QCR Holdings, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2015. QCR Holdings operates three commercial banks in Iowa and Illinois, commercial leasing, and wealth-management businesses. Comparisons below are with Q3 or the first nine months of 2014, unless noted.
Financial results and condition
| Metric | Q3 2015 | Comparison |
|---|---|---|
| Net interest income | $20.1 million | Up 15% year over year |
| Net interest margin, tax-equivalent | 3.51% | Up 36 basis points year over year and 18 basis points sequentially |
| Noninterest income | $7.6 million | Up 48% year over year |
| Net income | $6.5 million | Versus $4.1 million |
| Diluted EPS | $0.55 | Versus $0.50 |
| Provision for loan and lease losses | $1.6 million | Up from $1.1 million year over year; down 30% sequentially |
- For the first nine months, net interest income was $56.4 million, up 10%; noninterest income was $19.6 million, up 28%; and net income was $10.1 million, down 15% from $12.0 million. Diluted EPS was $1.01 versus $1.35. The 2015 results included $6.9 million in pretax debt-extinguishment losses; the company’s non-GAAP core net income was $14.6 million versus $11.9 million.
- Q3 noninterest income included a $1.2 million pretax gain on an OREO sale, $760,000 in gains on sales of government-guaranteed loan portions, and a $387,000 lawsuit award. Management’s core-income calculation excluded securities gains and the lawsuit award, but included the OREO gain, which it identified as nonrecurring.
- At September 30, total assets were $2.58 billion, gross loans and leases $1.76 billion, deposits $1.86 billion, and stockholders’ equity $221.1 million. Since year-end 2014, loans and leases grew about 8%, deposits about 10%, and equity about 54%.
- Cash, federal funds sold and interest-bearing deposits totaled $107.7 million. Nine-month operating cash flow was $23.2 million, compared with $18.9 million a year earlier. Investing activities used $46.2 million; financing activities provided $25.9 million.
- Total borrowings were $456.1 million, down from $662.6 million at year-end 2014. The company reported $266.2 million of unused subsidiary-bank credit lines and a separate, undrawn $40 million parent-company revolving line. Each subsidiary bank met regulatory “well capitalized” requirements; the company’s September 30 total risk-based capital ratio was 13.06%.
- Asset quality improved: nonperforming assets were $20.6 million, or 0.80% of assets, versus $39.4 million, or 1.61%, a year earlier. Nonperforming loans and leases were 0.70% of total loans and leases. The allowance was $25.5 million, or 1.45% of gross loans and leases; nine-month net charge-offs were 19 basis points of average loans and leases.
Material changes and management commentary
- A May 2015 common-stock offering of 3.68 million shares raised $63.5 million net. Proceeds supported repayment of debt and a balance-sheet restructuring. The company prepaid $85.5 million of FHLB advances and wholesale repurchase agreements and repaid holding-company debt; associated pretax charges were $6.9 million. Management estimates the restructuring will save $4.2 million of interest expense annually.
- Management attributed stronger Q3 margin and net interest income to lower-cost funding, loan and lease growth, and shifting assets from lower-yielding securities into loans. Loans and leases grew at a 10.3% annualized rate in the first nine months. Commercial and industrial lending increased to 37% of the portfolio; commercial real estate declined to 40%.
- Management’s long-term, aspirational goals include a 70–75% loans-and-leases-to-assets ratio, NPA-to-assets below 1%, wholesale funding below 15% of assets, and annual growth of more than 15% in trust and investment advisory fees. At quarter-end, the corresponding reported measures included 68%, 0.80%, and 21%; advisory fees had grown 8% year to date. These are targets, not formal near-term earnings guidance.
- Key risks include credit losses and uncertainty in the allowance estimate, interest-rate sensitivity, and potential volatility in correspondent-bank deposits. Those deposits were about $272 million, or 15% of total deposits; the company also had approximately $67 million in loans to correspondent-bank customers. Management says it monitors concentration and liquidity risk. No material changes to previously disclosed risk factors were reported other than the correspondent-banking concentration and lending risk.
- Management reported effective disclosure controls and no significant change in internal control over financial reporting. The filing reports no material pending legal proceedings other than routine litigation.
Important facts for investors to verify
- Whether Q3 margin improvement and the estimated annual funding-cost savings persist, and how future interest-rate changes affect net interest income.
- Credit trends underlying the higher year-to-date provision, including charge-offs, criticized loans, and the sizable share of NPAs concentrated in a small number of relationships.
- The durability of gains from OREO disposals, government-guaranteed loan sales, and the lawsuit award when assessing recurring earnings.
- How the stock issuance and increased share count affect per-share results, and whether capital and funding goals can be met without further dilution or elevated borrowing costs.
- Potential deposit outflows or credit deterioration among correspondent-bank customers, and the resulting effects on liquidity and loan losses.