Doug Hultquist - President and Chief Executive Officer Todd Gipple - Executive Vice President, Chief Operating Officer and Chief Financial Officer.

Jeff Rulis - D.A. Davidson Erik Zwick - Stephens Inc Damon DelMonte - KBW Nathan Race - Piper Jaffray Brian Martin - FIG Partners LLC Daniel Cardenas - Raymond James Financial Inc..

Greetings and welcome to the QCR Holdings Inc. First Quarter 2017 Conference Call. Yesterday after market close, QCR distributed its first quarter press release and we hope that you have had the opportunity to review the results. If there is 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 May 5, 2017. 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 March 31, 2017, which is our company's first quarterly earnings call.

For the next few minutes I will recap some of the highlights for the first quarter and then will turn the call over to our Chief Operating Officer and Chief Financial Officer Todd Gipple, who will some additional color on our financial results.

I'm very pleased to begin this morning's call with news that we completed our most profitable quarter in the history of our company, with earnings of $9.2 million and diluted earnings per share of $0.68.

Our operating performance was quite strong as this represents an 8% increase in net income on a linked-quarter basis from Q4 of 2016 and a 44% increase in net income from the same quarter one year ago.

We continue to make solid progress in further improving our return on average assets performance as our ROAA was 1.12% this quarter compared to 1.04% in the prior quarter and 0.98% in the same quarter one year ago.

These improved results from the prior year were driven by strong organic loan growth, robust growth in core deposits and a corresponding reduction in our reliance on wholesale funding. Significant margin improvements, strong fee income, and modest operating expense growth.

We of course added Community State Bank Ankeny to our company in August of last year, which also contributed significantly to our improved financial results the past two quarters. We are very pleased to enter the Des Moines metro market with CSB and believe that that market provides a great opportunity for strong growth and financial performance.

Before I ask Todd to provide some additional comments on our financial results, I did want to comment on our loan growth for the quarter. For the past three years we have been successful in growing loans and leases in a range of 10% to 12% annually.

That is the solid rate of organic loan or lease growth for us as a significant portion of that loan growth has come in the form of market share gains as we attract clients to our relationship-based community banking model.

While we got off to a bit of a slow start in Q1 this year at a 5% growth rate, we still aim to achieve our targeted organic growth of 10% to 12% for the full year. We are seeing strong pipelines in each were bank charters in our leasing company and believe that we will see stronger long growth the remainder of the year.

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. We believe that we again made good progress on this strategic goal in Q1 with an ROAA of 1.12%.

Now I will turn it over to Todd for more detail on our financial results for the quarter..

Thanks Doug, good morning everyone. Thanks again for joining us on the call today. Our first results benefitted from strong fee income as gains on the sales of government guaranteed loans and swap fee income combined was more than $1 million.

And wealth management fee income was off to a strong start and more than $2.7 million for the quarter which was up around 11% from the prior quarter. Noninterest expenses were well controlled and actually down from the prior quarter, both in total and across several categories.

In addition income tax expense was reduced this quarter with the adoption of the new accounting pronouncement that reflects the tax benefit of stock options exercised and divesting of restricted stock awards as reduction of current period tax expense rather than treating that benefit as a direct increase to equity.

In Q1 this reduced tax expense by $533,000. This was a significant amount in Q1 due to the volume of stock options exercised into RSAs that normally vest in the first quarter each year, as they would have been initially granted under our performance-based equity incentive plans in prior years.

The strong performance of our stock further magnified this tax benefit in Q1. Provision expense was reduced this quarter as well due to continued strong asset quality and the more modest loan growth that Doug mentioned previously. Partially offsetting these results was the reduction in net interest income in Q1 versus the prior quarter.

Our net interest income was actually flat on a linked-quarter basis when you consider the impact of two fewer days in Q1 which resulted in a $615,000 reduction and that the positive impact of loan discount and FHLD accretion declined by slightly more than $1 million in Q1 versus Q4.

Combined, these two items accounted for the entire $1.6 million reduction in net interest income when comparing Q1 to the previous quarter. NIM percentage was reduced on a reported basis by 12 basis points from 4.02% in Q4 to 3.90% in Q1 of 2017.

However, the entire reduction in reported NIM was due to the impact of reduced acquisition accounting accretion in Q1 versus the prior quarter. Net interest margin excluding this impact of acquisition accounting accretion was stable at 3.65% for the first quarter of 2017 compared to 3.64% for the fourth quarter of 2016.

