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QCRH > SEC Filings for QCRH > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for QCR HOLDINGS INC


6-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The following table presents the carrying values and estimated fair values of
financial assets and liabilities carried on the Company's consolidated balance
sheets, including those financial assets and liabilities that are not measured
and reported at fair value on a recurring basis or non-recurring basis:

                                        As of September 30, 2012                 As of December 31, 2011
                                      Carrying            Estimated           Carrying            Estimated
                                        Value            Fair Value             Value            Fair Value

Cash and due from banks            $    40,564,561     $    40,564,561     $    53,136,710     $    53,136,710
Federal funds sold                       5,725,000           5,725,000          20,785,000          20,785,000
Interest-bearing deposits at
financial institutions                  49,436,938          49,436,938          26,750,602          26,750,602
Investment securities:
Held to maturity                           650,000             650,000             200,000             200,000
Available for sale                     590,701,449         590,701,449         565,029,291         565,029,291
Loans/leases receivable, net         1,224,875,461       1,243,192,000       1,181,956,235       1,202,817,000
Accrued interest receivable              6,640,822           6,640,822           6,510,021           6,510,021
Deposits                             1,343,235,434       1,346,256,000       1,205,457,788       1,209,197,000
Short-term borrowings                  140,888,698         140,888,698         213,536,450         213,536,450
Federal Home Loan Bank advances        196,350,000         216,052,000         204,750,000         223,678,000
Other borrowings                       138,237,737         154,663,000         136,231,663         151,813,000
Junior subordinated debentures          36,085,000          18,753,000          36,085,000          18,444,000
Accrued interest payable                 1,373,671           1,373,671           1,551,842           1,551,842

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, accrued interest receivable and payable, demand and other non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Loans/leases receivable: The fair values for variable rate loans equal their carrying values. The fair values for all other types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold on the secondary market. All of the above are classified as Level 2 in the fair value hierarchy as presented in the table below.

Deposits: The fair values disclosed for demand and other non-maturity deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits, and are classified as Level 2 in the fair value hierarchy as presented in the table below.

Federal Home Loan Bank advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements, and are classified as Level 2 in the fair value hierarchy as presented in the table below.

Other borrowings: The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value. All of the above are classified as Level 2 in the fair value hierarchy as presented in the table below.


Part I
Item 1

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Commitments to extend credit: The fair value of these instruments is not
material.

The following table presents the level in the fair value hierarchy for the
estimated fair values of the Company's financial instruments that are not
already on the Consolidated Balance Sheet at fair value at September 30, 2012.

                                     Fair Value           Level 1             Level 2            Level 3

Loans/leases receivable, net *     $ 1,229,824,367     $            -     $ 1,229,824,367     $            -
Time deposits                          361,397,000                  -         361,397,000                  -
Federal Home Loan Bank advances        216,052,000                  -         216,052,000                  -
Other borrowings                       154,663,000                  -         154,663,000                  -
Junior subordinated debentures          18,753,000                  -          18,753,000                  -

*Excludes impaired loans/leases totaling $13,367,633 measured at fair value on a non-recurring basis and reported separately.

NOTE 7 - PARTIAL REDEMPTION OF SERIES F PREFERRED STOCK

On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock from Treasury for an aggregate redemption amount of $10,223,000 plus unpaid dividends to the date of redemption of $124,948. Previously, on September 15, 2011, the Company issued 40,090 shares of Series F Preferred Stock to Treasury for an aggregate purchase price of $40,090,000. The sale of Series F Preferred Stock was the result of an investment by Treasury from the Small Business Lending Fund ("SBLF"), a $30 billion fund established under the Small Business Jobs Act of 2010, which was intended to encourage lending to small business by providing capital to qualified community banks with assets of less than $10 billion.

The remaining Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to the approval of the Company's primary federal banking regulator. All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares (if less than 25% of the originally issued shares).

