Business context and reporting period
QCR Holdings, Inc. is a multi-bank holding company serving markets in Iowa, Illinois, Wisconsin and Missouri, with commercial and consumer banking, leasing and wealth-management operations. This Form 10-K covers the fiscal year ended December 31, 2019; comparisons are primarily with 2018. The company sold substantially all of Rockford Bank & Trust’s assets and transferred most deposits and certain liabilities on November 30, 2019, so year-end balance-sheet comparisons are affected by the sale.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $155.6 million | $142.4 million |
| Net interest margin (GAAP) | 3.31% | 3.46% |
| Noninterest income | $78.8 million | $41.5 million |
| Noninterest expense | $155.2 million | $119.1 million |
| Provision for loan/lease losses | $7.1 million | $12.7 million |
| Net income | $57.4 million | $43.1 million |
| Diluted EPS | $3.60 | $2.86 |
| Operating cash flow | $76.5 million | $64.3 million |
Adjusted net income, a non-GAAP measure, was $58.5 million, or $3.66 diluted EPS; it excludes specified items including the RB&T sale gain, goodwill impairment and disposition and integration costs. The efficiency ratio was 66.25%, versus 64.77%. Return on average assets improved to 1.12% from 0.98%.
At year-end, assets were $4.91 billion, loans and leases $3.69 billion, deposits $3.91 billion, and stockholders’ equity $535.4 million. Reported loans/leases and deposits declined year over year, but excluding the RB&T sale, management reported loan/lease growth of 10.9% and deposit growth of 10.3%. Total borrowings were $279.0 million, down from $405.0 million; the company issued $65.0 million of subordinated notes in 2019. Cash, federal funds sold and interest-bearing deposits totaled $233.9 million. The banks had $380.6 million of unused lines of credit, and all subsidiary banks were reported well-capitalized.
Credit quality improved on reported measures: nonperforming assets were $13.1 million, or 0.27% of assets, versus $27.9 million and 0.56% a year earlier. Net charge-offs were 0.11% of average loans/leases. The allowance was $36.0 million, or 0.98% of gross loans/leases, compared with 1.07% in 2018.
Material changes and unusual items
- Noninterest income rose 89.6%, chiefly from swap fees ($28.3 million versus $10.8 million) and a $12.3 million gain on the RB&T sale. The gain was nonrecurring.
- Noninterest expense increased 30.3%, reflecting higher salaries and benefits, acquisitions and transition costs, $3.3 million in RB&T disposition costs, and a $3.0 million goodwill impairment related to Bates Companies. A $3.4 million subsequent write-down on one OREO property also affected expenses.
- Net interest income grew 9.2%, supported by loan growth and acquisitions, while margin compressed: tax-equivalent NIM declined to 3.45% from 3.62%, partly as funding costs rose faster than asset yields.
- The company reported $29 million of combined gains on government-guaranteed loan sales and swap fee income, exceeding its stated $8–12 million annual goal; swap-fee levels can vary with rates and transaction activity.
Outlook, risks and contingencies
Management’s 2020 strategic metrics call for 9% annual organic loan/lease growth funded with core deposits, at least 6% annual fee-income growth, and limiting noninterest-expense growth to 5%. These are targets, not guaranteed guidance. Management also described efforts to reduce wholesale funding, grow core deposits, improve asset quality and manage interest-rate exposure; purchased caps cover $375 million of certain deposits and short-term liabilities.
The company adopted CECL on January 1, 2020 and estimated an initial allowance increase of 5–20% of the December 31, 2019 allowance, with an after-tax reduction to opening equity. The filing identifies material risks from economic weakness, the coronavirus outbreak, interest-rate changes, concentrated commercial and commercial-real-estate lending, borrower and collateral deterioration, competition, cyber and operational incidents, regulatory requirements, acquisitions, and the transition from LIBOR. C&I and CRE represented approximately 41% and 47% of loans/leases, respectively. Management noted that CSB and SFC Bank had elevated real-estate portfolio levels and described added monitoring.
Commitments to extend credit were $1.2 billion and standby letters of credit were $23.8 million; management did not expect all commitments to be funded. The company disclosed no material pending legal proceedings. It stated that two former RB&T employees’ charges related to an SBA loan application were dismissed in December 2019 and that neither RB&T nor QCR Holdings was charged. On February 18, 2020, the company announced a discretionary authorization to repurchase up to 800,000 shares; it is not obligated to buy shares.
Most important facts for investors to verify
- Separate organic growth and operating earnings from the RB&T sale, acquisition effects, swap-fee volatility and other nonrecurring items.
- Track net interest margin, deposit pricing and mix, and whether loan growth can be funded by core deposits as targeted.
- Assess CRE/C&I concentration, criticized and classified credits, collateral values, OREO exposure and the allowance after CECL adoption.
- Confirm the realized CECL opening-equity impact and subsequent allowance trends; the filing’s initial estimate was a range, not a final amount.
- Review the timing and price of any share repurchases, debt service and dividend capacity, including restrictions tied to bank capital and holding-company funding.