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QCRH > SEC Filings for QCRH > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for QCR HOLDINGS INC


6-May-2013

Quarterly Report


MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 wholly-owned subsidiary, m2 Lease Funds, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City 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. Previously, CRBT had provided residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company. During the first quarter of 2013, CRBT and the partner mutually terminated the joint venture. CRBT continues to provide residential real estate mortgage lending services through its consumer banking division.

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.


Part I
Item 2

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

OVERVIEW

The Company recognized net income and net income attributable to QCR Holdings, Inc. of $3.3 million for the quarter ended March 31, 2013. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $2.5 million, or diluted earnings per common share of $0.49. By comparison, for the first quarter of 2012, the Company recognized net income of $3.4 million and net income attributable to QCR holdings, Inc. of $3.2 million, which excludes the net income attributable to noncontrolling interests of $166 thousand. After preferred stock dividends of $939 thousand, the Company reported net income attributable to common stockholders of $2.3 million, or diluted earnings per common share of $0.48.

Following is a table that represents the various net income measurements for the Company.

                                                       For the three months ended
                                              March 31,       December 31,       March 31,
                                                2013              2012             2012

Net income                                   $ 3,265,144     $    3,245,502     $ 3,402,849
Less: Net income (loss) attributable to
noncontrolling interests                               -             (5,958 )       166,031
Net income attributable to QCR Holdings,
Inc.                                         $ 3,265,144     $    3,251,460     $ 3,236,818

Less: Preferred stock dividends                  810,837            810,838         938,625
Net income attributable to QCR Holdings,
Inc. common stockholders                     $ 2,454,307     $    2,440,622     $ 2,298,193

Diluted earnings per common share            $      0.49     $         0.49     $      0.48

Weighted average common and common
equivalent shares outstanding                  5,034,342          4,983,939       4,833,399

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

                                                For the three months ended
                                       March 31,       December 31,        March 31,
                                         2013              2012              2012

   Net interest income               $  14,191,317     $  14,300,796     $  14,203,453
   Provision for loan/lease losses      (1,057,782 )      (1,045,658 )        (780,446 )
   Noninterest income                    5,204,029         4,479,726         3,956,878
   Noninterest expense                 (13,958,500 )     (13,380,267 )     (12,738,080 )
   Federal and state income tax         (1,113,920 )      (1,109,095 )      (1,238,956 )
   Net income                        $   3,265,144     $   3,245,502     $   3,402,849

Noninterest income and noninterest expenses were both elevated from the fourth quarter of 2012 to the first quarter of 2013. The increases were partly the result of nonrecurring items, as follows:

In the first quarter of 2013, QCBT sold its credit card loan portfolio and issuing operations for a pre-tax gain on sales totaling $850 thousand. The Company incurred $257 thousand of pre-tax expenses related to the transactions during the first quarter of 2013 resulting in a net pre-tax gain on sales of $593 thousand.

As a result of the planned acquisition of Community National (see Note 8 to the Consolidated Financial Statements), the Company incurred $357 thousand of pre-tax costs related to the acquisition in the first quarter of 2013.


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 $186 thousand, or 1%, to $14.8 million for the quarter ended March 31, 2013, from $14.6 million for the same period of 2012. The slight 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, on a tax equivalent basis, fell $638 thousand, or 3%, as the continued decline in yields more than offset the growth in loans and securities.

A comparison of yields, spread and margin from the first quarter of 2013 to the first quarter of 2012 is as follows (on a tax equivalent basis):

The average yield on interest-earning assets decreased 33 basis points.

The average cost of interest-bearing liabilities decreased 22 basis points.

The net interest spread declined 11 basis points from 2.79% to 2.68%.

The net interest margin declined 10 basis points from 3.12% to 3.02%.

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. As an example, during the first quarter of 2013,QCBT modified $50.0 million of fixed rate wholesale structured repurchase agreements ("structured repos") with a weighted average interest rate of 3.21% and a weighted average maturity of February 2016 into new fixed rate structured repos with a weighted average interest rate of 2.65% and a weighted average maturity of May 2020. This modification serves to reduce interest expense and improve net interest margin, and minimizes the exposure to rising rates through duration extension of fixed rate liabilities.

