QCR Holdings, Inc. — Q1 2023 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2023, with balance-sheet comparisons to December 31, 2022 and income and cash-flow comparisons to Q1 2022. QCR is a bank holding company with four commercial banks, equipment financing, and wealth management operations. Results include Guaranty Bank, acquired in April 2022, so year-over-year comparisons reflect the acquisition.
Financial results and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $56.8 million | $45.7 million in Q1 2022; +24% |
| Noninterest income | $25.8 million | $15.6 million in Q1 2022; +65% |
| Net income; diluted EPS | $27.2 million; $1.60 | $23.6 million; $1.49 in Q1 2022 |
| Adjusted net income; adjusted diluted EPS (non-GAAP) | $28.0 million; $1.65 | $24.4 million; $1.54 in Q1 2022 |
| Net interest margin | 3.18% GAAP; 3.52% tax-equivalent (non-GAAP); 3.47% adjusted tax-equivalent (non-GAAP) | Q1 2022: 3.30%, 3.50%, and 3.50%, respectively |
| Net cash from operating activities | $21.8 million | $6.9 million in Q1 2022 |
| Cash used in investing; cash from financing | $(117.4) million; $100.2 million | $(177.1) million; $183.2 million in Q1 2022 |
| Total assets | $8.04 billion | $7.95 billion at December 31, 2022 |
| Net loans/leases | $6.10 billion | $6.05 billion at December 31, 2022 |
| Deposits; total borrowings | $6.50 billion; $417.5 million | $5.98 billion; $825.9 million at December 31, 2022 |
| Stockholders’ equity; tangible common equity to tangible assets (non-GAAP) | $801.5 million; 8.21% | $772.7 million; 7.93% at December 31, 2022 |
Q1 2023 total revenue, defined here as net interest income plus noninterest income, was $82.7 million versus $61.4 million in Q1 2022. The efficiency ratio (non-GAAP) was 59.02%, compared with 62.45%. Cash and short-term assets totaled $318.3 million at quarter-end. The allowance for credit losses on loans/leases was $86.6 million, or 1.43% of loans held for investment.
Material changes and management commentary
- Earnings and funding costs: Net income increased year over year, but fell from $30.9 million in Q4 2022; diluted EPS declined from $1.81. Compared with Q4, net interest income declined 13%, which management attributed primarily to lower acquisition-related accretion and a shift from noninterest-bearing to interest-bearing deposits. Year over year, higher earning assets—including GFED—and loan growth lifted interest income, while cost of funds rose to 2.74% from 0.56%.
- Fee income: Capital markets revenue, primarily swap fees, rose to $17.0 million from $6.4 million as previously delayed client projects moved forward. Management cited a healthy low-income housing tax-credit market and a strong pipeline, while noting future swap fees depend on borrower demand and interest rates.
- Growth and expenses: Loans and leases grew 3.3% on an annualized basis during the quarter. Noninterest expense rose 27% year over year to $48.8 million, primarily reflecting a full quarter of Guaranty Bank operating costs and increased staffing. The company’s long-term strategic targets are annual organic loan/lease growth above 9%, fee-income growth above 6%, and noninterest-expense growth below 5%; Q1 annualized measures were 3.3%, 30.0%, and 7.5%, respectively. These are long-term targets, not formal near-term guidance, and management cautions they may not be achieved.
- Deposits and liquidity: Deposits increased $517.4 million, including $497.5 million of added short-term brokered deposits. Excluding brokered deposits, growth was $19.9 million, or 1.4% annualized. The added funding helped eliminate overnight FHLB borrowings and bolster on-balance-sheet liquidity. Uninsured and uncollateralized deposits were 23.8% of deposits; management reported $1.7 billion of immediately available liquidity, exceeding that amount. Total available liquidity excluding unpledged securities was reported at $3.2 billion.
- Credit quality: Nonperforming assets increased to $23.0 million from $8.9 million at year-end; the increase was principally one loan relationship moved to nonaccrual. Management expects to resolve that loan without further impairment. Criticized loans rose to $195.9 million from $164.4 million, primarily after three credit downgrades. The filing cautions that future borrower conditions could require additional provisions. Commercial real estate office exposure was $187.5 million, or 3.0% of total loans.
- Securities and unusual items: Q1 included a $989,000 credit-loss allowance for an acquired subordinated debt investment in a recently failed bank, and $463,000 of net securities losses. The company sold approximately $29 million of securities as part of a balance-sheet deleveraging strategy; management expected to earn back the modest loss before year-end. Securities unrealized losses improved versus December 2022 as intermediate- and long-term rates declined, but the portfolio still had substantial unrealized losses.
- Capital and shareholder returns: All subsidiary banks met the regulatory “well capitalized” thresholds. The company’s common stock repurchases totaled 152,500 shares for $7.7 million in Q1; the declared dividend was $0.06 per share.
Risks, contingencies, and outlook
Key disclosed risks include interest-rate and deposit repricing sensitivity, deposit concentration and potential withdrawals by uninsured depositors, credit deterioration, securities valuation and concentration, economic weakness and inflation, competition, acquisition integration, cybersecurity and technology disruptions, and legal or regulatory changes. Management described the balance sheet as modestly liability-sensitive after deposit mix shifted toward higher-beta funding; modeled interest-rate scenarios were within established policy limits. The filing reports no material pending legal proceedings beyond ordinary routine litigation, no material change in previously disclosed risk factors, and no loan modifications during the quarter for borrowers experiencing financial difficulty. Management stated that the LIBOR transition was expected to have minimal financial-statement impact.
Investor verification priorities
- Track deposit mix, brokered-deposit reliance, deposit pricing and retention, and the stability of correspondent-bank balances.
- Monitor nonperforming assets, criticized and classified loans, charge-offs, and allowance adequacy—especially the newly nonaccrual relationship and commercial real estate exposures.
- Assess whether the elevated swap-fee contribution is repeatable and compare ongoing fee income with the company’s long-term targets.
- Reconcile reported and adjusted earnings, margins, and efficiency measures; adjusted figures are non-GAAP and exclude specified items.
- Review securities portfolio unrealized losses, interest-rate sensitivity, and the credit performance of the impaired acquired debt investment.
- Confirm progress on replacing higher-cost wholesale funding with core deposits and maintaining liquidity and regulatory capital buffers.