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

Show all filings for QCR HOLDINGS INC

Form 10-Q for QCR HOLDINGS INC


14-Nov-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. On October 26, 2013, CNB merged with and into CRBT. CNB's merged branch offices will operate as a division of CRBT under the name "Community Bank & Trust." See below and Note 9 to the Company's Consolidated Financial Statements for further discussion on CNB.

? 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 historically provided full-service commercial and consumer banking, and trust and asset management services, to Cedar Falls, Mason City, and Waterloo, Iowa and Austin, Minnesota. As of September 30, 2013, CNB had 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. On October 4, 2013, the Company finalized the sale of the two branches in Mason City. On October 11, 2013, the Company finalized the sale of the two branches in Austin. On October 26, 2013, CNB merged with and into CRBT. CNB's merged branch offices will operate as a division of CRBT under the name "Community Bank & Trust." See further information in Note 9 to the Company's Consolidated Financial Statements.


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 $3.8 million for the quarter ended September 30, 2013. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $3.0 million, or diluted earnings per common share of $0.51. By comparison, for the third quarter of 2012, the Company recognized net income of $3.2 million 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. For the first three quarters of 2013, the Company recognized net income and net income attributable to QCR Holdings, Inc. of $11.1 million, or diluted earnings per share of $1.59 after preferred stock dividends of $2.4 million. This was an increase of $1.8 million, or 19%, 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 nine months ended
                                           September 30,        September 30,      September 30,       September 30,
                                                2013                2012                2013               2012

Net income                                 $    3,811,944      $     3,184,510     $   11,122,319     $     9,860,738
Less: Net income attributable to
noncontrolling interests                                -              127,177                  -             494,431
Net income attributable to QCR Holdings,
Inc.                                       $    3,811,944      $     3,057,333     $   11,122,319     $     9,366,307

Less: Preferred stock dividends                   810,837              810,837          2,432,512           2,685,248
Net income attributable to QCR Holdings,
Inc. common stockholders                   $    3,001,107      $     2,246,496     $    8,689,807     $     6,681,059

Diluted earnings per common share          $         0.51      $          0.44     $         1.59     $          1.35

Weighted average common and common
equivalent shares outstanding                   5,915,279            5,080,288          5,482,298           4,938,514

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

                                               For the three months ended                      For the nine months ended
                                   September 30,        June 30,        September 30,      September 30,      September 30,
                                        2013              2013               2012               2013               2012

Net interest income                $   17,310,336     $  15,708,052     $   14,629,518     $   47,209,705     $   43,348,464
Provision for loan/lease losses        (1,366,984 )      (1,520,137 )       (1,496,194 )       (3,944,903 )       (3,325,109 )
Noninterest income                      5,934,653         6,948,756          4,117,182         18,087,438         12,141,569
Noninterest expense                   (17,027,268 )     (15,234,349 )      (13,031,517 )      (46,220,117 )      (38,878,680 )
Federal and state income tax           (1,038,793 )      (1,857,091 )       (1,034,479 )       (4,009,804 )       (3,425,506 )
Net income                         $    3,811,944     $   4,045,231     $    3,184,510     $   11,122,319     $    9,860,738

With the acquisition of Community National and CNB on May 13, 2013, the Company's third quarter results include the first full quarter of CNB's earnings. Specifically, CNB recognized net income of $592 thousand.

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

? Net interest income grew $1.6 million, or 10%, propelled by the addition of CNB for its first full quarter as well as modest organic growth in earning assets.

? Excluding the bargain purchase gain of $1.8 million on the Community National acquisition recognized in the second quarter, noninterest income increased $827 thousand, or 16%, led by wealth management and deposit service fee income.

? The Company incurred $1.8 million more in noninterest expenses as a result of the first full quarter of CNB's existing cost structure.


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 $2.7 million, or 18%, to $18.0 million for the quarter ended September 30, 2013, from $15.3 million for the same period of 2012. The increase in net interest income was primarily driven by the addition of CNB for the first full quarter. Included in CNB's net interest income for the third quarter was $592 thousand of net accretion of the market value adjustments recorded upon acquisition.

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

? The average yield on interest-earning assets decreased 34 basis points.

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

? The net interest spread declined 7 basis points from 2.88% to 2.81%.

? The net interest margin declined 13 basis points from 3.20% to 3.07%.

Net interest income, on a tax equivalent basis, increased $4.3 million, or 10%, to $49.1 million for the first nine months of 2013, from $44.8 million for the same period of 2012. The increase in net interest income was driven primarily by the addition of CNB for the first full quarter. Exclusive of CNB, the Company was still 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 which have slowed.

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

? The average yield on interest-earning assets decreased 38 basis points.

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

? The net interest spread declined 11 basis points from 2.85% to 2.74%.

? The net interest margin declined 15 basis points from 3.18% to 3.03%.

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 September 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        $    24,208     $         9            0.15 %    $     6,199     $         3            0.19 %
Interest-bearing
deposits at financial
institutions                   40,416              73            0.72 %         33,446              76            0.90 %
Investment securities
(1)                           717,195           4,043            2.24 %        619,650           3,930            2.52 %
Restricted investment
securities                     16,279             144            3.51 %         15,419             132            3.41 %
Gross loans/leases
receivable (1) (2) (3)      1,529,771          18,440            4.78 %      1,227,326          16,002            5.19 %

Total interest earning
assets                    $ 2,327,869          22,709            3.87 %    $ 1,902,040          20,143            4.21 %

Noninterest-earning
assets:
Cash and due from banks   $    44,349                                      $    38,376
Premises and equipment         39,067                                           31,401
Less allowance for
estimated losses on
loans/leases                  (21,401 )                                        (18,922 )
Other                          66,283                                           77,314

