QCR Holdings Inc (QCRH) 2017 Q4 法說會逐字稿

Greetings, and welcome to the QCR Holdings, Inc. Fourth Quarter 2017 Conference Call. Yesterday after market close, QCR distributed its fourth quarter press release, and we hope that you've had an opportunity to review the results. If there's anyone on the call who has not received a copy, you may access it at 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 quarter and then we will open up the call to questions from analysts.

Before we begin the call, 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, I must point out that 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 from time to time in the company's 10-K and 10-Q filings, which may be obtained on the company's website or the SEC's website.

As a reminder, this conference is being recorded and will be accessible on the company's website until February 2, 2019. At this time, I will now turn over the call to Mr. Doug Hultquist at QCR.

Good morning, everyone. Thank you for joining us today, and I would like to welcome you to our quarterly earnings call for the quarter ended December 31, 2017.

Initially, I will recap some of the highlights for the fourth quarter and full year 2017, and will then turn the call over to our Chief Operating Officer and CFO, Todd Gipple, who will provide additional color on our financial results.

Yesterday we announced record earnings of $9.9 million and diluted earnings per share of $0.70 for the fourth quarter of '17. Core earnings, which exclude acquisition and other costs related to the company's previously announced acquisition of Guaranty Bank and Trust Company and costs related in the core processor conversion of Community State Bank, as well as the reduced tax expense due to the write-up of the company's net deferred tax asset, also equaled $9.9 million and diluted earnings per share of $0.70. I'll ask Todd to provide more detail on these non-core items later in the call.

Our core earnings were improved significantly this quarter as we experienced strong expansion in net interest income due to our strong loan growth throughout the year, a very strong quarter of swap fee income and relatively well-controlled provision and other expenses. Additionally, we closed the acquisition of Guaranty Bank and Trust in Q4 and saw the benefit of those earnings for the full quarter.

Our core EPS increased by $0.07 or more than 11% over Q3. Earnings for the full year were quite strong with core net income of $36.3 million and diluted EPS of $2.66 versus $29.4 million and $2.31 for the same period a year ago. This represents an increase in EPS of approximately 15% on a year-over-year basis.

We continue to demonstrate very strong loan growth, as we grew loans and leases on an organic basis by $366.5 million in 2017 or an annual growth rate of 15.2%. Additionally, Wealth Management revenue continues to be very strong and increased to $11.1 million in 2017 versus $9.2 million in '16 or an annual growth rate of 21%.

As I mentioned previously, we closed our acquisition of Guaranty Bank and Trust Company on October 1, 2017. We are very pleased to have the opportunity to combine the great people and clients of Guaranty with our existing Cedar Rapids Bank & Trust charter and further strengthen our market position in the Cedar Rapids community.

Before I ask Todd to provide some additional comments on our financial results, I did want to comment on a few more items from Q4. We again demonstrated very strong loan growth in the fourth quarter of 2017, and our full year annualized growth rate of 15.2% is a bit higher than our targeted growth rate of 10% to 12% annually.

In addition, much of our loan growth for the year was in commercial and industrial lending. Each of our bank charters contributed to this strong organic loan growth as we continue to have significant success, taking market share from our competitors as we attract clients to our relationship-based community banking model.

In Q4, we acquired title to the large CRE credit in the amount of $9.7 million that was placed on nonaccrual right at the end of Q3. This credit was subsequently charged down to a carrying value of $7.9 million and moved into other real estate in Q4. We believe that this was an isolated issue and not indicative of any deterioration in the overall portfolio as other credit metrics remain strong. We have begun work to stabilize the project and have initiated discussions with several potential buyers and are working to sell the property as soon as possible and practical.

Our long-term focus is on continued improvements in return on average assets, and our strategic goals and related strategic initiatives are focused on achieving ROAA results in the upper quartile of our peer group.

