QCR Holdings, Inc. Announces Second Quarter Earnings Results and Impact of Successful Balance Sheet Restructuring

MOLINE, Ill., July 22, 2015 (GLOBE NEWSWIRE) -- QCR Holdings, Inc. (NASDAQ:QCRH) today announced core net income (non-GAAP) for the quarter ending June 30, 2015 of $4.5 million, with diluted core earnings per common share ("EPS") of $0.45. For the six months ended June 30, 2015, the Company reported core net income of $8.4 million, with diluted core EPS of $0.92. Core net income for both the second quarter and year-to-date excludes $5.0 million of after-tax non-recurring expenses, $4.5 million of which related to the previously announced prepayment of FHLB advances and other wholesale borrowings.

During the second quarter, the Company successfully executed several planned initiatives aimed at improving the long-term profitability of the company and strengthening its capital base to take advantage of future opportunities. As a result, financial performance was greatly impacted by several previously announced nonrecurring income and expense items; most prominently the one-time expense related to the prepayment of certain FHLB advances and other wholesale borrowings.

On a GAAP basis, the Company reported a net loss of $524 thousand for the quarter ended June 30, 2015, and diluted EPS of ($0.05). By comparison, for the quarter ended March 31, 2015, the Company reported net income of $4.2 million, and diluted EPS of $0.52. As a result of the redemption of all of the Company's remaining outstanding shares of preferred stock in the second quarter of 2014, neither quarter of 2015 included preferred stock dividends. For the second quarter of 2014, the Company reported net income of $4.0 million, and diluted EPS of $0.45, after preferred stock dividends of $374 thousand.

For the six months ended June 30, 2015, the Company reported GAAP net income of $3.7 million, and diluted EPS of $0.40. By comparison, for the first six months ended June 30, 2014, the Company reported GAAP net income of $7.9 million, and diluted EPS of $0.85, after preferred stock dividends of $1.1 million.

"We are extremely pleased with the careful execution of our strategy to repay high-cost borrowings," commented Douglas M. Hultquist, President and Chief Executive Officer. He continued, "We expect annual interest expense savings of roughly $4.2 million pre-tax, with this better than expected result attributable to lower replacement funding cost."

"Core operating performance in the second quarter was solid," added Mr. Hultquist, "as organic loan growth was quite strong, we experienced robust growth in noninterest bearing deposits, and asset quality metrics showed continued improvement. Core return on average assets, or ROAA, improved 9 basis points quarter-over-quarter, and we anticipate continued improvements in ROAA as the full impact of the balance sheet restructuring is realized and we continue to make progress on other planned initiatives to reach our targeted 1.00% ROAA."

Proceeds from Stock Offering
Used to Restructure Balance Sheet

The Company utilized the proceeds from the common stock offering to restructure certain debt obligations and to bolster overall capital levels, including tangible common equity. Specifically, the Company repaid $15.3 million of holding company senior debt at a rate of 3.27%, and $2.7 million of subordinated debt at a rate of 6.00%. Additionally, $85.5 million of FHLB advances and wholesale structured repurchase agreements at a weighted average rate of 4.36% were prepaid at Quad City Bank & Trust and Cedar Rapids Bank & Trust. As a result of this planned restructuring, the Company incurred $6.9 million (pre-tax) in losses for debt extinguishment that were recognized in the second quarter.

Of the $103.5 million in debt extinguishments, $63.5 million was funded with the proceeds from the common stock issuance. Approximately $27.7 million was funded through the maturity of low-yielding securities. Brokered CDs and overnight FHLB advances were utilized to fund the remaining $12.3 million. The weighted average rate on these new borrowings was approximately 0.90%. 

This restructuring and deleveraging significantly reduced the wholesale borrowings portfolio of the Company. Defined as the sum of FHLB advances, wholesale structured repurchase agreements and brokered CDs, total wholesale borrowings decreased $60.4 million from December 31, 2014 to June 30, 2015. During the same period, the cost of those wholesale borrowings decreased from 2.66% to 1.96% and the duration shortened, as many of the borrowings that were extinguished were long-term in nature. Of the $85.5 million in FHLB advances and wholesale structured repurchase agreements that were prepaid, $30.5 million were set to mature in 2016, $15.0 million in 2017, $10.0 million in 2018 and $30.0 million in 2019. The weighted average duration of these borrowings was 2.56 years.

