QCR Holdings Sees Boost in Loan Sales

QCR Holdings reported net income of $2.4 million, or $0.49 per share, after preferred stock dividends of $811 thousand in the first quarter of 204 compared with net profit of $2.3 million, or $0.48 per share, after preferred dividends of $939 thousand in the first quarter of 2013. Despite the net interest margin decline during the quarter, QCRH’s asset quality continued to improve. However, the improved results at the bank were partially due to larger gains taken on the sale of government-guaranteed portions of loans than in previous reporting periods. At this point, we are leaving our economic moat rating and fair value estimate unchanged.

During the first quarter, QCRH recognized $845,000 of pretax gains from the sale of government-guaranteed portions of loans administered by the Small Business Administration and the U.S. Department of Agriculture. Gains on SBA- and USDA-guaranteed portions approximated $100,000 for both the fourth quarter of 2012 and the first quarter of 2012. If QCRH had realized similar gains in the first quarter of 2013, net income after preferred dividends would have equaled $1.9 million, or $0.38 per diluted share. While these gains have helped counteract net interest margin compression, we do not expect SBA and USDA loan sale gains to be a long-term remedy to squeezed margins.

Net interest margin declined to 3.02% from 3.12% in the year-ago quarter. We were pleased that nonperforming assets declined to 1.10% of total assets from 1.95% a year ago. Despite the high efficiency ratio of 72.0%, return on total equity reached 9.3%. With borrowings constituting nearly one third of total liabilities, we think QCRH needs to address its higher-cost borrowings in order to achieve wider margins.

During the quarter, QCRH announced that it had signed a definitive agreement to acquire Community National Bancorporation in Waterloo, Iowa, a $290 million bank with eight branches, for a total consideration of $20.1 million. The transaction implies that QCRH is acquiring each common share of Community National for $9.83, using cash and stock. Given that QCRH is paying only 70% of book value for Community National, we think this is a good deal for the bank. While the transaction is subject to regulatory and shareholder approval, QCRH is looking to close the deal in the second quarter.

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