QCR Holdings, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012, compared with the same periods in 2011. QCR is a bank holding company operating three commercial banks in Iowa and Illinois, alongside leasing and wealth management businesses.
Key financial metrics
| Metric | Q3 2012 / Sep. 30, 2012 | Comparison |
|---|---|---|
| Total assets | $2.024 billion | Up 3% from Dec. 31, 2011 |
| Loans/leases, gross | $1.244 billion | Up $43.5 million from year-end |
| Deposits | $1.343 billion | Up $137.8 million, or 11%, from year-end |
| Total borrowings | $511.6 million | Down from $590.6 million at year-end |
| Stockholders’ equity | $139.1 million | Down from $144.4 million at year-end |
| Net income / attributable to common shareholders | $3.18 million / $2.25 million | Q3 2011: $2.27 million / loss of $25,000 |
| Diluted EPS | $0.44 | Q3 2011: loss of $0.01 |
- Nine-month earnings: Net income was $9.86 million, versus $7.27 million in 2011; common shareholders’ income was $6.68 million versus $2.71 million. Diluted EPS was $1.35 versus $0.56.
- Net interest income and margin: GAAP net interest income was $14.63 million for Q3 and $43.35 million for nine months, up from $13.83 million and $39.99 million, respectively, in 2011. Tax-equivalent net interest margin was 3.16% for Q3 (3.13% prior year) and 3.14% for nine months (3.06%). Management attributed improvement chiefly to lower funding costs.
- Credit costs and fee income: Q3 provision for loan/lease losses was $1.50 million, down from $2.46 million; nine-month provision was $3.33 million, down from $5.20 million. Noninterest income was $4.12 million for Q3 and $12.14 million for nine months, compared with $4.34 million and $13.57 million.
- Cash flow: For the first nine months, operating cash flow was $20.75 million, investing cash flow was negative $77.30 million, and financing cash flow was positive $43.97 million. Cash and due from banks declined $12.57 million to $40.56 million; cash, federal funds sold, and interest-bearing deposits totaled $95.73 million at quarter-end.
- Asset quality: The allowance was $19.42 million, or 1.56% of gross loans/leases. Nonperforming loans/leases were $23.94 million; nonperforming assets were $29.06 million, or 1.44% of assets. Criticized loans declined to $70.6 million from $88.7 million at year-end.
- Liquidity and capital: Management reported all subsidiary banks met “well capitalized” requirements. Company total risk-based capital was 12.98%, Tier 1 risk-based capital 11.52%, and leverage ratio 8.12%. The company reported $301.9 million of subsidiary-bank credit lines available and $14.4 million available on its separate revolving line.
Material changes versus prior periods
- Earnings improved, aided by reduced interest expense and lower loan-loss provision. Common-shareholder comparisons also reflect lower preferred dividends in 2012: the 2011 quarter included a $1.2 million one-time deemed dividend related to the TARP preferred-stock repurchase.
- Loan/lease balances grew 4% from year-end, while deposits grew 11%; management used deposit growth to fund assets and reduce wholesale borrowing. Noninterest-bearing deposits increased 17% to $417.3 million.
- Credit indicators improved: nonperforming assets fell 28% from year-end and 51% from the September 2010 peak. However, Q3 included further write-downs and sale losses on other real estate owned.
- The securities portfolio grew to $591.4 million. Municipal securities rose to $90.0 million from $25.7 million at year-end; portfolio duration increased to 2.7 years from 1.8 years.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management said it would continue pursuing prudent loan growth, fee-income expansion, margin improvement, core-deposit growth, and reduced reliance on higher-cost wholesale funding.
- Management cautioned that interim results are not necessarily indicative of full-year results. Its allowance assessment depends on judgments about borrower conditions, collateral, economic trends, and other factors; deterioration could require additional provisions.
- Interest-rate risk is a key exposure. The latest disclosed sensitivity analysis, as of June 30, 2012 (September 30 analysis was not yet available), estimated first-year net interest income declines of 2.9% under a 200-basis-point rise, 6.8% under a 300-basis-point shock, and 1.3% under a 100-basis-point fall; each was within the board’s 10% limit.
- Q3 noninterest income included a $580,000 pretax gain on sale of a small equity interest and $96,000 of swap fees. Q3 also recorded a $746,000 net loss on other real estate owned, including a $527,000 write-down of existing property. For nine months, OREO losses were $1.32 million.
- In August, QCBT acquired the remaining 20% of m2 Lease Funds. It paid $1.65 million initially and recorded a $2.85 million liability for the discounted book-value portion of a further payment due in 2015; an earnings-based component will be recorded over time. The premium reduced additional paid-in capital.
- In June, the company redeemed $10.22 million of Series F preferred stock. The remaining Series F dividend rate was 5%; management reported qualified small-business lending remained 15% below its SBLF baseline.
- Management stated the subsidiary banks met regulatory capital requirements. Proposed Basel III rules could change capital requirements; the final rules and their effects were not yet clear. No material change to previously disclosed risk factors or material pending legal proceedings was reported.
Important facts for investors to verify
- Whether lower provision expense and improving credit measures persist, particularly given commercial real estate exposure and continued OREO valuation losses.
- How deposit growth, loan growth, wholesale funding maturities and putable borrowing terms affect funding costs and liquidity.
- Whether net interest margin can hold up amid low rates, a longer-duration securities portfolio and changing interest rates; note the latest sensitivity data predates quarter-end.
- The recurring nature of earnings, separating core performance from the $580,000 equity-sale gain, OREO losses, and the prior-year preferred-stock deemed dividend.
- The future cost and capital implications of the m2 Lease Funds payment, preferred stock and SBLF lending requirements, and any finalized Basel III rules.