QCR Holdings, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. QCR Holdings is a community bank holding company serving markets in Iowa and Illinois, with equipment leasing and wealth-management operations. Results include Community National Bancorporation (CNB) from its May 13, 2013 acquisition; CNB was merged into Cedar Rapids Bank & Trust in October, after four branches were sold.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $81.9 million | $77.4 million |
| Net interest income | $64.1 million | $57.6 million |
| Noninterest income | $25.8 million | $16.6 million |
| Provision for loan and lease losses | $5.9 million | $4.4 million |
| Noninterest expense | $64.4 million | $52.3 million |
| Net income attributable to QCR Holdings | $14.9 million | $12.6 million |
| Net income available to common shareholders | $11.8 million | $9.1 million |
| Diluted EPS | $2.08 | $1.85 |
| Cash provided by operating activities | $32.0 million | $30.7 million |
- Growth and profitability: Total assets rose 14% to $2.395 billion; loans and leases were $1.460 billion and deposits $1.647 billion at year-end. Net income attributable to QCR increased 18%; common net income rose 29% and diluted EPS rose 12%. Average return on assets was 0.64%, and return on average common equity was 11.48%.
- Margin: Tax-equivalent net interest income increased 12% to $66.7 million, primarily from CNB and modest legacy-market growth. Net interest margin fell 11 basis points to 3.03%; average earning-asset yield declined 34 basis points to 3.84%, while funding cost declined 28 basis points to 1.09%.
- Credit quality: Nonperforming loans and leases declined 19% to $20.5 million; nonperforming assets were $30.6 million, or 1.28% of assets. The allowance was $21.4 million, 1.47% of gross loans and leases and 104.7% of nonperforming loans and leases. Net charge-offs were $4.4 million, or 0.31% of average loans and leases. OREO increased to $9.7 million from $4.0 million.
- Funding, debt and liquidity: Total borrowings were $563.4 million, including $231.4 million of FHLB advances, $149.3 million of short-term borrowings, $142.4 million of other borrowings, and $40.3 million of junior subordinated debentures. Loans-to-deposits improved to 88.66% from 93.69%. Cash, federal funds sold and interest-bearing deposits totaled $114.4 million; subsidiary banks had $315.3 million available under credit lines.
- Capital and securities: QCR’s year-end regulatory capital ratios were 12.87% total risk-based, 11.45% Tier 1 risk-based and 7.96% Tier 1 leverage; subsidiary banks were reported well-capitalized. Stockholders’ equity was $147.6 million. The investment portfolio was $697.2 million; management reported gross unrealized losses of $31.9 million, partly offset by $2.9 million in gains, and considered the declines temporary. AOCI shifted from $4.7 million of income to a $13.6 million loss, primarily reflecting higher interest rates.
Material changes and unusual items
- CNB acquisition and branch disposals materially changed scale and comparability. QCR paid $19.4 million in cash and stock; acquired assets were recorded at fair value, generating a $1.8 million bargain-purchase gain. Sales of the Mason City and Austin branches generated $2.3 million in gains. The filing attributes much of the growth in assets, deposits, loans, revenue and expenses to the acquisition.
- Noninterest income increased 55%, including the acquisition and branch-sale gains. Excluding those gains, management said noninterest income increased about $5.0 million, led by wealth-management fees, deposit service fees and gains on government-guaranteed loan sales. The credit card portfolio and issuing operations were sold in early 2013, generating a net pre-tax gain of about $593,000.
- Noninterest expense increased 23%, including $2.4 million in acquisition and conversion costs and the acquired CNB cost base. Provision increased 36% as specific reserves were added to certain existing nonperforming loans during workouts.
- Common shares outstanding increased substantially: 834,715 shares were issued for the CNB acquisition and 2,057,502 shares upon conversion of Series E preferred stock. Year-end common shares outstanding were 7.884 million versus 4.918 million a year earlier.
- The Series F preferred dividend rate increased to 9% beginning with the payment due April 1, 2014, because qualified small-business lending had not increased from the program baseline. The filing says this affects the cost of preferred capital and notes preferred terms can restrict common dividends.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management’s stated priorities include growing quality loans and leases, expanding wealth-management and fee income, growing noninterest-bearing core deposits, reducing reliance on wholesale funding, controlling costs and maintaining asset quality.
- Key risks include concentrated commercial and commercial-real-estate lending, local economic weakness, loan-loss estimates, interest-rate and securities valuation exposure, liquidity and funding access, acquisition integration, competition, changing regulation and cybersecurity or operational disruptions. Commercial real estate was 46% and commercial and industrial lending 30% of the year-end loan and lease portfolio.
- Management’s interest-rate simulation showed a 4.8% first-year net-interest-income decline under a 200-basis-point upward shift, within the stated 10% policy limit; a 300-basis-point upward shock showed an 11.0% decline, within the 25% limit. Management cautioned that results remain sensitive to rate changes and assumptions.
- Off-balance-sheet commitments to extend credit were $432.6 million and standby letters of credit were $9.7 million. Management did not expect all commitments to be funded. Mortgage loans sold with recourse provisions still in effect were $16.2 million; no related liability was recorded, as management assessed the risk as not significant.
- CNB’s acquired litigation matter was settled for $940,333 in December 2013. Separately, a judgment in QCR’s favor concerning a longstanding loan-related lawsuit was appealed by the defendant in January 2014. The filing reports no other material pending legal proceedings beyond routine business litigation.
- Basel III requirements were scheduled to take effect generally in 2015. Management believed the company’s capital structure and plan would be sufficient, but said it was still assessing the rules’ effects.
Most important facts for investors to verify
- Separate underlying recurring earnings from the $1.8 million bargain-purchase gain, $2.3 million branch-sale gains and other asset-sale gains; assess the full-year effect of acquired CNB operations and integration costs.
- Track post-acquisition loan performance, especially non-owner-occupied commercial real estate, the rise in OREO, troubled debt restructurings and the adequacy of the allowance.
- Review the portfolio’s duration and unrealized securities losses, and how any subsequent interest-rate changes affect capital, earnings and liquidity.
- Confirm the cost and terms of Series F preferred stock after its 9% rate took effect, the capacity to redeem it, and any resulting limits on common dividends.
- Assess share-count dilution from the acquisition and preferred-stock conversion, and verify that deposit growth, funding costs and acquisition integration support sustainable returns.