QCR Holdings, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. QCR Holdings is a regional banking and financial-services holding company operating three commercial banks, a leasing business, and wealth-management operations. This unaudited filing covers the quarter and nine months ended September 30, 2014. Comparisons are affected by the May 2013 acquisition of Community National Bancorporation (CNB), which was merged into Cedar Rapids Bank & Trust in October 2013.
Financial performance and position
- Third-quarter earnings: Net income was $4.06 million, up from $3.81 million in Q3 2013. Diluted EPS was $0.50 versus $0.51; common shares outstanding increased substantially following the 2013 preferred-to-common conversion. Q3 2013 common earnings also reflected $811,000 of preferred dividends and $389,000 of acquisition costs.
- Nine-month earnings: Net income was $11.96 million versus $11.12 million. Net income attributable to common shareholders rose to $10.88 million from $8.69 million, while diluted EPS declined to $1.35 from $1.59. The prior-year comparison included $2.43 million of preferred dividends and a $1.84 million bargain-purchase gain from CNB.
- Interest income and margin: GAAP net interest income was $17.48 million for Q3, up from $17.31 million; nine-month net interest income was $51.29 million, up from $47.21 million. On a tax-equivalent basis, management reported Q3 net interest income of $18.5 million and margin of 3.15%, up 8 basis points year over year. Nine-month tax-equivalent margin was 3.13%, up 10 basis points.
- Other income and expenses: Q3 noninterest income fell 14.6% to $5.07 million, with lower securities and government-guaranteed loan-sale gains among the contributors. Nine-month noninterest income fell 16.2% to $15.16 million, partly reflecting the absence of the prior-year CNB bargain-purchase gain. Noninterest expense decreased 3.8% in Q3 to $16.39 million, but increased 5.2% for the nine months to $48.64 million, with higher staffing and occupancy costs among the factors.
- Credit costs and asset quality: Q3 provision for loan and lease losses was $1.06 million, down from $1.37 million; nine-month provision was $3.16 million, down from $3.94 million. The allowance was $22.77 million, or 1.45% of gross loans/leases. Nonperforming assets rose to $39.41 million (1.61% of assets) from $30.56 million at year-end 2013; nonperforming loans/leases rose to $28.52 million from $20.48 million. Allowance coverage of nonperforming loans/leases was 79.83%.
- Balance sheet and funding: Total assets were $2.45 billion, up from $2.39 billion at year-end. Gross loans/leases were $1.57 billion, up from $1.46 billion; deposits were $1.71 billion, up from $1.65 billion. Total borrowings were approximately $550.1 million, including $162.2 million short-term borrowings, $196.5 million of FHLB advances, $151.5 million other borrowings, and $40.4 million junior subordinated debentures. Management’s stated strategy is to reduce reliance on wholesale funding where practical.
- Liquidity and cash flow: Cash, federal funds sold, and interest-bearing deposits totaled $106.7 million at quarter-end. For the first nine months, operating activities provided $18.5 million, investing activities used $40.7 million, and financing activities provided $22.6 million; cash and due from banks ended at $42.3 million. The banks had $258.8 million available under credit lines, and the parent had an unused $10 million revolver.
- Capital: Stockholders’ equity was $138.2 million versus $147.6 million at year-end. The company completed redemption of its remaining Series F preferred stock in June, eliminating preferred-dividend commitments. The company reported a 7.53% leverage ratio and 11.10% total risk-based capital ratio; subsidiary banks met “well-capitalized” thresholds. Tangible common equity to tangible assets was 5.45%, a non-GAAP measure.
Material changes and management commentary
- Loan growth, lower funding costs, and a greater contribution from tax-exempt municipal securities supported higher net interest income and margin. Management attributed nine-month net interest income growth partly to CNB and organic loan and lease growth.
- Management reported that nonperforming assets increased during the first nine months, citing differing performance among individual credits, including new nonaccrual loans and other real estate owned. It described credit quality as a priority and the allowance as adequate, while cautioning that future losses could exceed estimates.
- The securities portfolio was $652.8 million, down from $697.2 million at year-end. Management reported no other-than-temporary impairment and considered unrealized losses temporary; it noted sensitivity to interest rates and a portfolio duration of 4.6 years.
- The company purchased two interest-rate caps with a combined $30 million notional amount to limit exposure to rising rates on short-term FHLB advances. Management also highlighted interest-rate risk from mismatches in asset and liability repricing.
- No numerical earnings guidance was provided. Management discussed continued pursuit of quality loan growth, fee-income expansion, margin improvement, and a shift toward core deposits. It said the expected impact of recently issued accounting standards was not significant.
Key investor verification points
- Review the drivers, collateral, and subsequent performance of the increase in nonaccrual loans and nonperforming assets, especially commercial and industrial and non-owner-occupied commercial real estate exposures.
- Assess whether allowance levels and coverage remain appropriate as loans grow and criticized/classified credits change.
- Reconcile reported EPS trends with share-count changes, preferred-stock redemptions, and prior-year acquisition-related gains and costs.
- Track funding mix, brokered deposits, wholesale borrowings, maturities and putable funding options, and available liquidity lines.
- Evaluate exposure to rate changes, including securities duration, unrealized securities losses, and the effectiveness and cost of the interest-rate caps.
- Confirm that regulatory capital remains adequate as Basel III requirements take effect; the filing says management expected existing capital resources and plans to exceed revised ratios.