Good morning, and welcome to the QCR Holdings, Incorporated First Quarter 2019 Conference Call. Yesterday after market close, QCR distributed its first quarter press release and we hope that you have the opportunity to review the results. If there is 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 Doug Hultquist, President and CEO; Larry Helling, CEO-Elect; and Todd Gipple, President-Elect, 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 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 May 9, 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 would now like to turn the call over to Doug Hultquist at QCR. Please go ahead.

Thank you, Operator. Welcome ladies and gentlemen, and thank you for taking the time to join us today. As most of you know, this is my last earnings call as President and CEO of QCR, which is bittersweet. The May 23rd Annual Meeting will be my last day in my current role. It has been a privilege and a joy and I have many fond memories since we organized the company and went public 25 years ago. Over that time, our market cap has increased from $14 million to more than $500 million and our assets have grown to more than $5 billion. I will miss working with our wonderful team, serving clients and reporting shareholders. However, I'm looking forward to life's next phase. The transition has been made easier knowing your company will be in great hands. With the well-known and proven leadership of Larry Helling as CEO, and Todd Gipple as President. And I welcome Larry on the call today. It will be both fun and rewarding to watch them in action. I would like to thank our analysts and shareholders for all the support over the past 25 years. Investor relations has been a highlight for me and I value the relationships built with so many of you over the years. I'm confident QCR Holdings will continue to be a company where relationships matter for the next 25 years and beyond. Now, I'll turn it over to Todd for an update on the first quarter.

Thank you, Doug. I just want to say how much I've enjoyed working with you over the last 19 years here at QCRH, and prior to that at both KPMG and RSM. While you'll be retiring as CEO and one of the Co-Founders of our company, I'm confident that the culture you created here at QCRH will guide us for decades to come. I look forward to working with Larry to further strengthen that client-centric culture and drive significant long-term shareholder value. Now on to our first quarter results. We are generally pleased with our start to 2019, as we recorded another solid quarter of net income driven by robust loan and deposit growth, strong fee income and excellent credit quality. That being said, we continue to experience pressure on our net interest margin during the quarter due to a combination of factors, including lower acquisition-related net accretion, excess liquidity created by our strong deposit growth, and the impact of the issuance of our subordinated debt. Although this pressure was a main factor in our linked quarter decline in net interest income, we believe that we are now better positioned for return growth in NII given our robust loan pipeline and our outlook for a stable NIM in Q2. First quarter net income was $12.9 million and diluted earnings per share was $0.81. Adjusted net income excluding acquisition-related cost was $13 million and adjusted diluted EPS was $0.82 as compared to the fourth quarter when we reported adjusted earnings of $14.5 million, and adjusted diluted EPS of $0.91. Our annualized loan growth was 7.1% during the first quarter which was modestly impacted by normal seasonality. This growth was largely driven by new loan generation in commercial and industrial loans and commercial real estate loans. The main driver within C&I was…

Thank you, Todd. It is exciting to be involved in this earnings call and I look forward to meeting and working with all of you. I am honored to be succeeding Doug as CEO of QCRH and I want to thank him for his 25 years of hard work and dedication to this organization. I will miss him, but thank him for his support and confidence in me. His will be hard shoes to fill. I'm excited to take over the helm and to work closely with Todd to continue building upon the successful legacy that has been created over the last 25 years. We have already started some transition, as in February, we announced some organizational changes related to the new executive management team. I believe the changes will help us further empower our 5 independent charters to grow their business and successfully attract and serve their clients, all while benefiting from the scale that QCRH provides. We intend to continue to leverage our successful business model to improve our product and service offerings and share them along with all of the best practices across the platform. Finally, we will maintain the pursuit of our stated long-term initiatives, including emphasizing quality organic growth supported by core deposits, focusing on growing our fee-based businesses, and diversifying our revenue streams, maintaining excellent asset quality, carefully managing expenses while spending to support overall growth, and continuing to participate as an acquirer in our markets particularly with strategic tuck-ins to bolster existing markets and expanding to attractive markets like we did in Springfield, which has been a huge success. With that, I will turn the call over to the operator, so we can take your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Jeff Rulis with D.A. Davidson. Please go ahead.

It's actually Drake for Jeff this morning. My first question, regarding NIM. Can you just talk about deposit cost pressure that you're seeing in your markets? And are you starting to back off on CD specials on stuff like that. Can you just talk through what you're seeing in your market?

Sure, we can provide some color on that. We actually are feeling pretty good about deposit rate pressure right now as we indicated in the scripted comments, we're actually looking really hard at a couple of specific products and some of our client relationships and we're actually taking some step to reduce deposit costs in a couple of areas. So we're feeling very good about that, the fed pause is good is good for our balance sheet, good for the right side of our balance sheet and we're very optimistic about the velocity of deposit cost in Q2. That's really a significant part of our refreshed guidance that we expect a static margin in Q2 and the rest of '19.

And then in terms of deposit growth just in general, are you still planning on going after as much deposits as you can. Are you planning on backing off for the rest of the year?

