QCR HOLDINGS INC quarterly report, Q2 FY2022

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QCR Holdings, Inc. — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted.

Business context and reporting period

QCR Holdings is a regional banking company with commercial banking, lending, leasing, wealth management and correspondent banking operations. On April 1, 2022, it completed its acquisition of Guaranty Federal Bancshares (GFED); acquired results are included from that date. The transaction added approximately $1.2 billion of assets, including $1.1 billion of deposits.

Financial performance and condition

  • Q2 earnings: Net income was $15.2 million and diluted EPS was $0.87, versus $22.3 million and $1.39 in Q2 2021. Pretax income was $16.7 million, down from $27.1 million.
  • First-half earnings: Net income was $38.9 million and diluted EPS was $2.33, versus $40.3 million and $2.52 in the first half of 2021.
  • Revenue and net interest: Q2 net interest income rose 37% year over year to $59.4 million; noninterest income rose 18% to $22.8 million. Six-month net interest income increased 23% to $105.1 million, while noninterest income fell 10% to $38.4 million.
  • Margins and efficiency: Q2 GAAP net interest margin was 3.53%, up from 3.28% a year earlier; tax-equivalent NIM was 3.74%. The non-GAAP efficiency ratio was 66.01%, compared with 56.80% in Q2 2021.
  • Credit costs and asset quality: Q2 provision for credit losses was $11.2 million, including an $11.0 million CECL Day 2 provision related to GFED. The allowance for loan and lease losses was $92.4 million, or 1.59% of gross loans. Nonperforming assets were $24.0 million (0.33% of assets), versus $2.7 million at March 31, 2022; management attributed the increase mainly to the acquisition and two legacy relationships.
  • Balance sheet: Total assets were $7.39 billion, net loans and leases $5.71 billion, and deposits $5.82 billion at June 30, 2022. Compared with year-end 2021, assets increased 21%, net loans 24%, and deposits 18%, substantially reflecting GFED.
  • Debt and liquidity: Borrowings totaled $583.2 million, including $400.0 million of overnight FHLB advances, $133.6 million of subordinated notes and $48.5 million of junior subordinated debentures. Cash, federal funds sold and interest-bearing deposits totaled $148.9 million. The subsidiary banks had $485.9 million of available credit lines, and the parent’s $50.0 million revolving line was undrawn.
  • Cash flow: First-half operating cash flow was $53.6 million; investing activities used $146.8 million and financing activities provided $148.1 million. Ending cash and due from banks was $92.4 million, up from $37.5 million at year-end.
  • Capital and other comprehensive income: Consolidated total risk-based capital was 13.40%, and common equity Tier 1 was 9.46%; subsidiary banks met “well capitalized” requirements. Tangible common equity to tangible assets was 8.11%, down from 9.60% at March 31. First-half other comprehensive loss was $51.6 million, largely reflecting valuation declines in securities and derivatives as rates rose.

Material changes and unusual items

  • The GFED acquisition materially expanded the balance sheet and contributed to higher net interest income, deposits, loans and expenses. Purchase accounting recorded $63.5 million of goodwill; provisional fair values may be refined for up to one year after closing.
  • Q2 noninterest expense rose 52% year over year to $54.2 million. The quarter included $2.0 million of acquisition costs and $4.8 million of post-acquisition compensation, transition and integration costs. Management reported Q2 adjusted net income of $30.4 million and adjusted diluted EPS of $1.73, non-GAAP measures that exclude specified items, including acquisition-related costs and CECL Day 2 provision.
  • Management reported 14.0% annualized organic loan and lease growth for Q2, excluding acquired and PPP loans. Swap-fee and capital-markets revenue was $13.0 million in Q2, up from $9.6 million a year earlier, but was lower for the first half year over year, partly due to client project delays and inflationary pressures.
  • Rising interest rates produced substantial unrealized securities losses: the portfolio’s net unrealized gain/loss moved from 7.17% of amortized cost at December 31, 2021 to a loss of 6.12% at June 30, 2022. Most of the reported AFS securities and derivatives are measured using observable Level 2 inputs.
  • The company repurchased 602,500 shares in Q2 at an average $54.80 per share. The quarterly dividend was $0.06 per share.

Outlook, risks and contingencies

  • No specific near-term earnings or financial guidance is provided. Long-term strategic targets are annual loan and lease growth above 9%, fee-income growth above 6%, and operating expense growth below 5%; management cautions that achievement is not assured.
  • Management said Q2 NIM expanded with the rising-rate environment and identified quality loan growth, deposit mix and funding costs as ongoing priorities. It intends to reduce reliance on wholesale funding where possible.
  • Risks include interest-rate and repricing exposure, inflation and supply-chain effects, uncertain economic conditions and COVID-19 impacts, credit deterioration, CRE and construction lending exposure, correspondent-deposit fluctuations, and execution/integration of the GFED acquisition. Management warns that future borrower stress could increase problem assets and require further credit provisions.
  • The filing reports no material pending legal proceedings beyond routine litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2022. Management expects the LIBOR transition before June 30, 2023 to have minimal financial-statement impact.

Important facts for investors to verify

  • Whether GFED integration delivers expected benefits and whether acquisition-related expenses and provisional purchase accounting estimates change.
  • Whether the increase in nonperforming and classified loans is acquisition-related or signals broader credit deterioration, particularly in CRE and construction portfolios.
  • How further rate changes affect NIM, deposit pricing, overnight FHLB borrowing and the value of securities; track AOCI and tangible capital alongside regulatory capital.
  • Whether organic loan growth can be funded sustainably by core deposits, given deposit outflows excluding acquisition effects and increased wholesale funding.
  • How recurring earnings compare with adjusted non-GAAP results after the CECL Day 2 provision, integration costs and volatile swap-fee revenue are considered.