QCR HOLDINGS INC quarterly report, Q2 FY2013

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QCR Holdings, Inc. — 2013 Q2 Form 10-Q

Business context and period. Unaudited results cover the quarter and six months ended June 30, 2013. QCR operates commercial banks, wealth management businesses, and a leasing business. On May 13, 2013, it acquired Community National Bancorporation and Community National Bank (CNB); reported results include CNB only from the acquisition date.

Key financial metrics

  • Q2 earnings: Net income was $4.05 million versus $3.27 million in Q2 2012. Net income attributable to common stockholders was $3.23 million versus $2.14 million; diluted EPS was $0.59 versus $0.44.
  • First-half earnings: Net income was $7.31 million versus $6.68 million. Common-stockholder income was $5.69 million versus $4.43 million; diluted EPS was $1.08 versus $0.91.
  • Interest income and margin: Q2 interest and dividend income was $20.14 million, up from $19.53 million. Net interest income was $15.71 million versus $14.52 million. On a tax-equivalent basis, Q2 net interest margin fell to 2.99% from 3.21%; first-half margin was 3.00% versus 3.16%.
  • Credit costs and fees: Q2 loan-loss provision was $1.52 million versus $1.05 million; first-half provision was $2.58 million versus $1.83 million. Noninterest income was $6.95 million in Q2 and $12.15 million for the first half, including a $1.84 million acquisition bargain-purchase gain.
  • Expenses: Noninterest expense increased to $15.23 million in Q2 from $13.11 million, including $432,000 of Q2 acquisition costs. First-half noninterest expense was $29.19 million versus $25.85 million and included $789,000 of acquisition costs.
  • Balance sheet at June 30: Assets were $2.45 billion, net loans $1.51 billion, securities $703.5 million, deposits $1.72 billion, and stockholders’ equity $145.4 million. Compared with December 31, 2012, assets rose about 17%, loans 19%, and deposits 25%, substantially reflecting CNB’s acquisition.
  • Debt and liquidity: Short-term borrowings, FHLB advances, other borrowings, and junior subordinated debentures totaled about $550.0 million. Cash, federal funds sold, and interest-bearing deposits totaled $95.6 million. The banks had $306.5 million available on credit lines; the company also had an undrawn $10 million revolving facility.
  • Cash flow, first half: Operating activities provided $19.7 million, investing activities used $117.1 million, and financing activities provided $80.2 million. Cash and due from banks ended at $44.3 million, down from $61.6 million at year-end.
  • Capital: The company reported a 12.20% total risk-based capital ratio and an 8.07% leverage ratio. Tangible common equity to tangible assets was 3.51%, or 3.89% excluding accumulated other comprehensive loss.

Material changes versus comparable periods

  • Reported earnings and EPS increased year over year, aided by the acquisition, lower funding costs, and higher fee income. The $1.84 million bargain-purchase gain is a nonrecurring contributor to reported Q2 income.
  • Net interest income grew, but the tax-equivalent net interest margin declined as asset yields fell more than funding costs. Management cited organic loan growth and lower deposit costs as partial offsets.
  • Q2 nonperforming assets increased to $34.1 million from $29.6 million at December 31, 2012; nonperforming loans and leases were 1.96% of loans, versus 1.97% at year-end. Management attributed the quarterly increase to several commercial credits moving to nonaccrual and acquired CNB problem assets.
  • Higher market rates drove available-for-sale securities from a net unrealized gain position at year-end to a net unrealized loss position. Accumulated other comprehensive loss was $9.22 million at June 30, versus income of $4.71 million at year-end. Management reported no other-than-temporary impairment on debt securities.

Outlook, commentary, risks, and unusual items

  • Management said it plans to integrate CNB, pursue cost savings, grow quality loans and fee businesses, and reduce reliance on higher-cost wholesale funding. It expects further CNB integration costs during the second half of 2013. The filing does not provide earnings guidance.
  • CNB agreed to sell its Mason City branches (about $62 million of deposits and $26 million of loans) and Austin branches (about $37 million of deposits and $31 million of loans). Both sales were expected to close in Q4 2013, subject to approvals and customary conditions. Management anticipated an approximately $1.5 million pre-tax gain, dependent on deposits sold.
  • Key risks include credit quality and the adequacy of loan-loss reserves, interest-rate and securities-value changes, acquisition integration, and access to funding. Management cautioned that future borrower or economic conditions could require additional provisions. June 30 interest-rate sensitivity results were not yet available; the latest reported simulations, as of March 31, were within board limits.
  • CNB recorded a $1.028 million contingent liability related to litigation alleging unjust enrichment involving broker-originated participation loans. The company stated there were no other material pending legal proceedings beyond ordinary routine litigation.
  • The company reported that subsidiary banks met the regulatory “well capitalized” requirements. Basel III rules were expected to apply generally beginning January 1, 2015; management was assessing the impact.

Important facts for investors to verify

  • Separate the acquisition’s contribution, the $1.84 million bargain-purchase gain, and acquisition costs from recurring earnings; assess the pro forma results, which exclude the bargain gain.
  • Track criticized/classified credits, nonaccrual loans, provision levels, and reserve coverage, including how acquired CNB loans are treated at fair value without an acquisition-date allowance.
  • Monitor net interest margin, securities’ unrealized losses and duration, and sensitivity to changing interest rates.
  • Confirm regulatory approval and completion of the Mason City and Austin branch sales, the deposits transferred, and the expected gain.
  • Review the CNB-related litigation exposure, wholesale funding maturities and putable options, and management’s assessment of Basel III capital effects.