QCR HOLDINGS INC quarterly report, Q3 FY2019

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QCR Holdings, Inc. — Q3 2019 Form 10-Q

Business context and reporting period

QCR Holdings is a regional financial holding company operating commercial banks, a leasing business and wealth-management businesses across the Midwest. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparative results are for the corresponding 2018 periods. Results include Springfield First Community Bank, acquired in July 2018, and the Bates Companies, acquired in October 2018.

Financial performance and condition

  • Q3 earnings: Net income was $15.1 million and diluted EPS was $0.94, versus $8.8 million and $0.55 in Q3 2018. Adjusted net income, a non-GAAP measure, was $15.9 million, or $1.00 diluted EPS.
  • Nine-month earnings: Net income was $41.5 million and diluted EPS was $2.60, compared with $29.8 million and $2.02 in 2018. Adjusted net income was $43.0 million and adjusted diluted EPS was $2.70.
  • Revenue and expenses: Q3 net interest income was $40.7 million (+6% year over year); noninterest income was $19.9 million (+126%), including $9.8 million of swap fees. Noninterest expense was $39.9 million (+31%). For the first nine months, net interest income was $115.6 million, noninterest income $49.0 million and noninterest expense $108.9 million. The Q3 efficiency ratio was 65.89% (non-GAAP).
  • Margins: Q3 GAAP net interest margin was 3.37%, up 12 basis points from Q2 but below 3.46% a year earlier. Tax-equivalent NIM was 3.52%. Nine-month GAAP NIM was 3.29%, versus 3.45% in 2018.
  • Balance sheet: Total assets were $5.29 billion and stockholders’ equity $519.7 million at September 30. Gross loans and leases held for investment were $3.60 billion; deposits were $3.80 billion. Comparisons are affected by RB&T assets and liabilities classified as held for sale.
  • Credit quality: Nonperforming assets were $13.2 million, or 0.27% of assets, compared with $27.9 million and 0.56% at December 31, 2018. The allowance was $36.1 million, 1.00% of loans and leases; net charge-offs were $3.3 million year to date. Management said the allowance was adequate but cautioned losses could exceed estimates.
  • Cash flow and liquidity: Nine-month operating cash flow was $46.1 million, investing cash outflow $235.1 million and financing cash inflow $206.1 million. Cash and due from banks at period end was $102.7 million, including cash in held-for-sale assets. The company reported $288.9 million in cash, federal funds sold and interest-bearing deposits, plus $419.1 million of available subsidiary-bank credit lines and an undrawn $20 million revolving facility.
  • Debt and capital: Borrowings totaled approximately $320.5 million, including $68.3 million of subordinated notes issued in February. The company prepaid $30.2 million of FHLB term advances in Q3. Company regulatory total risk-based capital was 12.22%, common equity Tier 1 was 9.12%, and tangible common equity to tangible assets was 8.20% (non-GAAP). Subsidiary banks met well-capitalized requirements.

Material changes versus comparable periods

  • Higher earnings reflected loan growth, the Springfield acquisition and sharply higher swap fees; nine-month noninterest income rose 86% year over year. Management noted swap activity and fee income may fluctuate with rates, transaction size and volume.
  • Q3 net interest income increased 7% from Q2, supported by higher average earning assets and a 12-basis-point linked-quarter margin expansion. Deposit and borrowing costs had risen year over year, although interest expense eased modestly from Q2.
  • Noninterest expense rose 31% year over year in Q3. Drivers included acquired operations, higher compensation and professional/data-processing costs, and a $2.0 million write-down of an OREO property. Credit provision fell 68% year over year in Q3, primarily reflecting improved asset quality.
  • At September 30, the company reclassified $465.5 million of RB&T assets and $470.5 million of related liabilities as held for sale. Excluding RB&T held-for-sale loans, management reported annualized loan growth of 9.1% for Q3 and 9.4% year to date; deposits declined 1.7% on a linked-quarter basis, while year-to-date growth was 9.6% annualized.

Outlook, commentary, risks and unusual items

  • The RB&T sale agreement was signed August 13, 2019, subject to regulatory approval and customary closing conditions, with closing expected in Q4 2019. Based on RB&T’s September 30 balance sheet, the estimated purchase-price premium was $14.2 million and total payment was $59.7 million; final consideration depends on the agreement’s formula.
  • No specific earnings forecast was provided. Long-term targets include loans and leases of 73%–78% of assets, 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%. Management reported Q3 results within several of these targets.
  • Management highlighted economic and interest-rate uncertainty, deposit pricing sensitivity, potential borrower stress, cybersecurity, litigation, acquisition integration and agricultural or other tariff impacts as risks. Interest-rate simulations were within stated policy limits.
  • The nine-month effective tax rate was 16.3%; this included a one-time $715,000 prior-year tax true-up. Management estimated the rate would have been approximately 14.9% excluding that adjustment. Separately, two RB&T employees faced charges related to an SBA loan application; the company stated neither RB&T nor QCR Holdings had been charged. The filing reported no other material pending legal proceedings and no material change in previously disclosed risk factors.

Most important facts for investors to verify

  • Whether the RB&T transaction received approvals, closed on schedule and delivered proceeds consistent with the estimate and agreement formula.
  • How much of the exceptional swap-fee income is repeatable, and the effect of lower rates on NIM, funding costs and fee revenue.
  • Whether underlying loan and core-deposit growth continues after excluding RB&T, and how the company manages correspondent-deposit concentration and wholesale funding.
  • Whether credit metrics, OREO costs and the allowance remain stable as the portfolio changes and the company adopts the expected-loss accounting standard.
  • Whether acquisition-related expenses decline and whether the tax true-up, RB&T legal matter or other contingencies lead to further unusual costs.