QCR Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. QCR Holdings is a regional banking company with four subsidiary banks and a leasing business. Unless otherwise stated, dollar amounts below are in millions. The filing is unaudited.
Financial results and condition
| Metric | Q1 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $45.7 | Up 9% from Q1 2021 |
| Noninterest income | $15.6 | Down 33% from Q1 2021 |
| Net income | $23.6 | $18.0 in Q1 2021; $27.0 in Q4 2021 |
| Diluted EPS | $1.49 | $1.12 in Q1 2021; $1.71 in Q4 2021 |
| Net interest margin | 3.30% GAAP; 3.50% tax-equivalent | 3.26% and 3.43%, respectively, in Q1 2021 |
| Efficiency ratio | 62.45% | 56.87% in Q1 2021 |
| Operating cash flow | $6.9 | $11.1 in Q1 2021 |
Adjusted net income, a non-GAAP measure, was $24.4 million, or $1.54 per diluted share; it excludes certain items, principally acquisition costs. Total interest and dividend income was $51.1 million, interest expense $5.3 million, and noninterest expense $38.3 million. The effective tax rate was 9.0%, versus 16.4% a year earlier.
At March 31, total assets were $6.18 billion, net loans and leases $4.75 billion, deposits $4.84 billion, and stockholders’ equity $667.9 million. Total borrowings were $443.3 million, including $290.0 million of overnight FHLB advances, $113.9 million of subordinated notes, and $38.2 million of junior subordinated debentures. Cash and due from banks ended at $50.5 million. Investing activities used $177.1 million, while financing activities provided $183.2 million.
QCR reported a 9.60% tangible common equity to tangible assets ratio (non-GAAP). The company’s total risk-based capital ratio was 14.50%; management said the company and subsidiary banks met applicable capital requirements, and the banks were “well capitalized.”
Material changes versus prior periods
- Net loans and leases grew $151.7 million from year-end; annualized growth excluding PPP loans was 14.6%. Multi-family loans rose to $711.7 million from $600.4 million at year-end.
- Deposits fell $83.1 million from year-end, which management attributed primarily to seasonal commercial-client activity and deposit mix changes. Overnight FHLB advances rose $275.0 million, supporting loan growth and offsetting deposit declines.
- Noninterest income fell $7.9 million year over year. Swap fee and capital-markets revenue declined to $6.4 million from $13.6 million, with management citing project delays related to supply-chain disruption and inflation. Residential loan-sale gains also declined.
- Provision for credit losses was a negative $2.9 million, compared with an expense of $6.7 million in Q1 2021, reflecting strong credit quality and reduced pandemic-related qualitative reserves. The loan and lease allowance declined to $74.8 million, or 1.55% of gross loans, from $78.7 million, or 1.68%, at year-end.
- Rising intermediate- and long-term rates drove a $27.3 million after-tax other comprehensive loss in the quarter. AFS securities moved from a net unrealized gain of $5.9 million at year-end to a net unrealized loss of $16.2 million at March 31.
Outlook, risks, and unusual items
- No specific near-term earnings guidance is provided. Long-term company targets are annual loan and lease growth above 9%, fee-income growth above 6%, and operating-expense growth below 5%; management cautions that achieving them is not assured. Q1 fee-income growth was negative, driven chiefly by lower swap revenue.
- After quarter-end, QCR completed its GFED acquisition on April 1, 2022, and merged Guaranty Bank into its Springfield-based bank on April 2. GFED had $1.2 billion in assets, $821 million in loans, and $1.1 billion in deposits at acquisition. Consideration included $117.2 million of stock and $26.9 million of cash. Purchase accounting fair values were still being determined; GFED’s results are not included in Q1.
- Q1 included $1.9 million of acquisition costs related to GFED. The company repurchased and retired 77,500 shares for $4.4 million during the quarter.
- Management identifies COVID-19, inflation, supply-chain constraints, interest-rate changes, competition, cyber and technology issues, and acquisition execution as risks. It warns that further pandemic-related economic effects could impair borrowers, earnings, and capital.
- Interest-rate sensitivity modeling was within policy limits for the disclosed scenarios. Still, management notes that interest-rate movements can affect net interest income and portfolio values. Correspondent-bank deposits are a significant funding source and can fluctuate; the company monitors potential runoff and maintains contingent liquidity sources.
- Nonperforming assets were $2.7 million, or 0.04% of assets, a record low according to management. Criticized loans were $118.1 million, up slightly from year-end, while classified loans were $54.5 million. The company cautions that actual credit losses could exceed its allowance estimates.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. The filing reports no material pending legal proceedings apart from ordinary routine litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- GFED purchase accounting, integration progress, realized cost savings, and the effect of the acquisition on capital and earnings.
- Whether loan growth can be funded with stable core deposits or requires continued reliance on overnight FHLB advances.
- Trends in swap-fee revenue, client project delays, trust fees, and market-sensitive assets under management.
- Credit quality, criticized and classified loans, allowance assumptions, and any effects from economic or pandemic-related deterioration.
- Interest-rate exposure, AFS securities valuation and accumulated comprehensive losses, and the eventual impact of rate changes on margins and capital.