QCR Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Dollar amounts are in U.S. dollars. Comparisons are with the corresponding 2021 periods unless noted.
Business context and reporting period
QCR Holdings is a regional banking company with commercial banking, consumer lending, mortgage, wealth-management, correspondent-banking and equipment-finance operations. On April 1, 2022, it acquired Guaranty Federal Bancshares (GFED); Guaranty Bank’s results are included from that date. The acquisition materially increased the company’s balance sheet, so year-over-year comparisons include different periods of Guaranty Bank operations.
Financial performance and position
- Q3 earnings: Net income was $29.3 million and diluted EPS was $1.71, compared with $31.6 million and $1.99 in Q3 2021. Versus Q2 2022, net income rose from $15.2 million and diluted EPS from $0.87, largely as the prior quarter included acquisition-related CECL provision expense.
- Nine-month earnings: Net income was $68.2 million and diluted EPS was $4.20, compared with $71.9 million and $4.48 in the first nine months of 2021. Adjusted net income, a non-GAAP measure, was $28.9 million for Q3 and $83.7 million year to date.
- Revenue and margins: Q3 net interest income was $60.8 million, up 31%; nine-month net interest income was $165.9 million, up 26%. Q3 GAAP net interest margin was 3.46%, versus 3.36% a year earlier; adjusted tax-equivalent margin was 3.65%, versus 3.53%. Q3 total noninterest income was $21.1 million, down 39%, chiefly reflecting lower swap and capital-markets fees.
- Expenses and credit costs: Q3 noninterest expense was $47.7 million, up 15%; nine-month expense was $140.3 million, up 23%. Nine-month provision for credit losses was $8.3 million versus $6.7 million, including acquisition-related CECL charges. Q3 provision was zero, following $11.2 million in Q2. The Q3 effective tax rate was 14.1%, compared with 20.1% a year earlier.
- Assets and lending: Total assets were $7.73 billion, up from $6.10 billion at December 31, 2021. Gross loans and leases were $6.01 billion, versus $4.68 billion; net loans were $5.92 billion. Management reported annualized Q3 loan growth of 14.5%, excluding acquired and PPP loans.
- Credit quality: The allowance for credit losses was $90.5 million, or 1.51% of gross loans and leases, compared with 1.75% a year earlier. Nonperforming assets were $18.0 million, or 0.23% of assets, down from 0.33% at Q2 but up from 0.11% a year earlier. Criticized loans were $141.3 million, 2.35% of loans; classified loans were $77.3 million, 1.29%.
- Deposits, debt and liquidity: Deposits totaled $5.94 billion, including $1.32 billion of noninterest-bearing deposits. Total borrowings were $701.5 million, including $335.0 million of overnight FHLB advances and $232.7 million of subordinated notes. Cash, federal funds sold and interest-bearing deposits totaled $157.3 million. The banks had $413.6 million available under credit lines and the company had a fully available $50 million revolving credit facility.
- Cash flow and capital: For the first nine months, operating activities provided $76.6 million; investing activities used $404.4 million; financing activities provided $376.6 million. Stockholders’ equity was $737.1 million. Tangible common equity to tangible assets was 7.68%, down from 9.54% at September 30, 2021. Regulatory capital disclosures show a 14.38% consolidated total risk-based capital ratio; the executive overview separately cites 14.55%.
Material changes versus comparable periods
- Q3 net interest income benefited from the GFED acquisition, loan growth and higher asset yields. Higher interest rates also raised funding costs: Q3 cost of funds increased to 1.43% from 0.58% a year earlier.
- Swap fee and capital-markets revenue fell to $10.5 million in Q3 from $24.9 million in Q3 2021, with management citing client project delays related to supply-chain disruption and inflationary pressure. Nine-month swap revenue declined to $30.0 million from $48.0 million.
- GFED added assets, loans and deposits and increased operating costs. Nine-month acquisition costs were $4.1 million and post-acquisition transition and integration costs were $4.9 million. Acquisition-related CECL Day 2 provision on acquired loans and off-balance-sheet exposures was also recorded.
- Rising longer-term rates drove a $76.4 million after-tax decline in accumulated other comprehensive income during the first nine months, mainly from unrealized securities and derivative losses. Available-for-sale securities had $69.2 million of gross unrealized losses at quarter-end; held-to-maturity securities had $30.0 million.
- In August, QCR issued $100 million of subordinated notes. It repurchased and retired $47.9 million of shares during the first nine months under its repurchase programs.
Outlook, commentary and risks
- The filing provides no specific earnings or margin forecast. Management’s long-term strategic targets are annual organic loan and lease growth above 9%, fee-income growth above 6%, and noninterest expense growth below 5%; reported year-to-date metrics were affected by the acquisition and, for fee income, lower capital-markets activity.
- Management expects fee income from wealth management to respond to market valuations and future swap fees to depend on client demand, pricing and interest-rate conditions. It intends to emphasize core deposits and reduce reliance on wholesale funding, while noting correspondent deposits can fluctuate materially.
- Interest-rate sensitivity remains a key risk. Management described the company as moderately asset-sensitive; modeled scenarios at September 30 were within policy limits. Other cited risks include economic weakness, inflation and supply-chain constraints, interest-rate changes, competition, technology and cybersecurity, acquisition integration, and litigation.
- The company expects to transition LIBOR-linked instruments before published LIBOR rates expire on June 30, 2023, and expects minimal financial-statement impact. Management said disclosure controls were effective and reported no material change in internal control over financial reporting. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the 14.55% total risk-based capital ratio cited in the executive overview with the 14.38% ratio in the regulatory capital table, including the measurement basis.
- Assess the sensitivity of funding costs and net interest margin to continued rate changes, given the sharp increase in deposit costs and use of overnight FHLB advances.
- Review the size and duration of securities-related unrealized losses, the potential effects on tangible capital, and the company’s ability to hold securities to maturity.
- Track credit quality in the enlarged portfolio, particularly criticized and classified loans, nonperforming assets, and acquisition-related allowance assumptions.
- Evaluate whether GFED integration costs and expected benefits develop as planned, and whether organic growth can offset weaker swap-fee revenue and higher operating costs.
- Consider non-GAAP adjusted results alongside GAAP results; the filing notes that these measures are not audited and should not replace GAAP analysis.