QCR Holdings, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. QCR is a multi-bank holding company serving the Quad Cities, Cedar Rapids/Waterloo-Cedar Falls, and Rockford markets, with commercial and consumer banking, wealth management, and equipment leasing operations. The 2013 acquisition of Community National Bank (CNB) makes some year-over-year comparisons reflect a changing business mix. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal controls.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $86.0 million | $81.9 million |
| Net interest income | $69.1 million | $64.1 million |
| Provision for loan/lease losses | $6.8 million | $5.9 million |
| Noninterest income | $21.0 million | $25.8 million |
| Noninterest expense | $65.3 million | $64.4 million |
| Net income | $15.0 million | $14.9 million |
| Net income available to common shareholders | $13.9 million | $11.8 million |
| Diluted EPS | $1.72 | $2.08 |
| Net interest margin, tax-equivalent | 3.15% | 3.03% |
| Total assets | $2.525 billion | $2.395 billion |
| Gross loans/leases | $1.630 billion | $1.460 billion |
| Deposits | $1.680 billion | $1.647 billion |
| Total borrowings | $662.6 million | $563.4 million |
| Operating cash flow | $25.6 million | $32.0 million |
Net income was nearly flat, while diluted EPS fell 17%, reflecting the materially higher average share count following the 2013 CNB acquisition and conversion of Series E preferred stock. Preferred stock was fully retired in 2014. Common dividends declared remained $0.08 per share for the year.
Loan/lease growth was 12%; commercial and industrial loans grew 21% and direct financing leases 29%. Commercial real estate remained the largest portfolio category at 43% of loans/leases. Loans-to-deposits increased to 97.0% from 88.7%. Cash, federal funds sold, and interest-bearing deposits totaled $120.4 million at year-end. The company reported $237.6 million available on subsidiary-bank credit lines in its liquidity discussion and a separate undrawn $10 million holding-company revolver.
Borrowings rose $99.2 million, including an $80.6 million increase in overnight funding. Year-end borrowings included $268.4 million short-term, $203.5 million of FHLB advances, $150.3 million of other borrowings, and $40.4 million of junior subordinated debentures. Company regulatory capital ratios were 10.91% total risk-based and 7.62% Tier 1 leverage; all three subsidiary banks were reported well-capitalized under the rules then in effect.
Material changes and unusual items
- Net interest income increased 8% as strong organic loan growth and a lower cost of interest-bearing liabilities more than offset continued pressure on loan yields. Tax-equivalent net interest margin rose 12 basis points to 3.15%.
- Reported noninterest income fell 19%, largely because 2013 included CNB acquisition and branch-sale gains and gains from credit-card business and nonperforming-loan sales. Excluding identified one-time 2013 items, management said 2014 noninterest income increased 4%, led by trust, deposit-service, and correspondent-banking fees.
- Provision expense rose 15% to $6.8 million, with a substantial fourth-quarter provision of $3.65 million as management addressed asset-quality issues. Net charge-offs increased to $5.2 million from $4.4 million.
- Nonperforming loans/leases edged down to $20.1 million from $20.5 million, but nonperforming assets increased to $33.0 million from $30.6 million, principally due to a large relationship moving into other real estate owned (OREO). OREO rose to $12.8 million from $9.7 million.
- Noninterest expense increased 1% reported; excluding $2.4 million of 2013 acquisition and data-conversion costs, management reported a 5% increase, primarily from CNB’s first full year of operating costs and added business-development staff.
- The effective tax rate declined to 16.9% from 23.6%, reflecting growth in tax-exempt income and a one-time $359,000 tax benefit related to finalizing CNB acquisition tax matters.
- The investment portfolio’s net unrealized loss improved substantially from 2013; management considered remaining losses temporary and reported no 2014 other-than-temporary impairment. The company purchased $30 million of interest-rate caps to limit exposure on short-term FHLB advances.
Outlook, risks, and contingencies
No numerical earnings or growth guidance is provided. Management’s stated priorities include growing quality loans/leases, targeting loans/leases to at least 70% of assets, funding growth with core deposits and securities cash flows, reducing reliance on wholesale funding, and expanding wealth-management and correspondent-banking fees. Management said it expected its capital structure and capital plan to meet the Basel III requirements effective January 1, 2015; the company intended to elect the existing AOCI treatment for regulatory capital.
Key risks include credit deterioration in the concentrated Midwest markets; commercial real estate and small-business lending exposure; interest-rate and funding volatility; competition; cyber and operational threats; regulatory and capital requirements; and potential difficulty integrating future acquisitions. The allowance was $23.1 million, or 1.42% of gross loans/leases and 114.78% of nonperforming loans/leases. Commitments to extend credit were $499.3 million and standby letters of credit were $12.9 million; management did not expect all commitments to be funded. Mortgage loans sold with recourse provisions totaled $9.0 million, for which no liability was recorded because management considered the risk insignificant. The filing reports no material pending legal proceedings apart from routine matters, while also describing a continuing appeal in litigation on a past loan in which the company was awarded judgment.
Most important facts for investors to verify
- Whether elevated fourth-quarter provisioning and the rise in OREO signal further credit costs, especially in commercial real estate and large borrower relationships.
- Whether loan growth can be sustained with stable core deposits, given the 97% loans-to-deposits ratio and higher overnight borrowing.
- How much earnings growth is recurring, excluding prior-year acquisition, branch-sale, portfolio-sale, and tax-related items.
- Whether capital ratios remain adequate under Basel III and the phased-in capital conservation buffer, and how the preferred-stock retirement and added term debt affect holding-company flexibility.
- The status and potential financial impact of the ongoing loan litigation appeal, credit commitments, and mortgage repurchase obligations.