First quarter net income of $9.2 million represents a further treatment in core ROAA to 1.12% for the quarter and then efficiency ratio of 60.86%, which we consider to be continued good progress on our goal of achieving upper quartile ROAA. Earnings per share for the first quarter was $0.68 and a solid start to 2017.

As we look to the remainder of the year, we will continue to focus on our seven key initiatives, which we have highlighted in our filings. Continue strong organic loan and lease growth to maintain loans and leases to total assets ratio in a range of 70% to 75%.

Continue our focus on growing code deposits to maintain reliance on wholesale funding in less than 15% of the assets. Continue to focus on generating gains on sale of USDA and SBA loans and fee income on swaps as a significant and consistent component of core revenue. Grow wealth management net income by 10% annually.

Carefully manage noninterest expense growth. Maintain asset quality metrics at better than peer levels. And finally, participate as an acquirer in the consolidation taking place in our markets to further boost ROAA, improve efficiency ratio and increase earnings per share.

Strong progress on these seven initiatives in the past two 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 our per quartile peer performance. Now, I'll turn it back to Doug to wrap up..

Thanks Todd. Again, we are pleased with our first quarter results and hope that our comments have provided a bit more insight into the numbers. We can now open the phone lines for questions and we would also appreciate your input on the content of this earnings call..

We will now begin the question and answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Rulis of D.A. Davidson. Please go ahead..

Thanks, good morning guys..

Good morning Jeff..

Hey Jeff..

I guess a first question on the - maybe on the expense line.

Have you achieved all cost savings from the CSB acquisition and if you have, I guess just a comment on is this a good noninterest expense base to go off going forward?.

Yes, Jeff, we have achieved all the cost savings we anticipated with the exception of the fact that we have not converted the core operating system yet. I think we talked about that in some of our prior filings and that won't happen for some time.

So, we would expect a bit of an additional benefit in run rate on cost at CSB once that occurs; but all of the other cost savings are fully implemented. If you want to talk a little bit more about salary and employee benefits that's obviously the biggest component, we saw a nice drop there in Q1. We actually are down 11 FTEs from Q4.

So, just wanted to give you a little color on that number..

Okay, great. And then a bit on deposit growth, very strong, but noticed the cost of deposits also increased.

Is this - maybe just kind of talk about the strategy and what you'd expect, I mean is that part of the process is that you might see a bump in cost deposits as you continue to grow deposits?.

Sure Jeff. We were thrilled with the amount of deposit growth we saw. We really view that as a franchise value and are very focused on continuing to grow core deposits. As you know, it's really led to a significant improvement on margin for us as we've reduced our reliance on wholesale as a result.

We have the $3 billion in funding, we have about $500 million that we would really consider fairly rate sensitive. So, about $500 million of that funding and we actually saw about a 15 basis point increase in the cost on those funds. That’s really what's driving the increased cost of funds on the entire funding portfolio.

We feel like that 15 basis points on the 25 basis point move by the Fed in December is actually a pretty good result for us.

These are fairly rate sensitive, of course we continue to have fairly robust noninterest bearing DDAs that offset some of that pressure; but continued success we are holding on to low data’s on the most significant rate sensitive funds. Those $500 million is really the key for us and so far we've had good success with that..

Okay and overall market dynamics, you know pressure for deposits, do you get the sense that competitors deposit rates are - is it aggressive or how would you characterize the competitive landscape on deposits?.

Great question, Jeff. With the exception of the Credit Unions, the banks have not been too competitive in terms of deposit rates or really seeking funds, fairly liquid balance sheets in our markets right now. So, we're not seeing a tremendous amount of pressure really in our marketplace, but paying close attention to that..

Okay and maybe one last one.

Todd, would you anticipate the tax rate kind of heading backup to reverting to the kind of historical levels in the remaining three quarters of the year?.

Yes, we certainly would Jeff. Without the one-time benefit of the accounting change, it would have been 25.25% and that would be more normalized tax rate for us that we would expect for the rest of the year..

Great. Thanks and I thought the - thanks for hosting the call. I thought the introductory comments were concise and I appreciate the efforts. So, thanks..

Great. Thank you very much, Jeff..

The next question comes from Erik Zwick of Stephens Inc. Please go ahead..

Good morning guys. .

Good morning Erik..

Good morning Erik..

Maybe first just starting with your comments about loan growth and your expectations and ability to kind of achieve that 10% to 12% target, you obviously commented on the strength of the pipelines heading into the second quarter.

But maybe from a - looking at it from, are there any particular markets or loan types? Is it - do you think it will be balanced across CRE and commercial and industrial or what gives you kind of the optimism to achieve that goal?.

