QCR Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2018, compared primarily with Q1 2017. QCR operates four regional commercial banks, wealth management businesses and a leasing subsidiary. Results include Guaranty Bank, acquired in October 2017.
Financial performance and condition
| Metric | Q1 2018 | Comparable period / change |
|---|---|---|
| Net income | $10.55 million | $9.18 million in Q1 2017; up 15% |
| Diluted EPS | $0.74 | $0.68 in Q1 2017 |
| Net interest income | $32.40 million | $27.67 million; up 17% |
| Noninterest income | $8.54 million | $7.28 million; up 17% |
| Total revenue (net interest income plus noninterest income) | $40.94 million | $34.95 million; up about 17% |
| Provision for loan/lease losses | $2.54 million | $2.11 million; up 21% |
| Noninterest expense | $25.86 million | $21.27 million; up 22% |
| Net interest margin | 3.50% GAAP; 3.64% tax-equivalent | 3.65% GAAP; 3.90% tax-equivalent in Q1 2017 |
| Efficiency ratio | 63.17% | 60.86% in Q1 2017 |
| Total assets | $4.03 billion | $3.98 billion at Dec. 31, 2017 |
| Gross loans and leases | $3.05 billion | $2.96 billion at Dec. 31, 2017; 12.2% annualized quarterly growth |
| Deposits | $3.28 billion | $3.27 billion at Dec. 31, 2017 |
| Total borrowings | $334.8 million | $309.5 million at Dec. 31, 2017 |
| Stockholders’ equity | $360.4 million | $353.3 million at Dec. 31, 2017 |
Operating cash flow was $7.9 million, versus $10.8 million in Q1 2017. Investing activities used $60.0 million, principally reflecting $90.4 million of net loan and lease growth. Financing activities provided $38.3 million; cash and due from banks declined $13.9 million to $61.8 million. The quarterly dividend declared was $0.06 per common share.
Asset quality: nonperforming assets were $31.0 million, or 0.77% of assets, down from 0.81% at year-end; nonperforming loans were 0.59% of loans. The allowance was $36.5 million, or 1.20% of loans and leases, versus 1.16% at year-end. Criticized loans rose to $82.7 million from $74.7 million, while classified loans declined to $39.8 million from $43.7 million.
Capital: consolidated total risk-based capital was 11.25%, Tier 1 leverage was 9.08%, and common equity Tier 1 was 9.14%. The filing says each subsidiary bank met the requirements to be “well capitalized.”
Material changes versus prior periods
- Net income and diluted EPS increased year over year, supported by loan growth, the Guaranty acquisition, higher swap fees and wealth-management fees. Average earning assets grew 22% and average gross loans and leases grew 26% year over year.
- Interest expense rose 94% year over year as deposits repriced, Guaranty added funding costs, and short-term borrowing supported loan growth. The average cost of interest-bearing liabilities increased to 1.03% from 0.69%.
- Q1 2018 tax expense was $2.0 million, with a 15.9% effective tax rate, compared with $2.4 million and 20.6% in Q1 2017. The federal tax rate reduction under the Tax Act contributed. Q4 2017 included a one-time $2.9 million tax benefit.
- Noninterest expense increased 22% year over year, primarily due to Guaranty, staffing and related operating costs. Q4 2017 expense had included $4.4 million of nonrecurring Guaranty acquisition and processor-termination costs.
- Available-for-sale securities had a $6.9 million gross unrealized loss at March 31, 2018, compared with $2.9 million at year-end. The company recorded a $3.2 million after-tax other comprehensive loss in Q1, primarily associated with securities; management considered debt-security declines temporary and reported no impairment charge.
Outlook, commentary, risks and unusual items
- Management reported quarterly loan and lease growth above its 10–12% full-year organic growth target and aims to keep gross loans and leases at 73–78% of assets. Long-term goals also include NIM above 3.65%, ROAA above 1.10%, NPAs below 0.75% of assets, wholesale funding below 15% of assets, and annual wealth-management net income growth above 10%. These are targets, not earnings guidance; the filing provides no specific full-year earnings forecast.
- Management plans to shift funding toward core deposits and reduce wholesale funding. Wholesale funding increased during Q1 as loan growth outpaced deposits; brokered deposits rose to $209.5 million from $105.2 million at year-end. Management attributed much of the increase to seasonal commercial deposit declines and expected those deposits to return in Q2.
- Liquidity sources include $372.2 million of available subsidiary-bank credit lines and a fully available $10 million revolving line at March 31. Management monitors liquidity through contingency planning and stress testing. Correspondent banking deposits totaled $417.5 million across 192 relationships and may fluctuate materially.
- Interest-rate simulation showed estimated Year 1 net interest income changes of +0.3% for a 100-basis-point decline, −3.5% for a 200-basis-point increase and −8.6% for a 300-basis-point upward shock, within stated policy limits. Management cautions that interest-rate changes can adversely affect earnings and portfolio values.
- QCR signed an agreement to acquire the Bates Companies for $3.0 million cash and up to $3.0 million in stock, adding about $700 million of managed assets; closing was expected late Q2 or early Q3 2018, subject to approvals and conditions. In April, after quarter-end, it agreed to acquire Springfield Bancshares in a transaction valued at approximately $86.7 million; closing was expected in Q3, subject to approvals and conditions.
- Two RB&T employees were charged with wrongdoing related to an SBA loan application. The company and RB&T were not charged; QCR expected related legal costs to continue until proceedings were completed, expected in late 2018. The filing separately states there were no material pending legal proceedings to which the company or subsidiaries were a party, other than routine matters.
- Management identified the allowance for loan and lease losses as a critical estimate and said economic deterioration or other factors could require additional provisions. Other disclosed risks include economic conditions, interest rates, cybersecurity, litigation and acquisition integration or failure to realize expected benefits.
- ASU 2014-09 revenue guidance was adopted in January 2018 without material impact. The company was evaluating the impact of forthcoming lease and expected-credit-loss standards. It early adopted ASU 2018-02, applying the guidance to 2017 statements.
Important facts for investors to verify
- Whether Q1 loan growth can be sustained without further increases in borrowing costs, wholesale funding or credit-loss provisions.
- Deposit retention and mix, including the expected return of seasonal commercial deposits and the increase in brokered deposits and overnight FHLB advances.
- Credit trends: criticized loans increased, and CRE represents 45% of the loan and lease portfolio; assess concentrations, nonperforming assets and allowance coverage, including acquired-loan discounts.
- How securities valuation losses, interest-rate sensitivity and deposit repricing affect capital, liquidity and future net interest margin.
- Completion, consideration, integration costs and expected benefits of the Bates and Springfield transactions; the filing does not provide quantified expected earnings contribution.
- Progress and cost of the employee-related SBA legal matter, and the sustainability of volatile swap-fee and government-guaranteed loan-sale income.