NOTE 8 - ACQUISITION OF 20% NONCONTROLLING INTEREST IN M2 LEASE FUNDS

On August 27, 2012, the Company's largest subsidiary bank, QCBT, entered into an amendment to the operating agreement of m2 Lease Funds and purchased the 20% noncontrolling interest in m2 Lease Funds. QCBT previously owned an 80% equity interest in m2 Lease Funds. The acquisition is structured in two payments with the initial payment of $1,653,755 made on September 11, 2012 and the final payment to be made in September 2015. The initial payment represented a 50% premium over the book value of the 20% equity interest of $3,307,509 as of August 31, 2012, calculated in accordance with the operating agreement. The final payment will consist of the book value of the 20% equity interest as of August 31, 2012 plus 20% of the earnings from m2 Lease Funds for the period September 2012 through August 2015. As a result, for the portion of the final payment related to the book value of the 20% equity interest as of August 31, 2012, QCBT calculated the present value of the future payment using a discount rate of 5% and recorded the resulting liability of $2,847,687. QCBT will accrete the discount using the effective yield method over three years. For the portion of the final payment related to the 20% of earnings from m2 Lease Funds for the period September 2012 through August 2015, QCBT will record compensation cost and increase the liability on a monthly basis. As a result of acquiring additional equity in a majority-owned company, the premium paid is reflected as a reduction of additional paid-in capital. The total premium paid and resulting reduction of additional paid-in capital totaled $2,133,417 which consists of the 50% premium over the book value as defined by the operating agreement ($1,653,755) and the difference between the discounted book value and the equity in the 20% noncontrolling interest as of August 31, 2012 ($453,884).


Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued GENERAL

QCR Holdings, Inc. is the parent company of QCBT, CRBT, and RB&T.

QCBT and CRBT are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation ("FDIC").

QCBT commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services, to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. QCBT also provides leasing services through its now wholly-owned subsidiary, m2 Lease Funds, located in Brookfield, Wisconsin. In August 2012, QCBT entered into an amendment to the operating agreement of m2 Lease Funds and purchased the 20% noncontrolling interest in m2 Lease Funds. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC (formerly known as CMG Investment Advisors,
LLC), which is an investment management and advisory company.

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services, to Cedar Rapids, Iowa and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. CRBT also provides residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company.

RB&T commenced operations in January 2005 and provides full-service commercial and consumer banking, and trust and asset management services, to Rockford, Illinois and adjacent communities through its main office located in downtown Rockford and its branch facility on Guilford Road at Alpine Road in Rockford.

The Company engages in real estate holdings through its 91% equity investment in Velie Plantation Holding Company, LLC, based in Moline, Illinois.


Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

OVERVIEW

The Company recognized net income of $3.2 million for the quarter ended September 30, 2012, and net income attributable to QCR Holdings, Inc. of $3.1 million, which excludes the net income attributable to noncontrolling interests of $127 thousand. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $2.2 million, or diluted earnings per common share of $0.44. By comparison, for the third quarter of 2011, the Company recognized net income of $2.3 million and net income attributable to QCR holdings, Inc. of $2.2 million, which excludes the net income attributable to noncontrolling interests of $103 thousand. After preferred stock dividends and discount accretion of $2.2 million, the Company reported a net loss attributable to common stockholders of $25 thousand, or diluted loss per common share of ($0.01). The 2011 preferred stock dividends included a one-time deemed dividend of $1.2 million as a result of the Company's repurchase of all of the preferred shares issued to Treasury under the Troubled Asset Relief Program ("TARP").

For the nine months ended September 30, 2012, the Company reported net income of $9.9 million, and net income attributable to QCR Holdings, Inc. of $9.4 million, which excludes the net income attributable to noncontrolling interests of $494 thousand. After preferred stock dividends of $2.7 million, the Company reported net income attributable to common stockholders of $6.7 million, or diluted earnings per common share of $1.35. For the same period in 2011, the Company recognized net income of $7.3 million and net income attributable to QCR Holdings, Inc. of $7.0 million, which excludes the net income attributable to noncontrolling interests of $308 thousand. After preferred stock dividends and discount accretion of $4.3 million, the Company reported net income attributable to common stockholders of $2.7 million, or diluted earnings per common share of $0.56.

Following is a table that represents the various net income measurements for the three and nine months ended September 30, 2012 and 2011, respectively.

                                     For the three months ended          For the nine months ended
                                   September 30,       September       September 30,      September
                                       2012             30, 2011           2012            30, 2011

Net income                         $   3,184,510      $  2,266,601     $   9,860,738     $  7,271,299
Less: Net income attributable to
noncontrolling interests                 127,177           103,446           494,431          308,215
Net income attributable to QCR
Holdings, Inc.                     $   3,057,333      $  2,163,155     $   9,366,307     $  6,963,084

Less: Preferred stock dividends
and discount accretion                   810,837         2,188,058         2,685,248        4,256,171
Net income attributable to QCR
Holdings, Inc. common
stockholders                       $   2,246,496      $    (24,903 )   $   6,681,059     $  2,706,913

Diluted earnings per common
share                              $        0.44      $      (0.01 )   $        1.35     $       0.56

Weighted average common and
common equivalent shares
outstanding                            5,080,288         4,866,692         4,938,514        4,847,433

Following is a table that represents the major income and expense categories.

