QCR Holdings, Inc. — Q2 2011 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter and six months ended June 30, 2011. QCR Holdings is a bank holding company with three commercial bank subsidiaries, plus leasing, wealth-management and real-estate operations.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $24.0 million | $23.9 million | $35.4 million | $31.7 million |
| Net interest income | $14.0 million | $12.5 million | $26.2 million | $25.4 million |
| Net income | $2.8 million | $1.8 million | $5.0 million | $3.0 million |
| Net income attributable to common stockholders | $1.6 million | $0.7 million | $2.7 million | $1.0 million |
| Diluted EPS | $0.34 | $0.15 | $0.57 | $0.21 |
- Q2 tax-equivalent net interest margin was 3.21%, up from 2.90%; net interest spread improved to 2.90% from 2.60%. First-half margin was 2.99%, versus 2.98%.
- Q2 provision for loan and lease losses was $1.7 million, compared with $1.4 million; first-half provision was $2.7 million, down from $3.0 million. Q2 noninterest expense rose 2.8% year over year to $12.6 million.
- First-half operating cash flow was $24.7 million, versus $9.4 million in 2010. Investing activities used $56.7 million and financing activities provided $35.1 million. Cash and due from banks ended at $45.1 million.
- At June 30, total assets were $1.88 billion, loans net of allowance were $1.16 billion, deposits were $1.21 billion, and stockholders’ equity was $137.3 million.
- Cash, federal funds sold and interest-bearing deposits totaled $80.4 million. Deposits increased $99.5 million, or 9%, from year-end; total borrowings declined about $61.9 million, or 12%, to approximately $504.1 million, including junior subordinated debentures.
- All subsidiary banks were reported as well capitalized. The holding company’s total risk-based capital ratio was 13.87% and Tier 1 leverage ratio was 8.80%.
Material changes and management commentary
- Common-stockholder earnings improved substantially year over year. Lower funding costs drove the increase in net interest income: Q2 interest expense fell 24%, while interest income declined 2%. Management cited growth in low-cost noninterest-bearing deposits and reduced reliance on wholesale funding.
- Noninterest income increased 18% in Q2 and 45% for the first half. Drivers included trust and advisory fees, loan-sale gains, and first-half securities gains of $1.0 million. These gains include $880,000 from a Q1 securities sale associated with the funding restructuring and $149,000 from Q2 sales.
- Gross loans grew $11.3 million, or 1%, from year-end; Q2 marked the first quarter-over-quarter loan growth since Q4 2009. Securities grew $89.0 million, or 21%, as management invested excess liquidity amid weak loan demand.
- Nonperforming assets fell to $37.9 million from $50.1 million at year-end; nonperforming loans/leases were 2.30% of total loans, versus 3.51%. The allowance was $19.8 million, or 1.67% of gross loans, and equaled 73% of nonperforming loans/leases.
- QCR prepaid $15.0 million of higher-cost FHLB advances, incurring an $832,000 fee, and modified $20.4 million of advances at lower rates. Management said the restructuring reduced funding costs and wholesale-funding reliance and supported margin and capital objectives.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management identifies margin improvement as an ongoing challenge and notes that weak loan demand and historically low rates have weighed on interest income.
- Credit quality remains a key risk: management warns that weaker economic conditions or borrower cash flows could increase problem assets, losses and future loan-loss provisions. Commercial real estate is the largest loan category; non-owner-occupied commercial property and real-estate-related exposures merit monitoring.
- Interest-rate risk is material. The latest disclosed sensitivity analysis, as of March 31, 2011, estimated first-year net interest income declines of 1.8% for a 100-basis-point rate decrease, 3.6% for a 200-basis-point increase, and 4.1% for a 300-basis-point increase. June 30 sensitivity results were not yet available.
- Unusual items included the $832,000 FHLB prepayment fee, offset in part by the $880,000 securities gain, and a $119,000 impairment charge on two privately held equity securities. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
- Management said disclosure controls were effective and reported no significant changes in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth continues and whether credit quality improvements persist, especially in commercial real estate and troubled debt restructurings.
- How much earnings depend on securities and loan-sale gains versus recurring net interest and fee income.
- Whether the improved margin is sustainable as asset yields, deposit costs and interest rates change.
- Liquidity and funding composition, including FHLB advances, wholesale repurchase agreements, preferred dividends and the company’s ability to maintain capital buffers.
- Updated interest-rate sensitivity and the effect of securities portfolio maturities, calls and prepayments.