QCRH: QCRH Acquires Community National Bancorporation

Zacks Small Cap Research

By Ann Heffron, CFA

QCR Holdings (QCRH) is purchasing Community National Bancorporation (CNB), headquartered in Waterloo, Iowa with approximately $290 million in total assets, in a $20.1 million cash and stock transaction that is expected to be completed toward the end of the second quarter. We view the acquisition positively, noting the close fit between the two companies’ relationship-oriented community banking models, and the fact that the acquisition is manageable, with CNB roughly 15% the size of QCRH. In addition, this transaction provides the opportunity for QCRH to expand its footprint in Iowa, while adding another strong commercial and industrial lending market to its roster.

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Community National Bancorporation, which began operations in 1997, is a single bank holding company that owns 100% of Community National Bank, with eight banking locations in Waterloo, Cedar Falls, and Mason City, Iowa, and Austin, Minnesota. We note that Waterloo is #15 of the top 25 metropolitan statistical areas (MSAs) located in Iowa and Illinois, and appears to be an attractive lending market.

CNB is primarily a business lender, with its loan portfolio divided 47% commercial real estate, 27% commercial and industrial, 24% residential real estate, and 2% other. Primary competitors include US Bancorporation and Wells Fargo & Company, banks from which QCRH has successfully won market share in its own markets, and we expect this to be no different for CNB under QCRH’s tutelage.

As to the transaction, QCRH will pay about $9.63 per share ($20.1 million total) to CNB shareholders in the form of 0.40 shares of QCR Holdings common stock and cash of $3.00, or about 70% stock/30% cash. The price equates to 104% of tangible book value and adds 835,173 shares, or 17%, to QCRH’s outstanding shares. Following the acquisition, the outstanding stock will be owned 85% by QCRH shareholders and 15% by CNB shareholders. In addition, CNB Chairman Michael Peterson will join the QCRH Board.

A primary driver of profitability for the combined company going forward is the opportunity for substantial cost savings, which QCRH estimates will run at 20% of CNB’s cost base, or $2 million, about 75% of which is expected to be realized in 2013’s fourth quarter and the 25% balance in 2014’s first quarter. QCRH expects costs savings to be realized by eliminating duplicate overhead and technology expenses. In addition, we would not be surprised to see some branch closings, given QCRH’s preference for running a lean branch structure (QCRH has 10 branches for $2.1 billion in assets, while CNB has 8 branches for $290 million in assets).

QCR Holdings, Inc. (QCRH or the Company) is a multibank holding company, which was founded in 1993 and is headquartered in Moline, Illinois, with $2.1 billion in total assets at December 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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