What a brutal six months it’s been for QCR Holdings. The stock has dropped 20.7% and now trades at $64.32, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy QCR Holdings, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is QCR Holdings Not Exciting?
Despite the more favorable entry price, we're swiping left on QCR Holdings for now. Here are three reasons why there are better opportunities than QCRH and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within financials, a stretched historical view may miss recent interest rate changes, market returns, and industry trends. QCR Holdings’s recent performance shows its demand has slowed as its annualized revenue growth of 2.7% over the last two years was below its five-year trend. 
2. Net Interest Margin Dropping
Net interest margin represents how much a bank earns in relation to its outstanding loans. It’s one of the most important metrics to track because it shows how a bank’s loans are performing and whether it has the ability to command higher premiums for its services.
Over the past two years, QCR Holdings’s net interest margin averaged 3.3%. Its margin also contracted by 29 basis points (100 basis points = 1 percentage point) over that period.
This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean QCR Holdings either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.
3. High Interest Expenses Increase Risk
Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.
Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.
This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.
New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.
Over the last two years, QCR Holdings has averaged a Tier 1 capital ratio of 10.5%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.
Final Judgment
QCR Holdings’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 1× forward P/B (or $64.32 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of QCR Holdings
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