QCR Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are principally to December 31, 2014. QCR Holdings is a regional banking holding company operating Quad City Bank & Trust, Cedar Rapids Bank & Trust, Rockford Bank & Trust, and a commercial leasing business.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $24.0 million | $21.6 million in Q1 2014 |
| Net interest income | $17.8 million | $16.8 million in Q1 2014 |
| Net income | $4.18 million | $3.89 million in Q1 2014 |
| Net income attributable to common shareholders; diluted EPS | $4.18 million; $0.52 | $3.18 million; $0.40 in Q1 2014 |
| Noninterest income / expense | $6.25 million / $17.23 million | $4.75 million / $16.14 million in Q1 2014 |
| Tax-equivalent net interest margin | 3.25% | 3.11% in Q1 2014 |
| Total assets; net loans and leases | $2.49 billion; $1.63 billion | $2.52 billion; $1.61 billion at Dec. 31, 2014 |
| Deposits; total borrowings | $1.73 billion; $569.4 million | $1.68 billion; $662.6 million at Dec. 31, 2014 |
| Allowance for loan and lease losses | $23.9 million; 1.44% of gross loans/leases | $23.1 million; 1.42% at Dec. 31, 2014 |
| Operating cash flow | $5.1 million | $3.2 million in Q1 2014 |
Net interest income increased 6% year over year, while tax-equivalent net interest income increased 7% to $18.9 million. Management attributed the improvement primarily to loan and lease growth and redeployment of funds from securities into higher-yielding loans. Average gross loans and leases grew $170.6 million, or 12%, year over year. The quarter’s $4.18 million net income included no preferred dividends; Q1 2014 common earnings were reduced by $708,000 of preferred dividends.
Cash provided by investing activities was $40.5 million, chiefly reflecting securities portfolio cash flows and lower cash held in federal funds and bank deposits. Financing activities used $38.7 million, including an $85.0 million net decrease in short-term borrowings, partly offset by deposit growth of $54.6 million. Cash and due from banks ended at $45.1 million, up $6.9 million from year-end.
At March 31, total stockholders’ equity was $151.0 million. The company reported regulatory capital ratios of 10.30% total risk-based capital, 9.00% Tier 1 risk-based capital, 7.24% common equity Tier 1, and 7.14% Tier 1 leverage. Management stated the company and its subsidiary banks met applicable well-capitalized requirements and the new Basel III minimums. Subsidiary banks had $349.5 million of available credit lines; the parent’s $10 million revolver was also undrawn.
Material changes versus comparable periods
- Net income rose 7% year over year; diluted EPS increased from $0.40 to $0.52, also reflecting the absence of preferred dividends in 2015.
- Noninterest income increased 32% to $6.25 million. Notable contributors included $726,000 of swap fees versus $62,000 a year earlier and $421,000 of net securities gains versus $21,000. Trust fees and investment advisory fees also grew; gains on sales of government-guaranteed loan portions declined.
- Noninterest expense rose 7%, with salaries and benefits up 10%, partly due to salary increases, incentive compensation, and additional business-development staff.
- Provision for loan and lease losses increased 56% year over year to $1.71 million, while net charge-offs were $901,000 versus $79,000 in Q1 2014.
- Nonperforming loans and leases declined to $16.5 million from $20.1 million at year-end; nonperforming assets fell to $30.1 million from $33.0 million. However, nonperforming assets remained above the $28.6 million reported at March 31, 2014.
- Deposits increased $54.6 million from year-end, mainly in noninterest-bearing demand deposits. Borrowings fell $93.2 million, primarily due to lower federal funds purchased.
- The securities portfolio’s net unrealized position improved from a loss of about 0.19% of amortized cost at year-end to a gain of about 0.31% at March 31. Management reported no other-than-temporary impairment.
Outlook, management commentary, and risks
- Management’s strategic aim is to increase loans and leases to more than 70% of assets; they represented about 65% at quarter-end. Management expects to support growth partly through core deposits and cash flows or targeted sales from securities.
- Management intends to continue growing core and noninterest-bearing deposits and reduce reliance on higher-cost wholesale funding, while balancing funding strategy against interest-rate risk. No formal earnings or revenue guidance is provided.
- Management said the allowance was adequate, but cautioned that weaker economic conditions or borrower cash flows could increase problem assets, losses, and future provision needs. Commercial real estate was 43% of the loan portfolio; non-owner-occupied commercial real estate was a substantial component.
- Interest-rate changes remain a key risk to net interest income and portfolio values. The filing’s sensitivity table’s latest scenario date is December 31, 2014: modeled year-one net interest income declines were 1.7% for a 100-basis-point rate decrease, 5.0% for a 200-basis-point increase, and 11.9% for a 300-basis-point shock, within stated policy limits.
- The effective tax rate was 17.9% in Q1 2015 versus 10.8% in Q1 2014; the prior-year quarter included a one-time $359,000 tax benefit related to the Community National acquisition.
- The company disclosed no material changes to previously reported risk factors and no material pending legal proceedings other than routine litigation. Management concluded disclosure controls were effective and reported no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth continues alongside stable credit quality, particularly in commercial real estate; monitor criticized loans, nonperforming assets, charge-offs, and allowance coverage.
- How much of earnings growth is recurring: assess the sustainability of swap fees and securities gains, as well as ongoing expense growth and the absence of preferred dividends.
- Whether core deposit growth can fund lending and reduce wholesale borrowings without pressuring funding costs or liquidity.
- Whether management achieves its loan-mix objective while managing interest-rate sensitivity; note that the disclosed sensitivity analysis was dated December 31, 2014.
- Capital headroom as Basel III capital conservation buffer requirements phase in, and the terms or use of available borrowing facilities.