QCR Holdings, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012 unless otherwise noted. QCR Holdings is a regional banking company operating three subsidiary banks, with commercial banking, leasing and wealth-management businesses.
Financial performance and condition
- Earnings: Net income was $3.27 million, down 4% from $3.40 million in Q1 2012. Net income attributable to QCR Holdings common stockholders was $2.45 million, up 7% from $2.30 million; diluted EPS was $0.49 versus $0.48. The prior-year comparison included $166,000 attributable to noncontrolling interests.
- Revenue and margins: Interest and dividend income declined 4% to $18.54 million, while interest expense fell 16% to $4.35 million. Net interest income was nearly flat at $14.19 million. On a tax-equivalent basis, net interest income increased 1% to $14.75 million, but net interest margin contracted 10 basis points to 3.02% and net interest spread fell 11 basis points to 2.68%. Noninterest income rose 31.5% to $5.20 million; noninterest expense increased 9.6% to $13.96 million. The filing does not provide a directly comparable consolidated operating-margin figure.
- Cash flow: Operating activities provided $7.2 million; investing activities used $84.9 million, mainly reflecting securities purchases; financing activities provided $49.4 million, primarily from deposit growth. Cash and due from banks ended at $33.3 million, compared with $61.6 million at year-end. Cash, federal funds sold and interest-bearing deposits totaled $67.0 million.
- Balance sheet and funding: Total assets were $2.144 billion, up $50.3 million (2%) from year-end. Net loans and leases were $1.271 billion; securities totaled $692.6 million. Deposits rose $46.4 million to $1.420 billion, including $496.5 million of noninterest-bearing deposits. Total borrowings were $551.5 million, including short-term borrowings of $171.9 million, FHLB advances of $205.4 million, other borrowings of $138.2 million and junior subordinated debentures of $36.1 million. Stockholders’ equity was $142.2 million.
- Credit and capital: The allowance for loan and lease losses was $20.8 million, or 1.61% of gross loans and leases, versus 1.55% at year-end. Nonperforming assets fell 20% to $23.7 million; nonperforming loans and leases were 1.53% of total loans and leases, and allowance coverage of nonperforming loans and leases was 105.3%. The company’s total risk-based capital ratio was 13.04%, Tier 1 risk-based ratio 11.60%, and leverage ratio 8.07%; subsidiary banks met the filing’s “well capitalized” standards.
Material changes and unusual items
- QCBT sold its $10.2 million credit-card loan portfolio and issuing operations. The transactions produced a net pretax gain of $593,000 after $257,000 of related expenses.
- The company recorded $357,000 of acquisition costs related to its planned purchase of Community National Bancorporation and Community National Bank. The proposed acquisition is for approximately 70% QCR common stock and 30% cash; regulatory approval had been received, with closing expected on or about May 13, 2013, subject to shareholder approval and customary conditions. Community National reported year-end 2012 assets of $287.7 million.
- One other-real-estate-owned property was written down by $463,000. Net losses on other real estate owned were $447,000, compared with $189,000 in Q1 2012.
- Available-for-sale securities generated an after-tax other comprehensive loss of $836,000, reducing accumulated other comprehensive income. Management considered unrealized security losses temporary and reported no other-than-temporary impairment.
- During Q1, QCBT repriced $50 million of structured repos from a 3.21% weighted-average rate to 2.65%, extending weighted-average maturity from February 2016 to May 2020.
Outlook, commentary and risks
- The filing provides no quantified earnings or revenue guidance. Management identified improving net interest margins, growing quality loans and leases, expanding wealth-management fees, and shifting funding toward core deposits as priorities. It noted that falling asset yields continue to pressure interest income and margins.
- Management said it intends to reduce reliance on wholesale funding and manage securities growth in relation to deposits and loan demand. At quarter-end, $304.5 million of bank credit lines were available; a separate $20 million revolving note had $14.4 million available.
- Credit-loss estimates depend on borrower performance, collateral values and economic conditions. Management viewed the allowance as adequate but cautioned that adverse conditions could increase problem assets and require additional provisions. Commercial real estate was 46% of the loan and lease portfolio; non-owner-occupied commercial real estate was the largest contributor to nonperforming loans.
- Interest-rate changes may adversely affect net interest income. The latest disclosed sensitivity results were as of December 31, 2012—not March 31, 2013—and showed modeled first-year net interest income changes within the board’s 10% decline limit for the disclosed scenarios.
- The company reported a 14% decline in qualified small business lending from the SBLF baseline, primarily reflecting eligibility rules and portfolio mix. The Series F preferred dividend rate is linked to this measure; the filing describes potential higher dividend costs if qualifying lending does not increase. Basel III implementation remained delayed and its final effects were uncertain.
- No material changes to previously disclosed risk factors were reported. Management found disclosure controls effective; no material pending legal proceedings beyond routine litigation were disclosed.
Key investor verification points
- Track whether core deposit growth and lower funding costs can offset continued asset-yield and net interest margin pressure.
- Review credit quality, particularly non-owner-occupied commercial real estate, criticized loans, OREO valuations and the adequacy of the loan-loss allowance.
- Confirm completion terms and integration effects of the Community National acquisition, including cash use, share issuance and remaining deal costs.
- Assess the durability of noninterest income, separating recurring fees from credit-card-sale gains and variable loan-sale gains.
- Monitor wholesale funding maturities and putable borrowing features, liquidity, capital ratios, and the effect of SBLF-qualified lending on preferred-stock costs.