QCR HOLDINGS INC annual report, FY2023

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QCR Holdings, Inc. — 2023 Form 10-K

Business context and reporting period

QCR Holdings is a multi-bank holding company operating four banks across Iowa and Missouri, with commercial and consumer banking, wealth management, and equipment finance and leasing businesses. This filing covers the fiscal year ended December 31, 2023; comparisons are primarily with 2022. The 2022 acquisition of GFED affects year-over-year comparability because 2023 includes a full year of its results versus nine months in 2022.

Financial results and condition

  • Earnings: Net income was $113.6 million, up from $99.1 million; diluted EPS was $6.73 versus $5.87. Adjusted net income, a non-GAAP measure, was $115.1 million and adjusted diluted EPS was $6.82.
  • Revenue and margins: GAAP net interest income declined 4.4% to $221.0 million. Tax-equivalent NII increased 1% to $249.2 million, but tax-equivalent net interest margin fell to 3.35% from 3.73% (adjusted for acquisition accretion: 3.32% versus 3.60%). Interest expense rose 213% to $192.4 million as funding costs increased; average cost of interest-bearing liabilities rose to 3.31% from 1.28%. Noninterest income increased 64.4% to $132.7 million, led by capital markets revenue of $92.1 million, primarily swap fees.
  • Expenses and profitability: Noninterest expense rose 10.8% to $210.5 million, reflecting the additional GFED quarter and higher incentive compensation. The non-GAAP efficiency ratio improved to 59.52% from 60.93%. The effective tax rate was 10.3%, compared with 12.7%.
  • Growth: Assets were $8.54 billion, loans and leases $6.54 billion gross, and deposits $6.51 billion at year-end. Loans grew 6.6%, or 10.9% excluding fourth-quarter securitizations; deposits grew 8.9%. Net loans and leases increased 7% to $6.46 billion.
  • Credit: Provision for credit losses rose to $16.5 million from $8.3 million, including a $4.0 million provision for off-balance-sheet commitments. Nonperforming assets increased to $34.2 million from $8.9 million; nonperforming loans were 0.50% of loans versus 0.14%. Criticized loans were 2.93% of loans versus 2.68%. The loan allowance was $87.2 million, or 1.33% of gross loans held for investment, versus 1.43% a year earlier; net charge-offs were 0.13% of average loans and leases.
  • Liquidity and funding: Year-end cash, federal funds sold, and interest-bearing deposits totaled $237.5 million. The company reported $699.3 million of available subsidiary-bank credit lines and a fully available $50 million parent revolver. Deposits rose while total borrowings fell 13% to $718.3 million. Year-end deposits included $285.0 million of brokered deposits and approximately $1.8 billion of uninsured deposits.
  • Debt and capital: Holding-company indebtedness was $281.8 million, comprising subordinated notes and junior subordinated debentures. FHLB advances were $435 million. Stockholders’ equity was $886.6 million; the non-GAAP tangible common equity-to-tangible assets ratio rose to 8.75% from 7.93%. All four banks were reported well-capitalized.
  • Cash flow: Operating activities provided $376.3 million, investing activities used $749.3 million, and financing activities provided $410.3 million. Loan growth was the principal investing cash use.

Material changes, outlook, and risks

  • Capital markets revenue reached a record $92.1 million, up 123%, largely from swap fees associated with commercial and low-income housing tax credit (LIHTC) lending. Management cited healthy affordable-housing demand and a strong pipeline, and expected the business to remain a solid fee source in 2024; fee levels remain sensitive to market conditions and borrower demand.
  • QCR completed two Freddie Mac LIHTC loan securitizations in the fourth quarter, totaling $264.7 million in principal. The transactions generated a combined reported gain of $664,000 and retained beneficial interests of $22.4 million. Management said securitizations would continue as a liquidity and loan-production tool.
  • Long-term strategic targets are annual loan and lease growth above 9%, fee-income growth above 6%, and noninterest-expense growth below 5%. These are targets, not formal earnings guidance. In 2023, reported organic loan growth was 6.6%, fee-income growth 75.1%, and expense growth 16.3% under the filing’s stated metric definitions.
  • Interest-rate pressure on funding costs reduced margins. Management described the balance sheet as moderately liability-sensitive. Risks include further deposit-cost increases, competition for deposits, economic weakness, CRE and C&I credit deterioration, and rate-driven securities valuation changes. CRE loans were approximately 65% of gross loans; LIHTC loans were about 39% of CRE, and management said all LIHTC loans were performing and pass-rated.
  • The securities portfolio was about $1.0 billion with a 6.2-year duration. At year-end it had $84.8 million of gross unrealized losses, partly offset by $33.6 million of gross unrealized gains; management attributed losses primarily to interest-rate changes and said they were temporary. A $989,000 credit-loss allowance was recorded on a legacy subordinated-debt investment in a failed bank.
  • Other notable items included $1.1 million of BOLI death-benefit income and $451,000 of net securities losses; the company said losses from a $30 million securities sale were earned back during 2023. No material pending litigation was reported. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.

Important facts for investors to verify

  • Whether deposit growth and funding mix can sustain margins as time deposits and higher-cost funding reprice; monitor uninsured and brokered deposits.
  • Whether the sharp increase in nonperforming assets and criticized loans persists, and whether the allowance remains adequate, particularly for C&I, construction, and CRE exposures.
  • How much 2024 earnings and fee income depend on LIHTC swap fees and securitizations, and whether the reported pipeline converts into completed transactions.
  • How securities values, accumulated other comprehensive loss, and liquidity would respond to rate changes or any need to sell securities before maturity.
  • Progress against the stated long-term growth and expense targets, while accounting for acquisition effects and non-GAAP metric definitions.