QCRH

QCR Holdings Inc. 10-K Summary (Fiscal Year Ended Dec 31, 2006)

Business Context and Reporting Period

Company: QCR Holdings, Inc.
Reporting Period: Fiscal year ended December 31, 2006.
Business Overview: A multi-bank holding company headquartered in Moline, Illinois, operating four wholly-owned banking subsidiaries (Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, and First Wisconsin Bank & Trust) across Iowa, Illinois, and Wisconsin. The company also operates a credit card processing subsidiary (Bancard), a direct financing lease subsidiary (M2 Lease Funds), and holds a majority interest in a real estate holding company (Velie Plantation Holding Company).

Key Financial Metrics

Material Changes vs. Prior Period

• Decline in Net Income: Net income dropped 42% to $2.8 million despite a 37% increase in total revenue. The decline was driven by a 274% increase in the provision for loan/lease losses ($3.3 million vs. $0.9 million) and a 17.8% increase in noninterest expenses ($34.7 million vs. $29.4 million).
• Loan Loss Provision: The significant increase in the provision was primarily due to a $992,000 write-off of a single commercial credit relationship in the Milwaukee portfolio during the fourth quarter.
• Expense Growth: Noninterest expenses rose by $5.2 million, largely due to a $4.8 million increase in salaries and employee benefits (driven by a 15% increase in employee count) and $2.0 million in start-up costs for the new Milwaukee banking operation.
• Asset Quality: Nonaccrual loans increased 154% to $6.5 million, and nonperforming assets rose to 0.58% of total assets. The allowance for loan losses as a percentage of total loans decreased slightly to 1.10% from 1.17%.
• Net Interest Margin Compression: The net interest margin declined 38 basis points to 2.87% as the cost of interest-bearing liabilities rose 125 basis points to 4.04%, outpacing the 80 basis point increase in asset yields.

Guidance, Outlook, and Risks

• Capital Actions: In Q4 2006, the company issued $12.9 million of Series B Non-Cumulative Perpetual Preferred Stock. In Q1 2007, it initiated a private placement offering of up to $3.0 million of common stock to support the new Wisconsin charter.
• Expansion: The company completed the acquisition of a Wisconsin-chartered bank (First Wisconsin Bank & Trust) in February 2007. Management anticipates continued start-up losses associated with new facilities and the Milwaukee operation in the near term.
• Risk Factors:
  • Geographic Concentration: Heavy reliance on the economic conditions of the Quad City, Cedar Rapids, Rockford, and Milwaukee markets.
  • Interest Rate Risk: Sensitivity analysis indicates a 200 basis point increase in rates could decrease net interest income by 3.64%.
  • Credit Risk: Significant concentration in commercial loans (approx. 47% of portfolio) and commercial real estate (approx. 36%).
  • Competition: Intense competition from larger regional banks and non-bank financial institutions.

Key Facts for Investor Verification

• Single Credit Impact: Verify the status and resolution of the specific Milwaukee commercial credit relationship that resulted in a $992,000 charge-off and significantly impacted Q4 2006 earnings.
• Start-up Costs: Monitor the timeline for profitability of the new Milwaukee branch and the newly acquired First Wisconsin Bank & Trust, as start-up costs are currently suppressing earnings.
• Expense Management: Assess whether the 29% year-over-year increase in salaries and benefits is sustainable or if it reflects a permanent step-up in the cost structure.
• Asset Quality Trends: Track the ratio of nonperforming assets to total assets, which doubled from 0.36% to 0.58%, to ensure the allowance for loan losses remains adequate.
• Dividend Policy: Note that the company declared a $0.04 per share common dividend in Q4 2006, but the issuance of preferred stock and junior subordinated debentures creates priority claims on cash flow that could restrict future common dividends.