Greetings everyone, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the First Quarter of 2022. Yesterday, after our market closed, the company distributed its first quarter earnings press release. 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 Larry Helling, CEO; and Todd Gipple, President, COO and CFO. Management will provide a brief summary of the financial results and then open the call to questions from analysts. Before we begin, I'd like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations, and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is recorded and will be available for replay through May 4th, 2022 starting this afternoon approximately one hour after completion of this call. It will be accessible on the company's website. At this time, I'd like to turn the floor over to Mr. Larry Helling at QCR Holdings. Sir, you may begin.

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 discussion regarding our first quarter performance. Todd will follow with additional details on our financial results for the quarter. Before I discuss the quarter, I want to welcome any new shareholders that are on the call today as a result of our successful acquisition of Guaranty Federal Bancshares, which closed on April 1st. We have merged Guaranty Bank into SFC Bank or Charter in Southwest Missouri, and the integration process is going very well. We have retained the Guaranty Bank brand due to its more extensive branch network and strong name recognition in the market. We're eager to continue our growth in the vibrant Southwest Missouri region. Turning to quarterly results, which are highlighted by exceptional loan growth and expanded net interest margin, carefully managed expenses, and continued excellent credit quality. We continue to experience healthy demand from our client base and grew loans by 14.6% on an annualized basis, excluding PPP. Our accelerated loan growth in the first quarter was driven by strength in our traditional commercial banking, leasing and specialty finance businesses. We are capitalizing on improved economic conditions in our markets and continue to gain market share across our Charters. Our clients value our relationship-based community banking model emphasizing the importance of strong relationships and customized service. Our loan pipelines remain healthy and our near-term outlook for loan growth remains positive. Therefore, we are increasing our targeted loan growth to between 10% and 12% for the full year. While core deposits decreased modestly during the quarter, mainly due to expected seasonality with our commercial client base, we saw the mix of our deposits continue to improve with further rotation from time deposits to interest bearing demand deposits. In addition, Guaranty Bank brings excess liquidity and a strong core deposit client base to our balance sheet, which will support our ability to continue to fund our expected loan growth. We expanded our net interest margin in the first quarter, which was up 1 basis point on an adjusted basis and up 4 basis points, excluding the impact of PPP fees. This expansion was supported by a favorable change in our asset mix, lower deposit costs and stable loan yields. Given our asset sensitive balance sheet, we are very well positioned for the current rising rate environment and expect to see meaningful NIM expansion in the second quarter. Todd will go into more details in his remarks. With respect to our non-interest income, we experienced a decline in capital markets revenue from swap fees, due to project delays, which were caused by ongoing supply chain disruptions and inflationary pressures. The majority of our swap business is generated by low-income housing tax credit projects. Over the years, we have grown and diversified our client base, which has helped our outsized growth. And as a result, our pipeline remains robust. The gap between the demand and the availability of affordable housing is widening. And we believe that the long-term fundamentals for this business have actually strengthened despite the short-term challenges. Our asset quality and credit metrics remain extremely strong, non-performing assets improved again and represent a record low of 4 basis points of total assets. Additionally, our criticized loans and classified loans to total loans and leases decreased during the quarter. We continue to have negligible net charge-offs and we feel very good about our current reserve level at 1.55% of total loans and leases. Our excellent credit quality is a function of our disciplined and consistent underwriting along with vibrant economic conditions across our markets. With that, I will now turn the call over to Todd, to provide further information about our first quarter results.

