QCR Holdings, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016, unless noted. QCR is a financial holding company operating four commercial banks and a commercial leasing business. Community State Bank (CSB), acquired in August 2016, is included in Q1 2017 results but not in Q1 2016 income comparisons, limiting comparability.
Key financial metrics
| Metric | Q1 2017 | Comparison / detail |
|---|---|---|
| Interest and dividend income | $31.3 million | Up 33% year over year |
| Net interest income | $27.7 million | Up 34% year over year; down 6% from Q4 2016 |
| Net interest margin | 3.90% tax-equivalent | Up 31 basis points year over year; down from 4.02% in Q4 2016 |
| Noninterest income / expense | $7.3 million / $21.3 million | Income up 7%; expense up 25% year over year |
| Provision for loan/lease losses | $2.1 million | Broadly flat year over year |
| Net income / diluted EPS | $9.2 million / $0.68 | Compared with $6.4 million / $0.53 in Q1 2016 |
| Cash flows | Operating +$10.8 million; investing −$102.6 million; financing +$77.5 million | Cash and due from banks ended at $56.3 million |
| Assets / loans | $3.38 billion / $2.44 billion gross | Assets up $79.1 million and gross loans/leases up $30.4 million from year-end |
| Deposits | $2.81 billion | Up $136.7 million from year-end; annualized growth 20.5% |
| Borrowings | $231.5 million | Down approximately $59.4 million from year-end |
| Equity / regulatory capital | $295.8 million; company CET1 ratio 9.64% | All subsidiary banks met the “well capitalized” requirements |
Material changes versus comparable periods
- Net income rose 44% and diluted EPS rose from $0.53 to $0.68 year over year. CSB’s addition contributed materially to growth in earning assets, interest income, fees, and operating costs.
- Net interest income growth reflected CSB, loan growth, and redeployment of securities into loans. The quarter-over-quarter decline reflected lower acquisition-related accretion and two fewer days in Q1.
- Noninterest expense increased 25% year over year, principally due to CSB’s cost structure; salaries, occupancy, and professional/data-processing costs were among the increases.
- Gross loans/leases grew 5% annualized in Q1, while deposits grew strongly and borrowings declined. Loans/leases were 71% of assets at quarter-end.
- Nonperforming assets were $27.3 million, relatively unchanged from year-end but higher than $18.7 million a year earlier; NPAs were 0.81% of assets. The allowance was $32.1 million, or 1.32% of loans/leases (1.64% including the remaining acquired-loan discount).
Outlook, management commentary, and risks
- Management aims for full-year organic loan and lease growth of 10%–12%, following the slower 5% annualized Q1 pace. These are stated objectives, not formal earnings guidance.
- Long-term targets include tax-equivalent NIM above 3.85%, ROAA above 1.10%, NPAs below 0.75% of assets, wholesale funding below 15% of assets, and noninterest-bearing deposits above 30% of assets. At Q1 end, NIM was 3.90%, ROAA 1.12%, NPAs/assets 0.81%, wholesale funding/assets 9%, and noninterest-bearing deposits/assets 23%.
- Management intends to continue reducing wholesale funding, growing core deposits, pursuing acquisitions, and building fee businesses. It cited strong SBA/USDA loan pipelines, while noting that gains on guaranteed-loan sales and swap fees can fluctuate. Q1 gains on guaranteed-loan sales and swap fees totaled approximately $1.1 million.
- Credit risks include potential deterioration in borrower cash flows and economic conditions; criticized and classified loans increased modestly during the quarter. The allowance depends on management judgments and may require additional provisions. Two related TDRs redefaulted during the quarter.
- Interest-rate movements could affect net interest income and securities values. Management’s modeled year-one net-interest-income impacts were within policy limits for the disclosed rate scenarios. Municipal securities were a substantial portfolio component, and portfolio duration was 6.1 years.
- Q1 income tax expense included a $533,000 benefit from adopting ASU 2016-09, reducing the effective tax rate to 20.6% from 24.1%. Management reported no material change in risk factors; no material pending legal proceedings were disclosed. Disclosure controls were deemed effective.
Most important facts for investors to verify
- How much of year-over-year earnings and margin growth is sustainable after separating CSB’s contribution and purchase-accounting accretion.
- Whether loan growth accelerates toward the 10%–12% annual objective and whether deposit growth is stable, particularly correspondent and brokered deposits.
- Whether credit quality improves: track NPAs, criticized/classified loans, TDR redefaults, charge-offs, and the allowance alongside acquired-loan discounts.
- Whether expense growth moderates and fee income remains resilient despite volatility in swap fees and guaranteed-loan sale gains.
- How interest-rate changes affect funding costs, NIM, securities values, and the company’s ability to continue reducing wholesale borrowings.