QCR Holdings, Inc. — Q2 2021 Form 10-Q
Business context and period. QCR Holdings is a regional banking company with four commercial bank subsidiaries and an equipment-financing business. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons below are with the corresponding 2020 periods unless noted.
Financial performance and condition
| Metric | Q2 2021 | Comparable period / change |
|---|---|---|
| Net income | $22.3 million | $13.7 million in Q2 2020; $40.3 million for H1 2021 versus $25.0 million in H1 2020 |
| Diluted EPS | $1.39 | $0.86 in Q2 2020; H1: $2.52 versus $1.56 |
| Net interest income | $43.5 million | Up 6% year over year; H1 up 9% to $85.5 million |
| Net interest margin | 3.28% GAAP; 3.46% tax-equivalent | 3.14% GAAP and 3.27% tax-equivalent in Q2 2020 |
| Noninterest income | $19.3 million | Down 33% year over year, primarily reflecting lower swap and capital-markets fees |
| Noninterest expense | $35.7 million | Up 8% year over year; H1 up 13% to $72.9 million |
| Provision for credit losses | No net provision expense | $19.9 million in Q2 2020; H1 2021: $6.7 million versus $28.3 million |
Q2 adjusted net income was $22.5 million and adjusted diluted EPS was $1.40 (both non-GAAP). The efficiency ratio was 56.8% (non-GAAP). Management reported annualized core loan and lease growth of 14.9% in Q2, excluding PPP loans, and core deposit growth of 4.9%.
- Balance sheet at June 30: Assets of $5.81 billion, up from $5.68 billion at December 31, 2020; net loans and leases of $4.34 billion, up from $4.17 billion; deposits of $4.69 billion, up from $4.60 billion.
- Credit and asset quality: Loan and lease allowance was $78.9 million, or 1.79% of gross loans and leases (1.85% excluding PPP loans, non-GAAP). Nonperforming assets were $10.1 million, or 0.17% of assets, down from $14.1 million and 0.25% at March 31. Criticized loans were 2.97% of loans and leases.
- Liquidity and funding: Cash, federal funds sold and interest-bearing deposits totaled $144.4 million. The company had $4.69 billion of deposits and $198.9 million of borrowings, including $40.0 million of FHLB advances, $113.8 million of subordinated notes and $38.1 million of junior subordinated debentures. Subsidiary banks had $639.8 million of available credit lines; the parent’s $25.0 million revolving line was also fully available.
- Capital: Stockholders’ equity was $630.5 million. Consolidated total risk-based capital was 14.72%, and management stated subsidiary banks met the “well capitalized” requirements.
- Cash flows, H1: Operating cash flow was $32.7 million, investing cash flow was negative $143.4 million, and financing cash flow was positive $104.9 million. Cash and due from banks decreased $5.7 million to $55.6 million.
Material changes and management commentary
- Profit rose substantially year over year as net interest income increased and credit-loss provisioning fell sharply. The comparison is affected by the prior-year Q2 provision of $19.9 million and differing credit-loss accounting standards.
- Swap fee and capital-markets revenue fell to $9.6 million from $19.9 million in Q2 2020. Management attributed part of the decline to transactions expected in Q2 moving into Q3; future fees also depend on rates and transaction activity.
- Interest expense declined 30% year over year in Q2 as funding costs fell and core deposits replaced higher-cost funding. Management said it intends to continue emphasizing core deposits and reducing wholesale funding.
- QCR adopted CECL on January 1, 2021. Adoption reduced retained earnings by $937,000 after tax and changed allowance methodology; therefore, credit-loss comparisons with 2020 are not fully like-for-like.
- The company repurchased and retired 100,000 shares in Q2 for $4.8 million. Its $0.06 quarterly dividend was unchanged.
- Long-term strategic targets are organic loan and lease growth above 9% annually, fee-income growth above 6%, and annual operating-expense growth below 5%. These are targets, not quarterly earnings guidance. No specific near-term earnings guidance is provided.
Outlook, risks and contingencies
Management said COVID-19 could continue to adversely affect borrowers, collateral values, asset quality and results, particularly in hotels, restaurants, arts/entertainment/recreation and retail. Loans to hotels, restaurants, and arts/entertainment/recreation totaled $138.5 million, or 3.13% of gross loans and leases. Management cautioned that losses may emerge later and that future provisions could rise despite its view that the allowance was adequate at quarter-end. At June 30, 29 m2 loan and lease modifications totaling $4.7 million remained on deferral; there were no bank modifications on deferral.
Other stated risks include interest-rate and repricing exposure, LIBOR transition, competition, technology and cybersecurity, regulatory or accounting changes, acquisitions, and litigation. The company reported no material pending legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors. Its interest-rate sensitivity simulations were within stated policy limits. Management reported effective disclosure controls and no significant change in internal control over financial reporting.
Most important facts for investors to verify
- Whether deferred swap transactions closed in Q3 and how sustainable swap-related fee income is.
- Loan growth, deposit mix and funding costs, including the contribution and runoff of PPP loans.
- Credit performance and allowance adequacy under CECL, especially exposures tied to COVID-affected sectors and the increase in TDR balances.
- Whether expense growth, particularly compensation, remains consistent with management’s long-term efficiency targets.
- Regulatory capital, liquidity availability and the effect of interest-rate changes on margins and earnings.