Q4 2020 QCR Holdings Inc Earnings Call
Greetings and welcome to the <unk> Holdings, Inc. Earnings Conference call for the fourth quarter and full year 2020.
Yesterday after market close the company distributed its fourth quarter and year end earnings press release.
And if there is anyone on the call who has not received a copy you may access it on the company's website www Dot QC.
You see our Inc. Dot com.
In addition, the company has included a supplemental slide presentation with COVID-19 related disclosures that you can refer to during the call.
You can also access these slides on the website.
With us today from management are Larry Helling, CEO, and Todd Gipple, President and COO and CFO.
Management will provide a brief summary of the financial results and then we'll open the call to questions from analysts.
Before we begin I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward looking statements as defined by the Securities and Exchange Commission.
As part of these guidelines any statements made during this call concerning the company's hopes beliefs expectations and predictions of the future are forward looking statements and actual results could differ materially from those projected.
Additional information on these factors is included and the company's SEC filings, which are available on the company's website.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
As a reminder, this conference call is being recorded and will be available for replay through February 11, 2021, starting this afternoon.
Approximately one hour after the completion of this call.
We will also be accessible on the company's website.
At this time I would like to turn the conference call over to Mr. Larry Helling at <unk> Holdings, Sir you may begin.
Thank you operator.
Welcome, ladies and gentlemen, and thank you for taking time to join us today.
And we'll start the call with a brief discussion regarding our full year performance Todd will follow with additional details on our financial results for the fourth quarter.
We are very pleased with our financial performance and the fourth quarter and for the year highly.
Highlighted by record net income and a solid increase and adjusted earnings per share.
These record results were driven by robust revenue growth and.
Including record fee income and solid organic loan growth that helped boost our net interest income.
The pandemic has made it a challenging year.
But we adjusted to the new environment helped our clients manage the impact of the crisis and continued to identify and capitalize on growth opportunities.
Our adjusted net income increased 8% for the year and.
And we grew our tangible book value by 14%.
After adjusting for non core items, our revenues grew by 25% driven by strong swap fee income and higher net interest income while core expenses were down 1% demonstrating strong operating leverage.
We experienced healthy demand from our client base and grew loans by nearly 8%.
This does not include the $358 million of PPP loans for both new and existing clients.
Our specialty finance group had an outstanding year generating record production volumes based on strong client demand for our niche lending products.
Our loan pipelines remain healthy and our near term outlook for loan growth remains positive.
However, until we have better visibility on the economic recovery, we are targeting organic loan growth for the full year of 2021 of between six and 8% slightly lower than our long term goal of 9%.
We funded our loan growth and 2020 with core deposits.
Which grew by a very robust 22% for the year.
With strong contributions from our core commercial and correspondent banking clients.
We continue to grow market share across our charters, which reflects the value that our clients place on relationship based community banking.
Additionally, we successfully protected our net interest margin in 2000, and 'twenty, which was up slightly for the year. Despite a significant drop and short term interest rates as a result of the pandemic.
Our balance sheet initiatives paid off as we drove down our interest cost by eliminating high cost wholesale funds.
We also increased noninterest bearing deposits meaningfully and capitalize on favorable deposit repricing opportunities.
Our asset quality and credit metrics remained strong.
We also significantly built our loan loss reserves over the course of the year and feel very good about our current reserve level.
As we discussed on our last three earnings calls, we proactively implemented our loan relief program early in the pandemic.
<unk> loan payment deferrals to our impacted clients.
Hoping them preserve cash and liquidity.
Nearly all of our borrowers who received payment relief resumed payments well before the year ended.
As of December 31, we had only $28 million of loans remaining on deferral or six 6% of the total portfolio.
We believe this speaks to the high quality of our loan portfolio and the resiliency of our local markets, which continue to exhibit improving economic activity.
While it remains difficult to predict the ultimate impact that the pandemic will have on our clients.
Our banks are well positioned to navigate this environment.
We are monitoring our loan portfolio closely and working with clients to help them adapt to the current economic environment.
We continue to believe that our client focus combined with local decision, making is the best way to serve our markets as the economy adapts and recovers.
