QCR Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The unaudited consolidated results include Community State Bank (CSB) from its August 31, 2016 acquisition date. QCR Holdings is a bank holding company operating commercial banks, a leasing business, and wealth-management services in Iowa, Illinois, and surrounding markets.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total interest and noninterest income | $37.2 million | $29.5 million | $98.2 million | $85.2 million |
| Net interest income | $23.6 million | $20.1 million | $65.2 million | $56.4 million |
| Provision for loan/lease losses | $1.6 million | $1.6 million | $4.9 million | $5.7 million |
| Net income | $6.1 million | $6.5 million | $19.2 million | $10.1 million |
| Diluted EPS | $0.46 | $0.55 | $1.52 | $1.01 |
- Q3 pretax income was $8.0 million, down from $9.0 million a year earlier. Q3 reported results included $2.0 million of acquisition costs and $4.1 million of debt-extinguishment losses, alongside a $4.0 million gain from selling an equity security.
- Management’s non-GAAP core net income was $7.5 million for Q3 versus $6.2 million in Q3 2015; nine-month core net income was $20.6 million versus $14.6 million. These measures exclude items management identifies as nonrecurring.
- Tax-equivalent net interest margin was 3.71% in Q3, up 20 basis points year over year and 9 basis points sequentially. Nine-month margin was 3.65%, up 28 basis points year over year. Management attributed the Q3 improvement principally to CSB; excluding CSB, margin was flat from Q2.
- For the first nine months, operating cash flow was $25.8 million; investing activities used $132.1 million, including $69.9 million net cash paid for CSB; financing activities provided $125.7 million. Cash and due from banks ended at $61.2 million.
Financial condition and changes
- At September 30, total assets were $3.281 billion, up from $2.593 billion at December 31, 2015. The CSB acquisition contributed $580.2 million of assets. Gross loans/leases were $2.361 billion and deposits were $2.595 billion.
- CSB was acquired for $80.0 million cash. QCR recorded $10.4 million of goodwill and a $6.4 million core deposit intangible; purchase accounting valuations remained provisional. CSB contributed $2.7 million of revenue and $189,000 of net income for the partial quarter, including $473,000 of after-tax acquisition costs.
- Organic loan and lease growth was 10.6% annualized for the first nine months, excluding CSB. Total reported borrowings were approximately $312.1 million, down from $444.2 million at year-end; deposits and acquisition funding helped reduce wholesale borrowings.
- Stockholders’ equity was $280.9 million. Tangible common equity to tangible assets, a non-GAAP measure, was 7.92%, down from 8.55% at year-end, primarily reflecting CSB-related intangibles and balance-sheet growth. The company reported total risk-based capital of 11.33% and common equity Tier 1 of 9.22%; each subsidiary bank met the regulatory “well capitalized” requirements.
- The allowance for loan/lease losses was $28.8 million, or 1.22% of loans/leases. Management said including the remaining acquired-loan discount would make the comparable coverage measure 1.76%. Nonperforming loans were $16.6 million, or 0.70% of loans; nonperforming assets were $22.7 million, or 0.69% of assets. Criticized loans were $70.6 million, including $51.0 million classified as substandard.
- Q3 organic deposits increased $140.1 million, while CSB added $481.2 million. The company reported $354.6 million available under subsidiary-bank credit lines and $5.0 million remaining on its corporate revolving line.
Management outlook, risks, and unusual items
- The filing provides long-term operating goals, not specific earnings guidance. Targets include a 70–75% gross loans/leases-to-assets ratio, NIM above 3.75%, ROAA above 1.10%, NPAs below 0.75% of assets, wholesale funding below 15% of assets, and noninterest-bearing deposits above 30% of assets. At quarter-end, reported measures included 72%, 3.71%, 0.85%, 0.69%, 13%, and 23%, respectively.
- Management plans to grow core deposits and quality loans, reduce wholesale funding, and develop fee income from government-guaranteed loan sales, swaps, correspondent banking, leasing, and wealth management. Management noted that loan-sale gains and swap fees may fluctuate with transaction timing, market demand, and interest rates.
- Key disclosed risks include credit deterioration or weaker economic conditions, interest-rate changes affecting net interest income and securities values, and fluctuations in correspondent deposits. Management said its modeled interest-rate scenarios were within policy limits; the disclosed sensitivity analysis was based on June 30, 2016 data.
- The company prepaid wholesale funding during 2016, recording $4.2 million net debt-extinguishment losses for the first nine months. It also recognized a $1.2 million first-quarter gain from repurchasing trust preferred securities at a discount, included in that net amount.
- After quarter-end, the company filed a universal shelf registration statement for up to $100 million of securities. It also amended the index on its term and revolving credit agreements from three-month to one-month LIBOR. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
- A related-party disclosure describes a $3.5 million branch remodel contract awarded to a company owned and controlled by a CRBT director; the related company was expected to receive $2.1 million for its work. Management said the bid was at market rates.
Important facts for investors to verify
- Whether core earnings growth persists after removing the $4.0 million equity-sale gain, acquisition expenses, and debt-extinguishment charges.
- CSB’s post-acquisition earnings contribution, integration costs, final purchase-accounting valuations, and realization of management’s expected acquisition benefits.
- Credit trends, including the rise in nonperforming loans and classified loans, and how the acquired-loan discount affects allowance coverage and future provision expense.
- Whether margin improvement and organic loan and core-deposit growth continue, while the company meets its funding and profitability goals.
- The potential dilution or funding implications of the $100 million shelf registration, and the terms and oversight of the disclosed related-party construction contract.