Yes, Erik, we think it'll be pretty balanced and broad based. Certainly in the Des Moines MSA it will be a little more concentrated on real-estate and obviously we knew that going in and that market continues to grow much faster than what we see in the rest of the Upper Midwest.

But across the commercial banking loan operations in each of our charters in our leasing company, we’re seeing pretty diversified growth.

We think in early 2017 there was some hesitation after the initial optimism, after the election, I think some folks decided to wait and see a little bit if all of these proposed changes were really going to happen and held back on capital spending in Q1..

All right and then I guess how are you thinking about the opportunities to expand the swap fee and sale of government guaranteed loan businesses into the Des Moines market.

I guess how long do you think that ramp will take and what is the potential impact to fees?.

Yes, good question. They are not as C&I based as we are. It's a very financial oriented market with insurance and banking and obviously State Government and so forth. But I think given our look at those pipelines, we expect USDA and SBA to rebound in the final three quarters compared to Q1.

We’re a little surprised at the slowness in swap income, because we think given what's going on after the election that now is the time for our commercial clients to be lacking in fixed rates. But as I mentioned earlier as it relates to capital spending, they’re just kind of putting things on pause until there is some more certainty..

That’s helpful and have you set any targets for how much you think that market could contribute going forward or it's tough to tell at this point?.

Yes, probably little tough to tell, Erik, quite yet..

Yes, Erik, we are seeing some of those opportunities on the pipeline there in Des Moines now, which is a great sign and I think we’ll start having some success there. To further Doug’s comment on swaps, the bouncing around of the tenure has slowed that down a bit. There is just a little more uncertainly there than there was during most of 2016.

And so, we see that perhaps starting to pick backup, but of course it's really going to be somewhat dependent on the yield curve and what happens with that tenure..

Maybe just one more quick one and then I'll jump back into queue, as my questions aren’t answered.

With regard to the sale of CSB's insurance business at the end of last year, did you sell 100% of your interest and if not, what is the expected kind of annual impact to fees and expenses?.

Yes, a great question, Erik. We actually have a joint venture arrangement where we retained 25% ownership of that business. Candidly, we expect that 25% ownership to really provide much of the same bottom line impact that the 100% ownership used to provide based on the strength of our partner.

We’re very pleased with that arrangement and really don't see any material impact on CSB's bottom line as a result..

Great, thanks for taking my questions..

You bet. Thank you Erik..

You bet..

The next question comes from Damon DelMonte of KBW. Please go ahead..

Hey, good morning guys.

How is it going today?.

Great Damon..

Good Damon.

How are you doing?.

I'm doing well thanks. I guess my first question probably directed more towards Todd with regards to the margin.

I think the accrete-able yield this quarter was $1.9 million, is that correct?.

Yes, in total, both accelerated and scheduled..

Okay and as we look forward what are you projecting for a scheduled level of accrete-able yield?.

Yes, Damon we’re really at about a 250 to 275 per month run rate now. We've got about $8 million of the initial $13 million remaining and so worried about that 250 to 275 range per month and that would be the scheduled accretion..

Got you, okay. And then with respect to the core margin it was good to see that hold steady this quarter.

You know, as you look at the, some of the pricing pressures with that, those sensitive deposits and you look at the new loan originations, how do you see the core margin trending in the upcoming quarters, especially in light of the most recent rate increase we had in March and you know potentially a couple more as we progress through 2017?.

Sure Damon. We were please with the core margin here in Q1, considering the loan growth coming in at about 5% versus 10% annualized. So, the biggest benefit for us going forward potentially on margin would be seeing that loan growth ramp backup, as Doug mentioned previously. Absent that, we’re really just blocking and tackling every day.

We have a very significant focus on ALM at each of the charters and really the thing that perhaps is holding us back is something that I think most of our peers are seeing and that is, we are really seeing no beta at all on new loan pricing with three-year and five-year deals. We’re just seeing no movement in those yields.

If we could get a little bit of that across the industry that would help. But right now our expectation wouldn’t be changed in terms of margin just really trying to increase that a basis point or two going forward..

Okay, all right that’s helpful. And then I guess, you know if you look at the trust department fees and investment advisory management fees, you know both those came in pretty positive this quarter.

Is there anything that's kind of seasonally related in the first quarter or do you think this is a good run rate for these two categories going forward?.

Yes, interestingly Damon, last year it was a slow first quarter and we got off to a really slow start; but a lot of new clients, the stock market has helped obviously and we've just really put a lot of focus on getting that back on track because that’s a very important business for us.

