QCR Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. QCR Holdings is a Midwest banking company with four bank subsidiaries and an equipment-financing business. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
- Q3 earnings: Net income was $31.6 million, up 82% from $17.3 million in Q3 2020. Diluted EPS was $1.99 versus $1.09. For the first nine months, net income was $71.9 million versus $42.3 million, and diluted EPS was $4.48 versus $2.65.
- Revenue and expenses: Q3 net interest income rose 4% year over year to $46.2 million; noninterest income declined 9% to $34.7 million, while noninterest expense increased 1% to $41.4 million. Nine-month net interest income increased 7% to $131.7 million; noninterest income fell 5% to $77.4 million; noninterest expense rose 8% to $114.3 million.
- Margins: Q3 GAAP net interest margin was 3.36%, unchanged from Q3 2020 and up from 3.28% in Q2 2021. Adjusted NIM on a tax-equivalent basis, a non-GAAP measure, was 3.53%, versus 3.44% a year earlier. The Q3 non-GAAP efficiency ratio was 51.17%, compared with 49.48% a year earlier.
- Credit provision and asset quality: Reported Q3 provision for credit losses was zero, versus $20.3 million in Q3 2020. The quarter included $1.9 million of loan provision offset by a $1.9 million credit for off-balance-sheet exposures. Nine-month provision was $6.7 million versus $48.6 million. Nonperforming assets were $6.8 million, or 0.11% of assets, down from $17.9 million and 0.32% a year earlier. The loan-and-lease allowance was $80.7 million, or 1.75% of gross loans; excluding PPP loans, the allowance ratio was 1.79%.
- Balance sheet: Total assets were $6.01 billion, up 5.8% from December 31, 2020. Gross loans and leases were $4.60 billion, including $83.6 million of PPP loans; net loans and leases were $4.52 billion. Deposits totaled $4.87 billion, up 5.9% from year-end. Stockholders’ equity was $649.8 million.
- Cash flow and liquidity: For nine months, operating cash flow was $64.3 million, investing activities used $330.5 million, and financing activities provided $262.2 million. Cash and due from banks ended at $57.3 million; cash, federal funds sold and interest-bearing deposits together totaled $128.1 million. The banks had $560.6 million of available credit lines, and the company’s $25 million revolving credit facility was undrawn.
- Debt and capital: Total borrowings were $183.5 million, including $30.0 million of FHLB advances, $113.8 million of subordinated notes and $38.1 million of junior subordinated debentures. Consolidated total risk-based capital was 14.64%; management reported that subsidiary banks met “well capitalized” requirements.
Material changes and management commentary
- Management attributed stronger net interest income to organic loan growth, core deposit growth, and lower funding costs. Q3 loan and lease growth excluding PPP loans was 23.0% annualized; core deposit growth was 15.6% annualized.
- Q3 noninterest income increased sharply from Q2, largely because swap transactions originally expected to close in Q2 closed in Q3. Swap and capital-markets revenue was $24.9 million in Q3. Management cautioned that future revenue in this area depends partly on interest rates and transaction timing.
- Q3 expenses increased 16% sequentially, primarily due to higher incentive compensation and commissions tied to capital-markets revenue. Nine-month salaries and benefits rose 15.6% year over year. Other expense included a $1.4 million fixed-asset disposal loss; the company also recorded $1.3 million of Q3 net income from other real estate operations, primarily from selling a commercial property.
- The company adopted CECL on January 1, 2021. Adoption reduced retained earnings by $0.9 million after tax and changed allowance measurement and presentation; prior-year credit-loss comparisons use the previous accounting method.
- 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 formal near-term earnings guidance. Year-to-date fee-income growth was below the target, reflecting lower swap revenue and the prior-year comparison.
Risks, contingencies and unusual items
- Management warned that COVID-19 could continue to pressure borrowers and collateral, particularly in hotels, restaurants, arts/entertainment/recreation and retail. Loans to hotels, restaurants, and arts/entertainment/recreation totaled $128.5 million, or 2.79% of gross loans and leases. Management said future credit losses may exceed current estimates and the allowance may need to increase.
- Interest-rate changes, funding and correspondent-deposit fluctuations, and the LIBOR transition are identified risks. Management’s modeled interest-rate scenarios were within stated policy limits at quarter-end.
- The filing reports no material changes in risk factors from the 2020 Form 10-K, no material pending legal proceedings beyond routine litigation, and no significant changes to internal control over financial reporting.
- The company repurchased 193,153 shares in Q3 under its repurchase program, leaving 405,915 shares authorized for repurchase at September 30, 2021.
Most important facts for investors to verify
- Whether rapid loan growth continues without deterioration in criticized/classified credits, nonperforming assets, or charge-offs.
- Whether the $80.7 million loan allowance and $8.1 million off-balance-sheet allowance remain adequate as COVID-19 effects and economic forecasts evolve.
- How sustainable swap and capital-markets revenue is, given its transaction timing and sensitivity to interest rates.
- Whether deposit growth remains stable, particularly correspondent deposits, and how liquidity and funding costs respond to changing conditions.
- How reported GAAP results compare with management’s non-GAAP adjusted measures, and how CECL adoption affects comparisons with 2020.