QCR HOLDINGS INC annual report, FY2020

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QCR Holdings, Inc. — 2020 Form 10-K Summary

Business context and reporting period

QCR Holdings is a multi-bank holding company serving markets in Iowa, Illinois and Missouri through four banking subsidiaries, with additional equipment leasing and wealth-management activities. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. The company sold the Bates Companies on August 12, 2020.

Financial performance and condition

  • Earnings: Net income was $60.6 million, up 5.5% from $57.4 million in 2019. Diluted EPS was $3.80 versus $3.60. Adjusted net income, a non-GAAP measure, was $63.2 million and adjusted diluted EPS was $3.96.
  • Revenue and margins: Net interest income increased 7.3% to $167.0 million. GAAP net interest margin was 3.28%, down from 3.31%; adjusted tax-equivalent margin was 3.38%, compared with 3.36%. Noninterest income increased 44.5% to $113.8 million, driven mainly by swap fees of $74.8 million versus $28.3 million in 2019.
  • Credit costs and asset quality: Provision expense rose to $55.7 million from $7.1 million, primarily reflecting COVID-19-related qualitative reserves. The allowance was $84.4 million, or 1.98% of gross loans and leases (2.12% excluding PPP loans, non-GAAP). Net charge-offs were $7.3 million, or 0.18% of average loans and leases. Nonperforming assets were $14.8 million, or 0.26% of assets; criticized loans increased to $137.6 million from $53.6 million.
  • Balance sheet and growth: Total assets were $5.68 billion, up 16%; gross loans and leases were $4.25 billion, up 14%. Excluding $273.1 million of PPP loans, loan growth was 7.8%. Deposits increased 17.6% to $4.60 billion, while borrowings declined to $177.1 million from $279.0 million.
  • Liquidity and capital: Year-end cash, federal funds sold and interest-bearing deposits totaled $157.0 million. Subsidiary banks had $743.1 million of available lines of credit; the holding company also had a fully available $25 million revolving facility. Banks were reported well-capitalized. Consolidated total risk-based capital was 14.95%; tangible common equity to tangible assets was 9.08% (non-GAAP).
  • Cash flow and shareholder returns: Operating activities provided $112.2 million; investing activities used $704.5 million and financing activities provided $577.4 million. The annual common dividend declared was $0.24 per share. The company repurchased 100,932 shares before suspending buybacks in March 2020.

Material changes versus 2019

  • Net income increased despite a substantial increase in loan-loss provisions; the rise in fee income, particularly swap fees, was a key contributor.
  • Interest expense fell 48% to $31.4 million as funding costs declined and the company reduced higher-cost funding. Interest income fell 8% to $198.4 million, reflecting lower asset yields.
  • Core deposits grew strongly, supporting loan growth and repayment of wholesale funding. FHLB advances fell to $15.0 million from $159.3 million.
  • Noninterest expense declined 2.2% to $151.8 million, partly due to lower acquisition, disposition and goodwill impairment costs. The company recorded $3.9 million of liability-extinguishment losses and $0.5 million of Bates-related goodwill impairment in 2020.
  • Net interest margin was broadly stable, while asset quality indicators were mixed: NPAs as a share of assets improved slightly, but criticized loans and nonperforming loans increased.

Outlook, commentary, risks and unusual items

  • Management’s stated strategic targets include annual organic loan and lease growth above 9%, fee-income growth above 6%, and noninterest-expense growth below 5%. In 2020, excluding PPP loans and non-core items as applicable, reported results were 7.8%, 67.8% and 1.5%, respectively. These are strategic targets, not formal earnings guidance; the filing provides no specific 2021 earnings forecast.
  • Management expected pandemic effects to continue weighing on borrowers and asset quality, with particular concern for hotel, restaurant, entertainment and retail exposures. At year-end, 197 loan or lease modifications totaling $28 million were on deferral, or 0.66% of the portfolio.
  • The company originated 1,698 PPP loans totaling $357.5 million. It disclosed potential SBA-guaranty, processing-litigation and reputational risks related to the program.
  • CECL implementation was deferred under pandemic-related relief. The company planned adoption on January 1, 2021 and estimated a $1 million to $3 million increase in the allowance at adoption.
  • Credit concentration is material: C&I loans were about 41% and CRE loans about 50% of the portfolio. The company also disclosed multi-family and other real-estate industry exposures, and noted that CSB’s real-estate concentration exceeded policy limits.
  • Other key risks include persistent low interest rates, economic recovery uncertainty, potential loan losses, interest-rate and LIBOR transition risk, cybersecurity, competition, and the holding company’s debt and dependence on subsidiary-bank dividends.
  • Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included the allowance’s qualitative factors and goodwill impairment estimates. No material pending legal proceedings were reported beyond routine business litigation.

Important facts for investors to verify

  • Whether criticized loans, nonperforming loans, deferrals and COVID-sensitive industry exposures translate into higher charge-offs or additional provisions.
  • How sustainable the unusually high swap-fee income is, and the effect of market rates and transaction volumes on future noninterest income.
  • Actual CECL adoption impact versus the estimated $1 million to $3 million allowance increase.
  • Loan growth, deposit mix and liquidity trends, including the reliance on correspondent deposits and utilization of available credit lines.
  • Reconcile total borrowings and holding-company debt disclosures with the detailed debt note; assess maturities, interest costs and dividend capacity.
  • Performance against management’s strategic targets and the assumptions underlying non-GAAP adjusted earnings and margin measures.