QCRH

QCR Holdings Inc. 10-Q Summary: Period Ended June 30, 2008

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for QCR Holdings, Inc., a bank holding company operating four subsidiary banks (Quad City, Cedar Rapids, Rockford, and First Wisconsin) and a credit card processing subsidiary (Quad City Bancard). The report covers the three and six months ended June 30, 2008. The company is an accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth (QTD): Net income increased 35% to $1.77 million in Q2 2008 compared to $1.31 million in Q2 2007. Diluted EPS rose from $0.23 to $0.29.
• Earnings Decline (YTD): Net income decreased 4% to $2.46 million for the six months ended June 30, 2008, compared to $2.57 million in the prior year. Diluted EPS fell from $0.45 to $0.34, largely due to increased preferred stock dividends ($892k vs $536k).
• Net Interest Income: Increased 34% QTD and 31% YTD, driven by a 17% growth in average earning assets and a significant decrease in the cost of interest-bearing liabilities (down 121 bps QTD).
• Provision for Loan Losses: Increased significantly to $3.85 million YTD (up 213% from prior year). This was primarily driven by a $1.1 million charge-off on a single commercial loan at First Wisconsin Bank & Trust in Q1 2008 and increased qualitative reserve factors due to economic uncertainty and flooding in the Cedar Rapids market.
• Non-Interest Income: Increased 11.6% QTD and 15.6% YTD, boosted by credit card fees, deposit service fees (NSF charges), and investment advisory fees following the acquisition of CMG Investment Advisors.
• Non-Interest Expenses: Increased 21.4% QTD and YTD, primarily due to higher salaries (employee growth from 334 to 374 FTEs) and increased FDIC insurance premiums.

Outlook, Risks, and Management Commentary

• Asset Quality: Nonperforming assets rose to $11.9 million (0.74% of loans) from $7.5 million at year-end 2007. Management increased the allowance for loan losses to 1.18% of gross loans to address economic uncertainty and specific local risks (flooding).
• Liquidity: The company maintains strong liquidity with $47.7 million in cash and $150.5 million in available lines of credit. Net cash provided by financing activities was $111.1 million YTD, funded by deposit growth and borrowings.
• Capital: Stockholders' equity increased slightly to $86.6 million. The subsidiary banks are categorized as "well capitalized" by the FDIC.
• Market Risk: Interest rate risk is the primary market risk. A 200 basis point increase in rates is projected to decrease net interest income by 4.05% over a one-year horizon.
• Dividends: The company declared a common dividend of $0.04 per share in Q2. Management intends to continue semi-annual dividends while retaining earnings for growth.

Investor Verification Checklist

• Single Loan Charge-off: Verify the details and remaining exposure related to the $1.1 million charge-off at First Wisconsin Bank & Trust.
• Flooding Impact: Assess the long-term credit impact of the Cedar Rapids flooding on the local loan portfolio beyond the current qualitative reserve adjustments.
• Preferred Stock Obligations: Confirm the impact of the increased preferred stock dividend payments ($892k YTD) on future earnings available to common shareholders.
• Expense Growth: Monitor if the 21% increase in non-interest expenses (driven by headcount and FDIC fees) stabilizes as the company scales.
• Nonperforming Assets: Track the resolution of the four lending relationships comprising 72% of nonaccrual loans ($6.6 million aggregate).