QCR Holdings, Inc. Announces Record Third Quarter Earnings Despite Elevated COVID-19 Provisioning

EPS of $1.09 Driven by Record Pre-Provision/Pre-Tax Adjusted Net Income

Third Quarter 2020 Highlights

• Record net income of $17.3 million, or $1.09 per diluted share
• Adjusted net income (non-GAAP) of $17.7 million, or $1.11 per diluted share
• Record noninterest income of $38.0 million, driven by record swap fee income of $26.7 million
• Record pre-provision, pre-tax adjusted net income (non-GAAP) of $42.2 million
• Pre-provision, pre-tax adjusted ROAA (non-GAAP) of 2.90%
• NIM increased by 22 bps and NIM (TEY)(non-GAAP) increased by 24 bps to 3.36% and 3.51%, respectively
• Annualized core loan and lease growth (non-GAAP) of 11.5% for the quarter, excluding SBA Paycheck Protection Program (“PPP”) loans
• Provision expense of $20.3 million for the quarter, increasing ALLL to total loans and leases, excluding PPP loans (non-GAAP), by 44 bps to 2.05%
• Annualized core deposit growth of 36.4% for the quarter
• Loan Relief Program (“LRP”) participation down approximately 90% from the prior quarter to only 1.95% of total loans and leases

MOLINE, Ill., Oct. 27, 2020 (GLOBE NEWSWIRE) -- QCR Holdings, Inc. (NASDAQ: QCRH) (the “Company”) today announced record quarterly net income of $17.3 million and diluted earnings per share (“EPS”) of $1.09 for the third quarter of 2020, compared to net income of $13.7 million and diluted EPS of $0.86 for the second quarter of 2020. Pre-provision, pre-tax adjusted net income (non-GAAP) increased $5.4 million in the third quarter compared to the second quarter, led by record swap fee income, strong loan growth and improved net interest income and margin.

The Company reported adjusted net income (non-GAAP) of $17.7 million and adjusted diluted EPS (non-GAAP) of $1.11 for the third quarter of 2020, compared to adjusted net income (non-GAAP) of $14.0 million and adjusted diluted EPS (non-GAAP) of $0.88 for the second quarter of 2020. For the third quarter of 2019, net income and diluted EPS were $15.1 million and $0.94, respectively, and adjusted net income (non-GAAP) and adjusted diluted EPS (non-GAAP) were $15.9 million and $1.00, respectively.

“We are pleased to report a record quarter of net income, pre-provision, pre-tax adjusted net income, and noninterest income, driven by continued strong loan growth, record fee income and an expanded net interest margin,” commented Larry J. Helling, Chief Executive Officer. “Core loans grew more than 11% on an annualized basis, while maintaining disciplined underwriting and solid credit quality. Core deposits were even stronger this quarter with outsized growth in deposits coming from our correspondent banking relationships. Despite continuing to hold some excess liquidity on our balance sheet, we were able to lower deposit costs and bolster our net interest margin in the quarter.

“Additionally, we continued to experience a significant reduction in loan deferrals, and by quarter-end, approximately 90% of our clients who needed payment relief early in the pandemic had resumed making payments,” Helling said. “We believe this speaks to the high quality of our loan portfolio and the resiliency of our local markets, which continue to improve as pandemic-impacted jobs return at a faster pace than the rest of the country.

“Our asset quality remains solid and our banks are well positioned to continue to work through the pandemic,” added Helling. “We again chose to be prudent and recorded a significant provision for loan and lease losses during the quarter in order to continue to build reserves against future potential credit issues related to the unknown severity and duration of COVID-19.”

Annualized Loan and Lease Growth of 11.5%, excluding PPP Loans (non-GAAP)

During the third quarter of 2020, the Company’s total loans and leases increased by $107.7 million to a total of $4.2 billion. Loan and lease growth during the quarter was 11.5% on an annualized basis. Core deposits (excluding brokered deposits) increased $385.1 million, or 36.4% on an annualized basis. Brokered deposits declined by $62.6 million as the Company allowed certain higher cost brokered deposits to run off the balance sheet. The Company’s correspondent banking portfolio contributed to the majority of the core deposit growth as our correspondent bank clients grew liquidity. At quarter-end, the percentage of wholesale funds to total assets was 4.9%, which was down sharply from 8.9% in the second quarter of 2020 as the Company’s need for wholesale funding declined due to the strong growth in core deposits. Notably, more than half of the remaining wholesale funds consist of subordinated debt and trust preferred securities that provide regulatory capital. Additionally, at quarter-end, the percentage of gross loans and leases to total assets was 72.4%, which was down from 73.9% in the second quarter.

