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| QCRH > SEC Filings for QCRH > Form 10-K on 11-Mar-2013 | All Recent SEC Filings |
11-Mar-2013
Annual Report
The following discussion provides additional information regarding our operations for the years ending December 31, 2012, 2011, and 2010, and our financial condition at December 31, 2012 and 2011. This discussion should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
OVERVIEW
The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty years, the Company has grown to include two additional banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2012, the Company had $2.09 billion in consolidated assets, including $1.29 billion in total loans/leases and $1.37 billion in deposits.
The Company recognized net income of $13.1 million for the year ended December 31, 2012, and net income attributable to QCR Holdings, Inc. of $12.6 million, which excludes the net income attributable to noncontrolling interests of $488 thousand. After preferred stock dividends of $3.5 million, the Company reported net income available to common stockholders of $9.1 million, or diluted earnings per share of $1.85. For the same period in 2011, the Company recognized net income of $10.1 million, and net income attributable to QCR Holdings, Inc. of $9.7 million, which excludes the net income attributable to noncontrolling interests of $438 thousand. After preferred stock dividends and discount accretion of $5.3 million, the Company reported net income available to common stockholders of $4.4 million, or diluted earnings per share of $0.92. The $5.3 million of preferred stock dividends and discount accretion included $1.2 million of accelerated discount accretion on the repurchased Treasury Capital Purchase Program ("TCPP") preferred shares. Excluding the impact of the accelerated accretion, the Company's diluted earnings per share for 2011 would have been $1.18. By comparison, for 2010, the Company recognized net income of $6.8 million, and net income attributable to QCR Holdings, Inc. of $6.6 million, which excludes the net income attributable to noncontrolling interests of $221 thousand. After preferred stock dividends and discount accretion of $4.1 million, the Company reported net income available to common stockholders of $2.5 million, or diluted earnings per share of $0.53.
Following is a table that represents the various net income measurements for the years ended December 31, 2012, 2011, and 2010.
Year Ended December 31,
2012 2011 2010
Net income $ 13,106,240 $ 10,129,869 $ 6,807,726
Less: Net income attributable to
noncontrolling interests 488,473 438,221 221,047
Net income attributable to QCR Holdings,
Inc. $ 12,617,767 $ 9,691,648 $ 6,586,679
Less: Preferred stock dividends and discount
accretion 3,496,085 5,283,885 * 4,128,104
Net income attributable to QCR Holdings,
Inc. common stockholders $ 9,121,682 $ 4,407,763 $ 2,458,575
Diluted earnings per common share $ 1.85 $ 0.92 $ 0.53
Weighted average common and common
equivalent shares outstanding 4,919,559 4,789,026 4,618,242
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*Includes $1.2 million of accelerated accretion of discount on the TCPP preferred shares repurchased during the third quarter of 2011. See Note 10 to the consolidated financial statements for detailed discussion of preferred stock.
Following is a table that represents the major income and expense categories.
Year Ended December 31,
2012 2011 2010
Net interest income $ 57,649,260 $ 54,144,856 $ 49,863,768
Provision for loan/lease losses (4,370,767 ) (6,616,014 ) (7,463,618 )
Noninterest income 16,621,295 17,461,878 15,405,888
Noninterest expense (52,258,947 ) (50,992,652 ) (48,549,063 )
Federal and state income tax (4,534,601 ) (3,868,199 ) (2,449,249 )
Net income $ 13,106,240 $ 10,129,869 $ 6,807,726
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NET INTEREST INCOME AND MARGIN
Net interest income, on a tax equivalent basis, grew $4.2 million, or 8% in 2012 compared to 2011. Interest income (on a tax equivalent basis) grew slightly as growth in earning assets coupled with diversification of the securities portfolio outpaced the impact of declining yields. In addition, interest expense continued its significant decline as the Company continued its shift in mix of funding from wholesale (FHLB advances, wholesale structured repurchase agreements ("structured repos"), and brokered time deposits) to core deposits. For 2012, average earning assets increased by $122.2 million, or 7%, while average interest-bearing liabilities grew modestly by $15.7 million, or 1%, when compared with average balances for 2011. Primarily funding the growth in average earning assets, noninterest-bearing deposits grew $95.9 million, or 30%. A comparison of yields, spreads and margins from 2012 to 2011 shows the following (on a tax equivalent basis):
· The average yield on interest-earning assets decreased 27 basis points from 4.41% to 4.14%.