As we look forward to 2018, we will remain focused on our 7 key initiatives, which we have highlighted in our filings. Number one, continue strong organic loan and lease growth to maintain our loans and leases to total assets ratio in the range of 73% to 78%; number 2, continue to grow core deposits to maintain reliance on wholesale funding at less than 15% of asset; three, continue to generate gains on the sale of USDA and SBA loans and fee income on interest rate swaps as significant and consistent components of core revenue; four, grow Wealth Management net income by at least 10% annually; five, carefully manage noninterest expense growth; six, maintain asset quality metrics at better-than-peer levels; and finally, participate as an acquirer in the consolidation taking place in our industry to further boost ROAA, improve our efficiency ratio and increase EPS.

Strong progress on these 7 initiatives the past 2 years has resulted in significant improvement in our financial performance and the achievement of peer levels of ROAA. We will need to continue to execute on each of these initiatives to achieve our goal of upper quartile peer performance.

With that, I will now turn it over to Todd for more detail on our financial results for the quarter and for the full year.

Thanks, Doug. Good morning, everyone. Thanks again for joining us on the call today. I wanted to begin by providing a bit more color on the non-core items that impacted the fourth quarter.

First, we recorded $2.1 million in after-tax acquisition costs and post-acquisition compensation, transition and integration costs related to the acquisition of Guaranty Bank and Trust. In addition to closing the transaction, we also accomplished the full data processing conversion and merger of Guaranty Bank into our Cedar Rapids Bank & Trust charter during Q4. Total after-tax transaction costs related to the Guaranty acquisition, including amounts recorded in both the third and fourth quarter, were $2.7 million.

Second, we incurred a $753,000 after-tax cost in the fourth quarter to terminate the core processor contract for our Community State Bank charter. CSB had a long-term data processing contract in place when we acquired the bank in August of 2016, that would have resulted in a $4.4 million pretax termination fee at closing. As part of the renegotiation of our company's existing core processing contract during the fourth quarter, we were successful in significantly reducing this termination fee to $1.1 million pretax. And we now plan to convert CSB on to our core data processing platform in late 2018.

Finally, we recorded a $2.9 million increase in our net deferred tax asset as a result of the Tax Cuts and Jobs Act that reduced income tax expense by a like amount in the fourth quarter. The net impact of these core items was no net difference between reported earnings and core earnings, both resulting in net income of $9.9 million and $0.70 in earnings per share.

Net interest income increased $3.2 million in the fourth quarter as compared to the third quarter. The significant increase in net interest income was driven by our continued strong organic loan growth, as well as the addition of the Guaranty Bank balance sheet for the entire quarter.

Core net interest margin, stripping out the acquisition accounting net accretion for the CSB and Guaranty Bank acquisitions, decreased by 4 basis points in Q4 to 3.61% versus 3.65% in Q3. We had a very strong quarter of deposit growth, and that, combined with the acquisition of Guaranty Bank's more liquid balance sheet, caused us to carry slightly more than $50 million in additional balance sheet liquidity during much of the quarter. We estimate that this excess liquidity negatively impacted fourth quarter NIM by 5 basis points, and net interest margin would have otherwise expanded by 1 basis point.

Gains on the sale of government-guaranteed loans were again modest in the fourth quarter at only $34,000. However, swap fees were exceptionally strong for the quarter at nearly $2.5 million, which represented a record quarter for swap fee revenue. These 2 revenue streams combined to result in $4.3 million of revenue in 2017, slightly more than our $4 million annual target.

Wealth Management revenue continues to be very strong and grew $1.9 million or 21% year-over-year. In 2017, we added 422 new relationships and $393 million in assets under management. We now have $3.6 billion in assets under management, with $1.6 billion in trust assets, $971 million in brokerage RIA accounts, and $1 billion in custody assets. Of this growth during 2017, $208 million in assets under management came from the acquisition of Guaranty Bank's swap management operations.

Linked-quarter comparisons of noninterest income and noninterest expense run rates are quite difficult for the fourth quarter due to the addition of Guaranty Bank revenue and expenses. We expect to have more granular detail related to the impact of the acquisition on these results in our 10-K. We are still expecting 30% cost savings on Guaranty's historical noninterest expenses.