"The actual results of our planned balance sheet restructuring significantly exceeded our initial assumptions that were presented during the capital raise," stated Mr. Todd A. Gipple, Executive Vice President, Chief Operating Officer and Chief Financial Officer. "Our original restructuring strategy conservatively assumed that the wholesale funding that was to be redeemed would be replaced solely by brokered CDs. Due to the very successful capital raise and strong liquidity at Quad City Bank & Trust, we were able to execute the restructuring with a partial deleveraging accomplished by the maturity of lower yielding securities and utilization of a portion of the common stock proceeds. Only 12% of the debt extinguished was replaced with new debt. As a result, the margin improvements were better than anticipated and the earnback on the transaction is expected to be less than two years."

Second Quarter Loan and Lease Growth Totaled $60.9 Million, or 14.7% on an Annualized Basis

During the second quarter of 2015, the Company's total assets increased $51.3 million, or 2%, to a total of $2.54 billion, while total loans and leases grew $60.9 million, or 14.7% on an annualized basis. The loan and lease growth was funded by deposit growth. Deposits grew $102.5 million, or 6%, during the quarter. Excess cash was also used to reduce borrowings, consisting mostly of FHLB advances, wholesale debt obligations and customer repurchase agreements. Borrowings decreased $112.8 million, or 20%, in the second quarter. 

"First quarter loan and lease growth was fairly modest, however, the pace rebounded in the second quarter," commented Mr. Hultquist. "Growth for the first half of the year totaled $85.4 million, or 10.5% on an annualized basis. We are currently within our targeted annual organic growth rate of 10-12%. A majority of this growth has been in the commercial and industrial loan category. This segment of our portfolio now accounts for 35% of our total loans and leases. At the same time, we have reduced our reliance on commercial real estate loans, with that segment now representing 41% of our portfolio. Additionally, solid loan and lease growth has continued to help us move our loan and lease to total asset ratio upward to 67%, from 66% in the first quarter of 2015 and 63% one year ago. We intend to continue increasing this ratio as we rotate out of securities and into loans and leases, with a goal of growing loans and leases to more than 70% of total assets."

Net Interest Margin Expanded 8 Basis Points from Prior Quarter
And 19 Basis Points Compared to Second Quarter of 2014

Net interest income totaled $18.5 million for the quarter ended June 30, 2015. By comparison, net interest income totaled $17.8 million and $17.0 million for the quarters ended March 31, 2015 and June 30, 2014, respectively. Net interest income totaled $36.3 million for the six months ended June 30, 2015, an increase of more than 7% compared to the same period of the prior year.

"The reduction in high-cost, wholesale debt is proving to have a substantial impact on our net interest margin percentage, as our margin expanded eight basis points from the prior quarter to 3.33% and our cost of interest bearing liabilities declined 11 basis points from the prior quarter to 0.85%," stated Mr. Gipple. He added, "The majority of the debt restructuring activity was executed mid-quarter, so we expect to continue to see NIM improvement in the third quarter. We anticipate our quarterly net interest margin percentage to land in the range of 3.40% to 3.45% for the remainder of the year. The margin expansion is helping us move closer to our targeted 1.00% ROAA."

Nonperforming Assets Decreased $3.0 Million, or 10%, During the Second Quarter

Nonperforming loans and leases at June 30, 2015 were $14.9 million, which were down $1.7 million, or 10%, from March 31, 2015. In addition, the ratio of nonperforming assets ("NPAs") to total assets was 1.07% at June 30, 2015, which was down from 1.21% at March 31, 2015. 

"Our asset quality metrics continue to show improvement, primarily due to payoffs or other real estate sales, and there were no significant additions this quarter," stated Mr. Gipple. "We have historically demonstrated better-than-peer asset quality metrics, with respect to NPAs as a percentage of total assets and charge-offs as a percentage of average loans, both during and subsequent to the credit crisis, and we are focused on reducing our NPAs as a percentage of total assets to less than 1.00% as quickly as possible. We have made greats strides towards achieving this goal over the last three quarters, reducing our percentage from a recent peak of 1.61% at September 30, 2014 to 1.07% at June 30, 2015."

