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QCRH > SEC Filings for QCRH > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for QCR HOLDINGS INC


14-Aug-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

QCR Holdings, Inc. is the parent company of QCBT, CRBT, RB&T, and as the result of the May 13, 2013 acquisition, CNB. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's acquisition of CNB.

QCBT and CRBT are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank. CNB is a national-chartered commercial bank headquartered in Iowa. 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 on Guilford Road at Alpine Road in Rockford and its branch facility in downtown Rockford.

? CNB commenced operations in 1997 and provides full-service commercial and consumer banking, and trust and asset management services, to Cedar Falls, Mason City, and Waterloo, Iowa and Austin, Minnesota. CNB has a total of eight branch facilities with four in the Waterloo/Cedar Falls area which is where CNB is headquartered, two in Mason City, and two in Austin. Recently, CNB signed separate definite agreements to sell certain assets and liabilities of the two Mason City branches and the two Austin branches. The proposed transactions, which are subject to regulatory approval and customary closing conditions, are expected to be completed in the fourth quarter of 2013. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's sales of the Mason City and Austin branches.


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 $4.0 million for the quarter ended June 30, 2013. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $3.2 million, or diluted earnings per common share of $0.59. By comparison, for the second quarter of 2012, the Company recognized net income of $3.3 million and net income attributable to QCR holdings, Inc. of $3.1 million, which excludes the net income attributable to noncontrolling interests of $201 thousand. After preferred stock dividends of $936 thousand, the Company reported net income attributable to common stockholders of $2.1 million, or diluted earnings per common share of $0.44. For the first half of 2013, the Company recognized net income and net income attributable to QCR Holdings, Inc. of $7.3 million, or diluted earnings per share of $1.08 after preferred stock dividends of $1.6 million. This is an increase of $1.0 million, or 16%, over the same period of 2012.

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

                                            For the three months ended               For the six months ended
                                        June 30, 2013        June 30, 2012      June 30, 2013       June 30, 2012

Net income                              $    4,045,231      $     3,273,379     $    7,310,375     $     6,676,228
Less: Net income attributable to
noncontrolling interests                             -              201,223                  -             367,254
Net income attributable to QCR
Holdings, Inc.                          $    4,045,231      $     3,072,156     $    7,310,375     $     6,308,974

Less: Preferred stock dividends                810,838              935,786          1,621,675           1,874,411
Net income attributable to QCR
Holdings, Inc. common stockholders      $    3,234,393      $     2,136,370     $    5,688,700     $     4,434,563

Diluted earnings per common share       $         0.59      $          0.44     $         1.08     $          0.91

Weighted average common and common
equivalent shares outstanding                5,497,275            4,901,853          5,265,809           4,867,628

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

                                                 For the three months ended                       For the six months ended
                                   June 30, 2013       March 31, 2013      June 30, 2012      June 30, 2013      June 30, 2012

Net interest income                $   15,708,052     $     14,191,317     $   14,515,493     $   29,899,369     $   28,718,946
Provision for loan/lease losses        (1,520,137 )         (1,057,782 )       (1,048,469 )       (2,577,919 )       (1,828,915 )
Noninterest income                      6,948,756            5,204,029          4,067,509         12,152,785          8,024,387
Noninterest expense                   (15,234,349 )        (13,958,500 )      (13,109,083 )      (29,192,849 )      (25,847,163 )
Federal and state income tax           (1,857,091 )         (1,113,920 )       (1,152,071 )       (2,971,011 )       (2,391,027 )
Net income                         $    4,045,231     $      3,265,144     $    3,273,379     $    7,310,375     $    6,676,228

With the acquisition of Community National and CNB on May 13, 2013, the Company's quarterly results include a partial quarter of CNB's earnings. Specifically, CNB recognized net income of $240 thousand.

In comparing quarter-over-quarter, following are some noteworthy fluctuations:

? Net interest income grew $1.5 million, or 11%, propelled by the addition of CNB for the partial quarter as well as organic growth in earning assets.

? Provision for loan/lease losses ("provision") increased $462 thousand as specific reserves were established for certain commercial credits at the Company's largest bank.

