QCR Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. QCR is a regional banking and financial services holding company with four bank subsidiaries, equipment financing, and wealth-management operations. Comparisons below are primarily year over year unless stated otherwise. Dollar amounts are in millions unless noted.
Financial performance and condition
| Metric | Q3 2023 | Comparable period / context |
|---|---|---|
| Net interest income | $55.3 | Down 9% from Q3 2022; up 3.9% from Q2 2023 |
| Provision for credit losses | $3.8 | Nil in Q3 2022; $3.6 in Q2 2023 |
| Noninterest income | $26.6 | Up 26% year over year; down $5.9 from Q2, largely as swap-related capital markets fees normalized |
| Noninterest expense | $51.1 | Up 7% year over year |
| Net income / diluted EPS | $25.1 / $1.49 | Net income was $29.3 and diluted EPS $1.71 in Q3 2022 |
| Net interest margin | 3.31% tax-equivalent; 3.28% adjusted | Adjusted margin was flat sequentially and 3.65% in Q3 2022 |
| Efficiency ratio | 62.41% | 58.32% in Q3 2022 |
For the first nine months, net income was $80.7 and diluted EPS $4.79, versus $68.2 and $4.20 in 2022. Net interest income was nearly unchanged at $165.3; noninterest income rose 43% to $85.0, while noninterest expense rose 7% to $149.6. Adjusted net income, a non-GAAP measure, was $81.8 and adjusted diluted EPS $4.85, compared with $83.7 and $5.15 in the prior-year period.
- Balance sheet at September 30: Assets $8.54 billion; net loans and leases $6.52 billion; deposits $6.49 billion; stockholders’ equity $828.4 million.
- Growth: Gross loans and leases grew 10.2% annualized year to date and 13.3% annualized in Q3, with strength in low-income housing tax credit (LIHTC) lending. Assets rose 4% sequentially.
- Credit: Allowance for credit losses on loans and leases was $87.7 million, or 1.39% of loans held for investment. Nonperforming assets were $34.7 million (0.41% of assets), up from $18.0 million a year earlier. Criticized loans were $196.6 million, 2.98% of loans, up from $141.3 million and 2.35% a year earlier.
- Deposits and liquidity: Deposits fell $111.9 million in Q3, including a $102.8 million reduction in brokered deposits; core deposits excluding brokered balances declined $9.0 million. Uninsured and uncollateralized deposits were 20.1% of total deposits. Management reported $1.1 billion immediately available liquidity and $3.0 billion total available liquidity, excluding unpledged securities.
- Borrowings: Total borrowings were $712.1 million, including $430.0 million of FHLB advances, $233.0 million of subordinated notes, and $48.7 million of junior subordinated debentures. Q3 ended with $295.0 million of overnight FHLB advances, used in part to fund loan growth.
- Capital: Consolidated common equity Tier 1 ratio was 9.72%; total risk-based capital ratio was 14.54%. Subsidiary banks met the “well-capitalized” thresholds. Tangible common equity to tangible assets was 8.05%, down from 8.28% at Q2-end.
- Cash flows, nine months: Operating activities provided $85.3 million; investing activities used $426.5 million; financing activities provided $385.7 million. Cash and due from banks increased $44.5 million to $104.3 million.
Material changes and management commentary
- Higher loan yields and loan growth increased interest income, but funding costs rose sharply: Q3 cost of funds was 3.54%, versus 1.43% in Q3 2022. Management cited the inverted yield curve and deposit mix moving toward higher-cost accounts as pressure on net interest income.
- Capital markets revenue reached $15.6 million in Q3 and $55.1 million year to date, driven largely by swap fees associated with commercial and LIHTC lending. Q3 was below Q2’s unusually high $22.5 million. Management said affordable-housing demand and its pipeline remained healthy, while future swap fees depend on market rates and borrower activity.
- Noninterest expenses increased year over year partly because 2023 included a full nine months of Guaranty Bank operations, compared with six months in 2022 following its April 2022 acquisition. Salary costs also reflected higher variable compensation and additional staff.
- The available-for-sale securities portfolio had $73.5 million of gross unrealized losses at quarter-end. Held-to-maturity securities had amortized cost of $615.3 million and fair value of $524.8 million. Management attributed unrealized losses principally to interest rates. A $0.989 million allowance was recorded in Q1 for an impaired subordinated debt investment in a failed bank acquired with Guaranty.
- Q3 other comprehensive loss was $19.4 million after tax, mainly from securities and derivative valuation changes. A $1.1 million BOLI death-benefit gain contributed to year-to-date noninterest income.
Outlook, risks, and contingencies
- The filing provides long-term strategic targets, not formal earnings guidance: annual organic loan and lease growth above 9%, fee-income growth above 6%, and annual operating expense growth below 5%. These are targets and are not assured.
- Management expects LIHTC securitizations to remain an ongoing liquidity and capital-management tool; one closed in October 2023 and another was scheduled before November-end. Securitization execution and associated fee income may vary.
- Interest-rate exposure is a key risk. Management described the balance sheet as moderately liability-sensitive as funding shifted toward higher-beta deposits. Modeled rate scenarios were within policy limits, but results remain sensitive to deposit pricing, asset repricing, and market rates.
- Credit risks include rising criticized loans and nonperforming assets, loan growth, and concentrations in commercial real estate and multifamily lending. Management noted that about one-third of NPAs related to one credit, which it expected to resolve without loss. Office exposure was $188.9 million, or 2.9% of total loans.
- Other disclosed risks include deposit withdrawals, especially from large uninsured accounts; economic deterioration; securities valuation changes; competition; cybersecurity and technology disruptions; and acquisition-related risks. The filing reported no material change to previously disclosed risk factors and no material pending legal proceedings beyond routine litigation.
- A new Cedar Rapids facility carries an approximately $17.0 million construction contract; $1.2 million had been paid and $15.8 million remained committed at September 30, with completion anticipated in 2024.
Most important facts for investors to verify
- Whether deposit mix, funding costs, and net interest margin stabilize, and whether management can reduce reliance on brokered deposits and wholesale funding.
- Whether criticized loans and nonperforming assets continue to rise, especially within commercial real estate, multifamily, and construction portfolios; monitor charge-offs and allowance adequacy.
- How much capital markets revenue is repeatable, given its reliance on swap fees, LIHTC activity, interest rates, and securitization timing.
- The potential impact of securities unrealized losses on capital and liquidity if securities must be sold, and the performance of the impaired acquired subordinated debt investment.
- Progress against expense and growth targets, regulatory capital ratios, and the remaining $15.8 million facility commitment.
- The filing’s reported third-quarter repurchase table shows 745,000 shares remaining under the 1.5 million-share authorization; verify authorization usage in subsequent filings.