QCR Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance sheet compared with December 31, 2022. The company operates four commercial banks and equipment-finance, wealth-management and other businesses. Comparisons with 2022 are affected by the April 2022 acquisition of Guaranty Federal Bancshares (GFED).
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Interest and dividend income | $98.4 million | $68.2 million | $192.6 million | $119.3 million |
| Net interest income | $53.2 million | $59.4 million | $110.0 million | $105.1 million |
| Noninterest income | $32.5 million | $22.8 million | $58.4 million | $38.4 million |
| Noninterest expense | $49.7 million | $54.2 million | $98.5 million | $92.6 million |
| Net income | $28.4 million | $15.2 million | $55.6 million | $38.9 million |
| Diluted EPS | $1.69 | $0.87 | $3.29 | $2.33 |
- Q2 return on average assets was 1.44% and return on average equity was 13.97%. The reported tax-equivalent net interest margin was 3.29%, down from 3.74% a year earlier; GAAP net interest margin was 2.93% versus 3.53%. The non-GAAP efficiency ratio improved to 58.01% from 66.01%.
- Capital markets revenue rose to $22.5 million in Q2 from $13.0 million, primarily from interest-rate swap fees. For the first half, it was $39.5 million versus $19.4 million.
- Six-month operating cash flow was $60.5 million, investing cash outflow $240.6 million and financing cash inflow $204.5 million. Cash and due from banks ended at $84.1 million.
Financial condition, liquidity and capital
- Total assets were $8.23 billion, up from $7.95 billion at year-end. Net loans and leases were $6.29 billion, up from $6.05 billion; deposits were $6.61 billion, up from $5.98 billion.
- Q2 loans and leases grew at a 12.2% annualized rate. Core deposits excluding brokered deposits grew at a 23.0% annualized rate during Q2; brokered deposits declined $234.2 million in the quarter.
- Uninsured and uncollateralized deposits were 19.9% of deposits. Management reported $1.6 billion of immediately available liquidity, more than covering that amount, and $3.3 billion of total available liquidity excluding unpledged securities. The company also had approximately $834 million of unpledged AFS and HTM securities.
- Short-term borrowings were $1.9 million and FHLB advances $135.0 million at quarter-end, compared with $129.6 million and $415.0 million, respectively, at year-end. Subordinated notes were $232.9 million and junior subordinated debentures $48.7 million. A $50 million revolving credit line had no balance drawn.
- Stockholders’ equity was $822.7 million. The company’s total risk-based capital ratio was 14.69%, common equity Tier 1 was 9.73%, and tangible common equity to tangible assets was 8.28%. The company and subsidiary banks met stated regulatory capital requirements; subsidiary banks were classified as well capitalized.
Material changes and credit quality
- Year-over-year net income increased, supported by higher noninterest income and lower noninterest expense. Q2 net interest income nevertheless fell 10% year over year and 6% sequentially. Management attributed margin pressure to the inverted yield curve, deposit competition and customers shifting toward higher-cost deposits. Q2 cost of funds rose to 3.20% from 0.74% a year earlier.
- Q2 provision for credit losses was $3.6 million, versus $11.2 million in Q2 2022; the prior-year period included significant GFED acquisition-related CECL Day 2 provision. First-half provision was $7.5 million versus $8.3 million.
- Nonperforming assets were $26.1 million, or 0.32% of assets, compared with $8.9 million at year-end. Nonperforming loans and leases were 0.41% of total loans and leases. Management said approximately half of NPAs related to one credit it expected to resolve later in 2023 without a loss; that outcome is not assured.
- The allowance for credit losses on loans and leases was $85.8 million, or 1.41% of loans held for investment, compared with $87.7 million and 1.43% at year-end. Criticized loans were 2.84% of total loans and leases, down from 3.16% at March 31 but above 2.68% at year-end.
- Commercial real estate exposure includes substantial residential-building, construction and multifamily lending; management reported office exposure of $184.2 million, or 2.9% of total loans. A $291.1 million portfolio of loans was transferred to held for sale in preparation for securitization.
- The securities portfolio had net unrealized losses equal to 9.81% of amortized cost. AFS unrealized losses totaled $54.4 million and HTM fair value was $38.7 million below amortized cost. Management attributed losses largely to interest rates; it also recorded a $989,000 allowance in Q1 for a subordinated debt investment in a recently failed bank, a legacy GFED investment.
Outlook, commentary and risks
- No specific earnings or margin guidance was provided. Management’s long-term strategic targets are annual organic loan and lease growth above 9%, fee-income growth above 6%, and operating-expense growth below 5%. These are targets, not assurances.
- Management cited a strong pipeline in capital-markets and tax-credit lending and expects that business to remain a solid source of fee income in 2023. Swap-fee levels depend on borrower demand and interest-rate conditions; the company also noted that trust fees fluctuate with market valuations.
- Management intends to grow core deposits and reduce reliance on wholesale funding, while retaining multiple contingent liquidity sources. Interest-rate risk, deposit pricing and deposit mix remain material sensitivities; the company described its balance sheet as modestly liability-sensitive.
- Key disclosed risks include economic weakness, inflation, interest-rate changes, competition, deposit concentration and withdrawals, credit deterioration, securities valuation changes, CRE and other loan concentrations, cybersecurity and technology disruptions, and acquisition integration or benefit shortfalls. Risk factors were reported as unchanged from the 2022 Form 10-K. No material pending legal proceedings were reported; disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether deposit growth is sustained in core, lower-cost accounts and whether uninsured/un collateralized deposit exposure remains manageable.
- Whether deposit costs and funding mix stabilize enough to prevent further net interest margin compression.
- Performance, collateral and resolution progress for the large credit representing about half of NPAs, as well as changes in criticized and classified loans.
- Terms, execution and proceeds of the planned securitization of the $291.1 million held-for-sale loan pool.
- Capital-markets revenue sustainability given its reliance on swap fees, tax-credit lending activity and prevailing rates.
- Changes in securities unrealized losses, liquidity availability and the company’s ability to maintain capital and regulatory buffers.
Amounts are in U.S. dollars. Non-GAAP measures are identified as such in the filing and should be considered alongside GAAP results.