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start with net interest income. Our adjusted net interest income for the quarter was $48.5 million, down 1.4% from our record amount set in the fourth quarter. However, the decline was entirely due to the significant linked-quarter decrease in PPP loan forgiveness fees, which was expected as our PPP loan program nears its end. With our strong loan growth using our excess liquidity from the prior quarter, our balance sheet efficiency improved helping to expand margin in the first quarter. We funded our loan and lease growth during the quarter with a combination of excess liquidity and overnight advances. Our non-maturity deposits typically experienced a seasonal decline in the first quarter, as many of our commercial clients are using funds to make bonus and tax payments during this period. We continue to improve the mix of our deposit base, intentionally rotating out of higher cost CD balances as they mature. The cost of our total interest bearing liabilities further improved by 1 basis point from the fourth quarter. We utilized our overnight borrowing capacity during the quarter to temporarily fund some of our loan growth and we subsequently repaid the majority of these advances after quarter end with Guaranty Bank's excess liquidity. Our adjusted NIM improved by 1 basis point for the quarter. However, after excluding the impact of lower PPP income that I mentioned earlier, our core NIM expanded by 4 basis points, significantly outperforming our guidance of a slight decline of 2 basis points to 4 basis points. We've been very pleased with our NIM performance over the last several quarters as we've been successful in maintaining earning asset yields while driving down our cost of funds. As we are now entering a rising rate environment, our asset sensitive balance sheet will lead to significant further NIM expansion. Our asset sensitivity is driven by the strong growth in our floating rate loan portfolio over the past three years. During that same period, the success we've had in growing core deposits has reduced our reliance on deposits tied to an index and higher cost wholesale funds. Looking ahead, as we benefit from a full quarter of the March rate hike and factoring in another rate hike of 50 basis points in early May. Combined with the addition of the Guaranty Bank balance sheet, we project further NIM expansion of 9 basis points to 11 basis points in the second quarter. Given the addition of Guaranty Bank in the second quarter, we are also providing additional guidance on net interest income for Q2. Excluding PPP and acquisition-related accretion, we expect net interest income for the second quarter in the range of $56 million to $58 million. Now turning to our non-interest income of $15.6 million for the quarter, which was lower than the $23 million we generated in the fourth quarter. As Larry mentioned, we produced capital markets revenue from swap fees of $6.4 million in Q1. While this result was below the lower end of our typical guidance range of $14 million, it is very consistent with our past Q1 LIHTC production, which has averaged $6.8 million in the past four years. Capital markets revenue from LIHTC swap fees has averaged $15 million per quarter since the first quarter of 2020, which gives us continued confidence in the sustainability of this important source of fee income. During the same nine-quarter period, capital markets revenue from LIHTC swap fees has ranged from a low of $4.5 million to a high of $25.2 million. Given our solid pipeline of transactions, but recognizing the project delays caused by ongoing supply chain disruptions and inflationary pressures that Larry mentioned previously, we are expecting this source of fee income to be in a range of $13 million to $15 million per quarter for the remainder of 2022. Excluding swap fees and non-core items, non-interest income for the first quarter totaled $8.3 million. With the addition of Guaranty Bank in the second quarter, we are also providing additional non-interest income guidance. We expect non-interest income, excluding capital markets revenue to be in the range of $9 million to $11 million for the second quarter. This guidance reflects the addition of Guaranty Bank's strong retail and commercial banking fee income while adjusting for the headwinds of rising rates on our mortgage business. Now turning to our expenses. Non-interest expense for the first quarter totaled $38.3 million, compared to $39.4 million for the fourth quarter. After adjusting for acquisition expenses and lower performance-based compensation expense related to capital markets revenue, non-interest expenses were $39 million, and at the low end of our guidance range of $39 million to $41 million. Our non-interest expense run rate remains very well controlled. Looking ahead to the second quarter and factoring in the addition of Guaranty Bank, we anticipate that our level of non-interest expense will be in the range of $46 million to $48 million. This guidance includes the incremental expenses from Guaranty Bank, but excludes remaining integration costs. In addition, we do not anticipate that the forecast savings from the Guaranty Bank acquisition will be recognized until 2023. Our overall asset quality continues to be quite strong. Non-performing assets remained very low at $2.7 million and, as Larry mentioned, represent only 4 basis points of total assets; 21 basis points lower than one year ago. Additionally, we recorded a $2.9 million negative provision for credit losses in the first quarter, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic. Our allowance for credit losses remains quite strong at 1.55% of total loans and leases, down 13 basis points from the end of 2021. This allowance represents over 27 times our non-performing assets. With respect to capital, our capital levels remained strong. Our tangible common equity to tangible assets ratio modestly declined to 9.60% at quarter end, compared to 9.87% at the end of December. This was largely the result of a decline in our AOCI, the resumption of our share repurchase program during the quarter and strong organic loan growth. While AOCI and the share repurchases did reduce the company's tangible common equity, our strong earnings helped to offset this impact, which led to a net decline of only 1.2% in intangible book value. Finally, our effective tax rate for the quarter was 9%, down significantly from 18.9% in the fourth quarter. The rate was lower on a linked quarter basis, due to an increased benefit from a tax strategy we implemented in 2021 combined with the book tax expense benefits from our stock compensation plans, which are typically higher in the first quarter as well as a lower ratio of taxable earnings to tax-exempt revenue in the first quarter. We expect the effective tax rate to normalize back to a range of 18% to 20%, including the addition of Guaranty Bank. With that added context on our first-quarter financial results, let's open up the call for your questions. Operator, we are ready for our first question.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. Our first question today comes from Nathan Race from Piper Sandler. Please go ahead with your question.

