QCR Holdings, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2013. QCR Holdings is a regional banking company with commercial banking, leasing, trust and wealth-management operations. Results include Community National Bank (CNB) from its May 13 acquisition; Q3 was the first full quarter of CNB operations.
Financial and operating highlights
- Q3 earnings: Net income was $3.81 million versus $3.18 million a year earlier; net income attributable to common shareholders was $3.00 million versus $2.25 million. Diluted EPS rose to $0.51 from $0.44.
- Nine-month earnings: Net income was $11.12 million versus $9.86 million. Common-shareholder income was $8.69 million versus $6.68 million; diluted EPS was $1.59 versus $1.35.
- Interest income and margin: Q3 net interest income was $17.31 million, up from $14.63 million. On a tax-equivalent basis, it was $18.02 million versus $15.29 million. Tax-equivalent net interest margin declined to 3.07% from 3.20%; the nine-month margin was 3.03% versus 3.18%.
- Fees and expenses: Q3 noninterest income increased to $5.93 million from $4.12 million, including $417,000 of securities gains. Noninterest expense increased to $17.03 million from $13.03 million, reflecting CNB’s costs and $389,000 of acquisition and data-conversion costs. Nine-month noninterest income included a $1.84 million bargain-purchase gain from the acquisition.
- Assets, funding and capital: At September 30, total assets were $2.49 billion, versus $2.09 billion at year-end 2012. Gross loans and leases were $1.54 billion, deposits $1.74 billion, total borrowings $557.5 million, and stockholders’ equity $148.0 million. The subsidiary banks met regulatory “well capitalized” requirements.
- Credit quality: The allowance for loan and lease losses was $22.1 million, or 1.43% of gross loans and leases. Nonperforming assets were $33.7 million; nonperforming loans and leases were 1.62% of the portfolio. Troubled debt restructurings totaled $16.5 million, up from $13.0 million at year-end 2012.
- Cash flow and liquidity: For the first nine months, operating activities provided $30.7 million; investing activities used $145.4 million; financing activities provided $111.9 million. Cash and due from banks ended at $58.7 million, while cash, federal funds sold and interest-bearing deposits together totaled $122.8 million. Banks had $293.8 million available under credit lines.
Material changes versus comparable periods
- Q3 earnings and diluted EPS improved year over year, supported by CNB, higher fee income and lower interest expense. Management attributed much of the increase in net interest income to the acquisition and loan growth.
- For the first nine months, net income attributable to QCR Holdings rose 19% year over year. The comparison includes the $1.84 million acquisition bargain-purchase gain and other nonrecurring items.
- At September 30, loans and deposits were substantially higher than at December 31, 2012, primarily reflecting the CNB acquisition and subsequent growth. Common shares issued also increased, including 834,715 shares issued as acquisition consideration.
- Higher long-term interest rates reduced the securities portfolio’s value: accumulated other comprehensive income moved from positive $4.7 million at year-end to a loss of $10.0 million. Management attributed the unrealized declines to market-rate changes and reported no other-than-temporary impairment.
- Nonperforming assets were up 16% from September 30, 2012, although the ratio to total assets improved to 1.35% from 1.44%. During Q3, about $5.0 million of foreclosed collateral moved from nonaccrual loans into other real estate owned.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it would continue seeking quality loan growth, growing fee-based services, reducing reliance on higher-cost wholesale funding and managing interest-rate exposure. It expects further CNB integration and data-conversion costs in Q4, while targeting future efficiency gains and cost savings.
- Interest-rate risk is a key exposure: changes in rates can affect net interest income and securities values. The latest disclosed sensitivity analysis, dated June 30, 2013, estimated a 4.1% decline in year-one net interest income under a 200-basis-point rate increase and an 8.0% decline under a 300-basis-point shock; September 30 results were not yet available.
- Management considered the loan-loss allowance adequate but cautioned that economic deterioration or borrower difficulties could increase delinquencies, losses and required provisions. Commercial real estate is the largest loan category; non-owner-occupied commercial real estate accounted for a significant share of criticized and nonperforming credits.
- The company acquired CNB for approximately $19.4 million, recognized a $1.84 million bargain-purchase gain, and assumed a contingent liability of $1.03 million related to litigation involving participation loans. Management also described separate ongoing litigation over a past nonperforming loan in which the company was awarded judgment.
- After quarter-end, the company sold CNB’s Mason City branches on October 4 and Austin branches on October 11, reporting pretax gains of $874,000 and $1.46 million, respectively. The remaining CNB branches merged into Cedar Rapids Bank & Trust on October 26.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in the 2012 Form 10-K.
Important facts for investors to verify
- How much of earnings growth persists after separating CNB’s contribution, the bargain-purchase gain, securities gains and other nonrecurring items.
- Whether integration costs decline and anticipated CNB cost savings are realized following the branch sales and merger.
- Trends in nonperforming loans, troubled debt restructurings, other real estate owned, criticized credits and provision levels—particularly in commercial real estate.
- Effects of interest-rate movements on net interest margin, securities marks, funding costs and the company’s capital position; the filing’s latest rate-sensitivity analysis predates quarter-end.
- Liquidity and funding composition, including wholesale-funding maturities, unused credit facilities and deposit stability; confirm capital ratios under the Basel III rules scheduled to apply beginning in 2015.