QCR HOLDINGS INC annual report, FY2021

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QCR Holdings, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. Although the request identifies 2021 Q4, this filing reports annual results, not standalone fourth-quarter results. QCR Holdings is a Midwest bank holding company serving Iowa, Missouri and Illinois through four banks, with equipment finance and wealth-management businesses.

Financial performance and condition

  • Earnings: Net income rose 63% to $98.9 million from $60.6 million; diluted EPS was $6.20 versus $3.80. Adjusted net income, a non-GAAP measure, was $100.0 million and adjusted diluted EPS was $6.27.
  • Income and margins: Net interest income increased 6.8% to $178.2 million. GAAP net interest margin was 3.30% versus 3.28%; tax-equivalent NIM was 3.49% versus 3.44%. Noninterest income fell 11.8% to $100.4 million, mainly as swap fee and capital-markets revenue declined to $61.0 million from $74.8 million. Total net interest and noninterest income was $278.7 million versus $280.7 million. The efficiency ratio increased to 55.16% from 54.05%.
  • Credit costs and quality: Provision for credit losses declined to $3.5 million from $55.7 million, reflecting improving conditions and lower credit-risk allocations; comparison is affected by CECL adoption in 2021. Nonperforming assets were $2.8 million, or 0.05% of assets, down from $14.1 million, or 0.25%. Net charge-offs were $3.3 million, approximately 0.07% of average loans. The loan allowance was $78.7 million, 1.68% of gross loans and leases (1.69% excluding PPP loans).
  • Balance sheet and growth: Assets increased 7% to $6.10 billion. Gross loans and leases rose 10% to $4.68 billion; excluding PPP loans, growth was 16.9%. Deposits increased 7% to $4.92 billion, including 7.2% growth in core deposits. Securities totaled $810.2 million.
  • Liquidity and cash flow: Cash, federal funds sold and interest-bearing deposits were $125.2 million at year-end. Operating activities provided $88.2 million of cash, compared with $112.2 million in 2020; investing activities used $411.8 million and financing activities provided $299.7 million. The banks had $517.7 million of available credit lines at year-end, and the parent had a fully available $25 million revolver.
  • Debt and capital: Consolidated borrowings were $170.8 million, including $113.9 million of subordinated notes and $38.2 million of junior subordinated debentures. Holding-company indebtedness was approximately $152.0 million. The company reported a 9.87% tangible common equity-to-tangible assets ratio (non-GAAP); subsidiary banks met regulatory “well-capitalized” standards. Common dividends were $0.24 per share for the year.

Material changes versus FY2020

  • Net income improved substantially, principally alongside a $52.2 million reduction in credit-loss provision and lower funding costs. Net interest income rose, while average earning assets grew 6% and the cost of funds fell to 0.59% from 0.85%.
  • Noninterest income declined $13.4 million, mainly from lower swap fees; trust fees rose 21.7% to $11.2 million. Noninterest expense rose 1.3% to $153.7 million, including higher salaries and benefits and a $1.4 million fixed-asset disposal loss. The 2020 comparison included $3.9 million of debt-extinguishment losses and $0.5 million of goodwill impairment.
  • Loan and lease growth was strong even as PPP loans fell to $28.2 million from $273.1 million. Credit indicators improved: criticized loans declined to $115.8 million from $137.6 million, and nonperforming assets fell about 80%.
  • CECL was adopted January 1, 2021, producing a $937,000 after-tax reduction to opening retained earnings. The accounting change affects comparability of credit provisions and allowances.

Outlook, risks and unusual items

  • Management’s stated long-term strategic targets are annual organic loan and lease growth above 9%, fee-income growth above 6%, and noninterest-expense growth below 5%; management cautions that these targets are not assured. In 2021, loan growth excluding PPP loans was 16.9%, while the company’s strategic-metric fee-income measure declined 10.1% and expense growth was 4.0% (these measures exclude non-core items).
  • QCR agreed to acquire Guaranty Federal Bancshares for approximately $151.6 million, with consideration intended to be about 80% stock and 20% cash. The deal remained subject to approvals and was expected to close in late Q1 or early Q2 2022. Guaranty reported $1.2 billion in assets, $815 million in loans and $1.0 billion in deposits at year-end.
  • Management said COVID-19 had not materially adversely affected FY2021 results, but warned its continuing effects, inflation, supply-chain disruption and economic uncertainty could increase borrower stress, credit losses and liquidity risk. The filing cites approximately 7% U.S. CPI inflation in 2021 and anticipated Federal Reserve rate increases in 2022.
  • Credit exposure is concentrated in commercial lending: CRE was approximately 57% of loans and leases, and C&I approximately 34%. Multifamily, including low-income housing tax-credit (LIHTC) lending, expanded materially. Management identifies real-estate values, construction execution, concentrations and continued LIHTC program availability as risks.
  • Swap fee income is significant and potentially volatile, particularly because activity is concentrated in LIHTC permanent loans and depends on borrower demand, market conditions and counterparties. Uninsured deposits were $1.9 billion at year-end.
  • Other items include $624,000 of acquisition costs related to the pending transaction, a $1.4 million loss on disposal of fixed assets, and a gain on sale of an OREO property. The filing reports no material pending litigation. The auditor issued an unqualified opinion on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.

Key facts for investors to verify

  • Standalone Q4 results and any subsequent updates to the Guaranty acquisition’s timing, cost, approvals and expected benefits.
  • How much future earnings depend on swap fees and whether lower fee revenue is offset by recurring fee businesses and net interest income.
  • Credit performance and allowance adequacy as multifamily, LIHTC, construction and other CRE exposures grow, especially under higher-rate or weaker economic scenarios.
  • Deposit concentration, uninsured deposit stability, available liquidity and the effect of changes in deposit costs on margin.
  • Progress toward management’s long-term growth, fee-income and expense targets; review non-GAAP definitions and reconciliations alongside GAAP results.
  • Interest-rate exposure and the effects of market-rate changes on the securities portfolio, reported equity and net interest income.