Yes. Hi, guys. Good morning.

Good morning, Nate.

Good morning, Nate.

Maybe a question on the swap capital markets revenue outlook, I appreciate the updated guidance. I guess, I'm just curious, if you guys could kind of update us just in terms of all the swap revenue pricing maybe impacted in future quarters just based on what rates have done recently?

You know, Nate, I'll start and let Todd add any additional comments we think are appropriate. The interest rate is really having just a modest impact on the pricing, compared to the other factors that we've talked about. It's really the impact on the future swap revenue, which we guided to slightly different numbers that's history, is really because of the inflationary pressures and the supply chain disruption that are causing the delays in the project. Our pipeline of activity is really consistent with a year ago. It's really just a matter of getting those projects to fruition. So certainly a little impact from interest rates, but we do expect the vast majority of these projects that come to fruition may have slightly less pricing power than we would have had during the pandemic. So probably pricing pressure may increase those fees by maybe 10% to 15%.

Got it. Very helpful. Sorry, go ahead, Todd.

Nate, I would just point out Larry's spot on in terms of the impact of the rates. It's really a drop of about 10% in terms of our average fee on each deal, so a fairly modest impact due to rate.

Understood. Maybe switching gears and kind of think about deposit trends in the quarter and the outlook. I appreciate some of the sequential decline in core deposits is somewhat seasonal in nature. And I know with Guaranty, you guys are picking up some excess liquidity. So just trying to think about core deposit growth expectations going forward. I know you guys have some deposits off balance sheet that are maybe more a $0.08 of that, you may want to keep there. But I'm just curious if you guys expect deposit growth to be commensurate with, kind of the loan growth expectations that you guys are guiding to in that 10% to 12% range for this year?

Sure, Nate. Yes, we do continue to have a fair amount of what we would call just-in-time inventory off balance sheet with the correspondent bank team. That actually ended at roughly $1.4 billion in excess balance accounts at the Fed. So a fair amount of liquidity available to us there. We love the core deposit franchise we acquired with Guaranty Bank and added to our legacy Bank here in Southwest Missouri. So we do expect the loan to deposit ratio to settle back down a bit here in Q2, it elevated. As we talked, we used some overnight funds to really supplement our loan growth funding in the first quarter because we knew that Guaranty Bank balance sheet was coming on April 1st and that really paid off for us in terms of taking advantage of that here in the second quarter. So while loan growth is very robust, we expect to keep pace with deposit growth and not have to rely on wholesale funding.

I would add that this is an interesting question. Due to the excess liquidity and various government programs implemented over the past year and a half, we expect some of that liquidity to flow out over time. We observed some of that in the first quarter, and we are working to understand the new normal in this area as well as the new liquidity levels for our clients, both retail and commercial. I can tell you that our new account opening activity in March was very strong. Although balances are fluctuating, we are still adding clients at a steady pace.

Okay, great. I would like to get an update on the margin outlook going forward, specifically regarding the interest rate sensitivity of the balance sheet at the end of the quarter. How do you see the margin trending over the next couple of quarters, especially with the Federal Reserve's anticipated increases of about 0.5% in both May and June?