In addition to the write-up of our net deferred tax asset in Q4 related to the Tax Cuts and Jobs Act that resulted in a reduction of fourth quarter tax expense by $2.9 million, we anticipate that the new corporate tax rates prescribed by the Tax Act will reduce our effective tax rate in 2018 to a range of 15% to 16% versus our prior historical effective tax rate that was in a range of 21% to 22%. These effective rates do not include the positive impact of the tax benefit from stock option exercises and restricted stock vesting each quarter.

Overall, we are pleased to report record net income for both the fourth quarter and full year 2017 that resulted in a 15% increase in core earnings per share on a year-over-year basis and contributed to a $2.59 or 13% growth in tangible book value per share during 2017.

During '17 and 2016, our team created very strong organic loan and deposit growth and growth in noninterest income. We supplemented these organic results with 2 successful M&A transactions that allowed us to add great bankers and bank clients to our company and create added scale. We are dedicated to driving long-term shareholder value by executing on the strategic initiatives that Doug discussed earlier, as this will result in continued growth in earnings per share and tangible book value per share. We look forward to continued success in 2018.

Now I'll turn it back to Doug to wrap up.

Thank you very much, Todd. I hope that our comments have provided a bit more insight into the numbers. We can now open the phone lines for questions.

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

So yes, I just kind of wanted to touch on the expense run rate. I just kind of want to see what the first quarter is looking like, kind of backing out those one-time merger and acquisition costs to get to a little bit of a more core number. And then kind of just when exactly you think the Guaranty conversion is going to happen. And just if you see costs stepping down further after that.

You bet. We will have a fair amount more detail on the K on some of these numbers on a more granular and line item basis. First off, the Guaranty conversion already happened. That happened late in the fourth quarter. You might be thinking about CSB. That one's scheduled for late in the fourth quarter of 2018. To give you some better comparative data on our noninterest expenses, a lot of noise, of course. But we had reported around $31.3 million in noninterest expense for the quarter. That included around $2 million of expenses related to Guaranty. That is pretty much right on top of their annual run rate prior to acquisition. So we've not yet seen cost saves. Again, we did not merge and convert them until late in the fourth quarter, so we really didn't anticipate that happening yet. Those will start to roll in, those cost saves, in Q1. We also had around $4.4 million in acquisition and integration costs that we reported in Q4. We had a little bit of elevated compensation in Q4 related to the very strong quarter on fee income and earnings. So if you strip out those items, we were at around $23.8 million in QCRH only, core or more normalized expenses. So that really was the QCRH run rate in Q4. Again, the Guaranty expenses are at about a $2 million rate per quarter. We still expect to see a 30% cost save there, so that should be down to around $1.4 million of additional cost from Guaranty. I would anticipate about half of that happening in Q1, and we would be fully there in Q2 to get down to that $1.4 million post cost save number. So a lot of noise there, a lot of chop. I hope that helps everybody get a stronger lead on where we expect expenses to go.

Definitely. Yes, I appreciate the color on that. And then just kind of changing views here to looking at just expectations for 2018 as far as loan and deposit growth go. Can you just kind of give a broad outlook on where you see that kind of coming from? I know commercial and CRE have been strong, but just kind of your guys' outlook for 2018?

Yes, Jeff. As you know, in '17, both were stronger than what we would have predicted. And pretty balanced among the charters, also pretty balanced among the type of loans originated. So we're continuing to look at that 10% to 12% growth rate on the loan side and roughly the same on the deposit side.

The next question comes from Nathan Race with Piper Jaffray.

Todd, maybe just around the core margin outlook for 2018. So we saw some nice quarter loan yield expansion in the quarter. So just kind of curious to hear your updated thoughts on the step-up in deposit costs that we can expect in 2018, assuming we get 2 more rate hikes this year, at least. And then just any other thoughts on just kind of competitive dynamic out there in terms of loan pricing going forward.