We did have a really successful Q1 and yeah, we will continue to look to add relationships on treasury management and the right side of our balance sheets. We're not going to slow those efforts. The additional liquidity and the success we had in Q1 does give us a little more confidence in terms of rate and that's leading us to have the capability to reduce some rates in targeted areas, but we are going to continue to look for core deposits. So it's going to remain a significant focus for us. We do expect to put a fair amount of the excess liquidity from Q1 to work in Q2. We have some very robust pipelines, we're up already off to a pretty good start here in Q2 with loan growth. So we're not going to take our eye off the ball in going after core deposits.

Thanks. And just finally maybe you can talk through capital plans. Are you seeing anything in your markets that interest you or seller expectations coming down?

Right now given our stock price candidly M&A is not a significant focus at this time. I would tell you, I don't believe that sellers expectations on pricing have yet normalized with the rest of the market for publicly traded banks. So we'll really take a combination of improve stock price performance and some resetting of those expectations before we see much in the way of M&A just to be candid.

The next question will be from Nathan Race of Piper Jaffray. Please go ahead.

Just going back to your comments around the core margin outlook from here. I'm just curious within that context and I appreciate your guidance in terms of stability from here over the remainder of 2019. But just curious kind of what the weight average rate on new loan production is relative to portfolio yield around 4.90% or so. I believe?

Yes. So we're still seeing new loan production starting with a five handle, really the curve is not helping anyone in our industry with that. So we're not seeing an increase in those new loan rates being put on the portfolio, but we are still seeing an uptick in new rate compared to pay-offs and pay down. So we do continue to see some traction there. Honestly, the disintermediation of LIBOR in Q1 hurt us a fair amount on the floating rate loan. So I think everyone knows that LIBOR was upside down in Q1 and actually dropped 3 basis points, so that wasn't helping us on the floating rate loans. But the new loans we're putting on do have a weighted average rate of over five.

And I apologize, I was scribbling down notes quickly during your prepared remarks around expenses. Can you kind of just run back through the guidance for 2Q and the remainder of 2019?

Sure. Nate, we are giving guidance in a range of $32 million to $33 million core expense, the $32 million that we had for Q1 was really at the high end of the range that we have provided in Q4, which was $31 million to $32 million. We really see $32 million to $33 million being the norm for us for the next three quarters.

And then if I could just ask one more on capital and I appreciate your comments around acquisitions going forward, but I guess, just kind of given where the stock's trading today and given you guys kind of short up capital levels a little bit with the sub debt issuance in the quarter, I mean, any thoughts on a potential share repurchase program or anything along those lines at this point?

Nate, we continued to evaluate that and whether it's prudent for the benefit of our shareholders to implement stock buyback plan. We are creating TCE nicely, our TCE was up 14 basis points organically, linked quarter basis. So we feel very good about the progress we're making there. We certainly are not happy about the multiples we have right now and the resulting stock price. So we will continue to evaluate that and look at whether our buyback makes sense for the benefit of the shareholders. We are very protective of tangible book value per share and that's one of the things we're keeping an eye on and we're very pleased that we actually grew TBV per share in 2018 even with the merger with Springfield. So we're very focused on that, but we will certainly continue to evaluate a buyback.

The next question will be from Terry McEvoy with Stephens.

Just to go back to the margin or more importantly getting comfortable with the stable outlook. I just want to make sure I understand the message correctly. Have you already had successful conversations with customers in terms of lowering the rates or is that something you're looking to do in the third quarter? And should that happen that gives you the confidence around the margin outlook?

To be very clear, we are taking action right now in Q2 on deposit rates. It's not a hope, it's not a future expectation. We're doing it right now. And as I said earlier, the amount of growth that we experience and the success we had in Q1 is helping us with the fed pause, is helping us with that. We are really looking hard at all of those more rate sensitive funds and negotiating with clients and we're actually taking action right now on those.

And then just looking at the Springfield bank had another strong quarter of loan growth and I know you've talked about that since closing in a few quarters ago. Will that growth slowdown just given the ability to kind of leverage your balance sheet? Or is the pipeline robust today and that should be really a bright spot in terms of growth for the remainder of the year?

Springfield would be expected to continue to be a very bright spot for us. We are thrilled with the team there and they are very, very talented with respect to generating asset growth. They did take a modest step back with respect to deposits that had more to do with timing and a couple of transfers, but remain very focused on continuing to fund that strong loan growth. But we continue to have very high expectations there. Rob and his team already very talented added a couple of nice producers this quarter. And we're thrilled to have them on the team. And so that continues to be a bright spot for us.

The next question will be from Damon DelMonte with KBW. Please go ahead.

First off, Doug, congrats on the upcoming retirement. Well deserved, and been a pleasure working with you.

Likewise. Thank you, Damon.

Sure. So I guess my first question just wondering Todd, maybe you could frame a little bit the full year outlook for non-interest income after the results from this quarter. I would expect there to be some seasonal increases in the next couple of quarters. Is that a fair assessment?