Sure, Nate. As we said in our opening comments, we're guiding for margin expansion of between 9 basis points and 11 basis points here in the second quarter. This might help you better plan for future quarters if you know really the mix of that improvement. We talked during the Q4 call about a 4 basis point to 5 basis point improvements in margin for each 25 basis point hike. So with the full impact of the March hike here in the second quarter, that's 4 basis points to 5 basis points of that increased margin. We are expecting, as we indicated in our opening comments, a 50 basis point hike by the Fed here in the first part of May. That would also do 4 basis points to 5 basis points per 25 basis points there, but, of course, it's only about half the quarter. So that nets down to a net 4 basis points to 5 basis points for Q2. And then while that's in a range of 8 basis points to 10 basis points, we're adding another basis point of margin expansion expectation due to the blending in of the Guaranty Bank balance sheet. Their legacy NIM was $3.15 in the first quarter, solid, but less than our legacy NIM run rate, but between the excess liquidity that they brought to the balance sheet, some of the bond restructuring that was accomplished post-closing, their balance sheet is actually slightly more rate sensitive than our legacy balance sheet. So all of that has us pivoting to slightly accretive NIM from the acquisition and we're adding another basis point here in the second quarter. So, that's really the buildup of the nine to 11 in terms of subsequent quarters. We certainly expect our asset sensitive balance sheet to continue to provide an upward trajectory on margin. So we're very pleased to be in this position from a balance sheet perspective.

Okay. Great. And then if I could just one more housekeeping question. Todd, do you have the amount of PPP revenue that was recognized in the quarter and what's remaining?

Yes. We have very little remaining as you would guess consistent with our comments. So in the fourth quarter, total PPP impact on NII was $1.4 million, dropped pretty significantly in the fourth quarter to about $530,000. So that $800,000 or so drop was really the cause for NII dollars to be down on a linked quarter basis. It was entirely PPP. We only have $119,000 of remaining PPP fees and only about $6 million in remaining loan balances. So we're really at the end of that program.

Okay. Perfect. I appreciate the color. I'll step back. Thanks guys.

Thanks, Nate.

And our next question comes from Jeff Rulis from D.A. Davidson. Please go ahead with your question.

Thanks. Good morning, Larry and Todd.

Good morning, Jeff.

Good morning, Jeff.

I wanted to check in on Guaranty. As of the first of the month, can you provide the loan balance you transferred, the growth in the first quarter, and still assuming a couple of million shares in the transaction?

Yes. So the shares issued were slightly over two million, really did end up very close to the 80-20 stock cash split that was announced based on the elections of the GFED shareholders issued about $27 million in cash through along with the 2 million shares. Their average earning assets for GFED was $1.15 billion. So I think, Jeff, that's probably the important number for you in terms of the run rate on earning assets that came across. Very strong performance in the first quarter of Guaranty Bank and so really pleased with the balance sheet and people and the clients that they brought along with the transaction.

And Todd, what is the expected timing for the conversion?

We had a lot of people working diligently to ensure that all of our collaboration tools were properly implemented by the closing date of April 1st. As a result, our teams, telephony, and all communication components were fully integrated right from the start. The transition to a single platform is currently set for early October. During this period, one of the advantages for us is our multi-charter structure, which allows our operations teams to manage different cores effectively. This enables us to operate on the two separate cores efficiently during this transition. Additionally, we have powerful software that combines data, financials, and other information, allowing us to view everything as one entity under Guaranty Bank.

Got it. Todd, could you clarify what the core margin was that you established at 4 basis points linked to the previous quarter? I would like to understand that better.

Core margin was set up 4 basis points linked quarter.

I'm sorry, for the overall.

On a consolidated basis with Guaranty Bank included.

Yes.

Your loan legacy first.

Yes. The legacy QCR was at 350 on a tax equivalent basis, and when we provide the guidance of 9 to 11 going forward, that can either be added to the tax equivalent yield or calculated by excluding the tax equivalent and focusing on the core margin of 330. These would be our legacy figures moving into the second quarter. The adjusted Guaranty Bank balance sheet would enhance that by 1 basis point in each scenario.

Right. Yes. To clarify, you mentioned a 1 basis point increase linked quarter. You also referenced a core of 4 basis points linked quarter, and I'm trying to understand how those figures relate to each other.

Got you. The difference would be the decrease in PPP revenue would give you that delta of those 3 basis points.

