QCR Holdings, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. QCR Holdings is a bank holding company operating four commercial banks and a leasing business, primarily in Iowa, Missouri, and Illinois. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are principally with 2019 and, where noted, Q2 2020. Results reflect the COVID-19 pandemic, low interest rates, PPP lending, and the August sale of the Bates Companies.
Financial performance and position
| Metric | Q3 2020 | Comparable period / context |
|---|---|---|
| Net interest income | $44.6 million | Up 9% year over year; up 9% from Q2 2020 |
| Provision for loan and lease losses | $20.3 million | $2.0 million in Q3 2019; $19.9 million in Q2 2020 |
| Noninterest income | $38.0 million | Up 91% year over year, chiefly from swap fees |
| Noninterest expense | $40.8 million | $39.9 million in Q3 2019; $33.1 million in Q2 2020 |
| Net income / diluted EPS | $17.3 million / $1.09 | $15.1 million / $0.94 in Q3 2019; $13.7 million / $0.86 in Q2 2020 |
| Net interest margin | 3.36% GAAP; 3.51% tax-equivalent | GAAP margin was 3.37% in Q3 2019 and 3.14% in Q2 2020 |
| Dividends declared | $0.06 per share | Unchanged from Q3 2019 |
For the first nine months, net income was $42.3 million and diluted EPS was $2.65, versus $41.5 million and $2.60 in 2019. Net interest income rose 7%; noninterest income rose 67%, led by swap fees. Provision expense increased to $48.6 million from $6.1 million. Management reported Q3 adjusted net income of $17.7 million and adjusted diluted EPS of $1.11; these are non-GAAP measures.
Balance sheet and credit. At September 30, total assets were $5.86 billion, up from $4.91 billion at December 31, 2019. Gross loans and leases were $4.25 billion, including $357.5 million of PPP loans; deposits were $4.67 billion. The allowance was $79.6 million, or 1.87% of gross loans and leases (2.05% excluding PPP loans, non-GAAP), compared with $36.0 million and 0.98% at year-end. Nonperforming assets were $19.0 million, or 0.32% of assets; nonperforming loans and leases were $18.7 million. Criticized loans were $150.0 million, including $70.4 million classified as substandard.
Cash flow, debt, and liquidity. For the nine months, operating cash flow was $129.3 million, investing cash flow was negative $837.8 million, and financing cash flow was positive $701.2 million. Cash and due from banks declined $7.3 million to $68.9 million; interest-bearing deposits at financial institutions were $302.1 million. Total deposits increased $761.2 million from year-end. Borrowings were $227.0 million, including $118.6 million of subordinated notes. The company issued $50 million of new fixed-to-floating subordinated notes in September, qualifying as Tier 2 capital. The company reported $749.9 million of subsidiary-bank lines of credit available and an additional $25 million revolving credit line available. Consolidated regulatory capital ratios included 14.93% total risk-based capital and 10.44% common equity Tier 1; subsidiary banks met well-capitalized requirements.
Material changes and unusual items
- Q3 fee income benefited from $26.7 million of swap fees, versus $9.8 million a year earlier. Swap fees for the first nine months were $53.4 million, versus $20.9 million. Management cautions that activity can vary with rates, deal size, and transaction volume.
- Q3 net interest margin improved sequentially as deposit funding costs fell and loan growth continued. Lower market rates also reduced yields on earning assets.
- Credit provisioning rose sharply in response to deteriorating economic conditions and COVID-related qualitative reserve adjustments. The allowance increased by $18.8 million during Q3.
- Noninterest expense included $1.9 million of losses on early extinguishment of liabilities, primarily from prepaying FHLB advances, and a $305,000 loss on the Bates Companies sale. Q3 also included $192,000 of disposition costs. A $500,000 goodwill impairment related to Bates was recorded earlier in 2020.
- The Bates Companies were sold on August 12, 2020. The transaction resulted in a reported $305,000 loss; consideration included a note receivable and cancellation of approximately $880,000 of earn-out amounts.
- The board-authorized repurchase program was suspended on March 16, 2020 amid pandemic uncertainty. The company had repurchased 100,932 shares before suspension and had not resumed purchases by quarter-end.
Outlook, commentary, and risks
Management said COVID-19 could continue to materially affect borrowers, collateral values, asset quality, and results. It highlighted hotel, restaurant, arts/entertainment/recreation, and retail exposures, as well as risks in commercial real estate, equipment leasing, and consumer lending. The filing reports $152.3 million of loans to hotels, restaurants, and arts/entertainment/recreation businesses, or 3.59% of gross loans and leases.
As of September 30, the Loan Relief Program had provided 2,451 modifications totaling $575 million, or 13.53% of the portfolio. Most borrowers had resumed scheduled payments; 238 loans and leases totaling $83 million, or 1.95% of the portfolio, had received a second deferral. PPP activity totaled 1,698 loans and $357.5 million. The company elected to defer CECL implementation under the CARES Act and estimated an eventual allowance increase of $3 million to $8 million, while noting that assumptions and model review remained in progress.
Management described long-term targets of organic loan and lease growth above 9% annually, fee-income growth above 6%, and annual operating-expense growth below 5%. Year-to-date annualized metrics reported were 11.5% organic loan growth excluding PPP, 61.1% fee-income growth, and negative 5.3% noninterest-expense growth, all subject to non-GAAP definitions and exclusions. The filing cautions that COVID-19 and other factors may prevent achievement of targets; it provides no specific earnings or margin guidance.
Key risks include further deterioration in the economy and credit quality, expiration of borrower relief or government programs, persistently low rates and resulting margin pressure, deposit concentration and potential correspondent-deposit volatility, PPP eligibility/guarantee and litigation risks, operational and cyber risks, and interest-rate sensitivity. Management said its modeled interest-rate scenarios were within policy limits. No material pending legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Whether criticized, classified, nonperforming, and deferred loans continue to rise, particularly in COVID-sensitive industries, and whether reserve levels remain adequate.
- How much of the record swap-fee contribution is repeatable, and how future results depend on swap activity and market rates.
- Whether deposits—especially correspondent deposits—remain stable and support loan growth without a return to higher-cost wholesale funding.
- The eventual CECL adoption impact versus the estimated $3 million to $8 million allowance increase, and the assumptions behind that estimate.
- Whether PPP loans are forgiven and guaranteed as expected, including any servicing, eligibility, or litigation exposure.
- Capital and liquidity trends, including the impact of the new subordinated notes, the suspended repurchase program, and any future credit losses.