I would like to thank the entire QC, our holdings team for their hard work and dedication to outstanding customer service.
And for delivering record earnings performance for the year.
Our employees are the heart of our company and I am very proud of our entire team and for all day of accomplished in 2020.
In summary, we continue to believe that we will emerge from this pandemic well positioned to pursue our long term goal of profitable growth and value creation, both organically and through strategic acquisitions.
With that and I will turn the call over to Todd to provide further information about our fourth quarter results.
Thank you Larry as I review, our fourth quarter financial results I'll focus on those items, where some additional discussion is warranted.
I'll start with our loan growth.
Annualized loan and lease growth was 9% during the fourth quarter and was largely driven by new production and our core commercial lending business, primarily in commercial real estate loans.
A key driver with strong loan production from our specialty Finance group as Larry mentioned, we continue to experience healthy demand in this area and maintain a solid pipeline of opportunities and particular with our relationships and tax credit project lending and municipal finance.
Our strong loan and lease growth during the quarter was funded with some of our excess liquidity.
Our deposits declined slightly as core deposit growth was offset by intentional reductions and our higher cost portfolio of broker deposits as well as from higher cost Cds. Additionally.
Additionally, we continued to reduce our reliance on wholesale funds to now record lows.
At year end, we had only $26 million of wholesale funding, excluding our subordinated debt, which provides tier two capital.
This is down from 328 million one year ago over that same period, we grew noninterest bearing deposits by nearly $370 million driven by a deposit gathering from our commercial clients as well as from our correspondent banking relationships non.
Interest bearing deposits now represent and 25% of our total deposit base up from 20% at the end of 2019.
Not only is our strong core deposit gathering activity significantly reduced our reliance on wholesale funding. It has also helped to enhance our net interest margin.
Now turning to earnings our net interest income for the quarter was $43 7 million down 900000, and on a linked quarter basis, while average earning assets grew by one 3% the yield on those assets declined by eight basis points from the third quarter and our deposit costs declined by two basis points driven by both.
Rate and mix.
And the lower yield on our assets was primarily due to onetime interest recoveries on previously charged off loans of $1 1 million debt, we experienced in the third quarter, which was not repeated in the fourth quarter.
As a result of this one time recovery and the third quarter, our reported NIM was down 11 basis points and our adjusted NIM was down seven basis points.
Excluding the impact of the prior quarter's interest recoveries adjusted NIM was actually up one basis point well ahead of our guidance on last quarter's call.
We are very pleased with our NIM performance throughout 2020.
We have been successful and holding on to earning asset yields while driving down cost of funds aggressively through timely and strategic deposit rate reductions as well as significant rotation from higher cost wholesale funds to low cost core deposits.
As we move further into the sustained low interest rate environment, our ability to continue driving cost of funds lower is diminishing and while we continue to experience loan pricing pressure and therefore, we do expect some modest NIM compression and 'twenty 'twenty one on a net basis, we expect first quarter adjusted NIM to decline and.
And the range of four to six basis points.
Now turning to our noninterest income, which was a strong 32 million for the quarter, but lower than the record $38 million, we generated and the third quarter.
We produce swap fee income of $21 million meaningfully above the $18 million level, we guided to but below the record $26 7 million and the third quarter.
We averaged almost $19 million per quarter of swap fee income in 'twenty and 'twenty as Larry mentioned.
Mentioned, we continue to expect strong sustainable levels of swap production based on the demand we're seeing from the relationships within our specialty finance group as well as and our core commercial lending.
Many of our clients continue to want to lock in attractive fixed long term rates by converting their variable rate loans through the use of swaps.
The pipeline of swap loans that are banks and our specialty finance group remains healthy and we believe that this source of fee income is sustainable for the foreseeable future.
While we don't anticipate achieving the same high level of swap fees that we did and the third and fourth quarters. We.
We do expect that swap fees will be approximately $14 million to $18 million per quarter for 'twenty 'twenty one.
Now turning to our expenses.
Non interest expense for the fourth quarter totaled $46 4 million compared to $40 8 million for the third quarter and higher than our guidance of 38 to 40 million and there were a number of significant items that impacted expenses.
