QCRH: Initiating Coverage - Outperform
Ann Heffron, CFA
We are initiating coverage on QCR Holdings, Inc. (QCRH) with an outperform recommendation and a twelve-month target price of $13.75. This is supported by an expected upturn in earnings over the next couple of years and a strengthened balance sheet.
Our diluted EPS estimates are $1.95 for 2012 and $2.10 for 2013, representing increases of 67% and 8%, respectively. A number of factors are contributing to this solid earnings growth, including: (1) good gains in net interest income stemming from growth in the interest-earning asset base, as well as a higher net interest margin in 2013; (2) continued strong cost control, with a corresponding drop in the efficiency ratio; and (3) a significant decline in the provision for loan losses in 2012, followed by a moderate increase in 2013, stemming from growth in the loan portfolio.
It appears that problem loans have peaked, and we expect asset quality metrics to continue to improve in the years ahead.
QCRH has also taken steps to strengthen its balance sheet, including increasing the core deposit base, reducing reliance on more expensive retail and wholesale borrowings, and enhancing liquidity.
Tangible common equity remains weak, but QCRH plans to increase this through growth in retained earnings and conversion of the Series E preferred stock in time. Importantly, QCRH has no plans to issue dilutive common stock. We believe that the $0.08 annual dividend is safe, but expect no increase over the medium term as QCRH retains excess earnings to grow tangible common equity and redeem the SBLF preferred stock.
QCR Holdings, Inc. (QCRH or the Company) is a multibank holding company, which was founded in 1993 and is headquartered in Moline, Illinois, with $2.0 billion in total assets at March 31, 2012 and 10 offices. QCRH provides a broad range of business and retail lending products and investment services through three wholly owned, full-service banking subsidiaries that are located in Illinois and Iowa. These subsidiaries include Quad City Bank and Trust Company (:QCBT), based in Bettendorf, Iowa; Cedar Rapids Bank and Trust Company (:CRBT), based in Cedar Rapids, Iowa; and Rockford Bank and Trust Company (RB&T), based in Rockford, Illinois.
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