Sure. Great questions, Nate. We will continue to see some pressure on funding costs. We have experienced very low beta thus far with now cumulatively 125 basis points of Fed increases. We've really been able to maintain funding costs in a fairly tight range. So we're very pleased with our outcome there, but we're going to continue to see pressure. Part of that's been offset for us by the acquisition of the CSB and the Guaranty portfolios. They have very good core deposits with very low betas. So we're very pleased about those acquisitions. So continued pressure on funding costs, certainly. I think everyone knows we were a bit more liquid in the quarter. We talked about that in the PR and our leading comments. Our loan-to-deposit ratio was down a little below 90% for most of the quarter. Prior quarter was a touch over 91%. So as Doug just told you, we expect to continue to see strong loan growth, and so we'd like to move that loan-to-deposit ratio and our loan-to-total asset number back up a little bit over 75%. So that will help offset some of that funding cost pressure.

We are, for the very first time, starting to see a little bit of lift in 3- and 5-year pricing on loans. And by a little bit, I mean a little bit. It's unfortunate. Again, we've had 125 bps of rate increases. We've seen almost no beta in loan pricing for new loans. We've seen the lift in our floating rate loans, of course. But new loan volume, it's been very tough to get better pay there. We are for the first time starting to see a little bit of traction there. So we're somewhat optimistic that with additional hikes to come, that we're going to start seeing some lift in loan betas. So our expectation is a fairly tight range for margin next year. I think it would be difficult for us to predict or comment on any margin expansion. It's just going to be difficult to hold on to margin. If you look back at our 5-quarter history, you can see there've been a couple of basis points up, a couple of basis points down from quarter-to-quarter. And that's really, today, what we're expecting for next year.

Got it. That's great color. I appreciate that, Todd. Is there an [FTE] benefit that we should be taking out going forward as it relates to tax reform?

Well, yes, related to tax reform, we talked about our rate being in a 15% to 16% range. And what I did want to comment on is just a little more color around that. So our tax equivalent yield will likely drop somewhere around 14 basis points. And again, we all know that the bottom line impact is 0. It's just really a non-GAAP reporting of tax equivalent yield. But our tax equivalent yield would be impacted by about 14 basis points if we look at '17. So that might move around a little bit. And then if we were to layer in the new tax rates in our core earnings for 2017, we would have seen about a 10-basis-point lift in ROA and about $0.27 of additional earnings per share. So that's a little more color on the new tax rate and its impact on tax equivalent yield, ROA and earnings per share. And again, those numbers are all based on looking back to 2017, not necessarily a prediction of '18 impact.

Got it. Okay. And then just thinking about swap fees, obviously, really strong in the quarter. So I was just curious if there're larger transactions that may have drove that number up sequentially. And just kind of how you're thinking about your overall fee income growth for 2018. I appreciate your guidance around 10% growth in Wealth Management income, but just any other broader comments just in terms of the overall pie outlook for 2018.

Yes, there were a couple of very large ones in Q4, Nate, on the swap side, and we continue to be talking to our commercial clients about swaps. We think it makes a lot of sense for them given the rate environment. So never able to predict those. We'd love it to be more consistent. SBA has been a bit soft, same with USDA. Primarily on the USDA side, again, those are larger and also take longer and are more difficult to predict. We really feel good about the strides we made in Wealth Management income during '17. Obviously, the market helped, but we brought in a lot of new assets, had assets added to additional -- or to existing accounts and then also picked up a couple of hundred million in the Guaranty acquisition and some nice talent there as well.

And Todd, just to clarify on the expense outlook. So if we take the $23.8 million from your core run rate and then you layer on $1.4 million from Guaranty, is that the right way to be thinking about it, around $25 million head into perhaps the second quarter on a clean run rate basis?

Exactly, Nate. I would say in a range of $25 million to $26 million, maybe starting out a little higher on that scale in Q1. We won't have all the cost saves implemented for the entire quarter. So that is the right way to think about that.

The next question comes from Damon DelMonte with KBW.

First question, just to kind of follow up on the margin. Todd, could you give a little guidance as far as what you're expecting from accretable yield impact? I think this quarter, you said it was around $745,000. What can we look for in the upcoming quarters?

