QCR Holdings, Inc. — Q2 2012 Form 10-Q
Business context and period: Unaudited consolidated results for the three and six months ended June 30, 2012. QCR operates three community banks in Iowa and Illinois, alongside leasing, wealth-management and other businesses.
Financial performance and position
- Q2 earnings: Net income was $3.27 million versus $2.77 million a year earlier. Net income attributable to QCR was $3.07 million; after preferred dividends, common-stockholder income was $2.14 million, or $0.44 per diluted share, compared with $1.64 million and $0.34 per diluted share.
- First-half earnings: Net income was $6.68 million versus $5.00 million; common-stockholder income was $4.43 million versus $2.73 million. Diluted EPS was $0.91 versus $0.57.
- Interest income and margins: Q2 interest and dividend income was $19.53 million, down from $19.86 million; net interest income was $14.52 million, up from $13.95 million as interest expense fell 15%. On a tax-equivalent basis, Q2 net interest margin declined to 3.16% from 3.21%. First-half net interest income was $28.72 million versus $26.16 million; tax-equivalent margin improved to 3.13% from 2.99%.
- Other income and expenses: Q2 noninterest income was $4.07 million versus $4.17 million; noninterest expense rose 4% to $13.11 million, including a 12% increase in salaries and benefits. First-half noninterest income declined 13% to $8.02 million, in part reflecting lower securities gains and higher losses on sales of other real estate owned.
- Credit costs: Provision for loan and lease losses was $1.05 million in Q2 and $1.83 million for the first half, down from $1.67 million and $2.74 million, respectively, in 2011. The allowance was $18.72 million, or 1.54% of gross loans and leases. Nonperforming assets were $36.46 million, 1.78% of assets; nonperforming loans and leases were 2.25% of loans and leases.
- Cash flow: First-half operating cash flow was $4.59 million versus $24.68 million in 2011; investing activities used $76.74 million and financing activities provided $70.65 million. Cash and due from banks declined $1.50 million to $51.64 million.
- Balance sheet and funding: Total assets were $2.04 billion, up $76.8 million from year-end. Net loans and leases were $1.19 billion; securities were $638.84 million. Deposits rose $110.0 million to $1.32 billion. Total borrowings were approximately $563.47 million, down from $590.60 million; stockholders’ equity was $139.32 million, down from $144.43 million.
- Capital and liquidity: The subsidiary banks met regulatory “well capitalized” requirements. At June 30, the company reported a 13.14% total risk-based capital ratio and an 8.20% Tier 1 leverage ratio. Management reported $258.2 million available under subsidiary-bank credit lines and $14.4 million available on the parent’s revolving line.
Material changes and notable items
- Deposit growth and lower funding costs supported net interest income; management said loan and securities growth was offset in part by declining yields. Q2 tax-equivalent net interest margin nevertheless narrowed year over year.
- Loan and lease balances increased 1% from year-end, with growth in residential real estate and direct financing leases. Commercial real estate was 48% of the loan and lease portfolio; management reported a favorable shift toward owner-occupied loans.
- Nonperforming assets declined 10% from year-end, and criticized and classified commercial loans also declined. However, accruing troubled debt restructurings were $9.90 million, and total troubled debt restructurings were $16.02 million.
- On June 29, QCR redeemed $10.223 million of Series F preferred stock issued to the U.S. Treasury under the Small Business Lending Fund, plus unpaid dividends. Management said the redemption would reduce annual preferred dividends by about $511,000, assuming a 5% dividend rate. The Series F rate remained 5%; reported qualifying small-business lending was $93.0 million, or 21%, below its program baseline.
- Q2 included a $62,400 impairment loss on one privately held equity security. Losses on sales of other real estate owned were $389,465 in Q2 and $578,669 for the first half; management attributed much of the Q2 write-downs to two properties.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management emphasized improving net interest margins, prudent loan growth, growing fee-based wealth-management services, and reducing reliance on higher-cost wholesale funding. It cautioned that interim results are not necessarily indicative of full-year results.
- Key risks include credit deterioration, particularly in commercial real estate; uncertainty in collateral values and the adequacy of the loan-loss allowance; low interest rates and changes in interest rates or the yield curve; and market volatility affecting trust and investment-management fees and securities values.
- Management said interest-rate simulation results available at March 31, 2012 showed modeled year-one net interest income declines of 1.6% for a 100-basis-point decrease, 4.1% for a 200-basis-point increase, and 6.8% for a 300-basis-point upward shock—all within the company’s 10% policy limit. June 30 results were not yet available.
- Management was assessing proposed Basel III capital rules; timing and final requirements were uncertain. The filing reported no material changes to previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Important facts for investors to verify
- Whether credit quality and nonperforming assets continued to improve, especially in non-owner-occupied commercial real estate, and whether the allowance remains adequate.
- Whether deposit growth and lower funding costs can offset loan-yield pressure and sustain net interest margin.
- The performance and interest-rate and credit risks of the expanded securities portfolio, including municipal securities, which grew to $81.1 million from $25.7 million at year-end.
- The impact of the Treasury preferred-stock redemption, remaining preferred dividends, and the SBLF qualifying-lending measure on future capital costs.
- Whether liquidity and capital remain sufficient as the company manages wholesale funding, asset growth, and any final Basel III requirements.