· The average cost of interest-bearing liabilities decreased 28 basis points from 1.65% to 1.37%.
· The net interest spread improved 1 basis point from 2.76% to 2.77%.
· The net interest margin improved 2 basis points from 3.08% to 3.10%.
Net interest income, on a tax equivalent basis, grew $4.3 million, or 9% in 2011 compared to 2010. A decline in interest income was more than offset by a significant decline in interest expense. For 2011, average earning assets increased by $53.0 million, or 3%, and average interest-bearing liabilities declined by $25.3 million, or 2%, when compared with average balances for 2010. Offsetting this decline and primarily funding the growth in average earning assets, noninterest-bearing deposits grew $84.5 million, or 36%. A comparison of yields, spreads and margins from 2011 to 2010 shows the following (on a tax equivalent basis):
· The average yield on interest-earning assets decreased 27 basis points from 4.68% to 4.41%.
· The average cost of interest-bearing liabilities decreased 43 basis points from 2.08% to 1.65%.
· The net interest spread improved 16 basis points from 2.60% to 2.76%.
· The net interest margin improved 16 basis points from 2.92% to 3.08%.
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 including, but not limited to, the use of alternative funding sources. 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 deposit growth outpacing loan growth, the Company's management has focused on growing and diversifying its securities portfolio.
The following strategies were executed by the Company to reduce reliance on wholesale funding or reducing the cost of portions of the Company's wholesale funding.
The Company's largest subsidiary bank, QCBT, executed a balance sheet restructuring during the first quarter of 2011. Specifically, the bank utilized excess liquidity and prepaid $15.0 million of FHLB advances with a weighted average interest rate of 4.87% and a weighted average maturity of May 2012. The fees for prepayment totaled $832 thousand. The Company sold $37.4 million of government sponsored agency securities and recognized pre-tax gains of $880 thousand which more than offset the prepayment fees. The proceeds from the sales of the government sponsored agency securities were reinvested into government guaranteed residential mortgage-backed securities with reduced risk-weighting for regulatory capital purposes and yields that were comparable to the sold securities. The resulting impacts were significant and included:
· Significantly reduced interest expense and improved net interest margin
· Stronger regulatory capital
· Reduced reliance on wholesale funding
Separately, during the first quarter of 2011, QCBT modified $20.4 million of fixed rate FHLB advances with a weighted average interest rate of 4.33% and a weighted average maturity of October 2013 into new fixed rate advances with a weighted average interest rate of 3.35% and a weighted average maturity of February 2014.
Additionally, during the fourth quarter of 2011, the Company's newest subsidiary bank, RB&T, modified $13.0 million of fixed rate FHLB advances with a weighted average interest rate of 3.37% and a weighted average maturity of March 2013 into new fixed rate FHLB advances with a weighted average interest rate of 2.29% and a weighted average maturity of February 2016.
During the second quarter of 2012, the Company modified $25.0 million of fixed rate structured repos with a weighted average interest rate of 3.77% and a weighted average maturity of December 2015 into new fixed rate structured repos with a weighted average interest rate of 3.21% and a weighted average maturity of April 2019.
These modifications serve to reduce interest expense and improve net interest margin, and minimize the exposure to rising rates through the duration extension of fixed rate liabilities.