We obviously like the fee income without requiring additional capital onto our ALM balance sheet..

Yes, I think Doug it's fair to say, it was a very strong quarter in terms of new assets under management close to $82 million. Maybe one of the other changes is our disbursements, our payouts on those are down a fair amount in the first quarter. And then of course as Doug mentioned, the market appreciation helped us a fair amount on fee.

So, we feel really good about that off to a very good start in wealth management. And clearly it's one of our seven initiatives where it's one of our core strength and it was perhaps the one thing we might have underperformed on last year; but we put a big focus on it and that team is doing a great job..

Okay great. And then with respect to credit, you know pretty stable trends quarter-over-quarter, so very minor uptick in nonperforming loans, but overall I think pretty healthy quarter.

You know how do you look at the provision expense going forward? Do you think you know something in the low $2 million range per quarter is reasonable, especially in light of acquired loans that might be renewing or new loans from the new markets coming on board?.

Yes, Damon, we really don't see any big movement in terms of provision certainly absent any asset quality issues. Our asset quality right now is very solid. As you already articulated NPAs are very static for us right now.

They’re really concentrated in a few larger deals and we’re working really hard to take some of those large deals out of NPAs, but I think that's a fair comment in terms of going forward provision..

All right, great. And then just my final question. Doug, maybe you could update us on your M&A thoughts, you know I know that's a very fragmented market that you guys are operating and there is a lot of smaller community banks which may look to partner up with the larger institution.

Just kind of wondering how the discussions if any have been going recently and if you think a potential acquisition is in the near future for you guys..

Yes, Damon as you well know, we don't give much forward-looking information in that regard. And one thing that we’re particularly sensitive to is, we have a group of almost 200 downstream correspondent banks throughout Iowa, Illinois and Wisconsin, and so we have to be somewhat sensitive about competing with them.

And quite honestly, we’re only interested in going into the bigger markets in the Upper Midwest and I would say that’s at least a 100,000 population or more. But, you know certainly we’re willing to engage with folks and listen to what their succession plans are and that type of thing and our first choice is always organic growth.

Our second would be in-market and then third would be a market expansion, like we did with CSB last year..

Okay, that's great, that's helpful. Thanks, I thought the call was very useful, you provided some good concise and detailed comments on the quarter, so very helpful. Thanks a lot..

Thank you Damon..

Thanks a lot Damon..

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

Hey guys, good morning..

Good morning Nate..

Hey Nate..

Just a question on the hires that you made late in 2016, just curious how much of an impact those individuals had on the deposit growth on the trust? Fee income growth that you guys generate here in the first quarter?.

Yes, there is really some momentum in the Des Moines market with the additions we made over there with a couple of very experienced folks. So quite honestly, Nathan, I'd say so far they are slightly exceeding our expectations..

Thanks, great.

And then can you kind of just speak to what the pipeline looks like for additional hires and kind of what your appetite is to add additional folks across the commercial team within your footprint going forward?.

Always looking for talented commercial people and they are becoming harder and harder to find, because they are very sort after. But we, as you mentioned, made some hires in Des Moines, we just recently made a hire in [Indiscernible] in a significant commercial lending position.

So I think we got a strong hoop already, but we're always looking for talented folks that have that skill set..

Got it, and then just changing gears a little bit, the leasing business was a little disappointing I think to some extent in 2016 as it take off to another slow start here in the first quarter, can you kind of just update us on your expectations for that segment as we go through the year?.

You bet and it was pretty much a slow 2016 for the entire leasing industry and we just had our spring Board meeting last week, as a matter of fact and talked about year-to-date and it's picking up here in March and April a little bit, but we're also finding more financial institutions getting into the leasing business and so it's becoming more competitive.

I'm proud of our folks, they've held great in terms of what we're yielding on those leases. We're also always looking for talented producers that have particular expertise in some segments, those folks are getting harder to find as well because a lot of folks are chasing them down..

Understood, I appreciate all the color guys and thanks for holding the call. I thought it was very helpful..

Thanks Nate..

Thanks Nate, take care..

[Operator Instructions] The next question comes from Brian Martin of FIG Partners. Please go ahead...

Hey guys..

Hey Brian.

How you're doing?.

Good morning Brian..

Hey sorry, I just joined here a couple of minutes ago, so I may have missed what you guys talked about earlier, I'll catch-up later, but just wanted to touch base on - and maybe you comment on it, but just on M&A and just kind of the temperature, I guess, maybe if you can talk about kind of what you're hearing on pricing out there as you kind of look at opportunities.

