to do is going out to clients, getting better wallet share, but not having those new funds indexed. We're giving them a good price. But we're not necessarily setting an index with those, and so we don't expect those to reprice as frequently as the Fed hikes. So we're trying to burn down the amount that's almost 100 beta, if that makes sense.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [36]

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Yes, to the index [stuff]. Okay. That is helpful, Todd. I appreciate it. And just the last one was just the accretion crystal ball, kind of how you're thinking about that for '19?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [37]

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Sure. Let me get to that number. So in fourth quarter, our accretion was up 900k to $2.7 million. Right now on scheduled accretion, the schedule is $1.2 million for Q1. So we did have some accelerated accretion in Q4. But total remaining discounts on the 3 books that we acquired in '16, '17 and '18 is down to a little less than $12 million, $11.6 million. So as a result, the quarterly run rate scheduled has come down a fair amount. So in your model, that's $1.2 million per quarter for '19.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [38]

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Okay. Unscheduled?

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Todd A. Gipple, QCR Holdings, Inc. - Executive VP, COO, CFO & Director [39]

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Unscheduled, yes.

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Operator [40]

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At this time, there are no further questions in the question queue. This concludes our question-and-answer session, and I would like to turn the conference back over to Mr. Doug Hultquist for any closing remarks.

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Douglas M. Hultquist, QCR Holdings, Inc. - Co-Founder, President, CEO & Director [41]

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Thank you, Sean. And I'd like to thank everyone for joining our call today. We look forward to speaking with you soon, and have a great day and a great weekend.

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Operator [42]

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