First we incurred increased salary and benefits expense and four 4 million with increased incentive compensation expense and the quarter driven by the strong financial results and the second half of the year.
Second we incurred $1 5 million of losses on debt extinguishment, as we prepaid some high cost wholesale funds to improve future profitability and.
And third we incurred some other onetime year and charges totaling $1 6 million adjusting for all of these items. Our noninterest expense came in at just below $39 million right and our guidance range.
Looking ahead to the first quarter, we anticipate that our level of non interest expense will return to a more normalized level and we'll be back and that range of 38 to 40 million.
Our overall asset quality continues to be quite strong nonperforming assets improved by 22% for the quarter and now represent only 26 basis points of total assets, one basis point lower than one year ago.
Linked quarter improvement was primarily due to a reduction and non accrual loans as a number of loans returned to performing status over either monetized or charged off during the quarter.
Our provision for loan and lease losses totaled $7 1 million for the fourth quarter down from $20 3 million and the prior quarter.
The level of our reserves, excluding the impact of the $273 million and P. P. P loans that remain on the balance sheet was two point, 12% to total loans and leases up seven basis points from the end of September.
And this allowance now represents over five times, our nonperforming assets.
We were fully prepared to implement Cecil at 12, 31, 'twenty as planned however, due to the lack of clarity from the FCC on their interpretation of the December cares Act legislation by the time, we needed to close the year. We stayed on our incurred loss methodology at 12 31 'twenty.
Our reserves under the incurred loss methodology and see so were nearly identical at 12, 31, 'twenty and we intend to adopt Cecil as of one 121.
With respect to capital we continue to maintain very strong capital levels and have abundant liquidity to meet our clients' needs our tangible common equity to tangible assets ratio improved to nine 4% as compared to $8 eight and 9% at the end of September if you exclude the dilutive impact.
And the P. P P loans.
Our overall earnings power remains significant and as a result, we are well positioned to continue to grow capital provide solid earnings per share and take advantage of future M&A opportunities.
Our effective tax rate for the quarter came in at 18%.
The rate was slightly lower on a linked quarter basis due to a lower ratio of taxable earnings to tax exempt revenue.
With that added context on our fourth quarter financial results, let's open up the call for your questions. Operator, we're ready for our first question.
Yeah.
And ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question and please press star and then one using a touchtone telephone.
Your question you May press Star and two.
If you are using a speaker phone, we do ask that you. Please pick up the handset before pressing and numbers to ensure the best sound quality.
Once again that is star and then one task a question and we'll pause momentarily to assemble the roster.
Yeah.
And our first question today comes from capital relief from D. A Davidson. Please go ahead with your question.
Good morning, Todd.
Good morning, Jeff Good morning.
Wanted to ask about.
And just the expenses.
Guide, there and and maybe to extend that a little further.
You know the 38 to 40, but but then a kind of on a growth rate from there or is that kind of range bound for the year any expectations for expense growth.
Potentially.
You know as we.
Get longer and the two to sort of the pandemic and if things were to open up incrementally in the back half of the year what are you what.
What are you kind of seeing on the expense side.
Sure Jeff.
Thanks for being on the call today, Great question, we would really anticipate staying in that 38 to <unk> 40 range throughout the year that feels like a pretty sustained run rate for us.
We did have some expenses pulled forward into Q4 that was intentional.
Trying to settle and at that 38% to 40 if were.
We're in that range of swap guidance that we provided that.
And that really should be where we land with respect to.
Non interest expense with that being elevated if we have them.
More significant and swap fees as you know we could see some incentives around that going on.
But short answer is 38 to 40 feels pretty good for much of the year.
Okay.
And Todd the.
And last comment there on on Cecil So it doesn't sound like we're going to see a big sort of day one adjustment.
Somewhat and material or my AR and am I reading that wrong.
No Jeff spot on and it would be immaterial.
And we're disappointed that there was some uncertainty there.
At year end.
And we didn't.
And feel like it was appropriate to wait for the SEC to give their final opinion on that.