Over the past several 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 continuing to outpace loan growth, 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 March 31,
                                            2013                                          2012
                                           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        $     2,349     $        1           0.17 %   $         -     $        -           0.00 %
Interest-bearing
deposits at financial
institutions                   37,834             60           0.64 %        84,367            120           0.57 %
Investment securities
(1)                           648,638          3,656           2.29 %       576,530          3,391           2.37 %
Restricted investment
securities                     15,415            125           3.29 %        15,280             81           2.13 %
Gross loans/leases
receivable (1) (2) (3)      1,279,040         15,251           4.84 %     1,198,047         16,139           5.42 %

Total interest earning
assets (1)                $ 1,983,276     $   19,093           3.90 %   $ 1,874,224     $   19,731           4.23 %

Noninterest-earning
assets:
Cash and due from banks   $    39,908                                   $    41,021
Premises and equipment         31,202                                        31,670
Less allowance for
estimated losses on
loans/leases                  (20,224 )                                     (18,911 )
Other                          75,850                                        76,738

Total assets              $ 2,110,012                                   $ 2,004,742

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits                  $   562,905     $      409           0.29 %   $   541,236     $      744           0.55 %
Time deposits                 333,696            708           0.86 %       345,800            972           1.13 %
Short-term borrowings         175,706             64           0.15 %       178,981             65           0.15 %
Federal Home Loan Bank
advances                      202,618          1,733           3.47 %       206,137          1,864           3.64 %
Junior subordinated
debentures                     36,085            241           2.71 %        36,085            268           2.99 %
Other borrowings              138,210          1,191           3.49 %       135,898          1,257           3.72 %

Total interest-bearing
liabilities               $ 1,449,220     $    4,346           1.22 %   $ 1,444,137     $    5,170           1.44 %

Noninterest-bearing
demand deposits           $   487,264                                   $   390,021
Other
noninterest-bearing
liabilities                    32,345                                        26,761
Total liabilities         $ 1,968,829                                   $ 1,860,919

Stockholders' equity          141,183                                       143,823

Total liabilities and
stockholders' equity      $ 2,110,012                                   $ 2,004,742

Net interest income (1)                   $   14,747                                    $   14,561

Net interest spread (1)                                        2.68 %                                        2.79 %

Net interest margin (1)                                        3.02 %                                        3.12 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    136.85 %                                      129.78 %

(1) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate fo reach period 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.


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 March 31, 2013 and 2012

                                                Inc./(Dec.)              Components
                                                   from                 of Change (1)
                                               Prior Period         Rate           Volume

2013 vs. 2012
(dollars in thousands)

INTEREST INCOME
Federal funds sold                             $           1     $         -     $         1
Interest-bearing deposits at financial
institutions                                             (60 )            87            (147 )
Investment securities (2)                                265            (668 )           933
Restricted investment securities                          44              43               1
Gross loans/leases receivable (2) (3) (4)               (888 )        (5,932 )         5,044

     Total change in interest income (2)       $        (638 )   $    (6,470 )   $     5,832

INTEREST EXPENSE
Interest-bearing deposits                      $        (335 )   $      (530 )   $       195
Time deposits                                           (264 )          (230 )           (34 )
Short-term borrowings                                     (1 )             3              (4 )
Federal Home Loan Bank advances                         (131 )           (96 )           (35 )
Junior subordinated debentures                           (27 )           (27 )             -
Other borrowings                                         (66 )          (186 )           120

     Total change in interest expense          $        (824 )   $    (1,066 )   $       242

Total change in net interest income (2)        $         186     $    (5,404 )   $     5,590

(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 allocated to rate and volume.

(2) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate for each period 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.


Part I
Item 2

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

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 estimated losses on loans/leases. The Company's allowance for estimated losses on loans/leases methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for estimated losses on loans/leases 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, 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 state 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. Management may report a materially different amount for the provision for loan/lease losses in the statement of operations to change the allowance for estimated losses on loans/leases if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the portion in the section entitled "Financial Condition" of this Management's Discussion and Analysis that discusses the allowance for estimated losses on loans/leases. Although management believes the level of the allowance as of March 31, 2013 is 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 herein.


Part I
Item 2

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income declined $836 thousand, or 4%, comparing the first quarter of 2013 to the same period of 2012. The effect of declines in loan and securities yields more than offset the growth in loans and securities. Specifically, over the year, the average balance for loans/leases grew $81.0 million, or 7%, while yields declined 58 basis points. For securities over the year, the average balance increased $72.1 million, or 13%, while yields fell 8 basis points. As deposit growth continues to outpace loan growth, the Company has focused on growing and diversifying its securities portfolio, including increasing its portfolio of agency-sponsored mortgage-backed securities as well as municipal securities. Of the latter, all are located in the Midwest with strong underwriting conducted before investment.

