QCR Holdings, Inc. — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2014, for QCR Holdings and its subsidiary banks, leasing, and wealth-management businesses. Comparisons are primarily with the corresponding 2013 periods; balance-sheet comparisons are with December 31, 2013. The 2013 comparison includes Community National Bancorporation, acquired in May 2013, so periods are not fully comparable.
Key financial metrics
| Metric | Q2 2014 | Comparison |
|---|---|---|
| Interest and dividend income | $21.1 million | Up 5% from Q2 2013 |
| Net interest income | $17.0 million | Up 8% from $15.7 million; tax-equivalent NIM was 3.14%, up 15 basis points |
| Provision for loan/lease losses | $1.0 million | Down from $1.5 million |
| Noninterest income | $5.3 million | Down 23%, largely reflecting the absence of the prior-year acquisition bargain gain |
| Noninterest expense | $16.1 million | Up 6% |
| Net income | $4.0 million | About flat versus $4.0 million |
| Net income attributable to common stockholders | $3.6 million | Up from $3.2 million |
| Diluted EPS | $0.45 | Down from $0.59; weighted-average diluted shares increased about 47% |
- First half: Net interest income was $33.8 million, up 13%; net income was $7.9 million, up 8%; common-stockholder income was $6.8 million, up 20%. Diluted EPS was $0.85 versus $1.08, reflecting the higher share count following the CNB acquisition and the 2013 conversion of Series E preferred stock.
- Margins and costs: Tax-equivalent net interest margin was 3.12% for the first half, up 12 basis points year over year. Management attributed improvement to loan growth, lower funding costs, and a greater contribution from tax-exempt municipal securities.
- Balance sheet at June 30: Total assets were $2.46 billion; gross loans and leases were $1.55 billion and net loans and leases were $1.53 billion. Loans and leases grew 6% from year-end; deposits were $1.68 billion, up 2% from year-end.
- Asset quality: Allowance for loan/lease losses was $23.1 million, or 1.49% of gross loans and leases. Nonperforming loans and leases were $19.9 million; nonperforming assets were $31.2 million, or 1.27% of assets. Nonperforming loans declined from $20.5 million at year-end, while criticized loans rose to $87.7 million from $68.1 million.
- Liquidity, debt, and capital: Cash, federal funds sold, and interest-bearing deposits totaled $113.6 million. Total borrowings were approximately $619 million. The company had $258.8 million available under bank credit lines and an unused $10 million revolving credit facility. Subsidiary banks met “well-capitalized” regulatory thresholds; management said it expected to meet the upcoming Basel III requirements.
- Cash flow, first half: Operating activities provided $7.0 million, investing activities used $47.5 million, and financing activities provided $54.8 million. Cash and due from banks ended at $56.3 million.
Material changes and unusual items
- Q2 2013 included a $1.8 million bargain purchase gain on the CNB acquisition and $432,000 of acquisition and data-conversion costs. Their absence reduced reported year-over-year noninterest income and expense, respectively. Management said pre-tax core earnings, excluding the prior-year net acquisition benefit, increased approximately 27% in Q2 2014.
- The company redeemed the remaining Series F preferred stock on June 30, 2014, for approximately $14.8 million, plus $374,000 of dividends. It has no preferred stock outstanding and eliminated the associated dividend commitments. The redemptions reduced reported stockholders’ equity.
- Other comprehensive income improved as available-for-sale securities recovered in value; accumulated other comprehensive loss narrowed to $3.9 million from $13.6 million at year-end. Management considered securities losses temporary and reported no other-than-temporary impairment.
- The company purchased two interest-rate caps, totaling $30 million notional, to limit exposure to rising rates on short-term FHLB advances; the premiums totaled $2.1 million.
- A $75 million universal shelf registration statement became effective July 14, 2014, allowing possible future issuance of equity, preferred stock, debt, or warrants. No offering was reported in this filing.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance was provided. Management said it intended to pursue quality loan and lease growth, expand wealth-management and deposit-service fee income, and continue shifting funding toward core deposits while reducing reliance on wholesale funding.
- Management highlighted interest-rate risk: changes in rates can affect net interest income and portfolio values. Its modeled year-one net-interest-income changes for selected scenarios were within policy limits, but the filing notes the business remains vulnerable to rate increases and changes in the yield curve.
- Management considered the allowance adequate, but warned that weaker economic conditions, borrower cash flows, collateral values, or other factors could increase problem assets, losses, and required provisions. Criticized and classified loans increased during the first half even as nonperforming loans declined.
- Management cited higher personnel, occupancy, technology, insurance, and loan-workout costs. It expected elevated loan/lease workout expenses to decline as nonperforming loans trend lower, but did not provide a timetable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth can be sustained without further deterioration in criticized/classified credits, nonperforming assets, or credit-loss provisions.
- Whether the improvement in net interest margin and funding costs persists, particularly under rising-rate scenarios and with continued wholesale-funding exposure.
- How much underlying earnings growth remains after separating CNB acquisition effects, tax benefits, securities-related comprehensive income, and the substantial increase in common shares.
- The effect of preferred-stock redemption and the new term debt on funding costs, capital, and future common-shareholder returns; also monitor any securities issued under the $75 million shelf.
- Whether cash generation and available borrowing capacity remain sufficient to support loan growth, maturities, and other funding needs.