“We delivered solid loan growth for the quarter, driven primarily by strong production in our Specialty Finance Group,” said Helling. “Excluding our PPP loan production, loan and lease growth for the first nine months of 2020 was 7.2% on an annualized basis, and given our current pipeline, we now believe that we will be able to achieve organic loan growth of between 6% and 8% for the full year, higher than our previous guidance.”

Net Interest Income of $44.6 million

Net interest income for the third quarter of 2020 totaled $44.6 million, compared to $41.0 million for the second quarter of 2020 and $40.7 million for the third quarter of 2019. The increase was primarily due to an increase in the reported net interest margin and, to a lesser extent, the growth in average interest-earning assets of $25.6 million, or 0.5% on a linked quarter basis. Acquisition-related net accretion totaled $833 thousand (pre-tax) for the third quarter of 2020, up slightly from the second quarter of 2020 and down from $1.3 million for the third quarter of 2019. Adjusted net interest income (non-GAAP) was $45.7 million for the third quarter of 2020, compared to $41.9 million for the second quarter of 2020 and $41.2 million for the third quarter of 2019.

In the third quarter, NIM was 3.36% and, on a tax-equivalent yield basis (non-GAAP), NIM was 3.51%, an increase of 22 basis points and 24 basis points from the second quarter of 2020, respectively. Adjusted NIM (non-GAAP), excluding acquisition-related net accretion was 3.44%, up 23 basis points from the second quarter. The increase in adjusted NIM (non-GAAP) during the quarter was primarily due to a 13 basis point increase in the yield on earning assets combined with a 14 basis point decline in the total cost of interest-bearing funds (due to both mix and rate).

“During the quarter, we worked to improve the efficiency of the balance sheet by proactively reducing higher cost non-core funding which, in turn, eliminated some of our excess liquidity and helped to enhance our NIM,” stated Todd A. Gipple, President, Chief Operating Officer and Chief Financial Officer. “Combined with a meaningful drop in our funding costs, which was driven by the increased core deposits and reduced wholesale funding, we were able to increase our adjusted NIM by 23 basis points in the quarter.”

Record Noninterest Income of $38.0 million

Noninterest income for the third quarter of 2020 totaled $38.0 million, compared to $28.6 million for the second quarter of 2020. The increase was primarily due to $26.7 million in swap fee income, up $6.8 million from the second quarter of 2020. Wealth management revenue was $3.5 million for the quarter, consistent with the second quarter. In addition, securities gains and other income increased by $1.7 million from the prior quarter. Noninterest income increased $18.1 million or 90.7% when compared to the third quarter of 2019.

“Continued strong production from our Specialty Finance Group and our commercial teams across all of our banks led to a record $26.7 million in swap fee income during the quarter. Swap fee income totaled $53.4 million for the first nine months of 2020. This level of sustained production puts us on track to exceed our full year expectations for this source of fee income,” added Mr. Gipple.

Noninterest Expenses of $40.8 million

Noninterest expense for the third quarter of 2020 totaled $40.8 million, compared to $33.1 million for the second quarter of 2020. The linked-quarter increase was primarily due to increased salary and benefits expense of $4.7 million, with increased commission and incentive compensation expense in the quarter driven by the strong financial results and higher than anticipated swap fee income. In addition, losses on debt extinguishment increased $1.4 million, FDIC insurance and regulatory fees increased by $393 thousand due to our larger asset base, net cost on operations of other real estate increased by $348 thousand, disposition costs increased by $275 thousand, and advertising and marketing expenses increased by $198 thousand.

Continued to Significantly Build Reserves for COVID-19

Nonperforming assets (“NPAs”) totaled $19.0 million, an increase of $5.7 million from the second quarter of 2020. The increase was primarily due to a few isolated relationships that experienced degradation not directly related to COVID-19. The ratio of NPAs to total assets increased to 0.32% at September 30, 2020, compared to 0.24% at June 30, 2020, and 0.27% at September 30, 2019.

The Company’s provision for loan and lease losses totaled $20.3 million for the third quarter of 2020, up from $19.9 million in the prior quarter. The linked-quarter increase in the provision for loan and lease losses was primarily due to increased qualitative factors in response to the COVID-19 pandemic. As of September 30, 2020, the Company’s allowance to total loans and leases was 1.87%, which was up from 1.47% at June 30, 2020, and from 1.00% at September 30, 2019. Excluding the impact of the $358 million in PPP loans that are on the Company’s balance sheet, the ALLL to total loans and leases was 2.05% (non-GAAP).

In accordance with GAAP for acquisition accounting, loans acquired through past acquisitions were recorded at market value; therefore, there was no allowance associated with the acquired loans at the acquisition date. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount of $4.5 million at September 30, 2020.

