QCR Holdings, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016. QCR Holdings operates three commercial banks and a commercial leasing business, with wealth management and correspondent banking activities. The filing cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2016 | Comparable period |
|---|---|---|
| Total interest and dividend income | $23.9 million | $22.1 million in Q2 2015 |
| Net interest income | $21.0 million | $18.5 million in Q2 2015 |
| Net interest margin, tax-equivalent | 3.62% | 3.33% in Q2 2015 |
| Noninterest income | $6.8 million | $5.5 million in Q2 2015 |
| Provision for loan/lease losses | $1.2 million | $2.3 million in Q2 2015 |
| Noninterest expense | $17.7 million | $24.1 million in Q2 2015 |
| Net income (loss) | $6.7 million; diluted EPS $0.53 | Loss of $0.5 million; diluted loss per share $0.05 in Q2 2015 |
- For the first half, net income was $13.0 million and diluted EPS was $1.07, versus net income of $3.7 million and diluted EPS of $0.40 in the first half of 2015. First-half net interest income was $41.6 million, up from $36.3 million; noninterest income was $13.6 million, up from $11.7 million.
- Q2 revenue, measured as interest and dividend income plus noninterest income, was $30.7 million, compared with $27.5 million a year earlier. First-half revenue was $61.0 million versus $55.6 million.
- Management reported Q2 return on average assets of 1.01% and a 3-basis-point sequential improvement in NIM. Reported first-half tax-equivalent NIM was 3.61%, versus 3.29% a year earlier.
- At June 30, total assets were $2.68 billion, net loans and leases $1.89 billion, deposits $1.97 billion, and stockholders’ equity $275.1 million. Gross loans and leases grew at a reported 13.9% annualized rate in the first half.
- Cash from operating activities was $14.8 million for the first half, versus $8.9 million in 2015. Investing activities used $67.2 million and financing activities provided $60.3 million. Period-end cash and due from banks was $49.6 million.
- Total borrowings were approximately $381.9 million, or 14% of assets. Short-term borrowings fell to $51.6 million from $144.7 million at year-end 2015, while FHLB advances rose to $196.9 million from $151.0 million. The company reported $339 million available under subsidiary-bank credit lines and $10 million available under its parent revolving facility.
- All three subsidiary banks met regulatory “well capitalized” requirements. Consolidated capital ratios included total risk-based capital of 14.29%, Tier 1 risk-based capital of 13.04%, and common equity Tier 1 of 11.72%. Tangible common equity to tangible assets, a non-GAAP measure, was 10.10%.
Material changes versus prior periods
- Q2 2016 earnings compared favorably with the prior-year quarter, which included $6.9 million of net debt-extinguishment losses and other nonrecurring costs. First-half 2016 noninterest expense declined 16% year over year; the comparison is materially affected by those 2015 charges.
- Q2 noninterest income rose 24% year over year, primarily reflecting $1.6 million of gains on sales of government-guaranteed loan portions. That category and swap fees totaled $3.5 million year to date; such income can fluctuate with loan demand, transaction timing, and interest rates.
- Asset quality indicators improved year over year: nonperforming assets were $18.9 million, or 0.70% of assets, compared with $27.1 million, or 1.07%, at June 30, 2015. However, classified commercial loans increased to $44.6 million from $28.0 million at year-end 2015, due primarily to a limited number of relationship downgrades.
- The company issued 1.215 million common shares at $24.75 per share in May, raising approximately $29.8 million net. Shares outstanding were 13.06 million at June 30, compared with 11.76 million at December 31, 2015.
- Available-for-sale securities declined to $230.6 million from $323.4 million at year-end 2015, while held-to-maturity securities increased to $280.3 million from $253.7 million. Management said securities sales and maturities helped fund loan growth and portfolio repositioning.
Outlook, commentary, risks, and unusual items
- The company signed an agreement to acquire Community State Bank, an Iowa bank with $571 million in assets at June 30, for $80 million cash. Closing was expected in Q3 2016, subject to customary conditions; CSB results are not included in this filing. Planned funding includes the stock-offering proceeds, approximately $35 million of credit facilities, and approximately $15 million in subsidiary-bank dividends. Q2 acquisition costs were $355,000.
- Management’s stated long-term goals include 70%–75% gross loans and leases to assets, NIM above 3.50%, NPAs below 0.75% of assets, wholesale funding below 15% of assets, and noninterest-bearing deposits above 30% of assets. These are targets, not earnings guidance. At quarter-end, the company reported 72%, 3.62%, 0.70%, 18%, and 23%, respectively.
- Management cited strong loan growth, lower provision expense, funding-cost reductions, and redeployment of lower-yielding securities into loans as performance drivers. It also noted that SBA/USDA loan-sale gains and swap fees are variable sources of revenue and that trust and investment advisory fees were affected by market conditions.
- Principal risks include credit deterioration and potentially higher loan-loss provisions, interest-rate changes affecting net interest income and portfolio values, funding and deposit fluctuations (including correspondent-bank balances), and execution and financing of the pending acquisition. Management stated that the allowance was adequate but noted actual losses could exceed estimates. Interest-rate simulations were within policy limits using the latest available quarter-end data, March 31, 2016.
- Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, effective disclosure controls, and no significant changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Community State Bank acquisition closed on the expected timetable and how its purchase accounting, integration costs, funding, and share dilution affect results and capital.
- Whether loan growth can be sustained without weakening underwriting, and how classified loans, nonperforming assets, charge-offs, and the allowance develop.
- How much earnings depend on variable government-guaranteed loan-sale gains, swap fees, and securities gains versus recurring net interest income and fees.
- Whether margin improvement continues as funding costs, deposit mix, wholesale funding, and interest rates change.
- How the 2015 debt-extinguishment costs affect year-over-year comparisons; assess both GAAP results and management’s non-GAAP “core” measures.