? Noninterest income increased $1.7 million, or 34%, which consisted primarily of a bargain purchase gain ($1.8 million) that was recorded on the Community National acquisition.

? The Company incurred $1.3 million more in noninterest expenses as a result of the acquisition of CNB's existing cost structure, as well as additional acquisition related expenses.


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 $1.4 million, or 9%, to $16.4 million for the quarter ended June 30, 2013, from $15.0 million for the same period of 2012. The increase in net interest income was driven by the addition of CNB for a partial quarter ($1.2 million at a net interest margin of approximately 3.72%). Exclusive of CNB, the Company was successful in growing net interest income. This was the result of organic loan/lease growth and continued reductions in the cost of deposits as well as growth in noninterest bearing deposits more than offsetting the impact of declining yields on loans.

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

? The average yield on interest-earning assets decreased 48 basis points.

? The average cost of interest-bearing liabilities decreased 32 basis points.

? The net interest spread declined 16 basis points from 2.88% to 2.72%.

? The net interest margin declined 22 basis points from 3.21% to 2.99%.

Net interest income, on a tax equivalent basis, increased $1.6 million, or 5%, to $31.1 million for the first half of 2013, from $29.5 million for the same period of 2012. The increase in net interest income was driven primarily by the addition of CNB for a partial quarter ($1.2 million at a net interest margin of approximately 3.72%). As with the quarterly comparison, the Company expanded net interest income excluding CNB through organic earning asset growth and declining cost of funds more than offsetting the continued declining yields on loans.

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

? The average yield on interest-earning assets decreased 41 basis points.

? The average cost of interest-bearing liabilities decreased 28 basis points.

? The net interest spread declined 13 basis points from 2.84% to 2.71%.

? The net interest margin declined 16 basis points from 3.16% to 3.00%.

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 long-term 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 June 30,
                                            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        $     8,410     $        3           0.14 %   $         -     $        -           0.00 %
Interest-bearing
deposits at financial
institutions                   35,158             62           0.71 %        36,478             92           1.01 %
Investment securities
(1)                           714,808          4,040           2.27 %       615,089          3,569           2.33 %
Restricted investment
securities                     16,531            131           3.18 %        15,282            165           4.34 %
Gross loans/leases
receivable (1) (2) (3)      1,418,389         16,530           4.67 %     1,211,595         16,165           5.37 %

Total interest earning
assets                    $ 2,193,296         20,766           3.80 %   $ 1,878,444         19,991           4.28 %

Noninterest-earning
assets:
Cash and due from banks   $    41,791                                   $    39,896
Premises and equipment         35,698                                        31,529
Less allowance for
estimated losses on
loans/leases…                 (22,192 )                                     (19,183 )
Other                          74,743                                        74,938

Total assets              $ 2,323,336                                   $ 2,005,624

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits                  $   632,932            398           0.25 %   $   532,718            722           0.55 %
Time deposits                 416,085            779           0.75 %       354,285            908           1.03 %
Short-term borrowings         195,202            103           0.21 %       179,979             77           0.17 %
Federal Home Loan Bank
advances                      216,725          1,727           3.20 %       205,162          1,829           3.59 %
Junior subordinated
debentures                     41,398            261           2.53 %        36,085            259           2.89 %
Other borrowings              140,091          1,163           3.33 %       136,648          1,224           3.60 %

Total interest-bearing
liabilities               $ 1,642,433          4,431           1.08 %   $ 1,444,877          5,019           1.40 %

Noninterest-bearing
demand deposits           $   502,078                                   $   391,475
Other
noninterest-bearing
liabilities                    32,154                                        25,331
Total liabilities         $ 2,176,665                                   $ 1,861,683

Stockholders' equity          146,671                                       143,941

Total liabilities and
stockholders' equity      $ 2,323,336                                   $ 2,005,624

Net interest income                       $   16,335                                    $   14,972

Net interest spread                                            2.72 %                                        2.88 %

Net interest margin                                            2.99 %                                        3.21 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    133.54 %                                      130.01 %

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

(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 June 30, 2013





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

2013 vs. 2012
(dollars in thousands)

