QNB Corp. (OTCPK:QNBC) is the holding company for QNB Bank, a financial that operates 12 offices north of Philadelphia in Bucks, Lehigh, and Montgomery counties. The bank is small, with only $1.06 billion in assets as of December, and like most companies I've been reviewing lately, its low loan-to-deposit ratio (65%) got my attention.
Over the past couple years, my search has progressed from companies with upside from TARP payoffs, to banks with core earnings hidden from FDIC loss share accounting, to smaller companies with strong business lending potential, to ones I think may be able to increase returns at a faster pace once rates rise and pricing starts to make enough sense for management to lift the lid off a low loan-to-deposit ratio. Incremental income can come from higher asset sensitivity, but a lot more can be done when a bank can improve margins by simply increasing its allocation of higher-yielding assets.
Looking for a low L/D ratio, though, is just the start. So, let's dig in and see what potential the company has.
Growth and Margins
QNBC has been a steady performer, with earnings between $2.46 and $2.86 per diluted share in each of the last six years. The problem, though, is that earnings have fallen with rates and the trailing two-year average is at the bottom of this range ($2.54). At the end of December, assets of $1.06 billion were up 3% YOY, and this pace just hasn't been enough to combat falling asset yields even when interest expenses on a larger balance of deposits are about half of where they were at the end of 2012. At first glance, profitability appears to be a victim of the bank's low loan-to-deposit ratio (64.7%), but that isn't the only thing holding the company back.
With capacity for a
