QCR Holdings, Inc. — Q2 2019 Form 10-Q Summary
Business context and period. QCR Holdings is a multibank financial holding company with commercial banking, leasing and wealth management operations. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are primarily with the corresponding 2018 periods. Results include Springfield First Community Bank, acquired in July 2018, and the Bates Companies, acquired in October 2018, for periods after their respective acquisitions.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $38.0 million | $32.1 million | $74.9 million | $64.5 million |
| Provision for loan/lease losses | $1.9 million | $2.3 million | $4.1 million | $4.8 million |
| Noninterest income | $17.1 million | $8.9 million | $29.1 million | $17.5 million |
| Noninterest expense | $36.6 million | $26.4 million | $69.0 million | $52.2 million |
| Net income | $13.5 million | $10.4 million | $26.4 million | $21.0 million |
| Diluted EPS | $0.85 | $0.73 | $1.66 | $1.48 |
- Q2 net income increased 29% year over year; six-month net income increased 26%. Management reported record quarterly net income and adjusted net income of $14.1 million, or $0.88 per diluted share, a non-GAAP measure.
- Quarterly GAAP net interest margin was 3.25%, unchanged from Q1 but below 3.37% in Q2 2018. Tax-equivalent NIM was 3.40%, also unchanged sequentially and down from 3.52% a year earlier. The Q2 non-GAAP efficiency ratio was 66.38%, versus 64.32% in Q2 2018.
- At June 30, total assets were $5.19 billion, up from $4.95 billion at year-end 2018. Gross loans and leases were $3.91 billion, up from $3.73 billion; deposits were $4.32 billion, up from $3.98 billion. Management reported annualized loan growth of 11.7% for Q2 and 9.5% year to date, and deposit growth of 12.2% and 17.4%, respectively.
- Six-month operating cash flow was $29.3 million, investing cash outflow was $197.2 million, and financing cash inflow was $170.2 million. Cash and due from banks ended at $87.9 million. Net loan growth was a principal use of investing cash; deposit growth and subordinated-note proceeds supported financing cash flow.
- At June 30, borrowings totaled approximately $231.0 million, down from $405.0 million at year-end. The balance included $105.7 million of FHLB advances, $19.2 million of short-term borrowings, $68.3 million of subordinated notes and $37.8 million of junior subordinated debentures. Stockholders’ equity was $504.3 million. The company’s total risk-based capital ratio was 12.04%; each subsidiary bank met the regulatory “well capitalized” requirements.
Changes, outlook and notable items
- Growth in net interest income reflected acquired operations and organic loan growth. Higher deposit costs partly offset asset growth: the average cost of interest-bearing liabilities rose to 1.76% in Q2 from 1.21% a year earlier.
- Noninterest income rose sharply, led by swap fee income of $7.9 million in Q2 and $11.1 million for the first half, versus $1.6 million and $2.6 million, respectively, in 2018. Management noted that swap activity and resulting fees can fluctuate with transaction size and interest-rate conditions.
- Noninterest expense increased 39% year over year in Q2. Drivers included acquired operations, higher compensation and commissions associated with strong fee income, $708,000 of post-acquisition and integration costs, and a $1.0 million write-down of an other-real-estate-owned property. Q2 also included approximately $2.5 million of additional bonus and commission expense.
- Asset quality improved on several measures: nonperforming assets declined to $23.2 million from $26.4 million at Q1-end, and NPAs to total assets fell to 0.45% from 0.52%. The allowance was $41.1 million, or 1.05% of loans and leases. Classified loans increased 43% during the first half, which management attributed to two relationships downgraded in Q1; they decreased 6% in Q2.
- The company issued $65.0 million of fixed-to-floating subordinated notes in February, receiving $63.4 million net. Proceeds helped repay term debt and the revolving line; strong deposit growth also enabled repayment of wholesale funding. The revolving credit line was renewed and increased to $20.0 million, with no balance outstanding at June 30.
- Management’s stated long-term goals include loan-to-assets of 73%–78%, NIM above 3.35% tax-equivalent, ROAA above 1.10%, NPAs below 0.75% of assets, and wholesale funding below 15% of assets. Q2 loan-to-assets was 75%, NIM (TEY) 3.40%, ROAA 1.06%, NPAs/assets 0.45%, and wholesale funding/assets 10%. These are goals, not formal near-term earnings guidance; management cautioned there is no assurance they will be achieved.
- Key risks cited include economic and borrower conditions, interest-rate changes, cybersecurity, litigation, acquisition integration and realization of acquisition benefits, and weather or trade-policy impacts on borrowers. The filing also notes ongoing legal proceedings involving two RB&T employees charged with wrongdoing related to an SBA loan application; neither RB&T nor QCR Holdings was charged, and legal costs were expected to continue until proceedings were completed, anticipated in early 2020.
- A $715,000 first-quarter tax true-up reduced reported first-half tax expense; excluding it, management estimated the first-half effective tax rate at approximately 16.8%, versus the reported 14.5%. Management said adoption of the new lease standard had no significant impact; the company was still assessing the expected-credit-loss standard, effective for it in 2020.
Important facts for investors to verify
- Whether unusually strong swap-fee income is repeatable and how a change in swap activity would affect earnings.
- Whether loan growth, deposit growth and deposit pricing can sustain margins while reducing reliance on wholesale funding.
- Trends in classified credits, nonperforming assets, charge-offs and allowance adequacy, particularly given the first-half increase in classified loans.
- Whether higher compensation, integration costs and other expense growth moderate, and whether the OREO write-down signals further asset-value pressure.
- The potential duration and cost of the employee-related legal matter, and the eventual effect of expected-credit-loss accounting adoption.