QCRH

QCR Holdings Inc. 10-Q Summary: Period Ended June 30, 2007

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for QCR Holdings, Inc., a Delaware corporation and parent company of four subsidiary banks (Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, and First Wisconsin Bank & Trust) and a credit card processing subsidiary (Bancard). The report covers the three and six-month periods ended June 30, 2007. The company operates primarily in the Midwest, offering commercial and consumer banking, trust services, and leasing.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 24% year-over-year for the quarter and 28% for the six-month period, driven primarily by a 30% increase in interest income due to higher loan volumes and improved yields.
• Profitability: Net income rose 9% for the quarter and 26% for the six-month period compared to 2006. However, net income available to common stockholders decreased for the quarter ($1.04M vs $1.20M) due to the initiation of preferred stock dividends ($268k).
• Expense Increases: Noninterest expenses increased 10% for the quarter and 11% for the six-month period. This was largely due to a 13% rise in salaries and benefits (driven by expansion into new markets) and a 26% increase in professional fees.
• Asset Quality: The provision for loan losses increased significantly ($473k for the quarter) due to specific reserves established for six commercial loan relationships experiencing quality issues. Nonaccrual loans increased slightly to $6.7 million.
• Balance Sheet: Total assets grew 5% since year-end 2006. Loans receivable increased by $55 million, funded by increased borrowings (FHLB advances and short-term borrowings) as deposits declined by $17.7 million.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued growth but notes that results for the interim period are not necessarily indicative of full-year results. The company intends to pay common dividends semi-annually and preferred dividends quarterly.
• Market Risk: The company is exposed to interest rate risk. A simulation model indicated a 3.30% decrease in net interest income if rates rise 200 basis points, and a 1.60% increase if rates fall 200 basis points.
• Contingencies: The company has $552.6 million in commitments to extend credit and $20.7 million in standby letters of credit. There are no material pending legal proceedings.
• Subsequent Event: On July 11, 2007, the company sold its 20% interest in Nobel Electronic Transfer, LLC, for $500,000 cash and a 2.25% ownership interest in the buyer (TriSource Solutions, LLC).

Investor Verification Checklist

• Loan Quality Concentration: Verify the status of the six commercial loan relationships that triggered the increased provision for loan losses, as they represent a specific risk concentration.
• Funding Mix: Confirm the sustainability of the funding strategy, as the company has shifted from deposit growth to increased reliance on wholesale borrowings (FHLB advances and short-term borrowings) to fund loan growth.
• Preferred Stock Impact: Assess the long-term impact of the new preferred stock dividends ($268k per quarter) on earnings available to common shareholders.
• Noninterest Expense Control: Monitor the trajectory of salaries and professional fees, which are rising faster than revenue, to ensure margin expansion is maintained.
• Subsequent Event Realization: Track the realization of income from the sale of the Nobel interest in the third quarter of 2007.