QCR Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. QCR Holdings is a regional financial holding company operating commercial banks, equipment leasing and wealth-management businesses. Financial amounts below are in U.S. dollars; “m” means million and “bn” means billion.
Financial performance and position
| Metric | Q2 2020 / June 30, 2020 | Comparison |
|---|---|---|
| Net income; diluted EPS | $13.7m; $0.86 | Q2 2019: $13.5m; $0.85. Q1 2020: $11.2m; $0.70. |
| Net interest income | $40.9m | Up 8% from Q2 2019 and 9% from Q1 2020. |
| Net interest margin | 3.14% GAAP; 3.27% tax-equivalent | Tax-equivalent margin was 3.56% in Q1 2020 and 3.40% in Q2 2019. Excluding excess liquidity, management said adjusted margin was stable sequentially. |
| Provision for loan and lease losses | $19.9m | Q2 2019: $1.9m; Q1 2020: $8.4m. |
| Noninterest income and expense | $28.6m income; $33.1m expense | Income rose 68% year over year, largely from swap fees; expense fell 9%. |
| Assets; loans and leases | $5.60bn; $4.14bn gross | Assets were $4.91bn at December 31, 2019. Gross loans and leases were $3.69bn then; Q2 growth excluding PPP loans was 8.4% annualized. |
| Deposits; borrowings | $4.35bn; $376.3m | Deposits were $3.91bn and borrowings $279.0m at year-end 2019. |
| Allowance and asset quality | $60.8m allowance; 1.47% of gross loans and leases | Allowance ratio was 0.98% at year-end 2019. NPLs were 0.32% of loans; NPAs were 0.24% of assets. |
| Capital | Company total risk-based capital 13.71%; common equity Tier 1 10.25% | All subsidiary banks met “well capitalized” requirements. |
For the six months ended June 30, net income was $25.0m versus $26.4m in 2019; diluted EPS was $1.56 versus $1.66. Net interest income increased 5% to $78.6m, while provision expense rose to $28.3m from $4.1m.
Six-month cash flows: operating activities provided $39.3m; investing activities used $557.6m, principally reflecting loan growth and securities purchases; financing activities provided $530.6m, chiefly from deposit growth and borrowings. Cash and due from banks ended at $88.6m.
Material changes and notable items
- Q2 swap fee income was $19.9m, versus $7.9m a year earlier; first-half swap fees were $26.7m versus $11.1m. The increase materially supported noninterest income and depends partly on transaction activity and market rates.
- COVID-19-related economic assumptions drove higher credit provisions. Criticized commercial loans increased to $144.5m from $71.4m at March 31, 2020; special-mention loans rose notably. Management said the allowance may need to increase further.
- At June 30, the company reported $358.1m of PPP loans, originated through 1,655 loans. It also reported 2,401 loan and lease relief modifications totaling $544m, including $491m at the banks and $53m at m2.
- Noninterest-bearing deposits increased to $1.18bn from $777.2m at year-end. Management described substantial correspondent-bank deposit inflows and temporary quarter-end outflows that prompted overnight borrowing; most balances subsequently returned.
- The company suspended its share repurchase program on March 16, 2020. It repurchased and retired 100,932 shares for $3.8m during the first half.
- QCR agreed to sell the Bates Companies for $500,000 plus cancellation of future earn-out amounts with a stated nondiscounted value of about $1.6m. Regulatory approval was received; closing was scheduled for August 10, 2020. A $0.5m goodwill impairment was recorded in Q1 in connection with the sale.
Outlook, risks and contingencies
- Management warned that COVID-19 could significantly adversely affect borrowers, asset quality, capital and results, particularly in hotels, restaurants, entertainment, retail, commercial real estate, equipment leasing and consumer lending. It expected elevated provisions in future periods, without providing quantified earnings guidance.
- The company’s long-term strategic targets are annual organic loan and lease growth above 9%, fee-income growth above 6%, and annual operating-expense growth below 5%. Management cautioned that COVID-19 could prevent achievement of these targets in 2020.
- QCR elected to defer CECL implementation under the CARES Act. It estimated a $4m–$6m increase in the allowance upon adoption, while noting model assumptions were still being finalized.
- Management reported $527.9m available under subsidiary-bank credit lines and the full $25m revolving credit facility available at quarter-end. It monitors liquidity risks from potentially volatile correspondent deposits.
- Additional disclosed risks include possible PPP-related litigation or SBA guaranty disputes, interest-rate and margin pressure, cyber and operational risks, and potential future goodwill impairment. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Whether credit deterioration, criticized loans, charge-offs and required provisions rise as loan-relief periods and government support end.
- PPP forgiveness, servicing and SBA-guaranty outcomes, as well as the status and performance of modified loans.
- Stability and concentration of correspondent deposits, liquidity usage and changes in short-term borrowings.
- How sustainable elevated swap-fee income is, and the effect of low rates and excess liquidity on net interest margin.
- Completion and final proceeds of the Bates Companies sale, including treatment of the earn-out cancellation.
- Final CECL adoption timing and allowance impact; confirm reported capital and allowance ratios, including the differing presentation with and without PPP loans.