You bet. So Damon, we obviously still have the CSB accretion that's rolling down. And we're expecting that to be at about $380,000 a quarter without any acceleration. So that's just scheduled. And then we brought on Guaranty, of course. The yield mark there is a little more modest, a fair amount smaller portfolio. Total mark there -- and we'll have more color on this in the K, but total mark there is about 2.4. And so think about that as around 600 a year-ish. And so on a combined basis, we're probably going to be more in a 500 to 600 range in the early part of the year this year. So down a little bit because of the continued roll-down of the CSB number. Hope that makes sense.

It does, it does. And then I guess, if we can just kind of go back to the fee income. Sorry if I missed -- if this was asked and you addressed it. But as we try to think of a normalized quarterly run rate, I know it's tough with the swap fee income and the gain on sale of the USDA and SBA loans and stuff. But I mean, should we think about this more in the kind of upper $6 million to low $7 million quarterly run rate?

Yes. So when you think about the comp combined number on gains on sales of government-guaranteed loans and swaps. So again, we talked about those 3 buckets -- USDA, SBA and swaps -- together. We're going to continue to look at that as about a $4 million per year business for us. So Damon, we had $4.3 million this year, an exceptional year last year. We had some large USDA numbers in '16. And I think we had $4.8 million for total year of that year. We still think about it as a $4 million core business for us. Unfortunately, to make your guys' job tougher and ours a little bit harder to explain, that's very, very choppy and probably has not been more choppy than it was this year. We had a great start in Q1, had virtually no results in Q2 and Q3, and then we had a lot of deals come together in Q4. So it's going to remain very choppy. Kind of think about that business in that range of $4 million per year. And then the trust and investment advisory fees combining, about $3 million for this most recent quarter. And so that we expect to continue to see that grow at about a 10% clip.

Okay. That's helpful. And then how do the pipelines look for the SBA, USDA and the swap fee income kind of in the first quarter after such a strong fourth quarter?

Yes. Well, the good news is we still have a pretty solid pipeline. They will continue to be lumpy in terms of when they get booked. Doug indicated SBA being very light and pretty modest. Candidly, the marketplace isn't supporting a lot of SBA activity right now. A lot of banks are willing to do those deals without guarantees and we're not. And so we're not seeing a lot of activity there. USDA, we have pipeline swaps. We have a pipeline, still very good transactions for our clients. So we continue to look for ways to help our clients with those 2 transactions. So we did have a lot of success in Q4, but it didn't completely empty the pipeline. We still have some expectations in '18.

Got it. Okay. That's helpful. And then I guess, with regards to the tax savings you guys are going to be seeing, have you given thought to any types of initiatives or internal programs that you may look to undertake, just given the extra dollars that are hitting the bottom line?

I think how we look at it, Damon, is it is going to improve our ROA and improve our earnings per share and we're happy about that. I know our shareholders should be happy about that. We expect to continue to need to invest in people and invest in technology. We're not looking at it as we now have a bucket of X dollars to go ahead and spend on that. We'll just continue to do what we have done, which is build scale and invest in people and technology when needed. So we don't necessarily have any stated initiatives with regard to compensation issues. We feel like we have the best people in banking and have a very highly incentivized culture in terms of compensation. And so we expect to keep it that way. And really, we'll just see a lot of these benefits go to the bottom line. That's our expectation.

(Operator Instructions) The next question comes from Erik Zwick with Stephens, Inc.

First, maybe just a follow-up on the margins just to make sure I understand. If I think about the excess liquidity impact in the fourth quarter, the negative 5 basis points, are you expecting to put that to work? I'm just trying to kind of key in on the -- on a starting point for the 1Q '18 margin. Would it be kind of that 365 level? Or are we starting closer to 360?

Yes. I think that where we ended the reported quarter would be a good starting spot. We don't necessarily see that liquidity snapping back entirely right away. It didn't really all happen at the end of the quarter. While it did ease a bit and we had higher loan growth in December than the average for the quarter, we do expect to continue to bring on core deposits. And so I think we're going to be in this 90% loan-to-deposit to 91% loan-to-deposit ratio for a while. We believe it's always a good time to grow core deposits. And while we'd like to put those to work immediately, sometimes we have a little bit more liquidity. But, Erik, I would use our reported number for Q4 as your leaping off point for your model.

