QCR HOLDINGS INC annual report, FY2015

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QCR Holdings, Inc. — 2015 Form 10-K Summary

Business context and reporting period

QCR Holdings is a bank holding company serving communities in Iowa, Illinois, and Wisconsin through QCBT, CRBT, and RB&T, with commercial equipment leasing through m2 and wealth-management services. This summary covers the fiscal year ended December 31, 2015; the filing was signed March 11, 2016. Unless noted, comparisons are with 2014.

Financial performance and condition

  • Earnings: Net income was $16.9 million, up from $15.0 million. Diluted EPS was $1.61, down from $1.72, principally amid a substantial increase in weighted-average shares following the 3.68-million-share offering. Core net income, a non-GAAP measure, was $20.9 million and core diluted EPS was $1.99; these exclude nonrecurring items.
  • Revenue and margins: Net interest income rose 10% to $76.3 million; tax-equivalent net interest margin improved 22 basis points to 3.37%. Noninterest income increased 16% to $24.5 million. Noninterest expense rose 12% to $73.4 million, including $7.5 million of debt-extinguishment losses. Provision for loan and lease losses was $6.9 million, approximately flat.
  • Quarterly result: Fourth-quarter net income was $6.8 million and diluted EPS was $0.57, versus $3.0 million and $0.37 in fourth-quarter 2014.
  • Balance sheet: Total assets were $2.59 billion, up 3%; gross loans and leases were $1.80 billion, up about 10%; and deposits were $1.88 billion, up 12%. C&I loans grew 24% to $648.2 million; CRE loans were $724.4 million, or 40% of loans, down from 43% a year earlier.
  • Credit quality: Nonperforming assets fell 42% to $19.1 million, or 0.74% of assets, from 1.31%. The allowance was $26.1 million, 1.46% of gross loans and leases; net charge-offs were $3.8 million, or 0.22% of average loans and leases.
  • Funding, debt, and capital: Deposits increased while total borrowings declined 33% to $444.2 million. Stockholders’ equity rose to $225.9 million, including $63.5 million net proceeds from the common-stock offering; tangible common equity to tangible assets was 8.55% (non-GAAP). The company and subsidiary banks met applicable capital requirements; the banks were classified as well-capitalized.
  • Cash flow and liquidity: Operating activities provided $30.1 million; investing activities used $65.9 million; financing activities provided $39.5 million. At year-end, $286.6 million of subsidiary-bank credit lines was available, and a separate $40 million holding-company revolver was undrawn. Loans-to-deposits were 95.61%.

Material changes versus prior period

  • Net interest income benefited from loan growth, redeployment from securities into loans, and lower funding costs following balance-sheet restructuring. The average cost of interest-bearing liabilities fell to 0.81% from 0.99%.
  • The May 2015 offering funded debt reduction and strengthened capital. The company prepaid selected borrowings, recording $7.5 million of debt-extinguishment losses; borrowings and wholesale funding reliance declined. A $1.2 million gain on an OREO sale also reduced problem assets.
  • Noninterest income gains were mixed: swap fees rose to $1.7 million from $0.2 million, while gains on government-guaranteed loan sales fell to $1.3 million from $2.0 million. The 2015 result also included a $387,000 lawsuit award and a $300,000 debt-extinguishment gain. Prior-year comparisons include acquisition and branch-sale gains in 2013.
  • Asset quality improved, including lower nonaccrual loans and OREO. Allowance coverage of nonperforming loans increased to 223% from 115%.

Outlook, management commentary, and risks

  • Management’s long-term goals included loan and lease growth, higher profitability, NPAs below 0.75% of assets, net charge-offs below 0.25%, wholesale funding below 15% of assets, and noninterest-bearing deposits above 30% of assets. These are targets, not earnings guidance. In 2015, NPA and charge-off targets were met, while NIM, ROAA, wholesale-funding, and deposit-mix targets were not.
  • Management reported 10.3% loan and lease growth, within its stated 10%–12% organic growth target, and intended to continue growing commercial lending, leasing, correspondent banking, government-guaranteed lending, and wealth management. It expected further balance-sheet restructuring; no specific 2016 earnings or revenue guidance is provided.
  • After year-end, the company retired $5.1 million of junior subordinated debentures at a discount, recording a $1.2 million gain in first-quarter 2016, and prepaid $20 million of borrowings, with $1.3 million of related losses, replacing them with lower-cost short-term funding.
  • Key risks include concentration in Midwest markets and C&I/CRE lending, changing interest rates and margin pressure, borrower and collateral risk, funding and liquidity access, competition, regulation and capital requirements, cybersecurity and operational failures, and reliance on management and technology. The allowance depends on estimates and may not cover future losses.
  • Commitments to extend credit totaled $480.5 million and standby letters of credit $13.1 million; management did not expect all to be funded. The filing reports no material pending litigation beyond routine matters. Auditors issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.

Most important facts for investors to verify

  • Reconcile GAAP net income and diluted EPS with management’s non-GAAP core figures, including the assumptions and items excluded.
  • Assess whether the 2015 improvement in NIM and credit quality is sustainable after restructuring costs, one-time gains, and continued loan growth.
  • Review the C&I and CRE portfolio, criticized and classified loans, collateral values, allowance assumptions, and subsequent credit performance.
  • Check the effects of the 2016 debt transactions, remaining wholesale funding and maturities, and the company’s regulatory capital position as capital-buffer requirements phase in.
  • Evaluate dilution from the 2015 share issuance, restrictions on holding-company dividends, and management’s dividend policy and ability to maintain distributions.