QCR Holdings, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared primarily with Q1 2018 and, where noted, Q4 2018. QCR is a regional financial holding company operating five commercial banks, equipment leasing and wealth management businesses. Q1 2019 includes Springfield First Community Bank, merged in July 2018, and the Bates Companies, acquired in October 2018; these transactions affect year-over-year comparability.
Financial performance and condition
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Net interest income | $36.9 million | Up 14% year over year; down 7% from Q4 2018 |
| Noninterest income | $12.0 million | Up 40% year over year; down 22% from Q4 2018 |
| Combined net interest and noninterest income | $48.9 million | Versus $40.9 million in Q1 2018 |
| Provision for loan/lease losses | $2.1 million | Down 16% year over year; up 32% from Q4 2018 |
| Noninterest expense | $32.4 million | Up 25% year over year; down 11% from Q4 2018 |
| Net income / diluted EPS | $12.9 million / $0.81 | Up from $10.6 million / $0.74 in Q1 2018; below Q4 2018’s $13.3 million / $0.84 |
| Net interest margin | 3.25% GAAP; 3.40% tax-equivalent | Q1 2018: 3.50% GAAP; 3.64% tax-equivalent |
| Adjusted tax-equivalent NIM | 3.31% | Excludes acquisition accretion; Q1 2018: 3.57% |
| Operating cash flow | $8.6 million provided | Compared with $7.9 million provided in Q1 2018 |
Adjusted net income, a non-GAAP measure, was $13.0 million, or $0.82 per diluted share, excluding $106,000 of post-acquisition compensation, transition and integration costs after tax. The reported effective tax rate was 9.9%, including a one-time $715,000 year-end tax true-up; management estimated the rate would have been approximately 15.0% without it.
Balance sheet, funding and capital
- Total assets were $5.07 billion at March 31, up 2.4% from year-end 2018. Net loans and leases were $3.76 billion, up $65 million during the quarter and 7.1% annualized.
- Deposits were $4.19 billion, increasing $217 million during the quarter (21.8% annualized). Management attributed growth mainly to correspondent banks and large customers. Cash, federal funds sold and interest-bearing bank deposits totaled $292.6 million at quarter-end.
- Total borrowings fell to $283.0 million from $405.0 million at year-end. Wholesale funding was $480.0 million, down $98.3 million in the quarter; reported wholesale funding was 12% of assets. The company had $363.8 million of subsidiary-bank credit lines available and a separate $10 million revolving line fully available.
- Stockholders’ equity was $488.4 million; tangible common equity to tangible assets was 7.92% (non-GAAP). The company’s total risk-based capital ratio was 12.26%, and all subsidiary banks met “well capitalized” requirements.
- The allowance for loan and lease losses was $41.2 million, or 1.08% of loans and leases. Net charge-offs were $817,000. Nonperforming assets were $26.4 million, or 0.52% of assets, down from $27.9 million and 0.56% at year-end. Classified loans rose 53% from year-end to $43.7 million, following downgrades of two commercial relationships.
Material changes and management commentary
- Year-over-year earnings growth reflected loan growth, the Springfield acquisition and stronger fee income. Interest income rose 32%, while interest expense rose 113%, reflecting acquired deposits, deposit repricing and higher funding costs.
- Net interest margin compressed: tax-equivalent NIM fell 23 basis points sequentially, with management citing deposit costs, a flat yield curve, competition and excess liquidity from deposit growth. Issuance of subordinated debt also weighed on margin.
- Swap fees rose to $3.2 million from $959,000 a year earlier, contributing substantially to fee growth. Management cautioned that swap and government-guaranteed loan-sale gains can fluctuate; such gains and swap fees totaled $12.9 million in Q1 on a year-to-date annualized basis, versus the company’s stated annual goal of $8–$12 million.
- The company issued $65 million of fixed-to-floating subordinated notes in February, receiving $63.4 million net. The notes qualify as Tier 2 capital, bear a fixed 5.375% rate through February 2024, then float at three-month LIBOR plus 282 basis points through 2029. Proceeds funded repayment of $21.3 million of term notes and a $9 million revolving-line balance; remaining proceeds are intended for general corporate purposes and potential strategic uses.
- Management’s long-term goals include loans and leases at 73%–78% of assets, tax-equivalent NIM above 3.35%, ROAA above 1.10%, NPAs below 0.75% of assets, annual net charge-offs below 0.25%, wholesale funding below 15% of assets, and annual wealth-management net income growth above 10%. Q1 ROAA was 1.04%, below its stated target; NIM was 3.40% tax-equivalent, and NPAs were 0.52% of assets. These are targets, not a specific quarterly or full-year earnings forecast.
- Management expects post-acquisition transition and integration expenses to continue during 2019. Legal expenses are expected to continue until court proceedings involving two RB&T employees charged with wrongdoing related to an SBA loan application conclude, which the company expected in early 2020; neither RB&T nor QCR was charged.
Risks, contingencies and unusual items
- Credit quality remains a key watch item: classified loans increased despite lower total criticized loans; management noted potential future increases in problem assets, delinquencies, charge-offs and provisions. Commercial real estate was 47% of the loan portfolio.
- Funding costs and margin are sensitive to deposit mix, large and correspondent depositor balances, competition and interest-rate movements. Correspondent deposits can fluctuate with client liquidity needs and seasonality.
- Other stated risks include economic and trade developments (including tariffs), interest rates, cybersecurity, litigation, acquisition integration and severe weather. Management said modeled interest-rate scenarios remained within policy limits.
- Q1 included the tax true-up and elevated, but lower than Q4, integration costs. The filing reported no material pending litigation involving the company or subsidiaries other than routine business litigation, and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether loan and deposit growth is sustainable and whether large-customer and correspondent deposits remain stable.
- Whether deposit-cost increases and margin compression continue, and how subordinated-note funding affects earnings.
- Whether classified-loan growth leads to higher nonperforming assets, charge-offs or provision expense.
- How much future earnings rely on volatile swap fees, loan-sale gains and acquisition-related accretion, versus recurring core revenue.
- Whether integration costs, the disclosed employee-related legal matter and acquisition outcomes differ from management’s expectations.
- How the one-time tax true-up affects comparisons of the reported Q1 tax rate and earnings.