QCR HOLDINGS INC annual report, FY2012

QCR Holdings, Inc. — FY2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; fourth-quarter figures are noted separately where disclosed. QCR Holdings is a bank holding company serving the Quad Cities, Cedar Rapids, and Rockford markets through three community banks, with equipment leasing and wealth-management operations.

Financial performance and condition

Metric	2012	2011
Net interest income	$57.6 million	$54.1 million
Provision for loan/lease losses	$4.4 million	$6.6 million
Noninterest income	$16.6 million	$17.5 million
Noninterest expense	$52.3 million	$51.0 million
Net income	$13.1 million	$10.1 million
Net income attributable to QCR Holdings	$12.6 million	$9.7 million
Net income available to common shareholders	$9.1 million	$4.4 million
Diluted EPS	$1.85	$0.92

Fourth-quarter 2012 net income was $3.25 million and diluted EPS was $0.49, versus $2.86 million and $0.35, respectively, in fourth-quarter 2011.

Margins and returns: Tax-equivalent net interest margin was 3.10%, up from 3.08%; net interest spread was 2.77%, versus 2.76%. Return on average assets was 0.62% (0.51% in 2011); return on average common equity was 10.84% (5.82%). The efficiency ratio improved to 70.36% from 71.21%.
Balance sheet: Assets were $2.09 billion, up 6%; gross loans/leases were $1.29 billion, up 7%; securities were $602.2 million, up 7%. Deposits increased 14% to $1.37 billion. Loans-to-deposits improved to 93.69% from 99.61%.
Credit quality: Nonperforming assets declined to $29.6 million from $40.5 million; nonperforming assets/total assets fell to 1.41% from 2.06%. Net charge-offs were $3.2 million, or 0.27% of average loans/leases, versus $8.2 million, or 0.70%. The allowance was $19.9 million, 1.55% of gross loans/leases and 78.47% of nonperforming loans/leases.
Cash flow and liquidity: Operating activities provided $30.7 million; investing activities used $132.8 million; financing activities provided $110.6 million. Cash and due from banks ended at $61.6 million. Management reported $271.7 million available under subsidiary-bank credit lines and described overall liquidity as strengthened.
Debt and capital: Total borrowings were $547.8 million, including $36.1 million of junior subordinated debentures. Consolidated regulatory total risk-based capital was 12.71%; all three banks were reported well-capitalized. Total stockholders’ equity was $140.4 million.

Material changes versus 2011

Net income attributable to QCR Holdings rose about 30%; diluted EPS more than doubled. The 2011 comparison was affected by $1.2 million of accelerated preferred-stock discount accretion; excluding it, 2011 diluted EPS would have been $1.18.
Net interest income increased 6% as lower funding costs and balance-sheet growth more than offset lower asset yields. Interest expense fell 16%, supported by deposit repricing and a shift toward core, noninterest-bearing deposits.
Provision expense declined 34% alongside improving credit indicators. Total criticized loans fell to $70.3 million from $88.7 million; classified loans fell to $48.2 million from $62.7 million.
Noninterest income decreased 4.8%, mainly because securities gains were much lower and OREO losses increased. OREO losses were $1.3 million, including a $1.2 million write-down; the year-end OREO balance declined to $4.0 million.
Noninterest expense increased 2.5%, principally from a 9.6% rise in salaries and benefits. The company acquired m2’s remaining 20% interest and VPHC’s remaining 9% interest; VPHC was dissolved at year-end.
Funding mix improved: noninterest-bearing deposits reached $450.7 million, or 33% of deposits, versus $357.2 million, or 30%. Total deposits grew faster than borrowings, which declined to $547.8 million from $590.6 million.

Outlook, risks, contingencies and unusual items

Management emphasized continued growth in quality loans, core deposits and fee-based wealth-management services, while diversifying securities and reducing reliance on wholesale funding. The filing gives no quantified earnings or revenue guidance.
In February 2013, QCR agreed to acquire Community National Bancorporation, with a stated implied value of about $20.1 million and expected closing in the second quarter of 2013, subject to approvals and other conditions. Consideration is 70% QCR stock and 30% cash. The target reported year-end assets of $287.7 million and deposits of $247.8 million.
QCBT sold its credit-card receivables and issuing operations in February 2013. The receivables sale produced an approximately $435,000 pretax gain net of expenses; the additional gain tied to customer re-contracting was contingent, with a stated maximum of approximately $440,000. The filing’s earlier business discussion describes an expected combined gain of approximately $875,000.
Credit concentration is material: commercial real estate represented 46% of gross loans/leases and commercial and industrial lending 31%. Operations are concentrated in three regional markets. Management cautions that weaker local conditions, falling collateral values, or a small number of large credit deteriorations could increase losses; the allowance is an estimate and may prove insufficient.
Other key risks include interest-rate and funding sensitivity, competition, regulatory and capital changes, deposit outflows following expiration of expanded FDIC transaction-account coverage, operational/cybersecurity events, and acquisition integration. Basel III implementation in the U.S. was indefinitely delayed at the filing date.
Off-balance-sheet commitments included $430.1 million to extend credit and $15.2 million of standby letters of credit; management did not expect all to be funded. No liability was recorded for potential obligations under the letters. Sold residential mortgages with recourse provisions still in effect totaled $38.8 million; no repurchases were reported in 2010–2012.
Common dividends declared were $0.08 per share for 2012. Payment capacity depends partly on subsidiary-bank dividends and regulatory, capital, preferred-stock, and debt restrictions. The banks were reported well-capitalized; the company stated approximately $10.9 million was available for bank dividends at year-end.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded controls were effective as of December 31, 2012. No material pending legal proceedings were reported beyond routine litigation.

Important facts for investors to verify

Whether credit quality continues to improve, particularly in commercial real estate, criticized loans, accruing TDRs, and OREO; also assess allowance coverage against potential losses.
Whether deposit growth is durable and remains low-cost, and whether the company can reduce wholesale funding while maintaining net interest margin.
The terms, regulatory approvals, integration costs, and expected financial contribution of the Community National acquisition, including resulting dilution and capital effects.
The final realized gain and ongoing earnings impact of the credit-card portfolio and operations sale, distinguishing the completed receivables gain from the contingent re-contracting gain.
Capital and common-dividend flexibility given preferred-stock obligations, $36.1 million of junior subordinated debentures, and future regulatory capital rules.
Interest-rate exposure and securities valuation: the securities portfolio’s reported duration rose to 2.8 years from 1.8 years, while unrealized gains exceeded unrealized losses at year-end.