courtneyk
Thesis
QCR Holdings, Inc. (NASDAQ:QCRH) exhibited a strong performance in the second quarter of 2023, with non-GAAP EPS of $1.69 beating by $0.35 and revenue of $88.73M beating by $7.45M. This article aims to delve into the financial highlights and key figures, along with a comprehensive evaluation of the company’s overall performance, inherent risks, and future prospects. With their current standing, QCR Holdings presents a compelling investment case, especially when considering the undervalued state indicated by the Blended P/E ratio.
Company Overview
Incorporated since 1993 and stationed in Moline, Illinois, QCR Holdings, Inc. is a multi-bank holding company within commercial and consumer banking, as well as trust and asset management services. Beyond conventional banking, QCR caters to a broad customer base ranging from individuals to corporations and government agencies through lending, leasing, and investment services. Furthermore, QCR’s involvement in the leasing of machinery and equipment and issuance of trust preferred securities underlines its diversified business model.
QCR Holdings Q2 Earnings Highlights
In their Q2, QCR Holdings showed notable strength, driven by significant growth in their loan portfolio, the diversity of their deposits, solid capital markets revenue, and controlled expenditures.
The company’s balance sheet reveals a 12.2% annualized increase in total loans, a net expansion of $189 million. QCR Holdings took steps towards supporting its securitization agenda, earmarking $291 million of LIHTC loans as “held for sale” and adding another $152 million during this quarter. This initiative is geared to bolster their tax credit lending business and maintain it within predefined concentration thresholds.
QCR Holdings observed a rise of $105 million in total deposits for the quarter. This increment can be attributed to a strong influx of core deposits sourced from an array of commercial, retail, and municipal sectors. This not only amplified the company’s liquidity but also reduced its reliance on broker deposits by $234 million.
Examining the income statement, QCR Holdings reported a net income of $28.4 million, which corresponds to an 18.7% annualized increase. This positive outcome came despite a marginal decline in net interest margin, counterbalanced by the strong performance of the capital markets and effective expense management.
There was an upward trend in the cost of funds, instigated by a transition from lower beta to higher beta deposits. However, the company anticipates easing pressure on the margin, assuming the deposit mix shift slows down. QCR’s forecast for the third quarter suggests an adjusted net interest margin to remain static or decrease by up to 10 basis points.
The non-interest income segment experienced a 26% growth, adding $6.7 million, and the capital markets revenue hit a high of $22.5 million, exceeding the annualized guidance. QCR Holdings is projecting a 12-month capital markets revenue guidance ranging from $45 million to $55 million, showcasing their ongoing optimism.
In parallel, QCR’s wealth management revenue held steady, matching the first quarter with a figure of $3.8 million, and welcomed 148 new clients. Regarding expenses, the second quarter’s non-interest expenses were reported at $49.7 million, marking a minor uptick mainly due to increased variable compensation, FDIC insurance rates, and the direct costs associated with additional deposits.
Assessing asset quality, QCR Holdings holds a commanding position, with NPAs constituting only 32 basis points of total assets. The total risk-based capital ratio exhibited a small decrease to 14.66%, linked to the substantial loan growth. On the contrary, the tangible common equity to tangible assets ratio rose from 8.21% to 8.28%.
As the quarter saw higher interest rates, the company’s AOCI dipped sequentially, slightly offsetting the growth in tangible common equity and tangible book value. Regardless, the tangible book value per share ascended by $1.28, amounting to a 13.2% annualized increase for Q2. The firm also engaged in a modest share repurchase, emphasizing their priority to foster capital growth.
Lastly, QCR’s effective tax rate for the quarter settled at 12.2%, up from 9.3% in Q1. This was mainly due to a larger proportion of taxable income, primarily from the substantial increase in capital markets revenue. Management claims that QCR still boasts one of the lowest tax rates among its peer group due to a substantial portfolio of tax-exempt investments and loans; they anticipate its effective tax rate will range between 11%-14% for the rest of 2023.
Performance
Within the frame of medium-term optics (see data below), QCRH’s share price has grown from $17.90 in 2015 to $52.44 in 2023. That’s an impressive run, particularly when you consider it in the context of a hypothetical initial investment amount of $10,000. Looking at the performance results, the annualized rate of return without dividends is a hearty 13.37% that surpasses the S&P 500 Index (SP500) benchmark at 9.78%.
Fast Graphs
And another bright side, the compound growth rate for dividends over eight years stands at 14.72%. Not too shabby
Valuation
With a Blended P/E of 8.42x, QCRH is currently trading below its historical average P/E of 11.69x (see chart below). This discrepancy immediately suggests the stock might be undervalued.
Fast Graphs
Another factor that’s interesting is the EPS yield at a healthy 11.88%, which coupled with an Adjusted (Operating) Earnings Growth Rate of 11.91% indicates solid earnings performance.
Risks & Headwinds
One of the first thing that grabs my attention is the compression in the company’s adjusted net interest margin (NIM), down slightly by 19 basis points to 3.28%. Remember, NIM represents the differential between what the bank earns on loans versus what it shells out on deposits – it’s an absolutely key indicator of a bank’s profitability. Now, even with a mild tightening squeeze on the margin, it’s worth watching for potential headwinds to profitability in the upcoming quarters.
But it’s not just the margin pressure, there’s been an unanticipated jump in the cost of funds due to a move from lower beta to higher beta deposits. Essentially, this means the bank is shelling out more for deposits than it was before, thanks to a shift towards high-interest rate deposits, or higher beta deposits. If left uncontrolled, these expenses could eat into the firm’s profit margin over time and impact profitability negatively.
Lastly, economic uncertainty isn’t hiding in the shadows; it’s quite evident in the increasing provision for credit losses, which stands at $3.6 million for this quarter. While this strategy shows the bank’s proactive stance towards managing potential bad loans – a commendable approach – it simultaneously underscores potential vulnerabilities to broader economic fluctuations, which could cast a shadow on its performance.
Final Takeaway
Given QCR Holdings’ strong Q2 performance marked by significant growth in their loan portfolio, the diversity of deposits, and healthy capital markets revenue, alongside a fairly commanding position in asset quality, I would rate this stock as a “buy.” The company’s positive annualized increase in net income and the control over expenditures despite challenges in net interest margin further strengthen this position. While there are concerns like the compression in net interest margin and an increased cost of funds, the growth potential, and the current undervaluation indicated by a blended P/E ratio lower than its historical average present a compelling investment case.