The Company's provision for loan/lease losses totaled $2.3 million for the second quarter of 2015, which was up $639 thousand from the prior quarter, and up $1.3 million compared to the second quarter of 2014. The increased provision was the result of a $971 thousand increase in a specific allowance allocated to one relationship at Quad City Bank & Trust. This relationship is not a new NPA, but new circumstances developed this quarter requiring an increase in specific allowance allocation. 

The Company had net charge-offs of $86 thousand for the second quarter of 2015 which, when coupled with the provision of $2.3 million, increased the Company's allowance for loan/lease losses ("allowance") to $26.1 million at June 30, 2015. As of June 30, 2015, the Company's allowance to total loans/leases was 1.52%, which was up from 1.44% at March 31, 2015, and up from 1.49% at June 30, 2014. 

In accordance with generally accepted accounting principles for acquisition accounting, the loans acquired through the acquisition of Community National Bank ("CNB") in May 2013 were recorded at market value; therefore, there was no allowance associated with CNB's loans at acquisition. Management continues to evaluate the allowance needed on the acquired CNB loans, factoring in the net remaining discount ($917 thousand at June 30, 2015) originally established upon acquisition. 

The Company's allowance to total nonperforming loans/leases was 176% at June 30, 2015, which was up from 144% at March 31, 2015, and up from 116% at June 30, 2014. 

Successful Public Common Stock Offering
Capital Ratios Significantly Enhanced

On May 13, 2015, the Company announced the closing of an underwritten public offering of 3,680,000 shares of its common stock at a price of $18.25 per share. The net proceeds to the Company, after deducting the underwriting discount and offering expenses, totaled $63.5 million.

As a result of the capital raise, the Company's total risk-based capital ratio was 13.25%, the common equity tier 1 ratio was 10.25% and the tangible common equity to tangible common assets ratio improved to 8.15%, all as of June 30, 2015. For comparison, these respective ratios were 10.30%, 7.24% and 5.88% as of March 31, 2015. Both the total risk-based capital ratio and the common equity tier 1 ratio are well-above the fully phased-in requirements under Basel III.

About Us

QCR Holdings, Inc., headquartered in Moline, Illinois, is a relationship-driven, multi-bank holding company, which serves the Quad City, Cedar Rapids, and Rockford communities through its wholly owned subsidiary banks. Quad City Bank & Trust Company, which is based in Bettendorf, Iowa, and commenced operations in 1994, Cedar Rapids Bank & Trust Company, which is based in Cedar Rapids, Iowa, and commenced operations in 2001, and Rockford Bank & Trust Company, which is based in Rockford, Illinois, and commenced operations in 2005, provide full-service commercial and consumer banking and trust and asset management services. Quad City Bank & Trust Company also engages in commercial leasing through its wholly owned subsidiary, m2 Lease Funds, LLC, based in Milwaukee, Wisconsin. With the acquisition of Community National Bancorporation on May 13, 2013, the Company now serves the Waterloo/Cedar Falls, Iowa community through Community Bank & Trust, a division of Cedar Rapids Bank & Trust Company. 

Special Note Concerning Forward-Looking Statements. This document contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "predict," "suggest," "appear," "plan," "intend," "estimate," "annualize," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

A number of factors, many of which are beyond the ability of the Company to control or predict, could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following: (i) the strength of the local and national economy; (ii) the economic impact of any future terrorist threats and attacks, and the response of the United States to any such threats and attacks; (iii) changes in state and federal laws, regulations and governmental policies concerning the Company's general business, including Basel III, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations issued thereunder; (iv) changes in interest rates and prepayment rates of the Company's assets; (v) increased competition in the financial services sector and the inability to attract new customers; (vi) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (vii) the integration of acquired entities; (viii) the loss of key executives or employees; (ix) changes in consumer spending; (x)  unexpected outcomes of existing or new litigation involving the Company; and (xi) changes in accounting policies and practices. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the SEC.