Strong Capital Levels

As of September 30, 2020, the Company’s total risk-based capital ratio was 14.91%, the common equity tier 1 ratio was 10.43%, and the tangible common equity to tangible assets ratio was 8.42% (non-GAAP). By comparison, these respective ratios were 13.71%, 10.25% and 8.48% as of June 30, 2020. Excluding the impact of the PPP loans, the tangible common equity to tangible assets ratio was 8.89% (non-GAAP).

During the third quarter, the Company successfully completed a private placement of $50.0 million of 5.125% Fixed-to-Floating Rate Subordinated Notes due 2030. This offering enabled us to further build our capital base to support the organic growth of our subsidiary banks and be well positioned for future M&A opportunities.

Focus on Three Strategic Long-Term Initiatives

As part of the Company’s ongoing efforts to grow earnings and drive attractive long-term returns for shareholders, it continues to operate under three key strategic long-term initiatives:

• Organic loan and lease growth of 9% per year, funded by core deposits;
• Grow fee-based income by at least 6% per year; and
• Limit our annual operating expense growth to 5% per year.

These initiatives are long-term targets. Due to the impact of the COVID-19 pandemic among other factors, the Company may not be able to achieve these goals for the full year 2020.

Supplemental Presentation and Where to Find ItIn addition to this press release, the Company has included a supplemental presentation that provides further information regarding the Company’s loan exposures and deferrals. Investors, analysts and other interested persons may find this presentation on the Securities and Exchange Commission’s EDGAR filing system at www.sec.gov/edgar.shtml, or on the Company’s website at www.qcrh.com.

Conference Call Details The Company will host an earnings call/webcast tomorrow, October 28, 2020, at 10:00 a.m. Central Time. Dial-in information for the call is toll-free: 888-346-9286 (international 412-317-5253). Participants should request to join the QCR Holdings, Inc. call. The event will be available for replay through November 11, 2020. The replay access information is 877-344-7529 (international 412-317-0088); access code 10148155. A webcast of the teleconference can be accessed at the Company’s News and Events page at www.qcrh.com. An archived version of the webcast will be available at the same location shortly after the live event has ended.

About Us

QCR Holdings, Inc., headquartered in Moline, Illinois, is a relationship-driven, multi-bank holding company serving the Quad Cities, Cedar Rapids, Cedar Valley, Des Moines/Ankeny, and Springfield communities through its wholly-owned subsidiary banks. The banks provide full-service commercial and consumer banking and trust and wealth management services. Quad City Bank & Trust Company, based in Bettendorf, Iowa, commenced operations in 1994, Cedar Rapids Bank & Trust Company, based in Cedar Rapids, Iowa, commenced operations in 2001, Community State Bank, based in Ankeny, Iowa, was acquired by the Company in 2016, and Springfield First Community Bank, based in Springfield, Missouri, was acquired by the Company in 2018. Additionally, the Company serves the Waterloo/Cedar Falls, Iowa community through Community Bank & Trust, a division of Cedar Rapids Bank & Trust Company. Quad City Bank & Trust Company engages in commercial leasing through its wholly-owned subsidiary, m2 Lease Funds, LLC, based in Milwaukee, Wisconsin, and also provides correspondent banking services. The Company has 24 locations in Iowa, Missouri, Wisconsin and Illinois. As of September 30, 2020, the Company had approximately $5.9 billion in assets, $4.2 billion in loans and $4.7 billion in deposits. For additional information, please visit the Company’s website at www.qcrh.com.

Special Note Concerning Forward-Looking Statements. This document contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “predict,” “suggest,” “appear,” “plan,” “intend,” “estimate,” ”annualize,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.        A number of factors, many of which are beyond the ability of the Company to control or predict, could cause actual results to differ materially from those in its forward-looking statements. These factors include, among others, the following: (i) the strength of the local, state, national and international economies (including the impact of the 2020 presidential election and the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations); (ii) the economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), or other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse external events; (iii) changes in accounting policies and practices (including the new current expected credit loss (CECL) impairment standards, that will change how the Company estimates credit losses when implemented); (iv) changes in state and federal laws, regulations and governmental policies concerning the Company’s general business; (v) changes in interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out); (vi) increased competition in the financial services sector and the inability to attract new customers; (vii) changes in technology and the ability to develop and maintain secure and reliable electronic systems; (viii) unexpected results of acquisitions, which may include failure to realize the anticipated benefits of acquisitions and the possibility that transaction costs may be greater than anticipated; (ix) the loss of key executives or employees; (x) changes in consumer spending; and (xi) unexpected outcomes of existing or new litigation involving the Company. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including additional factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission.

Contacts:

Todd A. GipplePresidentChief Operating OfficerChief Financial Officer(309) 743-7745[email protected]

Kim K. GarrettVice PresidentCorporate CommunicationsInvestor Relations Manager(319) 743-7006[email protected]