QCR Holdings, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2015; unaudited consolidated results. QCR Holdings is a regional banking company operating three commercial banks, with commercial lending and leasing, consumer banking, and wealth management businesses.
Financial results and condition
| Metric | Q2 / June 30, 2015 | Comparison |
|---|---|---|
| Net income (loss) | $(0.5) million; diluted EPS $(0.05) | Q2 2014 net income $4.0 million; diluted EPS $0.45 |
| Core net income (non-GAAP) | $4.5 million; diluted core EPS $0.45 | Excludes $5.0 million after-tax nonrecurring expenses |
| Net interest income | $18.5 million | Up 9% year over year and 4% from Q1 2015 |
| Net interest margin | 3.33% on a tax-equivalent basis | Up 19 bps year over year and 8 bps sequentially |
| Provision for loan/lease losses | $2.35 million | Up from $1.00 million in Q2 2014; included a $971,000 specific allowance increase on one QCBT relationship |
| Noninterest income / expense | $5.65 million / $24.29 million | Expense includes $6.89 million of debt-extinguishment losses |
| Total assets / deposits | $2.543 billion / $1.837 billion | At June 30, 2015; deposits up $157.1 million from year-end |
| Loans and leases | $1.715 billion gross; $1.689 billion net | Gross loans and leases grew 10.5% annualized in first-half 2015 |
| Allowance / asset quality | $26.1 million allowance; 1.52% of gross loans | NPAs $27.1 million, or 1.07% of assets; NPLs 0.87% of loans |
| Borrowings / equity | $456.6 million total borrowings; $211.7 million equity | Borrowings down from $662.6 million and equity up from $144.1 million at year-end |
| Cash flows, six months | $8.9 million operating; $(15.0) million investing; $7.9 million financing | Cash and due from banks ended at $40.0 million |
Material changes and notable items
- A May public offering of 3.68 million common shares generated $63.5 million net proceeds. It materially increased capital; tangible common equity to tangible assets rose to 8.15% from 5.52% at year-end.
- The company restructured approximately $103.5 million of debt, including prepayments of FHLB advances and other borrowings. The resulting $6.9 million pretax extinguishment loss contributed to the quarterly GAAP net loss. Management estimates the restructuring will save $4.2 million in annual interest expense.
- Loans and leases grew while securities declined: net loans/leases were 67% of assets versus 64% at year-end, and securities were 23% versus 26%. Noninterest-bearing deposits increased to 34% of deposits.
- Asset quality improved: NPAs fell to 1.07% of assets from 1.31% at year-end; criticized loans declined 15% sequentially. The allowance increased, reflecting loan growth and a higher specific reserve on one existing relationship.
Outlook, risks and contingencies
- No formal earnings guidance is provided. Management expects quarterly net interest margin of 3.40%–3.45% for the remainder of 2015, citing the full-quarter effect of the restructuring. Its 12–24 month goals include loans/leases at 70%–75% of assets, NPAs below 1%, and wholesale funding below 15% of assets.
- Management cites continued loan growth, lower-cost funding, and growth in trust, advisory, leasing, and correspondent-banking fees as strategic priorities. It expects stronger government-guaranteed loan-sale gains in the second half, while noting that such gains fluctuate with transaction timing and demand.
- Key risks include credit losses and the judgment involved in allowance estimates; interest-rate changes affecting net interest income and securities values; and funding concentration. Correspondent-bank deposits were approximately $308 million, 17% of deposits, and could fluctuate with customers’ liquidity needs. QCR also had approximately $70.7 million of loans outstanding to correspondent-bank customers.
- At June 30, banks had $300.2 million available across credit lines; the parent had an undrawn $40 million revolving credit facility. All subsidiary banks were reported as “well capitalized.” The filing reports no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether recurring earnings and margins improve as projected after the debt restructuring, and whether the estimated $4.2 million annual interest savings are realized.
- Whether the specific QCBT credit exposure, provision levels, allowance coverage, and improving NPA trend remain manageable.
- Whether loan growth is funded by stable core deposits without renewed reliance on higher-cost wholesale funding, including given correspondent-deposit concentration.
- How dilution from the 3.68 million-share offering affects per-share earnings, and how reported GAAP results compare with management’s non-GAAP core measures.