QCR Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are primarily with December 31, 2020. QCR Holdings is a regional bank holding company with four bank subsidiaries and an equipment-financing business, serving markets primarily in Iowa, Missouri, and Illinois. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Comparable period / reference |
|---|---|---|
| Net interest income | $42.0 million | Up 11% from Q1 2020; down 4% from Q4 2020 |
| Noninterest income | $23.5 million | Up 55% from Q1 2020, primarily from swap fees |
| Net income / diluted EPS | $18.0 million / $1.12 | $11.2 million / $0.70 in Q1 2020; $18.3 million / $1.14 in Q4 2020 |
| Net interest margin | 3.26% GAAP; 3.40% adjusted tax-equivalent | GAAP 3.40% and adjusted tax-equivalent 3.50% in Q1 2020 |
| Provision for credit losses | $6.7 million | $8.4 million in Q1 2020; periods use different credit-loss accounting standards |
| Noninterest expense | $37.2 million | Up 18% from Q1 2020, mainly reflecting higher salaries and incentive compensation |
| Cash flow | $11.1 million operating inflow; $36.5 million investing outflow; $42.8 million financing inflow | Operating inflow was $6.6 million in Q1 2020 |
- Total assets were $5.65 billion, down from $5.68 billion at year-end 2020. Net loans and leases were $4.28 billion, up $112.5 million during the quarter; deposits were $4.63 billion, up $32.6 million.
- Cash, federal funds sold, and interest-bearing deposits at financial institutions totaled $133.9 million at quarter-end. Shareholders’ equity was $608.7 million. Tangible common equity to tangible assets was 9.42%, or 9.67% excluding PPP loans (non-GAAP).
- Total borrowings were approximately $188.6 million, including $6.8 million short-term borrowings, $25.0 million FHLB advances, $118.7 million subordinated notes, and $38.0 million junior subordinated debentures. All subsidiary banks met regulatory “well capitalized” requirements.
- Nonperforming assets were $14.1 million, or 0.25% of total assets. The loan and lease allowance was $81.8 million; the allowance was 1.99% of loans and leases excluding PPP loans (non-GAAP).
Changes and notable items
- Versus Q1 2020, net income rose about 60%, supported by lower funding costs, loan growth, and higher swap-fee income. Interest expense fell 50%; noninterest expense increased 18%.
- Swap-fee income was $13.6 million, nearly double Q1 2020, but fell from the unusually strong Q4 2020. Management noted that swap activity and related fees can vary substantially with transaction volume and interest-rate conditions.
- Core loans and leases, excluding PPP loans, grew at a 14.0% annualized rate during Q1; core deposits grew at a 3.2% annualized rate. PPP loans outstanding were $243.9 million, down from $273.1 million at year-end.
- The company adopted CECL on January 1, 2021. Adoption reduced retained earnings by $937,000 after tax and established a $9.1 million allowance for off-balance-sheet exposures; the loan allowance decreased $8.1 million at adoption. The filing cautions that the new methodology affects comparability with prior periods.
- Criticized loans were $138.4 million, broadly stable from year-end, while classified loans increased to $85.0 million from $66.1 million, primarily because of one borrower. Nonperforming assets were broadly stable quarter over quarter.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Long-term strategic goals include organic loan and lease growth above 9% annually, fee-income growth above 6%, and annual operating-expense growth below 5%. Management cautions that COVID-19 and other factors may prevent achievement of these goals in 2021.
- Management expects COVID-19-related distress to remain a risk for borrowers in hotels, restaurants, arts/entertainment/recreation, and retail, with potential effects on repayment capacity, collateral values, credit quality, and future provisions. Direct hotel, restaurant, and arts/recreation loans totaled $142.5 million, or 3.27% of gross loans and leases.
- At March 31, 69 qualifying loan or lease modifications totaling approximately $6.9 million remained on payment deferral, about 0.16% of the portfolio. Management said future asset quality and results could be adversely affected; it also stated that losses may have been incurred but are not yet known.
- Interest-rate risk remains a key market risk. Management reported modeled exposures within board policy limits. Other stated risks include economic conditions, competition, technology and cybersecurity, LIBOR transition, regulation, and acquisition outcomes.
- The share-repurchase program remained suspended, with no repurchases in Q1. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
Investor verification priorities
- Review credit quality by borrower and sector, especially the borrower driving the increase in classified loans, and monitor criticized loans, nonperforming assets, and allowance adequacy.
- Assess the durability of unusually strong swap-fee income and the related incentive-compensation costs; compare reported earnings with adjusted non-GAAP measures.
- Track core loan and deposit growth separately from PPP activity, and assess the concentration and stability of correspondent-bank deposits.
- Evaluate the impact of CECL adoption and the new off-balance-sheet allowance when comparing credit costs with 2020 periods.
- Monitor liquidity, wholesale funding, capital ratios, and interest-rate sensitivity as rates and deposit conditions change.