The Company's average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:
Years Ended December 31,
2012 2011 2010
Interest Average Interest Average Interest Average
Average Earned Yield or Average Earned Yield or Average Earned Yield or
Balance or Paid Cost Balance or Paid Cost Balance or Paid Cost
(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold $ 3,003 $ 6 0.20 % $ 49,510 $ 92 0.19 % $ 63,430 $ 174 0.27
Interest-bearing deposits at
financial institutions 54,834 378 0.69 29,691 405 1.36 31,002 411 1.33
Investment securities (1) 603,568 14,268 2.36 501,470 12,344 2.46 400,224 11,457 2.86
Restricted investment securities 15,172 507 3.34 15,573 558 3.58 16,750 497 2.97
Gross loans/leases receivable
(2) (3) (4) 1,219,623 63,364 5.20 1,177,705 64,808 5.50 1,209,587 67,999 5.62
Total interest earning assets $ 1,896,200 78,523 4.14 $ 1,773,949 78,207 4.41 $ 1,720,993 80,538 4.68
Noninterest-earning assets:
Cash and due from banks $ 40,770 $ 48,797 $ 34,559
Premises and equipment, net 31,502 30,848 31,557
Less allowance for estimated
losses on loans/leases (19,162 ) (19,902 ) (21,678 )
Other 76,383 73,346 73,887
Total assets $ 2,025,693 $ 1,907,038 $ 1,839,318
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LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Interest-bearing demand deposits $ 545,739 2,679 0.49 % $ 530,340 3,927 0.74 % $ 425,702 3,771 0.89 Time deposits 352,582 3,540 1.00 363,337 5,012 1.38 465,160 8,911 1.92 Short-term borrowings 170,065 248 0.15 144,267 290 0.20 142,197 628 0.44 Federal Home Loan Bank advances 201,704 7,280 3.61 211,361 7,972 3.77 233,384 9,247 3.96 Junior subordinated debentures 36,085 1,039 2.88 36,085 1,228 3.40 36,085 1,945 5.39 Other borrowings (4) 137,226 4,941 3.60 142,281 5,149 3.62 150,430 5,732 3.81 Total interest-bearing liabilities $ 1,443,401 19,727 1.37 $ 1,427,670 23,578 1.65 $ 1,452,958 30,234 2.08 Noninterest-bearing demand deposits $ 412,039 $ 316,110 $ 231,604 Other noninterest-bearing liabilities 28,460 26,558 23,690 Total liabilities $ 1,883,900 $ 1,770,338 $ 1,708,252 Stockholders' equity 141,793 136,700 131,066 Total liabilities and stockholders' equity $ 2,025,693 $ 1,907,038 $ 1,839,318 Net interest income $ 58,796 $ 54,629 $ 50,304 Net interest spread 2.77 % 2.76 % 2.60 % Net interest margin 3.10 % 3.08 % 2.92 % Ratio of average interest earning assets to average interest-bearing liabilities 131.37 % 124.25 % 118.45 % |
(1) Interest earned and yields on nontaxable investment securities are
determined on a tax equivalent basis using a 34% tax rate in each year
presented.
(2) Loan/lease fees are not material and are included in interest income from
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 government-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 years ended December 31, 2012, 2011 and 2010, this
totaled $0.0 million, $2.5 million and $9.6 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.
The Company's components of change in net interest income are presented in the following table:
For the years ended December 31, 2012, 2011 and 2010
Inc./(Dec.) Components Inc./(Dec.) Components
from of Change (1) from of Change (1)
Prior Year Rate Volume Prior Year Rate Volume
2012 vs. 2011 2011 vs. 2010
(dollars in thousands) (dollars in thousands)
INTEREST INCOME
Federal funds sold $ (86 ) $ 6 $ (92 ) $ (82 ) $ (49 ) $ (33 )
Interest-bearing
deposits at other
financial
institutions . (27 ) (263 ) 236 (6 ) 12 (18 )
Investment securities
(2) 1,924 (506 ) 2,430 887 (1,750 ) 2,637
Restricted investment
securities (51 ) (37 ) (14 ) 61 98 (37 )
Gross loans/leases
receivable (3) (4)
(5) (1,444 ) (3,701 ) 2,257 (3,191 ) (1,420 ) (1,771 )
Total change in
interest income $ 316 $ (4,501 ) $ 4,817 $ (2,331 ) $ (3,109 ) $ 778
INTEREST EXPENSE
Interest-bearing
demand deposits $ (1,248 ) $ (1,359 ) $ 111 $ 156 $ (727 ) $ 883
Time deposits (1,472 ) (1,328 ) (144 ) (3,899 ) (2,188 ) (1,711 )
Short-term borrowings (42 ) (88 ) 46 (338 ) (347 ) 9
Federal Home Loan
Bank advances (692 ) (336 ) (356 ) (1,275 ) (430 ) (845 )
Junior subordinated
debentures (189 ) (189 ) - (717 ) (717 ) -
Other borrowings (5) (208 ) (26 ) (182 ) (583 ) (281 ) (302 )
Total change in
interest expense $ (3,851 ) $ (3,326 ) $ (525 ) $ (6,656 ) $ (4,690 ) $ (1,966 )
Total change in net
interest income $ 4,167 $ (1,175 ) $ 5,342 $ 4,325 $ 1,581 $ 2,744
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(1) The column "Inc/(Dec) from Prior Year" 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 allocated 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 in each year presented.