And I think you guys have kind of said, you are definitely open to that, I'm looking at, it's just kind of wondering, you know if anything has changed over the last, you know maybe six months, three to six months as far as the opportunities that you're seeing and just kind of with the pricing being up on handful of deals that have gotten announced this year just kind of what the temperature of the potential targets are out there and how that's coming along?.

Sure Brian, yes, Doug did give a little bit of an update on that just before you joined, but I'd like to summarize that a bit. We continue to look for organic growth first and then looking at certain deals in our existing markets and that now would include the Des Moines metro, we'd like to larger there. And then some new markets that we have in mind.

With respect to pricing, it certainly increased here over the last couple of quarters. We know we set the bar pretty high in terms of the execution we had on the CSB Ankeny deal, a very good deal for us and we're very happy about that and pricing has went up since then. We're going to hold very tight to our financial metrics in terms of future M&A.

We expect strong EPS accretion, very modest TBV dilution and realistically we've added to those metrics that we expect any deal to be accretive to ROAA as soon as the cost saves are implemented. We really need to continue to have M&A help us with our efforts on improving ROAA and that's probably rather obvious, but we want to make sure that's clear.

In terms of flow, a fair amount of opportunities and yet holding on to our financial metrics will funnel those a bit and narrow the field. We really don't have anything imminent at this point, but we continue to look to that as one of our key strategies..

Okay and the optimal size that you guys would see would be I guess is there a minimum size or just kind of how large would you go in a transaction?.

Yes, fairly large would be available and certainly larger deals are more efficient in terms of all the work that goes into them. With the in-market fill in deals, of course Brian, those are going to be smaller and that's okay because those can be done a little more efficiently and still add the franchise value quite quickly.

So we'd be open to some smaller deals in existing markets, for new markets we price cook that out at closer to $1 billion in size. We would expect those to be at least the size of CSB at $600 million, but we don't want to go into a new market and not have some scale..

Okay, fair enough. And just kind of the - as you guys look to the organic and the external growth this year, I guess there one, there is optimism regarding one of them more than the other at this point in time or it's fairly even as you look at it.

So, it sounds like there is a lot of opportunities out there and I guess and from the organic side, I guess you are equally as optimistic, is that way you characterize it today?.

Yes, Brian. Doug started the call talking about organic loan growth and that our current expectation is still to be in that annualized 10% to 12% for the full year, early on we're a bit slow for that growth, but we're still very optimistic about organic growth and that's really our main focus.

The M&A opportunities will of course be a little more sporadic, so we can just continue to focus on organic growth leading the charge there..

Okay. All right, that's helpful, I appreciate it guys, thanks..

Thank you Brian..

Thanks Brian..

The next question comes from Daniel Cardenas of Raymond James. Please go ahead..

Good morning guys..

Good morning Dan..

Hi Dan..

A couple of quick questions.

Just going back to the loan growth we saw this quarter, could you maybe give us a little bit of color as to what impact if any paydowns and payoffs had on the balances in Q1?.

Sure. We did have some paydowns and some payoffs that netted us down to that 5% growth rate, Dan. Nothing troubling in terms of losing clients to competitors, but certainly some paydowns netted us down to that 5%. We don't think that that's really specific to any of our four charters, but we did experience some of that in Q1..

Okay.

And then as maybe if you could give us some color as to how the loan growth unfolded during the quarter? Was it pretty much even throughout January, February and March or was it more back-end loaded or front-end loaded?.

It was back-end loaded. We got off to a slow start 1st of the year and saw a lot better results towards the end of the quarter, so it was back-end loaded, which as you know bodes well for future quarters..

Right.

And then maybe you said your pipelines look good, but would you consider them to be maybe more robust coming into Q2 versus the end of the year?.

For sure, yes..

Okay.

And then quickly just jumping over to the SBA, what does that pipeline look like right now and maybe some color as to where the premiums are at currently?.

Yes, that pipeline has improved as well, Dan. And premiums have come off slightly, maybe 10% overall that's not real consistent, but that seems to be picking up here and I think both on the SBA and USDA side we're pretty optimistic for the next three quarters..

All right, great. I appreciate the call guys, thank you..

Thank you Dan very much..

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

Thanks very much and I appreciate all of you listening in to our very first call. I appreciate the comments you've made this morning and the questions that you've asked.

If you'd like anymore color, feel free to line up a call and we'd also certainly solicit any more input you've got in terms of suggestions on content of these earnings calls, but this has been suggested to us for quite a while and it does seem to be an efficient way to get the message across, so thanks for taking time out of your busy schedules to join us this morning..

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