Okay. I can calculate that. I thought you reported a core margin linked to the previous quarter. The last point relates to the buyback. It seems you mentioned the Guaranty shareholders approved it around the third week of March. Was that the timeframe for the approvals at the end of the quarter, or did it extend to today, effectively giving you nearly a month, or was it just a small amount remaining from the first quarter?

Yes, Jeff, that was just through quarter end 331.

Got it. I have a broader question for both you and Larry regarding the appetite for future discussions with the Board in terms of increasing the authorization, especially knowing that there is a moderate amount remaining under authorization.

Yes. I'll take first crack there, Jeff, that your timing is good. At our next Board meeting a few weeks, we're certainly going to discuss our overall capital plan and revisit the facts and beside of the appropriate time to reset our repurchase program in just a couple of weeks right about the same time as at our shareholder meeting.

Okay. Is there any remaining authorization given the pullback in bank stocks just as of today until that meeting?

Yes. We do still have some available and certainly at this price point we feel like we're undervalued and then there is an opportunity for us.

Perfect. Okay. Thank you.

Hey, Jeff, I feel badly that maybe I wasn't quite on top of understanding your linked quarter question. And what I'm wondering is, are you looking for the adjusted NIM where we talked about the 4 basis point delta and what that core number is on a linked quarter basis?

Yes, the adjusted NIM is 349 to 350, while the stated is 329 to 330. You mentioned a 4 basis point increase from the previous quarter. Can you clarify the other margin related to the core that you are referring to?

Sure. Yes, that's why I wanted to get back to your question. So that gets down to taking the TEY 350, compared to the last quarter at 349. There is 1 basis point we're talking about pretty consistently. And then when we strip out the impact of PPP, we get that down to a 343 in Q4 and a 347 in Q1, so it's really the stripping out of that PPP impact that gets us to that 4 basis points.

Got it. Thank you.

Yes. Thanks, Jeff.

Our next question comes from Damon DelMonte from KBW. Please go ahead with your question.

Hey. Good morning, guys. Hope everybody is doing well today. Not to belabor the discussion on the margin. But, so just to kind of close the loop on this, so that 347 core that you just described to Jeff's question, from there, you would layer on 9 basis points to 11 basis points, is that correct?

Correct.

Correct, Damon. Yes.

Thank you for the explanation regarding the lower swap fees this quarter and your insights on the outlook. Do you anticipate that, similar to previous quarters where a weaker performance led to a rebound in the following quarter, we might see a similar scenario in the second quarter? Is there a possibility of reaching the high end of the range or even exceeding it, followed by a trend that averages around $13 million to $15 million per quarter for the rest of the year?

Yes. I think that since we had a bit of a slow start, we anticipate the total for the year will be in the $45 million to $50 million range based on what we currently know. Although our clients are finding ways to navigate the supply chain issues, these could still impact the overall execution of the projects. Therefore, we believe that the best estimate for quarterly revenue for the rest of the year remains $13 million to $15 million.

Okay. So I think there was in the third quarter of last year where you spoke in the July call and you had said, oh, we already had three deals pricing in the beginning of July. That's not the case this go around.

Yes, it's somewhat smaller due to supply chain issues and inflationary pressures causing a reset in the capital stacks for the deal. This business tends to be more consistent, and the pipeline remains intact. While it is possible for the scenario you mentioned to occur in the second or third quarter, I believe it may be too early to provide that kind of guidance.

Got it. Okay, and then in the previous quarter you guys had commented that you're exploring the opportunity or potential opportunity to securitize some of the SFG loans and sell them off. Is there any update on where that stands and any color around that?

Yes. It's still something that we would expect to do at some point in the future, possibly late in the year, because the growth slowed a little bit there, we're not in the big rush to execute on securitization, but it's still something we want available to us later in the year. So, we plan to be very transparent when we get closer to do a securitization let you know exactly how it's going to work in the economics of the transaction when we do that, but it's a couple of quarters possibly down the road yet. We'll give you a preview when we get there. But I would tell you that the loan growth number that we guided you to would be net of any securitization if that happens later this year.

Got it. Okay, that's all that I had. Thank you very much for the commentary this quarter.

Thanks, Damon.

Thanks, Damon.

And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.

Good morning, guys.

Good morning, Brian.

Good morning, Brian.

