QCR Holdings, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. QCR Holdings is a regional financial holding company operating four commercial banks, a leasing business and wealth-management services. This unaudited report covers the quarter and six months ended June 30, 2017. Comparisons with 2016 are affected by the August 2016 acquisition of Community State Bank (CSB), whose results are included in 2017 but not in the 2016 comparative income statements.
Key financial results
| Metric | Q2 2017 | Comparison |
|---|---|---|
| Net income | $8.8 million | Up 31% from $6.7 million in Q2 2016; down from $9.2 million in Q1 2017 |
| Diluted EPS | $0.65 | Up from $0.53 in Q2 2016; down from $0.68 in Q1 2017 |
| Net interest income | $28.0 million | Up 33% year over year |
| Net interest margin, tax-equivalent | 3.81% | Up from 3.62% year over year; down from 3.90% in Q1 2017 |
| Provision for loan/lease losses | $2.0 million | Up 69% year over year; management attributed much of the increase to CSB and purchase-discount accounting |
| Noninterest income / expense | $6.8 million / $21.4 million | Income was nearly flat year over year; expense rose 21%, primarily reflecting CSB |
| Efficiency ratio | 61.46% | Compared with 61.44% in Q2 2016 |
For the six months ended June 30, net income was $18.0 million versus $13.0 million, and diluted EPS was $1.33 versus $1.07. Tax-equivalent NIM was 3.86% versus 3.61%. The six-month effective tax rate was 21.9%, down from 24.2%; adoption of stock-compensation accounting guidance reduced tax expense by about $623,000 in the first half.
Financial position, cash flow and credit
- Scale and growth: Total assets were $3.46 billion, up from $3.30 billion at year-end 2016. Gross loans and leases were $2.55 billion, up $148 million from year-end; Q2 growth was $117.7 million, an annualized 19.2%. Loans and leases were 74% of assets.
- Funding and liquidity: Deposits were $2.87 billion, up $201 million year to date. Noninterest-bearing deposits were $761 million, or 27% of deposits. Total borrowings were $230 million, down from $291 million at year-end. The company reported $359 million available on subsidiary-bank credit lines and $10 million available on its corporate revolving line.
- Cash flows: The consolidated cash-flow statement reports $18.9 million of operating cash provided, $152.5 million used in investing and $140.2 million provided by financing for the first half. The MD&A gives different operating and investing cash-flow figures ($23.6 million and $157.1 million); reconcile this discrepancy against the filed statements.
- Credit quality: Nonperforming assets were $25.9 million, or 0.75% of assets, down from 0.81% at March 31 but above 0.70% a year earlier. The allowance was $33.4 million, or 1.31% of loans/leases; management said including the remaining $6.3 million CSB loan discount would make the comparable coverage measure 1.55%. Criticized loans were 2.86% of loans/leases, and classified loans were 1.77%.
- Capital: The company’s regulatory total risk-based capital ratio was 11.65%, Tier 1 risk-based ratio 10.51%, and Tier 1 leverage ratio 9.34%. Each subsidiary bank met the “well capitalized” requirements. Tangible common equity to tangible assets, a non-GAAP measure, was 8.29%.
Changes, outlook and risks
- Growth in interest income and net interest income was driven substantially by CSB, loan growth and redeployment of securities into loans. Deposit-cost increases and higher operating expenses partly offset the gains. Management reported that noninterest expense excluding CSB declined year over year.
- Management’s long-term goals include loans/leases at 70–75% of assets, NIM above 3.85%, ROAA above 1.10%, NPAs below 0.75% of assets, and wholesale funding below 15% of assets. At quarter-end, NIM was 3.81%, ROAA was 1.04%, and NPAs were 0.75%—so these stated targets were not all met. These are goals, not earnings guidance.
- The company agreed to acquire Guaranty Bank and Trust Company, which had $264 million of assets and $212 million of deposits at June 30. Closing was expected in late Q3 or early Q4 2017, subject to approvals and customary conditions. Estimated consideration was approximately $37.2 million, mostly stock; the filing describes an expected stock portion of about 638,400 shares using an August 3 share price. A $7 million term-note commitment may help fund the cash portion.
- Interest-rate sensitivity simulations were within company policy limits, but management cautioned that rate changes can adversely affect net interest income and portfolio values. Other risks include credit deterioration, loan growth and allowance estimation, deposit fluctuations—including correspondent-bank balances—acquisition execution, and securities duration. Management reported no material change in previously disclosed risk factors and no material pending litigation beyond routine matters.
- The filing reports no other-than-temporary impairment on securities during the periods presented. Management considered unrealized securities losses temporary and reported no intent or expected requirement to sell affected securities before recovery.
Important facts for investors to verify
- Reconcile the cash-flow amounts reported in the cash-flow statement with the differing MD&A figures.
- Track whether loan growth, deposit mix and funding costs support NIM and the company’s stated profitability and asset-quality goals.
- Assess allowance adequacy and credit trends, including the treatment of CSB’s remaining purchase discount, criticized credits and nonperforming assets.
- Confirm Guaranty acquisition approvals, final consideration and share issuance, closing timing, integration costs and subsequent results.
- Review the impact of CSB on year-over-year comparability and distinguish reported results from management’s non-GAAP measures.