                                    For the three months ended                      For the nine months ended
                       September 30,                         September 30,      September 30,      September 30,
                            2012          June 30, 2012           2011               2012               2011

Net interest income    $   14,629,518     $   14,515,493     $   13,828,704     $   43,348,464     $   39,988,561
Provision for
loan/lease losses          (1,496,194 )       (1,048,469 )       (2,456,965 )       (3,325,109 )       (5,196,850 )
Noninterest income          4,117,182          4,067,509          4,335,307         12,141,569         13,565,812
Noninterest expense       (13,031,517 )      (13,109,083 )      (12,773,149 )      (38,878,680 )      (38,340,967 )
Federal and state
income tax                 (1,034,479 )       (1,152,071 )         (667,296 )       (3,425,506 )       (2,745,257 )
Net income             $    3,184,510     $    3,273,379     $    2,266,601     $    9,860,738     $    7,271,299


Part I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued NET INTEREST INCOME

Net interest income, on a tax equivalent basis, increased $1.1 million, or 8%, to $15.1 million for the quarter ended September 30, 2012, from $14.0 million for the same period of 2011. The increase in net interest income was driven primarily by reduced interest expense. This was the result of continued reductions in the cost of deposits as well as growth in noninterest bearing deposits, which funded the earning asset growth and allowed the level of interest-bearing funding to remain relatively flat. Interest income grew slightly as growth in loans and securities more than offset the continued decline in yields.

A comparison of yields, spread and margin from the third quarter of 2012 to the third quarter of 2011 is as follows (on a tax equivalent basis):

The average yield on interest-earning assets decreased 25 basis points.

The average cost of interest-bearing liabilities decreased 27 basis points.

The net interest spread improved 2 basis points from 2.82% to 2.84%.

The net interest margin expanded 3 basis points from 3.13% to 3.16%.

Net interest income, on a tax equivalent basis, increased $3.9 million, or 10%, to $44.3 million for the first nine months of 2012, from $40.4 million for the same period of 2011. The growth was primarily a function of reductions in the rates paid on all interest-bearing liabilities with most of the impact from declining cost of deposits. Additionally, interest income grew as growth in loans and securities more than offset the decline in yields.

A comparison of yields, spread and margin from the first nine months of 2012 to the same period of 2011 is as follows (on a tax equivalent basis):

The average yield on interest-earning assets decreased 22 basis points.

The average cost of interest-bearing liabilities decreased 30 basis points.

The net interest spread improved 8 basis points from 2.73% to 2.81%.

The net interest margin expanded 8 basis points from 3.06% to 3.14%.

The Company's management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing and other balance sheet management strategies. Over the past two years, the Company's management has emphasized improving its funding mix by reducing its reliance on wholesale funding, which tends to be at a higher cost than deposits. In addition, with loan growth continuing to be modest, the Company's management has focused on growing and diversifying its securities portfolio.


Part I
Item 2
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

The Company's average balances, interest income/expense, and rates earned/paid
on major balance sheet categories, as well as the components of change in net
interest income, are presented in the following tables:

                                                     For the three months ended September 30,
                                                 2012                                         2011
                                               Interest       Average                       Interest       Average
                                 Average        Earned        Yield or        Average        Earned        Yield or
                                 Balance        or Paid         Cost          Balance        or Paid         Cost
                                                              (dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold             $     6,199     $       3           0.19 %   $    18,996     $       8           0.17 %
Interest-bearing deposits at
financial institutions              33,446            76           0.90 %        26,124            98           1.49 %
Investment securities (1)          619,650         3,930           2.52 %       516,617         3,243           2.49 %
Restricted investment
securities                          15,419           132           3.41 %        15,305           126           3.27 %
Gross loans/leases
receivable (2) (3) (4)           1,227,326        15,804           5.12 %     1,190,313        16,216           5.40 %

