QCRH

QCR Holdings Inc. 10-Q Summary: Period Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the six-month period ended June 30, 2004, for QCR Holdings, Inc. The Company is a bank holding company operating two Iowa-chartered commercial banks (Quad City Bank & Trust and Cedar Rapids Bank & Trust) and a credit card processing subsidiary (Quad City Bancard, Inc.). The reporting period includes a 3-for-2 common stock split retroactively adjusted to January 1, 2003, and the announcement of a planned expansion into Rockford, Illinois.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Mix Shift: Net interest income increased by 18% ($1.8 million) due to loan growth, while noninterest income declined 17% ($999 thousand). The decline in noninterest income was primarily driven by a 69% drop in gains on sales of loans ($1.5 million decrease) due to reduced mortgage refinancing activity.
• Expense Increase: Noninterest expenses rose 13% year-over-year. This was largely driven by a one-time $747,490 loss on the redemption of junior subordinated debentures (write-off of unamortized issuance costs) and increased occupancy/equipment expenses related to facility expansions.
• Asset Growth: Total assets grew 14% to $811.5 million, fueled by a 13% increase in the loan portfolio and a significant increase in bank-owned life insurance ($12.3 million increase).
• Liquidity and Funding: Short-term borrowings increased 146% to $126.9 million, and Federal Home Loan Bank advances increased 27% to $96.6 million to fund asset growth as deposits remained relatively flat.

Guidance, Outlook, and Risks

• Management Commentary: Management notes that excluding the one-time $747 thousand write-off and additional interest costs from the capital restructuring, net income would have been $3.2 million ($0.74 diluted EPS). The Company anticipates gains on sales of loans will remain depressed compared to 2003 levels.
• Expansion Plans: The Company announced plans to establish a third de novo bank charter in Rockford, Illinois, incurring $50,000 in start-up costs during the period. Significant capital expenditures are ongoing for new facilities in Davenport and Cedar Rapids.
• Capital Restructuring: The Company redeemed $12.0 million of 9.2% trust preferred securities issued in 1999 and issued $20.6 million in new trust preferred securities to optimize capital structure.
• Risks and Contingencies:
  • Credit Quality: Nonperforming assets increased to $6.7 million (from $5.0 million), driven by a $1.5 million increase in nonaccrual loans. Management maintains the allowance for loan losses at 1.65% of gross loans.
  • Interest Rate Risk: A 200 basis point increase in rates is projected to decrease net interest income by 1.15%, while a 100 basis point decrease is projected to decrease income by 1.23%.
  • Regulatory: Proposed Federal Reserve rules may limit the inclusion of trust preferred securities in Tier 1 capital to 25% of core capital elements.

Investor Verification Checklist

• Non-GAAP Adjustments: Verify the impact of the $747,490 one-time write-off on the redemption of trust preferred securities on reported earnings.
• Loan Sales Volatility: Assess the sustainability of revenue given the 69% year-over-year decline in gains on sales of loans due to the mortgage refinancing slowdown.
• Asset Quality Trends: Monitor the increase in nonaccrual loans ($5.7 million) and the concentration of nonperforming assets within the Quad City Bank & Trust portfolio.
• Capital Structure: Review the terms and regulatory treatment of the new $20.6 million trust preferred securities issued in February 2004.
• Expansion Costs: Track capital expenditures related to the new Rockford charter and facility expansions in Davenport and Cedar Rapids against projected returns.