Total assets              $ 2,456,167                                      $ 2,030,209

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits                  $   759,851             625            0.33 %    $   557,216             625            0.45 %
Time deposits                 452,751             769            0.67 %        357,734             864            0.96 %
Short-term borrowings         144,606              57            0.16 %        164,775              60            0.14 %
Federal Home Loan Bank
advances                      205,613           1,705            3.29 %        201,328           1,810            3.58 %
Junior subordinated
debentures                     40,222             329            3.25 %         36,085             261            2.88 %
Other borrowings              142,697           1,201            3.34 %        138,105           1,238            3.57 %

Total interest-bearing
liabilities               $ 1,745,740           4,686            1.06 %    $ 1,455,243           4,858            1.33 %

Noninterest-bearing
demand deposits           $   525,708                                      $   406,597
Other
noninterest-bearing
liabilities                    38,681                                           29,147
Total liabilities         $ 2,310,129                                      $ 1,890,987

Stockholders' equity          146,038                                          139,222

Total liabilities and
stockholders' equity      $ 2,456,167                                      $ 2,030,209

Net interest income                       $    18,023                                      $    15,285

Net interest spread                                              2.81 %                                           2.88 %

Net interest margin                                              3.07 %                                           3.20 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    133.35 %                                         130.70 %

(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 September 30, 2013



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

2013 vs. 2012
(dollars in thousands)

INTEREST INCOME
Federal funds sold                          $           6     $         (5 )   $         11
Interest-bearing deposits at financial
institutions                                           (3 )            (65 )             62
Investment securities (2)                             113           (2,016 )          2,129
Restricted investment securities                       12                4                8
Gross loans/leases receivable (3) (4)               2,438           (6,957 )          9,395

Total change in interest income             $       2,566     $     (9,039 )   $     11,605

INTEREST EXPENSE
Interest-bearing deposits                   $           -     $       (768 )   $        768
Time deposits                                         (95 )         (1,017 )            922
Short-term borrowings                                  (3 )             22              (25 )
Federal Home Loan Bank advances                      (105 )           (325 )            220
Junior subordinated debentures                         68               36               32
Other borrowings                                      (37 )           (240 )            203

Total change in interest expense            $        (172 )   $     (2,292 )   $      2,120

Total change in net interest income         $       2,738     $     (6,747 )   $      9,485

(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 nine months ended September 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        $    11,656     $        13            0.15 %    $     2,066     $         3            0.19 %
Interest-bearing
deposits at financial
institutions                   37,803             194            0.69 %         51,430             288            0.75 %
Investment securities
(1)                           693,547          11,742            2.26 %        603,756          10,890            2.41 %
Restricted investment
securities                     16,075             399            3.32 %         15,327             378            3.29 %
Gross loans/leases
receivable (1) (2) (3)      1,409,067          50,221            4.77 %      1,212,324          48,307            5.32 %

Total interest earning
assets                      2,168,147          62,569            3.86 %    $ 1,884,903          59,866            4.24 %

Noninterest-earning
assets:
Cash and due from banks   $    42,016                                      $    39,764
Premises and equipment         35,322                                           31,533
Less allowance for
estimated losses on
loans/leases                  (21,272 )                                        (19,005 )
Other                          72,292                                           76,330

Total assets              $ 2,296,505                                      $ 2,013,525

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits                  $   651,896           1,430            0.29 %    $   543,723           2,090            0.51 %
Time deposits                 400,844           2,257            0.75 %        352,606           2,744            1.04 %
Short-term borrowings         171,838             225            0.18 %        174,578             203            0.16 %
Federal Home Loan Bank
advances                      208,319           5,164            3.31 %        204,209           5,503            3.60 %
Junior subordinated
debentures                     39,235             832            2.84 %         36,085             787            2.91 %
Other borrowings              140,333           3,555            3.39 %        136,884           3,720            3.63 %

Total interest-bearing
liabilities               $ 1,612,464          13,463            1.12 %    $ 1,448,085          15,047            1.39 %

Noninterest-bearing
demand deposits           $   505,017                                      $   396,031
Other
noninterest-bearing
liabilities                    34,393                                           27,080
Total liabilities         $ 2,151,874                                      $ 1,871,196

Stockholders' equity          144,631                                          142,329

Total liabilities and
stockholders' equity      $ 2,296,505                                      $ 2,013,525

Net interest income                       $    49,106                                      $    44,819

Net interest spread                                              2.74 %                                           2.85 %

Net interest margin                                              3.03 %                                           3.18 %

Ratio of average
interest-earning assets
to average
interest-bearing
liabilities                    134.46 %                                         130.17 %

(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 nine months ended September 30, 2013



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

2013 vs. 2012
(dollars in thousands)

INTEREST INCOME
Federal funds sold                             $          10     $        (1 )   $        11
Interest-bearing deposits at financial
institutions                                             (94 )           (22 )           (72 )
Investment securities (2)                                852          (1,005 )         1,857
Restricted investment securities                          21               3              18
Gross loans/leases receivable (3) (4)                  1,914          (7,463 )         9,377

Total change in interest income                $       2,703     $    (8,488 )   $    11,191

INTEREST EXPENSE
Interest-bearing deposits                      $        (660 )   $    (1,209 )   $       549
Time deposits                                           (487 )          (996 )           509
Short-term borrowings                                     22              27              (5 )
Federal Home Loan Bank advances                         (339 )          (506 )           167
Junior subordinated debentures                            45             (32 )            77
Other borrowings                                        (165 )          (302 )           137

Total change in interest expense               $      (1,584 )   $    (3,018 )   $     1,434

Total change in net interest income            $       4,287     $    (5,470 )   $     9,757

(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 . . .

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