QCRH: Partial SBLF Redemption
Ann Heffron, CFA
QCR Holdings, Inc. (QCRH) recently announced that it has redeemed $10.2 million of the $40.1 million in preferred stock the Company had previously issued to the United States Department of the Treasury under the Small Business Lending Fund Program (:SBLF). While we had expected this would occur at some point in the future pursuant to QCRH’s previously stated objective of redeeming the SBLF capital over the coming years, the timing surprised us somewhat.
That said, we view this move positively as a demonstration of QCRH’s commitment to its ambitious capital plan, which includes increasing the tangible common equity ratio to the mid-6.00% area without issuing dilutive common stock. QCRH intends to do this through strong growth in retained earnings that should allow redemption of the SBLF preferred stock over time and conversion of the Series E Preferred Stock to common equity, which should add roughly 120 basis points to the tangible common equity ratio when completed.
We note that the Series E Preferred Stock is perpetually convertible by the holder into shares of common stock at a per share conversion price of $12.15, subject to antidilution adjustments. In addition, QCRH can exercise a conversion option on or after the third anniversary of the issue date (i.e., June 30, 2013) at the same $12.15 conversion price if the Company’s common stock price equals or exceeds $17.22 (compared to the stock price of $13.10 as of last Friday’s close) for at least 20 trading days in a period of 30 consecutive trading days.
Redemption of the SBLF preferred stock reduces the Company’s risk-adjusted capital ratios. Pro forma for the $10.1 million SBLF preferred stock redemption, QCRH’s Tier 1 capital ratio and Total capital ratio decline about 72 basis points to 11.55% (from 12.27%) and 13.15% (from 13.87%), respectively, as of March 31, 2012. Importantly, these capital ratios, as well as those at its subsidiary banks, remain well above the levels required to be well capitalized pursuant to federal regulations.
Notably, the SBLF preferred stock redemption reduces SBLF preferred dividends by $511,000 annually, thereby increasing fully diluted EPS by $0.11 on an annual basis, or about $0.03 per quarter. However, we are not changing our EPS estimates at this time, but will wait until after the Company reports its second quarter earnings in late July to make adjustments, as necessary.
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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