Total interest earning
assets                         $ 1,902,040        19,945           4.17 %   $ 1,767,355        19,691           4.42 %

Noninterest-earning assets:
Cash and due from banks        $    38,376                                  $    46,947
Premises and equipment              31,401                                       30,446
Less allowance for estimated
losses on loans/leases             (18,922 )                                    (19,693 )
Other                               77,314                                       79,293

Total assets                   $ 2,030,209                                  $ 1,904,348

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing deposits      $   557,216           625           0.45 %   $   537,887         1,006           0.74 %
Time deposits                      357,734           864           0.96 %       363,181         1,195           1.31 %
Short-term borrowings              164,775            60           0.14 %       145,147            66           0.18 %
Federal Home Loan Bank
advances                           201,328         1,810           3.58 %       204,911         1,931           3.74 %
Junior subordinated
debentures                          36,085           261           2.88 %        36,085           242           2.66 %
Other borrowings (4)               138,105         1,238           3.57 %       140,774         1,301           3.67 %

  Total interest-bearing
liabilities                    $ 1,455,243         4,858           1.33 %   $ 1,427,985         5,741           1.60 %

Noninterest-bearing demand
deposits                       $   406,597                                  $   311,044
Other noninterest-bearing
liabilities                         29,147                                       26,315
Total liabilities              $ 1,890,987                                  $ 1,765,344

Stockholders' equity               139,222                                      139,004

Total liabilities and
stockholders' equity           $ 2,030,209                                  $ 1,904,348

Net interest income                            $  15,087                                    $  13,950

Net interest spread                                                2.84 %                                       2.82 %

Net interest margin                                                3.16 %                                       3.13 %

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                         130.70 %                                     123.77 %

Interest earned and yields on nontaxable investment securities are
(1) determined on a tax equivalent basis using a 34% tax rate for each period presented. Loan/lease fees are not material and are included in interest income from
(2) loans/leases receivable in accordance with accounting and regulatory guidance.
(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
(4) In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of SBA-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the three months ended September 30, 2012 and 2011, this totaled $0.0 million and $0.6 million, respectively. During the second quarter of 2011, SBA removed the recourse provision for sales which allowed for sale accounting treatment at the time of sale; thus, the decline in average balance.


Part I
Item 2
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued


            Analysis of Changes of Interest Income/Interest Expense
                 For the three months ended September 30, 2012

                                                                     Components of Change (1)
                                                Inc./(Dec.)
                                                   from
                                               Prior Period          Rate               Volume
                                                                 2012 vs. 2011
                                                             (dollars in thousands)
INTEREST INCOME
Federal funds sold                             $          (5 )   $           7       $        (12 )
Interest-bearing deposits at financial
institutions                                             (22 )            (141 )              119
Investment securities (2)                                687                51                636
Restricted investment securities                           6                 5                  1
Gross loans/leases receivable (3) (4) (5)               (412 )          (2,733 )            2,321

Total change in interest income                $         254     $      (2,811 )     $      3,065

INTEREST EXPENSE
Interest-bearing deposits                      $        (381 )   $        (615 )     $        234
Time deposits                                           (331 )            (313 )              (18 )
Short-term borrowings                                     (6 )             (46 )               40
Federal Home Loan Bank advances                         (121 )             (85 )              (36 )
Junior subordinated debentures                            19                19                  -
Other borrowings (5)                                     (63 )             (36 )              (27 )

Total change in interest expense               $        (883 )   $      (1,076 )     $        193

Total change in net interest income            $       1,137     $      (1,735 )     $      2,872

(1) The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately alloctaed to rate and volume.
(2) Interest earned and yields on nontaxable investment securities are determined on a tax equivalent basis using a 34% tax rate for each period presented. Loan/lease fees are not material and are included in interest income from
(3) loans/leases receivable in accordance with accounting and regulatory guidance. Non-accrual loans/leases are included in the average balance for gross
(4) loans/leases receivable in accordance with accounting and regulatory guidance.
(5) In accordance with ASC 860, effective January 1, 2010, the Company accounts for some participations sold, including sales of SBA-guaranteed portions of loans during the recourse period, as secured borrowings. As such, these amounts are included in the average balance for gross loans/leases receivable and other borrowings. For the three months ended September 30, 2012 and 2011, this totaled $0.0 million and $0.6 million, respectively. During the second quarter of 2011, SBA removed the recourse provision for sales which allowed . . .

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