Understood. That's helpful. And then on kind of the deposit growth. It sounds like the outlook for growth is good, but you'll continue to see pressure on those costs. Are you able to quantify your expectations for the deposit beta in 2018 at all?

Well, I think if we looked at our deposit beta, and our Treasurer, John Oakes, and I just did this, but we looked at our beta from 12/31 of '15 when the hike started to 12/31/17. We've now had 5 hikes for 125 basis points. Our actual beta has been 25 over that period. So we've seen roughly 32 basis points of increased cost on deposits. So that is, we consider that to be a pretty solid performance on beta. Now a bit of that has been benefited from the addition of the CSB and the Guaranty core deposits, of course. But I would expect go-forward betas to be on the higher side. I'll give you a little bit more color on mix. So we track our total rate-sensitive funds quite tightly, and that's roughly about $790 million of our total funds or about 22% of our total funding, is very rate-sensitive. Those typically have a high beta, 75 to maybe 90 beta. But it is only 22% of our funding, so that's the fortunate thing. We have around $760 million of floating rate loans. So about 90% -- or I'm sorry, 96% of our very rate-sensitive funds are covered by floating rate loans. So very close to a match there, and of course, those floating rate loans would have 100 beta with the contract terms. So that's why we're thinking about margin in a fairly tight range next year. Those 2 things working to offset each other.

Great. And just one more for me. In light of the outlook for increased after-tax earnings due to the tax code changes, how are you thinking about the uses of your capital today? Certainly, organic growth is a priority. But as you think about dividends, potential buybacks and M&A, how are you -- what's your view today?

Yes. Erik, as you probably have heard us say before, organic growth is always our first choice. And we've been fortunate to be able to continue that the last couple of years in addition to the M&A activity that we've undertaken. And in-market acquisitions would be second choice after organic growth, and then we would also look at other attractive markets in the upper Midwest. So in talking with our senior management group and our board, we continue to plan to invest our equity back into the business and don't have plans at this point in time for other uses of that.

The next question comes from Daniel Cardenas with Raymond James.

Just a couple of questions here. Just touching briefly on the M&A front. What is that environment looking like? And as you look at your footprint, what does the viable pool of candidates look like? Is that shrinking pretty dramatically as you continue to grow? Or are you willing to kind of go downstream and do some smaller deals?

Yes. I think, Dan, that that population does continue to decrease. Size of transactions does matter, and you do just about as much work in a $600 million acquisition, like Ankeny was, compared to $250 million at Guaranty. So we will continue to look. But as you say, those candidate pools are shrinking.

Okay. Good, good. And then for the organic deposit growth that we saw this quarter, how much of that was public funds related?

Well, Dan, we picked up some significant funds from city and school. I think we talked about that on the call -- on the Q3 call. And we think about those less as public funds because they're not really bid. They're more relationship. So we really don't have a significant amount of what I think we all consider to be true public funds that are subject to bid. We obviously had to do a proposal for that relationship, But we think about those as core deposits. But we have picked up over $100 million of those deposits in Q3 and Q4. They are fairly price-sensitive, so don't want to indicate that they're going to behave like retail core deposits. They are fairly rate-sensitive but not subject to bid frequently. And we're really happy about having those onboard. In addition to providing funding, we are seeing some pretty solid fees every month from servicing those accounts. So we view those as more of a relationship.

And Dan, part of the reason those came our way is in our proposal process, we had presented to them our new treasury management platform, and that conversion took place in Q4 and has gone over very well with our commercial clients. So while we like the retail deposits that we've acquired with CSB and Guaranty, we're also very focused on continuing to expand our commercial deposits. And now we have a more sophisticated treasury management program to support that.

And then on that $100 million or so that you've picked up over the last couple of quarters, what kind of -- what's the average cost on that portfolio?

Yes. Probably in the low 1s, 1-teens, 1-20s. So again, a little more pricey, certainly, than retail core deposits but cheaper than overnight funding, certainly.