And we spool debt incurred loss model back up.
And I think you know that at the end of the third quarter. They were very close they were right on top of each other at 12 31, so it should not be and a significant day, one impact for adoption here and the first quarter.
Got you, Okay, and maybe one last one perhaps for Larry just thinking about that growing capital level and I think you've been.
Pretty consistent about earmarking that first through organic growth, but you do keep your eye on M&A.
And if it's perhaps the M&A side goes.
Kind of quiet and and loan growth a little bit under your expectations.
Do you and.
At any point throughout the year to give kind of increased the buyback discussion of.
Using that tool over some of your other oh sort of capital methods.
Yeah.
Yeah, Jeff another good question I would say.
You know first.
And.
We've had good organic growth even through the pandemic. So a lot of our discussion will depend on how much organic growth we see prospectively.
Secondly, do we think there will.
It will be some M&A opportunities and the foreseeable future.
That's hard to predict as you know.
But if things continue to normalize I would expect there to be more dialogue.
On potential M&A targets, but it's probably premature yet to anticipate anything.
But yes, if none of that materializes, if growth went a little slower and there's nothing on the horizon from M&A, It's certainly something we would discuss.
Later in the year with regard to potential buyback.
Okay, and could you remind us the authorization in place.
Yeah, we suspended however.
So net.
We would want to go back to our board and talk about it later this year.
If the if the dynamics change.
Throughout the year some time.
Okay, and Jeff we used much of the authorization, we had back in the first quarter and as Larry said, we suspended debt.
Mid March and if we were to do a buyback again reinstitute, one we'd likely go back to the board and settle and on a target or refreshed target.
Okay, great. Thank you guys.
Thanks, Joe.
Our next question comes from Nathan race from Piper Sandler. Please go ahead with your question.
Hi, guys.
Morning, where he made.
Good morning day, maybe just hoping to continue the discussion on the adjusted.
Margin outlook Todd appreciate your guidance in terms of some compression from here.
And I guess.
And then what are your expectations for Triple P. M flows and volumes from this latest round and obviously wells from run off from.
The volume from last year, but just trying to kind of parse that out as we think about the.
The outlook there.
Sure.
And maybe I'll just start with a high level kind of burned down on forward NIM, and then talk a little bit about PPP.
Certainly the.
Big headwind for Us and.
Providing that guidance and compression in Q1 would be loan yields.
Certainly fixed rate loans repricing.
Also continuing to issue more floating rate with our slot program. So those are LIBOR floaters.
So that will continue to provide a bit of a headwind we are fortunate and we still have some opportunities.
To fight that off we will continue to drive down our cost of funds. We are starting to bump into some fours as you might've noticed and looking at the tables.
So there's a bit of a diminished opportunity there, but we have some incredibly talented bankers on through the company.
Fighting for every basis point that can get in terms of cost of funds reductions. So we still have a little bit of opportunity there.
Excess liquidity, while we work that down pretty successfully and Q3 and here again in Q4.
And our estimate is it cost us roughly nine basis points and Q4 excess liquidity.
And that's not going to get any easier with new PPP funding, there's certainly going to be another wave of liquidity and the system.
We will continue to work hard at forest and down excess liquidity, but.
And to the extent, we can we'll see some benefit and then.
And we'll have a full year or full quarter result from some of the Delevering that we did and some of the prepayment we did and the fourth quarter. So those things will help offset that a bit but we just think given the challenges. It is prudent to provide a little bit of a softer guidance and that four to six range will do all we can to out.
The format.
And then you asked a little bit about PPP.
Roughly 900, K and forgiveness and Q4 around two 6 million total and net fees between accretion and the forgiveness.
We only have about $2 million and fees remaining.
We would expect roughly a $1 million of that and the first quarter again, and thats all dependent on forgiveness rates and activity, but thats going well and then the rest will tail off.
Really not speculating at this point, what we might see with around two P. P. P. I know Larry has some good insight on on.
And what our lenders are expecting Larry maybe you want to.
To provide some of that in terms of where we think brown who might have.
Yeah.
Nate I would say that.
