QCR Holdings, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 7, 2011. QCR is a bank holding company operating Quad City Bank & Trust, Cedar Rapids Bank & Trust, and Rockford Bank & Trust, among other businesses. Figures below are consolidated unless noted.
Financial performance
| Metric | Q3 2011 | Comparable period |
|---|---|---|
| Total revenue | $23.9 million | $24.1 million in Q3 2010 |
| Net interest income | $13.8 million | $12.2 million in Q3 2010 |
| Net income | $2.27 million | $2.12 million in Q3 2010 |
| Net income attributable to QCR Holdings | $2.16 million | $2.01 million in Q3 2010 |
| Income attributable to common shareholders; diluted EPS | Loss of $25,000; $(0.01) | $985,000; $0.21 in Q3 2010 |
- For the first nine months, revenue was $71.6 million versus $71.3 million; net income was $7.27 million versus $5.14 million. Common-shareholder income was $2.71 million, or $0.56 per diluted share, compared with $1.94 million, or $0.42.
- Q3 tax-equivalent net interest margin rose to 3.16% from 2.85% a year earlier; net interest spread increased to 2.85% from 2.52%. Nine-month margin was 3.11% versus 2.94%.
- Provision for loan and lease losses was $2.46 million in Q3 and $5.20 million for nine months. Q3 provision rose from $1.43 million a year earlier, primarily due to a specific provision on a newly deteriorated commercial real estate credit.
- Noninterest expense was $12.77 million in Q3, up from $12.13 million. Salaries and benefits increased, while FDIC insurance expense declined.
- Nine-month operating cash flow was $26.4 million, compared with $8.1 million in 2010; investing cash outflow was $72.3 million and financing cash inflow was $49.3 million.
Financial position, credit and liquidity
- At September 30, assets were $1.899 billion, up 3% from year-end 2010. Gross loans and leases were $1.198 billion, up about 2%; securities were $525.9 million, up 24%.
- Deposits totaled $1.207 billion, up 8% from year-end. Noninterest-bearing deposits grew, while management reported reducing reliance on brokered and other time deposits.
- Borrowings included $143.6 million short-term, $204.8 million of FHLB advances, $140.1 million other borrowings, and $36.1 million junior subordinated debentures. Aggregate borrowings were down approximately $41.5 million from year-end.
- Cash and short-term assets totaled $75.9 million. Subsidiary banks had $200 million of credit lines available; a separate parent-company $20 million revolver had $17.5 million available. Management described liquidity as strong and said it conducts regular contingency-planning stress tests.
- Nonperforming loans and leases were $32.0 million, including $2.7 million of accruing troubled debt restructurings; nonperforming assets were $40.5 million. Nonperforming loans rose 18% during Q3 but were 32% below the September 2010 peak. The allowance was $19.6 million, or 1.63% of gross loans and leases, and equaled 61% of nonperforming loans.
Material changes, outlook and risks
- The Q3 common-shareholder loss reflected $2.19 million of preferred dividends and discount accretion, including $1.2 million of accelerated discount accretion on redeemed Treasury CPP preferred shares. This one-time accounting item substantially affected common EPS despite higher consolidated net income.
- On September 15, QCR issued $40.09 million of Series F preferred stock to Treasury under the Small Business Lending Fund and simultaneously redeemed Series D CPP preferred stock for $38.237 million. Series F dividends began at 5%, with the rate linked to qualified small-business lending and subject to later resets. Qualified lending was reported $62.4 million, or 14%, below its program baseline, so the rate remained 5%.
- Management attributed improved net interest income to lower funding costs, growth in noninterest-bearing deposits, and balance-sheet restructuring. QCBT prepaid $15 million of higher-cost FHLB advances and modified $20.4 million of advances to a lower rate. Weak loan demand continued to contribute to investment in agency and government-guaranteed securities.
- Management provided no numerical earnings or revenue guidance. It warned that economic deterioration could increase delinquencies, problem assets, losses and required loan-loss provisions. Other key exposures include interest-rate changes, low-rate conditions, uncertain loan demand, commercial real estate credit quality, and volatility in trust and investment-management fees. Management said bank subsidiaries exceeded “well-capitalized” regulatory minimums; the filing text provided here does not show the associated ratio values.
- The company reported no material changes to its risk factors from its 2010 Form 10-K, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Important facts for investors to verify
- Reconcile Q3 common EPS with consolidated profitability and the $1.2 million accelerated preferred-stock discount accretion; assess ongoing preferred dividends and the Series F rate conditions.
- Review the deterioration and subsequent performance of the commercial real estate credit driving the Q3 provision increase, and monitor nonperforming assets, TDRs, charge-offs and allowance coverage.
- Assess whether loan growth can continue and whether securities growth, deposit mix and lower funding costs can sustain net interest margin amid weak loan demand and interest-rate risk.
- Confirm preferred-share redemption details: the equity statement reports redemption of 38,237 Series D shares, while Note 8 refers to 38,327 shares; both cite $38.237 million in redemption proceeds.
- Reconcile the cover-page November 1 common shares outstanding of 4,749,234 with the September 30 balance-sheet count of 4,747,234, recognizing the dates differ.