And when you give your deposit growth guidance, that's including these types of funds in that growth?

Yes, I think that was certainly -- those were a couple of very large wins in Q3 and Q4. They're not going to tend to come in $100 million and $120 million chunks. But as Doug indicated, we're optimistic about deposit growth because of our new treasury management platform. We've added some folks to those teams. The conversion is over. Those teams are now focusing on growing treasury management deposits with a better platform and one that we've heard our clients say they believe is better than Wells Fargo and U.S. Bank. So that's a bit behind the optimism about keeping pace with core deposit growth. Hope that makes sense to you, Dan.

It does. Okay. And then, last question for me is, just kind of given some of the improvements that we're beginning to see on the credit quality side in a pretty well-behaved credit environment, how are you guys thinking of charge-off levels in '18?

Well, Dan, we really don't have any crystal ball telling us that we're going to have charge-offs in a substantial amount in '18. We feel pretty good about the year we just had. We did have elevated charge-offs in Q4, but Doug talked about that in his opening comments that that really was the result of that one large CRE project. We had it fully reserved at the end of Q3 and simply took the charge-off and moved it into ORE in Q4. So we view that as a one-time blip, and we certainly expect to see '18 be much more like the rest of '17 was in terms of pretty modest charge-offs.

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

I think most of my stuff here has been answered. Maybe a couple of little things. And Doug, you just touched on kind of the M&A. Just from a commentary on maybe a smaller population like you referenced there. I mean, I guess, can you just talk about the level of discussions? I mean, are they similar, lighter, heavier? And maybe just if the population is a bit smaller now, I mean, does it expand your horizon a bit to improve that? Or I guess, is it still the same markets you would look at and it doesn't really change the population?

Yes, pretty much the same population, Brian. Pretty steady. I think the Tax Act has caused some potential sellers to pause because as they look at what that does to their bottom line, they say, "Gee, maybe we should continue because our ROA is going to be that much larger." But I cannot say that the Tax Act has really changed our strategy from an M&A standpoint. We're still upper Midwest. We like to be in communities of size that can support commercial banking and wealth management. So that's pretty much the same.

Okay. And no change in dialogue? I guess, maybe it's less now. Is that what it sounds like from the commentary?

I'm sorry, Brian. What was the question?

Yes, I was just going to say, it sounds as though the conversations are less today than they have been based on kind of what you just outlined?

Maybe less in numbers. Like I say, I think a number of folks have paused. But in terms of how we would compare our outlook for the next year, 1.5 years to the last year or so, I'd say pretty steady.

Okay. That's helpful. And then on the loan pipeline, I guess, with kind of regard to the guidance, I guess, should we still expect some level of seasonality? I mean, I don't know whether maybe you can comment on where the pipelines are today. It was obviously a strong fourth quarter. But do you expect maybe a little bit of weaker performance in the first quarter just given normal seasonality and then kind of a normal build? Is that still fair to think about it that way?

Yes, I think you probably saw some accelerated activity in Q4 with the Tax Act. But our seasonality of our commercial portfolios is not really very predictable. So I don't think we're predicting that any one quarter is going to be stronger than the others.

Okay. And just going back to the SBA, USDA commentary. I mean, it seems like the swap activity that you guys said obviously was much stronger in the fourth quarter, and you're just kind of sticking with the $4 million type of number. I mean, I guess, do you expect next year to see -- it sounds like you expect to see some pickup in the SBA, USDA. Maybe it carries a bit more of its weight than we saw this year. Is that -- does that kind of seem fair? And it sounds like on the USDA side, yes, but maybe not on the SBA side. Is that kind of what -- you kind of read into your comments?

I think that's right. We try to work with a number of our downstream correspondents on the USDA side. And as Todd mentioned earlier on the call, on the SBA side, we're seeing many competitors originate those loans without the SBA guarantee. And that's just not a direction that we care to hit.

Okay. Perfect. And Todd, maybe just one on the tax benefit. I think you talked about related to the stock options exercise. I mean, that number has kind of bounced around and it sounds like your guidance does not include that impact. I guess, is there a way to think about that in a particular quarter if there's more or less impact based on the stock options exercised in restricted stock?