(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
(4) Non-accrual loans/leases are included in the average balance for gross 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 government-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 years ended December 31, 2012, 2011 and 2010, this totaled $0.0 million, $2.5 million and $9.6 million, respectively. During the second quarter of 2011, SBA removed the recourse provision for sales which allowed sale accounting treatment at the time of the sale; thus, the decline in average balance.
The Company's operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, gains from the sales of residential real estate loans and government guaranteed loans, earnings on bank-owned life insurance, and other income. Offsetting these items, the Company incurs noninterest expenses which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense, and other administrative expenses.
The Company's operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies, and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan/lease losses (also referred to as "allowance for estimated losses on loans/leases"). The Company's allowance for loan/lease losses methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan/lease losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers' sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company's markets, including economic conditions throughout the Midwest, and in particular, the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for loan/lease losses if its assessment of the above factors were different. The discussion regarding the Company's allowance for loan/lease losses should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere in this Form 10-K, as well as the portion of this Management's Discussion and Analysis section entitled "Financial Condition - Allowance for Estimated Losses on Loans/Leases." Although management believes the level of the allowance as of December 31, 2012 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
The Company's assessment of other-than-temporary impairment of its
available-for-sale securities portfolio is another critical accounting policy as
a result of the level of judgment required by management. Available-for-sale
securities are evaluated to determine whether declines in fair value below their
cost are other-than-temporary. In estimating other-than-temporary impairment
losses management considers a number of factors including, but not limited to,
(1) the length of time and extent to which the fair value has been less than
amortized cost, (2) the financial condition and near-term prospects of the
issuer, (3) the current market conditions, and (4) the intent of the Company to
not sell the security prior to recovery and whether it is not
more-likely-than-not that the Company will be required to sell the security
prior to recovery. The discussion regarding the Company's assessment of
other-than-temporary impairment should be read in conjunction with the Company's
financial statements and the accompanying notes presented elsewhere in this Form
10-K.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2011, and 2010
OVERVIEW. Net income attributable to QCR Holdings, Inc. for 2012 was $12.6 million, or diluted earnings per share of $1.85 after preferred stock dividends of $3.5 million. Comparing 2012 to 2011, annual earnings grew 30%, and diluted earnings per share more than doubled. Net interest income grew $3.5 million, or 6%, as growth and shift in mix of earning assets and funding outpaced the impact of declining yields on loans and securities. Provision for loan/lease losses declined $2.2 million as loan quality continued to improve. Noninterest income fell $841 thousand which was primarily the result of increased losses on other real estate owned ("OREO") as most of the other recurring sources realized modest gains year-over-year. Noninterest expenses grew $1.3 million, or 2%, during 2012. The large majority of this increase was salaries and employee benefits as health insurance costs continued to increase, incentive compensation grew due to improved financial performance, and the continuation of customary annual salary and benefits increases across the employee base.
Net income attributable to QCR Holdings, Inc. for 2011 was $9.7 million, or diluted earnings per share of $0.92 after preferred stock dividends and discount accretion of $5.3 million, compared to $6.6 million, or diluted earnings per share of $0.53 after preferred stock dividends of $4.1 million, for 2010. The $5.3 million of preferred stock dividends and discount accretion included $1.2 million of accelerated discount accretion on the repurchased TCPP preferred shares. Excluding the impact of the accelerated accretion, the Company's diluted earnings per share for 2011 would have been $1.18. Net interest income grew $4.3 million, or 9%, year-over-year. The Company's noninterest income increased $2.1 million, or 13%, during 2011. As part of the balance sheet restructuring at QCBT and as a result of favorable market conditions, the Company sold $54.3 million of securities at pre-tax gains totaling $1.5 million. The remaining increase consisted of modest growth across the majority of the Company's major noninterest income sources. Noninterest expense increased $2.4 million, or 5%, during 2011. The large majority of this increase was salaries and employee benefits as the Company resumed customary annual salary and benefits increases . . .
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