QCRH

QCR Holdings Inc. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for QCR Holdings, Inc., a Delaware corporation and parent company of three state-chartered commercial banks (Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Rockford Bank & Trust) and a credit card processing subsidiary. The report covers the three and nine months ended September 30, 2009. The company is classified as a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income attributable to common stockholders turned to a loss of $1.96 million for the nine months ended September 30, 2009, compared to a profit of $5.43 million in the same period of 2008. This was primarily driven by a significant increase in the provision for loan losses and FDIC assessments.
• Provision for Loan Losses: The provision increased to $12.8 million for the nine months of 2009, up from $4.5 million in 2008. The allowance for loan losses rose to 1.82% of gross loans, up from 1.47% at year-end 2008.
• Non-Interest Expense Surge: FDIC and other insurance expenses jumped 265% for the quarter and 242% for the nine months, driven by a one-time special assessment and new premium pricing methodologies. Loan/lease expenses also increased significantly due to higher carrying costs for nonperforming assets.
• Net Interest Income Growth: Despite lower yields, net interest income increased 18% for the quarter and 15% for the nine months, aided by a $1.3 million one-time recognition of deferred interest income and growth in earning assets.
• Capital Injection: Stockholders' equity increased by $36.0 million year-over-year, largely due to the issuance of Series D Preferred Stock and a warrant to the U.S. Treasury under the Capital Purchase Program (TCPP), raising approximately $38.1 million.

Guidance, Outlook, and Risks

• Asset Quality: Nonperforming assets totaled $31.9 million (1.82% of total assets) as of September 30, 2009, a decrease from $35.3 million in June 2009 but elevated compared to historical levels. Management continues to increase qualitative reserve factors due to economic uncertainty.
• FDIC Risk: The company faces ongoing risk of increased FDIC premiums due to the depletion of the Deposit Insurance Fund and potential future special assessments.
• TCPP Restrictions: Participation in the TCPP subjects the company to restrictions on executive compensation and dividend payments, which may impact employee retention and shareholder returns.
• Interest Rate Risk: Management monitors interest rate risk via simulation models. A 200 basis point increase in rates was projected to decrease net interest income by 2.80%.
• Discontinued Operations: The company sold its merchant credit card acquiring business and First Wisconsin Bank & Trust in 2008; these are reported as discontinued operations with no 2009 activity.

Investor Verification Checklist

• Loan Loss Adequacy: Verify the sufficiency of the $22.6 million allowance for loan losses given the 1.82% coverage ratio and the $7.9 million in net charge-offs for the nine-month period.
• TCPP Impact: Review the specific terms of the Series D Preferred Stock, including the 5% (rising to 9%) dividend rate and the accretion of the $2.4 million discount, which reduces net income available to common shareholders.
• FDIC Assessment Exposure: Confirm the impact of the one-time special assessment and the proposed prepayment of future assessments on future liquidity and earnings.
• Nonperforming Assets: Monitor the composition of the $31.9 million in nonperforming assets, specifically the concentration of commercial loans on nonaccrual status.
• Capital Ratios: Verify that the subsidiary banks remain "well-capitalized" under regulatory frameworks despite the economic downturn.