You bet, Brian. You're exactly right. Our 15% to 16% ETR is guidance without the impact of the benefit from stock option and RSAs. And that historically has been about a 2% additional benefit. And that tends to come in lumps. Q1 is always pretty significant there, so you might see a bigger benefit in Q1 than much of the rest of the year. That just happens to be when a lot of our incentive-based equity grants vest and people take advantage of them, as they should. So Q1 tends to be a little stronger. But over the entire year, it probably reduces our effective tax rate by about a 2% number.

Okay that's helpful. And you characterized this quarter, Todd, as more on the heavier side in Q4 based on what, I think it was about $400,000?

Yes. We did have a little bit more here in Q4. So now that we're experienced for a full year with that new GAAP accounting, I think you can typically expect to see a bigger lump in Q1 and Q4, probably modest amounts in the middle 2 quarters.

Okay. And then just -- your comments on the CSB conversion later in '18, I guess, is the rationale for waiting to do that. I guess, is there something -- maybe I've missed it and you guys have commented on that, but the wait till later in the year is driven by what?

That's a great question, Brian. Really 2 things going on there. We had not anticipated a schedule on that CSB conversion until we were successful in negotiating that fee down, and that happened right at the end of the calendar year. So that really started the race to prepare for a conversion. Those typically take 6 to 12 months to plan for. And what we've got is we have some changes in our core system that we have today that we want to get implemented first before we convert CSB on to that platform. So we have a few upgrades with our core processing platform, Fiserv Signature, that we need to implement this spring and summer before we bring CSB on. So I hope that makes sense. It's really more staging than anything else.

Okay. And then, it sounds like there're cost savings that come out of that. And is that kind of a '19 event with regard to renegotiating that contract? Or is that -- I guess when does that kind of -- into the numbers if you will?

Right. So the cost savings related to getting CSB converted would certainly be '19. We did experience some cost savings in our core contract when we renegotiated that. It's really going to help us pay for additional new technology. It's going to help us cover the cost of the Q2 platform that we've talked about and some of the other new technologies we expect to add to the platform. So on a net basis, we're not expecting to see a big drop in DP cost. The good news is we're not going to see an increase from some of the new technology. We're going to pay for that with the savings on the core.

Okay. Yes, no, that's helpful. I appreciate it. And then just the last one for me, guys. Doug or maybe Todd, you talked about it as far as the ROA, or maybe it was Doug on as far as kind of if you look back where things would have been in '17. But just given your outlook with the tax reform and other momentum you guys have, I mean, as far as your ROA outlook, can you just talk about how you're thinking about that? And maybe '18 and '19, the escalation that you'd expect to kind of -- maybe if you have a new range as far as how you're thinking about that today?

Yes, Brian, we're reluctant to give a lot of guidance on bottom line ROA. We are very committed to continuing our work to expand ROA. Our goal is to be in the upper quartile of the peer group, so that's what we're chasing. We know the entire peer group is going to see a lift from the reduced tax rate. What we are comfortable with is talking about the impact. If we were to look at quarter earnings in '17, it would have lifted ROA from 103 basis points to 113, so a 10 basis point lift. The lift is not as dramatic for us as it is some of our peers because our effective tax rate was already lower than most of our peers. And we've worked hard to do that. And so the benefit is not as significant, but you can certainly expect to see a lift like that, perhaps a little more, as earnings go up into the future. But the lift we would have seen in '17's 10 basis points ROA, and so if you translate that into your modeling and everyone else doing it with their models, looking at a 15% to 16% tax rate and then maybe another 2% benefit from what we see on reduced tax expense due to options and RSAs, that's really the ROA outcome that we're expecting.

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

Well, I appreciate the relationship that we have with all of you and appreciate your interest in calling in and all the good questions. So we know there was a lot of noise this last quarter and this last year. But on a net base, we're feeling good about what got done in '17 and what's ahead for '18. So again, thank you for the relationships.

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