QCR Holdings, Inc. — Q1 2014 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2014, compared primarily with Q1 2013. QCR is a regional bank holding company with commercial banking, wealth management, and equipment leasing operations. The May 2013 Community National acquisition materially expanded the comparison base.
Financial performance and position
- Income: Net interest income was $16.85 million, up 18.7%; total noninterest income was $4.75 million, down 8.8%. Net income was $3.89 million versus $3.27 million. After preferred dividends, income attributable to common shareholders was $3.18 million versus $2.45 million.
- Per-share results: Diluted EPS was $0.40 versus $0.49. Management attributed the decline to a roughly 57% increase in weighted-average common and equivalent shares, principally from shares issued for the CNB acquisition and the Series E preferred conversion.
- Margins: Tax-equivalent net interest margin was 3.11%, up from 3.02%; net interest spread was 2.83%, up from 2.68%. Average earning-asset yield declined 5 basis points, while average interest-bearing liability cost fell 20 basis points.
- Expenses and taxes: Noninterest expense rose 15.6% to $16.14 million, reflecting the acquired business and higher operating costs. The effective tax rate was 11% versus 25%, including a one-time $381,000 tax benefit related to finalizing CNB acquisition tax matters.
- Cash flow: Operating activities provided $3.16 million, versus $7.24 million in Q1 2013. Investing activities used $19.25 million and financing activities provided $29.58 million. Cash and due from banks ended at $55.44 million, up $13.49 million during the quarter.
- Balance sheet and lending: Total assets were $2.43 billion, up 1.3% from year-end 2013. Gross loans and leases were $1.49 billion, up 2.2%; deposits were $1.67 billion, up 1.5%. Noninterest-bearing deposits were $579.1 million.
- Credit quality: The allowance was $22.65 million, or 1.52% of gross loans and leases, compared with 1.47% at year-end. Nonperforming loans and leases were $18.63 million, or 1.25% of loans, down from $20.48 million at year-end. Total nonperforming assets were $28.56 million, down 7% from year-end but up 21% year over year. Commercial real estate accounted for the largest share of nonperforming loans.
- Debt and liquidity: Borrowings, including junior subordinated debentures, totaled about $583.8 million. Quarter-end cash, federal funds sold, and interest-bearing deposits totaled $111.4 million. Subsidiary banks had $319.2 million available under credit lines. Management said it intends to reduce reliance on wholesale funding and grow core deposits.
- Capital: The company reported a 12.03% total risk-based capital ratio and a 7.49% leverage ratio. Subsidiary banks met the then-applicable “well capitalized” thresholds. Tangible common equity to tangible assets was 5.02%, a non-GAAP measure.
Changes, outlook, and risks
- Year-over-year net interest income growth was driven substantially by CNB, organic loan growth, lower deposit costs, and a larger noninterest-bearing deposit base. Trust fees increased 44%, partly reflecting the acquisition; gains on residential mortgage and government-guaranteed loan sales declined.
- Management reported continued progress in reducing nonperforming loans, while criticized and classified commercial credits increased from year-end. It considered the allowance adequate but cautioned that weaker economic conditions or borrower cash flows could require further provisions.
- The company redeemed $15 million of Series F preferred stock on March 31, 2014. The remaining 14,867 shares carried a 9% dividend rate; management intended to redeem the remainder during 2014, subject to any required regulatory approval.
- No specific earnings or revenue guidance was provided. Management’s stated priorities included quality loan growth, fee-income expansion, cost control, deposit growth, and reducing wholesale funding. It expected Basel III rules to apply beginning in 2015 and believed its capital plan would meet the revised requirements.
- Key exposures include credit and collateral risk, interest-rate sensitivity, securities valuation, and wholesale-funding availability and cost. Available-for-sale securities had $16.6 million of gross unrealized losses at quarter-end; management considered declines temporary and reported no other-than-temporary impairment. No material change to previously disclosed risk factors or material pending legal proceedings was reported.
Important facts for investors to verify
- How much of earnings and balance-sheet growth reflects CNB rather than ongoing organic growth, and whether post-acquisition expense savings persist.
- Whether the improvement in nonperforming loans continues, particularly in non-owner-occupied commercial real estate, and whether criticized-credit growth affects future provisions.
- Whether deposit growth can fund loan growth while reducing wholesale funding, and how interest-rate changes affect net interest margin and the longer-duration securities portfolio.
- Whether management completed the planned 2014 redemption of remaining Series F preferred stock and how the 9% preferred dividend affected common-stockholder returns.
- The company reported diluted EPS of $0.40 despite higher net income; investors should assess the impact of the expanded share count and distinguish GAAP results from tax-equivalent and other non-GAAP measures.