I appreciate the additional information this quarter on the margin and especially regarding Guaranty. Looking at the margin in a big picture sense, I’m curious about your variable rate loans and how you've typically considered your rate sensitive assets and liabilities together. In terms of your guidance or outlook for the second quarter regarding the margin and potential rate increases, I wonder about the repricing of those assets and liabilities. What betas do you have assumed there? This would help in understanding how to approach potential additional rate hikes. I'm not sure the best way to get that information, but that’s what I’m asking about.

Sure, Brian, I can provide more details on RSA and RSL. We concluded the quarter with a combined pro forma of $331 million with GFED. We have nearly $1 billion in net RSAs, totaling $2.6 billion in RSAs and RSLs, resulting in about $1 billion in net positive RSAs. Regarding deposit betas, we've made significant shifts in our balance sheet. As many of you know, our balance sheet is now more effective, and only about 25% of our funding comes from rate-sensitive liabilities that have high betas, which accounts for most of the $1.6 billion I mentioned. Within that amount, betas range from 60 to 100 as we begin to implement rate increases. Some are indexed and will behave like a 100 beta, while others are negotiated rates with weaker betas. However, 75% of our deposits have shown zero betas so far, and we believe we have room to maintain deposit rates before needing to raise them. We are optimistic not only about having $1 billion in net RSAs but also about the characteristics of our underlying rate-sensitive liabilities, which gives us confidence in ongoing betas. This optimism supports our strong guidance for the second quarter as the Fed continues to raise rates. We expect to remain stable regarding margin increases due to the 25 basis point hikes. I will also provide more guidance in July regarding Q2 and offer more precise insights for the rest of 2022. Did that help?

Got it. Yes. That helps. And I guess just at bottom line is your second, if you got another 50 basis point hike after the May 1, the benefit should be less than what you're guiding to this quarter based on the 50 hike in May. Is that accurate? You'll just give more detail later.

I don't know that we yet have enough insight once we get past this next 50 in May, if we are going to see diminished returns on rate hikes. I think it's a little too early for us to capitulate there and so that's going to narrow. We're optimistic based on what we're seeing, Brian, that we will continue to see a nice upward trend. We'll have more guidance in July, but I don't know that we're ready to yet say we're going to start getting diminished returns. Of course, we all know it's subject to market factors on deposit and loan pricing. And that's why I think we'll have a little more insight in July.

Got you. Okay. I appreciate all the information, Todd. That's helpful. Can you provide any insights on the purchase accounting accretion as we head into the second quarter?

Sure. So we right now looking at what we announced in November for the transaction and what we're seeing here being through closing an integration. The numbers are holding up very consistent with our initial thoughts back at announcement, so not seeing much in the way of variation there. We talked about an initial credit mark on non-PCD of around $10.5 million and actually disclosed in our deck that we had a negative interest rate mark of just shy of $3 million factored into the model. So that's roughly $13.5 million that would be accrued back over the three years. So that will give you a little bit of insight as to what early expectations would be for loan accretion adding to Q2 and beyond.

Got you. Okay, that's helpful. Can you provide an update on the loan growth this quarter, specifically on the Specialty Finance balances compared to year-end? Was there much change, or is it fairly distributed among traditional, leasing, and specialty categories?

Yes. Brian, it was really fairly evenly distributed where our traditional leasing and lending business was up and probably represented 60% to 70% of our growth in the first quarter of the Specialty Group because of the supply chain disruptions that we talked about in the LIHTC business grew, but more slowly than it had. But as we get into the year, we'd expect that pace to pick up.

Got you. Okay. Thank you, Larry. I appreciate it. Thanks for taking the questions, guys. I appreciate it.

Thanks, Brian.

Thanks, Brian.

And our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Hey, good morning, guys.

Good morning, Danny.

Maybe just a quick follow-up on the swaps someone asked earlier about pricing. Can you just go into a little more detail on what the swap pricing is based on and kind of your thoughts on if it could potentially tighten further as rates rise the rest of the year? Thanks.