We continue to believe that 8% to 12% -- I'm sorry, $8 million to $12 million is appropriate for the full year. We obviously got off to a very good start and hit the high end of that range. That business is less seasonal and more dependent on whether two or three of the big deals get closed in the end of a quarter or roll into the start of the next. So we're still thinking that $12 million upper end is a good number, Damon.

And then, I think, Todd, you mentioned that there is a provision this quarter, come in a little bit lower than, then what we are looking for at least. And I think you said there was some sort of like true up that occurred during the quarter?

Yes, actually the provision comment that I made was more about the fourth quarter being normally low because we actually had a really good outcome on NPA in the fourth quarter. So yes, if that wasn't more clear, but fourth quarter was benefited from a good outcome on a significant NPA in Q4. The Q1 number is pretty consistent with what we expected might have been a little light of your estimate and others that really has more to do with the fact that we continue to have very good asset quality.

And then I guess just lastly on the deposit growth this quarter, it looks like the broker deposits were up a decent amount. Are those in market broker deposits or those on a more national level?

Yes more national level and that's really a strategy to continue to combat cost of funds pressure. We had a very significant drop in wholesale, overnight wholesale and actually the short term brokered market was cheaper. So we rotated some of that. We had strong core deposit growth, but then we also took advantage of some better rates on national CDs and rolled that out of overnight wholesale, actually they were 2 basis points cheaper.

[Operator Instructions] The next question comes from Daniel Cardenas with Raymond James. Please go ahead.

So just -- most of my questions have been asked and answered, but just a couple of questions on criticized and classified loans. How did those trends look in Q1? I mean we saw some good improvement in Q4. Did that trend continue and maybe if you could just give us a little bit of detail there?

We actually had a slight uptick in classified really due to one credit and we looked hard at that, you'll see some of that detail in the queue when it gets filed. But we're in very good shape on that credit expect a very good outcome there. But that's first time in a while we've had an uptick in classified, in classified, feel really good about the credit, just thought what was appropriate to downgrade it, start working on a little more targeted.

Is that a commercial credit that ticked up here?

Yes.

The next question will be from Freddie Strickland with FIG Partners. Please go ahead.

This is Freddie on for Brian. Just a quick question if you guys could provide some color on the Specialty Finance Group and its contribution to loans and kind of what should we expect. How is that going to evolve over the coming quarters?

Yes, Larry, you want to take that one.

Yes. We are working hard to make that into a consistent business for us. We've talked about the fee income that they've helped lead the way on and we're working hard to try and make that fee income more consistent. On the loan growth side, we also have worked hard to try and make that consistent, but the pipeline is strong. So we believe that will allow us in the foreseeable future to continue to grow that portfolio at a consistent basis.

And then just one quick follow up from me. I was wondering if you could just talk, I mean you guys may have talked about this earlier, but just kind of core earnings or ROA away targets for '19 just kind of where you guys looking with your target?

Yes. So right now, Q1 was roughly 105 basis points, that plus or minus couple of basis points is pretty much the trajectory to expect here, could see some upside there if we do get better results than currently forecast for non-interest income, we continue to see some nice results not just in fees, fee income in SHG (ph) but also wealth management continues to grow nicely. We're going to keep an eye on expenses and certainly provision, but plus or minus a few basis points that 105 basis points is probably the mark for this year, given some of the headwinds in the industry.

The next question is a follow up from Nathan Race with Piper Jaffray.

Thank you on the follow up. Just any thoughts on how the purchase accounting accretion is going to run? There was a decent set down here in the first quarter. So just curious kind of what you guys have scheduled in? I know it can be kind of tough to predict with payoffs and so forth, but just kind of any thoughts on the trajectory of that line?

Yes, Nate, great follow up. We have not had a chance to talk about that. So I'm glad you brought it up. The accretion in Q1 was really only the scheduled accretion. So that's why we saw $1.5 million drop-off. We had -- as I think most of you recall, we had some significant payoffs and pay downs in Q4 and a lot of those would have been purchase credit impaired loans. So we released a fair amount of additional accretion in Q4. As we had about $2.6 million in that accretion in Q4 roughly $1.1 million, $1.2 million here in Q1 and the schedule for Q2 is static there about $1.2 million. So that's really got a roughly $10.4 million left in purchase discount accretion. And here over the next several quarters, would expect about a $1.1 million to $1.2 million scheduled accretion certainly could jump up if we have more payoffs or pay downs.

And if I could just ask one more on the provision line. Just going back to Dan's question, just given the kind of little increase in criticized loans this quarter. How should we kind of think about the provision going forward assuming criticized trends stabilize and if you guys are kind in that 8% to 10% loan growth target going forward?

Yes, I don't anticipate the modest jump in classified to really impact provisioning. We again feel very good about that credit. I think in this current range of $2 million to $2.5 million that's what we would expect that allows us to provide and keep pace with our fairly significant organic growth. But we really at this point don't expect any asset quality degradation that would make that jump up, so somewhere in that $2 million to $2.5 million range.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Doug Hultquist for any closing remarks.

Thank you. And I'd like to thank all of you that joined us today. Once again, it's been a pleasure working with you over the 25 years and I will miss it. Thank you again for all the support and have a great day.

And thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.