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QCRH > SEC Filings for QCRH > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for QCR HOLDINGS INC

Form 10-Q for QCR HOLDINGS INC


7-May-2014

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, 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. On October 26, 2013, Community National Bank ("CNB"), which was acquired by the Company on May 13, 2013, merged with and into CRBT. CNB's merged branch offices operate as a division of CRBT under the name "Community Bank & Trust," and serve Cedar Falls and Waterloo, Iowa and adjacent communities through its three offices (two in Waterloo and one in Cedar Falls).

? 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.

OVERVIEW

The Company recognized net income of $3.9 million for the quarter ended March 31, 2014. After preferred stock dividends of $708 thousand, the Company reported net income attributable to common stockholders of $3.2 million, or diluted earnings per common share of $0.40. By comparison, for the first quarter of 2013, the Company recognized net income of $3.3 million. 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.

Although earnings increased nearly 30% in the first quarter of 2014 compared to the first quarter of 2013, diluted earnings per common share decreased by $0.09, or 18%, due to the issuance of new common stock related to the CNB acquisition in the second quarter of 2013 (834,715 shares issued), as well as the conversion of Series E Preferred Stock to common stock that was executed in the fourth quarter of 2013 (2,057,502 shares issued). These two events increased weighted average common shares outstanding approximately 57%, resulting in the lower diluted earnings per share.


Part I

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

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

                                                             For the three months ended
                                                                    December 31,
                                                March 31, 2014          2013          March 31, 2013

Net income                                     $      3,889,215     $  3,815,926     $      3,265,144
Less: Preferred stock dividends                         708,008          735,790              810,837
Net income attributable to QCR Holdings,
Inc. common stockholders                       $      3,181,207     $  3,080,136     $      2,454,307

Diluted earnings per common share              $           0.40     $       0.50     $           0.49

Weighted average common and common
equivalent shares outstanding                         8,030,043        6,140,809            5,034,342

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

                                                                For the three months ended
                                                March 31, 2014       December 31, 2013       March 31, 2013

Net interest income                            $     16,849,241     $        16,895,732     $     14,191,317
Provision for loan/lease losses                      (1,094,162 )            (1,985,517 )         (1,057,782 )
Noninterest income                                    4,746,841               7,726,390            5,204,029
Noninterest expense                                 (16,140,420 )           (18,212,541 )        (13,958,500 )
Federal and state income tax                           (472,285 )              (608,138 )         (1,113,920 )
Net income                                     $      3,889,215     $         3,815,926     $      3,265,144

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

? Provision for loan/lease losses decreased 45% due to continued credit improvement.

? Noninterest income decreased $3.0 million compared to the fourth quarter of 2013. The fourth quarter of 2013, however, included $2.3 million of gains from the sale of CNB branches, as well as $576 thousand of gains recognized on the sale of nonperforming loans. Excluding these nonrecurring items, noninterest income remained relatively flat.

? Noninterest expense decreased 11%. CNB acquisition costs are no longer being incurred ($1.2 million of acquisition costs were incurred in the fourth quarter of 2013) and the Company has now realized the full impact of the reduced cost structure created by the acquisition.


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 $2.9 million, or 20%, to $17.7 million for the quarter ended March 31, 2014, from $14.7 million for the same period of 2013. The increase in net interest income was primarily driven by the acquisition of CNB in May 2013. The Company has also improved net interest income as the result of:

? Organic loan/lease growth,

? Further diversification of the Company's securities portfolio with increased investment in tax-exempt municipal securities,

? Continued reductions in the cost of deposits, and

? Continued growth in noninterest bearing deposits.

A comparison of yields, spread and margin from the first quarter of 2014 to the first quarter of 2013 is as follows (on a tax equivalent basis):

? The average yield on interest-earning assets decreased 5 basis points. ? The average cost of interest-bearing liabilities decreased 20 basis points. ? The net interest spread increased 15 basis points from 2.68% to 2.83%. ? The net interest margin improved 9 basis points from 3.02% to 3.11%.

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 while balancing interest rate risk. 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 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. Also, the Company's management has focused on reducing the cost of portions of the Company's existing wholesale funding. 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.


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,
                                        2014                                             2013
                                       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    $    10,995     $        3           0.11 %      $     2,349     $        1           0.17 %
Interest-bearing
deposits at
financial
institutions               88,376             91           0.42 %           37,834             60           0.64 %
Investment
securities (1)            722,220          4,655           2.61 %          648,638          3,656           2.29 %
Restricted
investment
securities                 17,249            129           3.03 %           15,415            125           3.29 %
Gross loans/leases
receivable (1) (2)
(3)                     1,465,061         16,968           4.70 %        1,279,040         15,251           4.84 %
Total interest
earning assets        $ 2,303,901         21,846           3.85 %      $ 1,983,276         19,093           3.90 %

Noninterest-earning
assets:
Cash and due from
banks                 $    43,830                                      $    39,908
Premises and
equipment                  36,732                                           31,202
Less allowance for
estimated losses on
loans/leases              (21,894 )                                        (20,224 )
Other                      71,589                                           75,850
Total assets          $ 2,434,158                                      $ 2,110,012

LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits              $   715,054            446           0.25 %      $   562,905            409           0.29 %
Time deposits             382,721            656           0.70 %          333,696            708           0.86 %
Short-term
borrowings                149,989             52           0.14 %          175,706             64           0.15 %
Federal Home Loan
Bank advances             234,627          1,556           2.69 %          202,618          1,733           3.47 %
Junior subordinated
debentures                 40,306            305           3.07 %           36,085            241           2.71 %
Other borrowings          142,317          1,171           3.34 %          138,210          1,191           3.49 %
Total
interest-bearing
liabilities           $ 1,665,014          4,186           1.02 %      $ 1,449,220          4,346           1.22 %
Noninterest-bearing
demand deposits       $   585,441                                      $   487,264
Other
noninterest-bearing
liabilities                33,640                                           32,345
Total liabilities     $ 2,284,095                                      $ 1,968,829
Stockholders'
equity                    150,063                                          141,183
Total liabilities
and stockholders'
equity                $ 2,434,158                                      $ 2,110,012
Net interest income                   $   17,660                                       $   14,747
Net interest spread                                        2.83 %                                           2.68 %
Net interest margin                                        3.11 %                                           3.02 %
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities                138.37 %                                         136.85 %

(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 March 31, 2014



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

2014 vs. 2013
(dollars in thousands)

INTEREST INCOME
Federal funds sold                             $           2     $        (2 )   $         4
Interest-bearing deposits at financial
institutions                                              31            (128 )           159
Investment securities (2)                                999             558             441
Restricted investment securities                           4             (46 )            50
Gross loans/leases receivable (2) (3) (4)              1,717          (2,681 )         4,398

Total change in interest income                $       2,753     $    (2,299 )   $     5,052

INTEREST EXPENSE
Interest-bearing deposits                      $          37     $      (296 )   $       333
Time deposits                                            (52 )          (508 )           456
Short-term borrowings                                    (12 )            (3 )            (9 )
Federal Home Loan Bank advances                         (177 )        (1,408 )         1,231
Junior subordinated debentures                            64              34              30
Other borrowings                                         (20 )          (185 )           165

Total change in interest expense               $        (160 )   $    (2,366 )   $     2,206

Total change in net interest income            $       2,913     $        67     $     2,846

(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 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 ("allowance"). The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance 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/leases losses ("provision") in the statement of income to change the allowance 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. Although management believes the level of the allowance as of March 31, 2014 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 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 grew $2.5 million, or 13%, comparing the first quarter of 2014 to the same period of 2013. The majority of this growth was the result of the acquisition of CNB and the addition of its earning assets. Additionally, the Company's loan/lease yield expanded 5 basis points during the first quarter of 2014 (from 4.65% to 4.70%) marking the first quarter of expansion since the recession. The securities portfolio yield continued to increase (from 2.29% for the first quarter of 2013 to 2.61% for the first quarter of 2014) as the Company continues to focus on diversifying its securities portfolio, including increasing its portfolio of agency-sponsored mortgage-backed securities as well as municipal securities, in an effort to increase interest income. 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 2014 declined $160 thousand, or 4%, from the first quarter of 2013. Considering the growth of interest-bearing liabilities (average balances grew $215.8 million, or 15%, from the first quarter of 2013 to the same quarter of 2014) from the acquisition of CNB as well as organic growth at the Company's legacy charters, the Company has been successful in maintaining pricing discipline on deposits and decreasing the cost of borrowings, which has more than offset the growth impact and contributed to the net decline in interest expense. Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have been replaced by core deposits, or, to a lesser extent, have been replaced by new wholesale funds at significantly reduced cost. Continuing this trend will strengthen the Company's franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

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. An important consideration to these strategies is the impact on the Company's interest rate risk position, as some of its wholesale funding was originally borrowed to help strengthen the Company's net interest income in rising interest rate scenarios.


Part I

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

PROVISION FOR LOAN/LEASE LOSSES

The provision 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.

Provision totaled $1.1 million for the first quarter of 2014, which was down $892 thousand from the prior quarter, and essentially flat from the first quarter of 2013. The Company had net recoveries of $111 thousand for the first quarter of 2014 which, when coupled with the provision of $1.1 million, increased the Company's allowance to $22.7 million at March 31, 2014. As of March 31, 2014, the Company's allowance to total loans/leases was 1.52%, which was up from 1.47% at December 31, 2013, and down from 1.61% at March 31, 2013.

A more detailed discussion of the Company's allowance can be found in the "Financial Condition" section of this report.

NONINTEREST INCOME



The following tables set forth the various categories of noninterest income for
the three months ended March 31, 2014 and 2013.



                                                    Three Months Ended
                                            March 31, 2014       March 31, 2013       $ Change       % Change

Trust department fees                      $      1,500,342     $      1,039,670     $  460,672           44.3 %
Investment advisory and management fees             648,992              609,341         39,651            6.5
Deposit service fees                              1,045,885              907,823        138,062           15.2
Gains on sales of residential real
estate loans                                         63,487              291,151       (227,664 )        (78.2 )
Gains on sales of government guaranteed
portions of loans                                   194,019              845,224       (651,205 )        (77.0 )
Earnings on bank-owned life insurance               454,164              438,687         15,477            3.5
Subtotal                                   $      3,906,889     $      4,131,896     $ (225,007 )         (5.4 )
Losses on other real estate owned, net              (18,048 )           (446,630 )      428,582          (96.0 )
Securities gains                                     20,625                    -         20,625          100.0
Other                                               837,375            1,518,763       (681,388 )        (44.9 )
Total noninterest income                   $      4,746,841     $      5,204,029     $ (457,188 )         (8.8 )%

Trust department fees continue to be a significant contributor to noninterest income. Trust department fees grew 44% from the first quarter of 2013 to the first quarter of 2014. Part of the increase stems from the addition of CNB's trust department which recognized $269 thousand of trust department fees for the first quarter of 2014. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As markets have strengthened with the national economy's continued recovery from recession, the Company's fee income has experienced similar growth. Additionally, the Company has been successful in organically expanding its customer base at its legacy charters, which has helped to drive the recent increases in fee income.


Part I

Item 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

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 . . .

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