Yes. Certainly the swap pricing is determined by things going on in the yield curve in the duration of the swap that we're doing. And so as we talk, there has been some marginal pricing pressure on that maybe 10% off the top end of our historic performance. As rates are starting to move, I don't think that's going to continue to impact pricing in the marketplace seems to have kind of started to adjust to that now. So while it will continue to be compressed, compared to a year ago probably a little bit pricing is really not the issue here. It's really people getting projects to the point where they're comfortable executing and moving forward, because of the other inflationary pressures and supply chain issues.

Okay. That's helpful. And then within the fee income guidance that you gave just curious what your assumptions are around the gain on sale of mortgage banking piece including with Guaranty Federal?

Sure, Danny. The additional guidance we provided on swaps was meant to clarify our expectations regarding the combined post-closing run rate. Looking back at the other non-interest income, we had approximately $8.3 million from the legacy QCRH and Guaranty Bank contributed about $2.2 million in the first quarter. This totals $10.5 million. We mentioned a range of $9 million to $11 million, reflecting the significant impact on the mortgage run rate. The positive aspect is that Guaranty Bank has a solid position in the community and in the mortgage sector. Our strong team from legacy SFC should help maintain and possibly enhance their market share. Although there is a considerable difference between $9 million and $11 million, the net figure is not overly significant. We expect the mortgage sector to face challenges due to both interest rates and supply issues. Based on our first quarter performance, we anticipate the mortgage figures may remain steady or decrease slightly. In the first quarter, refinancing activity was limited for obvious reasons, leading us to focus more on stable core purchase activity. Therefore, we foresee a decline in the mortgage outlook, but believe that most challenges have already been encountered, allowing us to align with purchase mortgage volume moving forward.

Okay. Great. Thank you for that. And then finally, just a quick one here. I'm just curious how much impact the decline in swap fees had on expenses? Obviously, we had a big step down, but you provided the guidance for that rebound here in the second quarter. Just curious how much of that was associated with the decline in swaps?

Sure. Danny, about $2.5 million was reduced commission and other salary expense related to that decline. So, the guidance that we gave has that added back in, if you will, and our guidance on non-interest expense that we just provided would be at the mid-point of that $13 million to $15 million. So $14 million of swap would get back to the guidance that we gave on non-interest expense. So it was about a $2.5 million reduction in Q1.

Alright, that's great. I appreciate it. That's all I had. Thanks for answering my questions.

Thanks, Danny.

Thank you.

And our next question is a follow-up from Jeff Rulis from D.A. Davidson. Please go ahead with your follow-up.

Thanks. I just wanted to check in on the 56 to 58 NII guide for next quarter. Is that comparable to the 45.7 GAAP or the adjusted 48.5?

Great question, Jeff. I'm glad you asked that clarifying comment, or clarifying question. So that is based on reported 45.7 not grossed up for TEY. So QCR for Q1, we had the 45.7, Guaranty Bank had 8.6, so 54.3 combined on a pro forma basis for Q1, and then our guidance is 56 to 58. And again, that's non-TEY. So I'm glad you asked that clarifying question.

Thanks, Todd. I have another question that is a bit less clear. Regarding the swap business, supply chain issues, and inflation pressures, have those conditions improved? They seemed consistent throughout the quarter. I believe Larry mentioned finding ways to navigate those challenges. Is there any reason to believe that the pressures were primarily early in the quarter and that things might be easing as we move into April? Or is it essentially stable, with each project having its own unique situation? Thanks.

Yes, you're correct, it's a bit uncertain, Jeff. What I can tell you is that our clients seem to be figuring out how to navigate the restructuring of their capital for transactions, allowing progress to continue. They are also addressing materials and costs to ensure they feel secure in moving forward with projects. While it's not completely resolved, I believe they are adapting, and we are also becoming more proactive by reaching out to those involved in operations to identify new transactions. I would say we are still in the midst of it, but certainly not finished.

I think you’re mostly helping them through this, and I appreciate it. Thank you, everyone.

Thanks, Jeff.

And ladies and gentlemen, with that, we will be concluding today's question-and-answer session. I'd like to turn the floor back over to Larry Helling for any closing remarks.

Thank you, operator. I'd just like to thank everyone for joining us on our call today. We hope everyone remains healthy and safe. Have a great day. We look forward to speaking with you all again soon.

And ladies and gentlemen, with that, we will be concluding today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.