INTEREST INCOME
Federal funds sold                             $           3     $         -     $         3
Interest-bearing deposits at financial
institutions                                             (30 )           (27 )            (3 )
Investment securities (2)                                471            (628 )         1,099
Restricted investment securities                         (34 )          (109 )            75
Gross loans/leases receivable (3) (4) (5)                365          (9,392 )         9,757

Total change in interest income                $         775     $   (10,156 )   $    10,931

INTEREST EXPENSE
Interest-bearing deposits                      $        (324 )   $    (1,049 )   $       725
Time deposits                                           (129 )          (854 )           725
Short-term borrowings                                     26              19               7
Federal Home Loan Bank advances                         (102 )          (613 )           511
Junior subordinated debentures                             2            (139 )           141
Other borrowings                                         (61 )          (232 )           171

Total change in interest expense               $        (588 )   $    (2,868 )   $     2,280

Total change in net interest income            $       1,363     $    (7,288 )   $     8,651

(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.

(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



                                                     For the six months ended June 30,
                                            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        $     5,379     $        4           0.15 %   $         -     $        -           0.00 %
Interest-bearing
deposits at financial
institutions                   36,496            122           0.67 %        60,423            213           0.71 %
Investment securities
(1)                           681,723          7,697           2.28 %       595,810          6,959           2.35 %
Restricted investment
securities                     15,973            256           3.23 %        15,281            246           3.24 %
Gross loans/leases
receivable (1) (2) (3)      1,348,715         31,782           4.75 %     1,204,820         32,297           5.39 %

Total interest earning
assets                      2,088,286         39,861           3.85 %   $ 1,876,334         39,715           4.26 %

Noninterest-earning
assets:
Cash and due from banks   $    40,849                                   $    40,459
Premises and equipment         33,450                                        31,600
Less allowance for
estimated losses on
loans/leases…                 (21,208 )                                     (19,047 )
Other                          75,297                                        75,837

Total assets              $ 2,216,674                                   $ 2,005,183

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits                  $   597,918            807           0.27 %   $   536,976          1,465           0.55 %
Time deposits                 374,890          1,487           0.80 %       350,043          1,880           1.08 %
Short-term borrowings         185,454            167           0.18 %       179,480            142           0.16 %
Federal Home Loan Bank
advances                      209,672          3,460           3.33 %       205,650          3,693           3.61 %
Junior subordinated
debentures                     38,742            502           2.61 %        36,085            527           2.94 %
Other borrowings (4)          139,151          2,354           3.41 %       136,273          2,482           3.66 %

Total interest-bearing
liabilities                 1,545,826          8,777           1.14 %   $ 1,444,507         10,189           1.42 %

Noninterest-bearing
demand deposits               494,671                                   $   390,748
Other
noninterest-bearing
liabilities                    32,250                                        26,046
Total liabilities           2,072,747                                   $ 1,861,301

Stockholders' equity          143,927                                       143,882

Total liabilities and
stockholders' equity        2,216,674                                   $ 2,005,183

Net interest income                       $   31,084                                    $   29,526

Net interest spread                                            2.71 %                                        2.84 %

Net interest margin                                            3.00 %                                        3.16 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    135.09 %                                      129.89 %

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

(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 six months ended June 30, 2013



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

2013 vs. 2012 (dollars in thousands)
INTEREST INCOME
Federal funds sold                         $             4     $         -     $         4
Interest-bearing deposits at financial
institutions                                           (91 )           (10 )           (81 )
Investment securities (2)                              738            (578 )         1,316
Restricted investment securities                        10              (1 )            11
Gross loans/leases receivable (3) (4)
(5)                                                   (515 )        (7,983 )         7,468

Total change in interest income            $           146     $    (8,572 )   $     8,718

INTEREST EXPENSE
Interest-bearing deposits                  $          (658 )   $    (1,083 )   $       425
Time deposits                                         (393 )          (730 )           337
Short-term borrowings                                   25              20               5
Federal Home Loan Bank advances                       (233 )          (419 )           186
Junior subordinated debentures                         (25 )          (109 )            84
Other borrowings (5)                                  (128 )          (259 )           131

Total change in interest expense           $        (1,412 )   $    (2,580 )   $     1,168

Total change in net interest income        $         1,558     $    (5,992 )   $     7,550

(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.

(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 . . .

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