We've got a new portal in place, which will make the process much easier and so we feel good about our ability to respond and theres plenty of second round dollars available for our clients.
There are as you know the restrictions on the size of the loans and who can qualify this time, so we would.
Estimate that the PPP for round two will be.
Roughly.
30% of the volume of the first round of PPP for Us and we'll certainly be active we're still trying to help our clients and proactively go on to them.
But it won't be the same magnitude as the first round of P. P T.
Got it that's very helpful. And then just kind of thinking about the provision outlook for this year.
Seasonal.
Implementing cure.
And the first quarter.
And you guys, obviously have a pretty strong loan growth and pipeline.
Outlook for this year.
And your reserve is already at a pretty strong level.
Should we expect any reserve releases and assuming kind of a steady recovery from here or do you guys continue to expect and need to provide on top of charge offs, just given the loan growth outlook.
And again it's.
Pretty strong entering this year.
Yeah, and Nate and I'll start on and I'll, let Todd finish here if he has any additional color.
We're certainly and that part where it's we've had less.
Credit issues, and we would have anticipated.
On a nine or 10 months ago and this whole pandemic started.
Are publicly available.
Metrics that we talk about our improved and the fourth quarter, so that feels really good.
And it's probably a little bit premature to declare victory over the pandemic, yet because it's difficult to tell exactly which clients will be impacted and certain ways. So we'd expect a little bit of challenges with a handful of clients.
And that May result in.
Some credit challenges later in the year or maybe even as late as 2022.
But that's why we've been aggressive and building our reserve the way we have so we've tried to get the meaningful component of the earnings impact behind us.
So I'd say, we from the very beginning wanted to target a reserved getting over that 2% level.
At those numbers if charge offs.
Normalize or go down.
And it's certainly possible that we'll need to reserve less later in the year, but it's probably too early to predict that.
Yeah.
Yeah, David and.
Larry nailed that we've been talking since April about getting up over 200 basis points and now that we're there.
To Echo Larry side, it's a little early to declare victory, but we feel really good about the level of reserve and and.
Our pristine the portfolio has thus far.
Yeah understandable sounds good I appreciate all the color guys. Thank you.
Thanks, Nick.
Yeah.
And our next question comes from Damon Delmonte from <unk> <unk>. Please go ahead with your question.
Good morning, guys hope everybody's doing well today.
So my first question just regards to the loan growth you guys referenced and the specialty finance group as being a good source of growth could you just remind us.
I guess first what the outstanding balances are and actually how much that's contributed to the growth.
During the past year.
Yes, Damon it's been a meaningful component of our growth throughout the year.
Because of P. P P and because of just tremendous liquidity and our borrowers hands.
You know our normal lines of credit for our C&I.
Operating and industrial clients those numbers are actually backed up during the year. So we've been able to overpower that.
Because a meaningful expansion in both our S F G and other commercial real estate and equipment finance activities.
And so.
We're pleased with that because we still have been able to have good growth in spite of our clients just borrow on less money on their lines of credit.
And so.
The growth really came from throughout the company and.
And but mostly in commercial real estate and equipment finance because of clients deleverage on their own balance sheets.
Okay and then.
Can you just kind of give a little perspective on how the relationship opportunities that came about through PPP path.
Or maybe you will be playing a role and in near future loan growth because that Ben and good source of new leads and have you been able to capitalize on it.
It's certainly been a good source of loan growth I think it will be even more meaningful going forward once we get through the P. P. P phenomena.
What I would say, it's probably created.
Better Treasury management.
And deposit opportunities.
And the short term and.
And we talked about some of our metrics, particularly non interest bearing deposits have grown substantially.
Throughout the year and so it's made a really good impact on our mix and our funding costs.
Got it okay.
I think that's all that I had everything else had been asked and answered. So thank you very much.
Thanks, Tim and David.
And ladies and gentlemen, once again, if you would like to ask a question and please press Star and then one to withdraw your question you May press Star and two.
Our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.
Hey, guys good morning.
Good morning, Brian.
Hey, Todd to your question and to your point on the asset quality and the reserve levels I mean, I guess, if you're are you.
