QCR Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. QCR is a regional bank holding company with commercial banking, wealth management and equipment leasing operations. Results include Guaranty Bank, acquired in October 2017, but exclude SFC Bank, whose merger closed July 1, 2018.
Key financial results
| Metric | Q2 2018 | Comparison |
|---|---|---|
| Net interest income | $32.1 million | Up 14% year over year; down 1% from Q1 2018 |
| Net interest margin, tax-equivalent | 3.52% | 3.81% a year earlier; 3.64% in Q1 2018 |
| Noninterest income | $8.9 million | Up 31% year over year, including higher swap fees |
| Noninterest expense | $26.4 million | Up 23% year over year, primarily reflecting Guaranty and related costs |
| Net income / diluted EPS | $10.4 million / $0.73 | Net income up 19% and diluted EPS up from $0.65 |
| Core net income / core diluted EPS | $10.9 million / $0.77 | Non-GAAP measures |
| Six-month net income / diluted EPS | $21.0 million / $1.48 | Compared with $18.0 million / $1.33 in first-half 2017 |
| Provision for loan and lease losses | $2.3 million | Up 14% year over year |
Financial condition, cash flow and capital
- Total assets were $4.11 billion at June 30, up 3% from year-end 2017. Net loans and leases were $3.08 billion, up 5% since year-end; second-quarter loan and lease growth was 7.8% annualized.
- Deposits were $3.30 billion, up $31.6 million from year-end. Total borrowings were $380.4 million, up from $309.5 million; management attributed increased short-term funding to loan growth outpacing deposit growth. Wholesale funding was 13% of assets.
- Six-month cash flows: $29.4 million provided by operations, $137.9 million used in investing and $101.9 million provided by financing. Cash and due from banks ended at $69.1 million, a $6.7 million decrease from year-end.
- Stockholders’ equity was $369.6 million. The company’s regulatory capital ratios included 9.16% common equity Tier 1 and 11.23% total risk-based capital; management reported that subsidiary banks met “well capitalized” requirements.
- Allowance for loan and lease losses was $37.5 million, or 1.21% of loans and leases. Nonperforming assets were $26.8 million, or 0.65% of assets; nonperforming loans were 0.45% of loans and leases.
Material changes, outlook and risks
- Year-over-year earnings growth reflected loan growth and Guaranty Bank, along with higher swap, trust and advisory fees. Interest expense rose sharply as deposit costs increased and the company used more borrowings. Tax expense declined, with a 15.3% effective tax rate for Q2, reflecting the lower federal rate under the Tax Act and tax-exempt income.
- Tax-equivalent NIM declined sequentially by 12 basis points. Management cited higher funding costs, competitive loan pricing and first-quarter loan origination fees; it noted core loan yields increased 13 basis points sequentially, but funding costs offset the improvement.
- Management’s long-term targets include NIM above 3.65%, return on average assets above 1.10%, nonperforming assets below 0.75% of assets, and wholesale funding below 15% of assets. Q2 NIM and reported ROAA of 1.03% were below targets; NPAs and wholesale funding were within targets. No specific full-year earnings guidance is stated.
- On July 1, 2018, after quarter-end, QCR completed its Springfield Bancshares merger for reported total consideration of $87.4 million. SFC Bank had historical book assets of $573 million, loans of $487 million and deposits of $439 million; purchase accounting fair values were still being determined. Bates Companies’ acquisition was pending, expected in early Q4 2018, and was intended to add about $700 million of assets under management.
- Acquisition and post-acquisition expenses were recorded in the first half. The filing also reports an RB&T legal matter in which two employees were charged with wrongdoing related to an SBA loan application; neither RB&T nor QCR was charged. The company expected related legal costs to continue until proceedings concluded, anticipated in late 2018.
- Principal risks discussed include interest-rate and funding-cost changes, credit deterioration and economic conditions, correspondent-deposit fluctuations, cybersecurity, litigation, and acquisition execution and integration. Management said interest-rate sensitivity remained within its stated policy limits. It also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth, deposit gathering and funding costs sustain or further pressure NIM and profitability.
- Credit quality trends, including criticized loans, allowance adequacy, nonperforming assets and acquired-loan discount accretion.
- Integration, purchase accounting, funding and subsequent results for the July 1 Springfield merger, and the status and terms of the Bates acquisition.
- How much of noninterest-income growth depends on volatile swap fees and other transaction-driven income, and whether acquisition-related expenses persist.
- Updates on the SBA-related employee legal matter and the potential costs or other consequences.