The Company intends to continue to grow quality loans and leases as well as to diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSE

Interest expense for the first quarter of 2013 declined $824 thousand, or 16%, from the first quarter of 2012. The Company continued to grow noninterest bearing deposits (average balances grew $97.2 million, or 25%, from the first quarter of 2012 to the same period of 2013), which has provided management increased flexibility to decrease pricing on its interest-bearing deposits. The Company has been successful in decreasing the cost of borrowings, which has also contributed to the decline in interest expense. Management has placed a strong focus on reducing the reliance on wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have not been replaced, or, to a lesser extent, have been replaced at significantly reduced cost.

Management continues to consider strategies to accelerate the reduction of the reliance on wholesale funding and continue the shift in mix to a funding base consisting of a higher percentage of core deposits, including noninterest-bearing deposits.

PROVISION FOR LOAN/LEASE LOSSES

The provision for loan/lease losses is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, the local and national economy and risk associated with the loans/leases in the portfolio as described in more detail in the "Critical Accounting Policies" section.

The Company's provision for loan/lease losses totaled $1.1 million for the first quarter of 2013, flat from the prior quarter, and an increase of $278 thousand from the first quarter of 2012. With the provision of $1.1 million more than offsetting the net charge-offs totaling $214 thousand (only 2 basis points of average loans/leases during the current quarter), the Company's allowance for loan/lease losses grew to $20.8 million at March 31, 2013. With modest loan/lease growth during the first quarter of 2013, the Company's allowance for loan/lease losses to total loans/leases increased to 1.61% at March 31, 2013 from 1.55% at December 31, 2012, and increased from 1.57% at March 31, 2012.

A more detailed discussion of the Company's allowance for estimated losses on loans/leases can be found in the "Financial Condition" section of this report.


Part I
Item 2

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

NONINTEREST INCOME

The following table sets forth the various categories of noninterest income for
the three months ended March 31, 2013 and 2012.

                                      Three Months Ended
                                    March 31,       March 31,
                                      2013            2012          $ Change         % Change

Trust department fees              $ 1,039,670     $   883,732     $   155,938             17.6 %
Investment advisory and
management fees                        609,341         521,462          87,879             16.9
Deposit service fees                   907,823         904,406           3,417              0.4
Gains on sales of residential
real estate loans                      291,151         291,433            (282 )           (0.1 )
Gains on sales of government
guaranteed portions of loans           845,224         107,657         737,567            685.1
Earnings on bank-owned life
insurance                              438,687         438,402             285              0.1
Credit card fees, net of
processing costs                        49,954         127,015         (77,061 )          (60.7 )
Subtotal                           $ 4,181,850     $ 3,274,107     $   907,743             27.7
Losses on other real estate
owned, net                            (446,630 )      (189,204 )      (257,426 )          136.1
Other                                1,468,809         871,975         596,834             68.4
Total noninterest income           $ 5,204,029     $ 3,956,878     $ 1,247,151             31.5 %

Trust department fees continue to be a significant contributor to noninterest income. Trust department fees grew 18% from the first quarter of 2012 to the first quarter of 2013. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As markets have experienced volatility with the national economy's recovery from recession, the Company's fee income has experienced similar volatility and fluctuation. In recent years, the Company has been successful in expanding its customer base, which has helped to drive the recent increases in fee income.

In recent years, the Company has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company's Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Fee income for investment advisory and management services grew 17% comparing the first quarter of 2013 to the same period of 2012. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. Continued expansion of the customer base has helped drive the recent increases in fee income.

As management focuses on growing fee income, expanding market share in trust and investment advisory services will continue to be a primary strategic focus.

Deposit service fees were up slightly from the first quarter of 2012 to the first quarter of 2013. Deposit service fees have generally expanded over the past several years. The Company has placed an emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits. With this shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees. Management periodically evaluates fee levels and fully understands the importance of this recurring source of fee income. In particular, the Company has recently evaluated the level of fee reduction and compensating balances for the noninterest-bearing correspondent bank deposits and restructured the program to minimize the reduction of fees effective in 2013.

. . .

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