QCR Holdings, Inc. — FY 2011 Form 10-K
Business context and period. QCR Holdings is a bank holding company serving the Quad Cities, Cedar Rapids and Rockford through three banks, with additional equipment-leasing and wealth-management activities. This annual filing covers the year ended December 31, 2011; comparisons are primarily with FY 2010.
Financial performance and condition
| Metric | FY 2011 / Dec. 31, 2011 | FY 2010 / Dec. 31, 2010 |
|---|---|---|
| Total assets | $1.967 billion | $1.837 billion |
| Net interest income | $54.1 million | $49.9 million |
| Provision for loan/lease losses | $6.6 million | $7.5 million |
| Noninterest income | $17.5 million | $15.4 million |
| Noninterest expense | $51.0 million | $48.5 million |
| Net income | $10.1 million | $6.8 million |
| Net income available to common shareholders | $4.4 million; diluted EPS $0.92 | $2.5 million; diluted EPS $0.53 |
| Net interest margin, tax-equivalent | 3.08% | 2.92% |
| Loans/leases | $1.201 billion | $1.173 billion |
| Deposits | $1.205 billion | $1.115 billion |
| Total borrowings | $590.6 million | $566.1 million |
- Net interest income increased 9%. Interest expense fell 22%, as funding costs declined and noninterest-bearing deposits grew; average earning-asset yield fell from 4.68% to 4.41%, while average cost of interest-bearing liabilities declined from 2.08% to 1.65%.
- Net income available to common shareholders rose, but FY 2011 diluted EPS included $1.2 million of accelerated discount accretion following the Series D preferred redemption. Management said diluted EPS would have been $1.18 excluding that accretion.
- Net cash from operating activities was $36.6 million; investing activities used $137.3 million and financing activities provided $111.8 million. Cash and due from banks ended at $53.1 million, up $11.1 million.
- At year-end, the allowance was $18.8 million, 1.56% of gross loans/leases and 58.7% of nonperforming loans/leases. Nonperforming assets were $40.5 million, or 2.06% of assets, down from $50.1 million and 2.73% a year earlier.
- Commercial real estate represented 48% of loans/leases and commercial and industrial loans 29%. The allowance declined from $20.4 million; 2011 net charge-offs were $8.2 million, or 0.70% of average loans/leases.
- Liquidity included $159.4 million available under subsidiary-bank credit lines and $16.4 million available on the parent’s revolving note. The company and banks were reported well-capitalized; consolidated year-end ratios were 13.84% total risk-based capital, 12.24% Tier 1 risk-based capital and 8.70% Tier 1 leverage.
Material changes versus FY 2010
- Total assets grew 7%; deposits increased 8%, while loans/leases grew 2%. Securities increased 33% to $565.2 million as weak loan demand and deposit growth left excess liquidity to invest.
- Nonperforming loans/leases fell 22% to $32.0 million. Criticized loans declined to $88.7 million from $118.7 million. Accruing troubled debt restructurings rose to $11.9 million from $3.4 million, partly reflecting loans returning to accrual under restructured terms.
- Noninterest income rose 13%, including $1.5 million of securities gains. Noninterest expense increased 5%, led by a 9% increase in salaries and benefits; FDIC and other insurance expense declined 24%.
- QCR Holdings issued $40.1 million of Series F preferred stock through the Small Business Lending Fund and redeemed $38.2 million of Series D preferred stock. It also repurchased the related Treasury warrant for $1.1 million.
Outlook, commentary and risks
- No quantitative earnings or growth guidance is provided. Management’s stated priorities include growing quality loans, increasing core deposits, reducing reliance on wholesale funding and improving net interest margins. It intends to consider common dividends semi-annually; 2011 declared dividends were $0.08 per share.
- Management described loan demand as still weak. It noted improving credit-quality trends but cautioned that economic deterioration could raise problem assets, charge-offs and provisions. The loan portfolio is concentrated in commercial lending and the company’s Midwest markets.
- Interest-rate simulations showed first-year net interest income changes of -1.5% under a 100-basis-point rate decline, -3.1% under a 200-basis-point increase and -4.2% under a 300-basis-point increase; all were within the board’s 10% decline limit.
- Series F preferred dividends were 5% for the fourth quarter of 2011. Qualified small-business lending was $67.5 million, or 16%, below the SBLF baseline, and the preferred terms can restrict common dividends and repurchases. The filing also identifies possible higher capital requirements, FDIC assessments, regulatory costs and funding-market disruption as risks.
- Unusual items included $1.5 million in securities-sale gains and $832,000 in FHLB prepayment fees. Auditors issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether commercial real estate credit quality continues to improve, particularly construction/land exposures, non-owner-occupied properties and restructured loans.
- Whether the $18.8 million allowance remains adequate relative to future charge-offs and nonperforming-loan trends.
- How sustainable earnings are without securities gains and after preferred dividends and discount accretion; verify the basis for management’s adjusted $1.18 EPS figure.
- Whether deposit growth can fund assets while short-term borrowings remain elevated, and how wholesale borrowing maturities, put options and collateral requirements affect liquidity.
- How SBLF lending levels affect Series F dividends, capital and the company’s capacity to maintain common dividends or redeem preferred shares.