And I guess, if you guys wanted to get to that 2% level. You know I guess do you think that the current levels. If you were there where the reserve may trend to once you get past the pandemic kind of on a post COVID-19 world and.
Seems justifying 2% will get more challenging, but I guess can you give some thought as to if you look where you were before versus where you are today, where do you think that might end up at some point.
Sure, Brian and I think to Larry's earlier comments, its really all going to depend on the charge offs, we see and the pace of those.
We would certainly expect to.
Maintain elevated levels of reserves.
Until we're all the way through this as a country.
We could maybe see it softening up a little bit from the.
And $2 12 ish range that we have now but that would only be if our longer term expectations.
Also soften a bit and if we feel like we're getting through some charge offs and the most troubled areas and industries.
Getting through those and the sky seem to open up after that I could see us maybe coming off of the 212.
But.
Our credit philosophy, and discipline and is quite strong I think you know you've followed us for quite some time.
And we're just not ready to take the foot off the gas in terms of making sure we had plenty of reserves.
It will be a bit more challenging and seasonal of course.
I will tell you, we enter Cecil with roughly $40 million and unallocated reserves due to both the COVID-19 and economic factors.
So we feel pretty good about <unk> ability to handle that again, we were right on top of the numbers at 12 31.
I don't know that it's going to necessarily give us a lot of runway to increase those.
And unless asset quality degradation really shows up and at this point, we don't expect that.
But long term.
Next year, it's really going to depend on on level of charge offs and if those don't show up and then youll see some softened provision and reserves from us.
Got you, Okay, and then maybe.
One one or two more just on the M&A side I guess.
You talked a little bit about that I guess would you say at this point, you've seen a pickup and discussions or is it Ben.
More of a a.
And more distant opportunity and maybe the second half of the year on on M&A or just kind of wondering where the dialogue has been given it's kind of struggled for a lot of other bankers out there and then maybe looking at buying partners.
Sure Larry do you want to start with that.
Yes, I'll start I would say.
There's certainly there's been a pickup in discussions.
But it was as you know unbelievably quiet the last three quarters or so.
But people are starting to I think because of the.
Opportunity for things to normalize I think there will be some opportunities, but when exactly that's going to be is going to be tough to predict.
But people are willing to talk about it more than they were certainly the last few quarters.
Gotcha, Okay, and then just last one card I appreciate the color on the on the on the margin and just wondering and and <unk> your four to six.
In terms of basis points, I mean, how much benefit do you have and therefore or just how are you thinking about the forgiveness. It sounds like forgiveness is mostly a first half event on the remaining credits or just kind of wondering how the margin might look and the back half of the year based on kind of the liquidity that they continued forgiveness here and just big picture how to think about.
What's driving the margin directionally.
And beyond <unk>.
Sure Fair question, Brian and again, our guidance for Q1 of a little bit of softening and that four to six basis point range.
And I went through the puts and takes on that.
Included in that would be that roughly $1 million of forgiveness and recognition of PPP fees.
And what we don't have any clarity on just yet is what kind of PPP fees, we might have from round to back half of the year.
And as Larry shared our expectations, maybe 30% of the volume we had from round one.
I believe that.
We do see there will be.
Fairly neutral with respect to margin outcome I don't expect there to be.
And of PPP drag or necessarily a big lift out of round. Two I think it's really not going to impact margin. Much I think if you were to look at that 337 adjusted number that we posted for Q4 and.
And part of our Q1 guidance.
I think we should be fairly static.
That's it okay. Okay.
Okay.
And I appreciate you guys, taking the questions everything else has been answered so thanks, and nice quarter nice year.
Great. Thank you Ryan.
Yeah.
Okay.
And ladies and gentlemen at this time and showing no additional questions I'd like to turn the conference call back over to Mr. Helling for any closing comments.
Thank you operator, and thanks to all of you for joining on our call today.
We hope that everyone remains healthy and safe during the ongoing health crisis have a great day, and we look forward to speaking with you all again soon.
Okay.
Ladies and gentlemen, with that we'll conclude today's conference call with you. Thank you for joining you may now disconnect your lines.