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QCR HOLDINGS INC - Quarter Report: 2013 June (Form 10-Q)

qcrh20130630_10q.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending June 30, 2013

 

 [    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to________

 

Commission file number 0-22208

 

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware  

42-1397595

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

 

(309) 743-7761

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                         Yes      [ X ]          No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

Yes      [ X ]          No [     ]

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of  “large accelerated filer,” “accelerated filer,”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):   

Large accelerated filer [ ]

Accelerated filer [ ]

Non-accelerated filer [ ]

Smaller reporting company [ X ]

                

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes      [     ]          No [ X ]

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 1, 2013, the Registrant had outstanding 5,807,332 shares of common stock, $1.00 par value per share.

 

 
 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

INDEX

 

 

       

Page

Number(s)

Part I 

FINANCIAL INFORMATION

   
         
 

Item 1

Consolidated Financial Statements (Unaudited)

   
         
   

Consolidated Balance Sheets As of June 30, 2013 and December 31, 2012

 

                   2

         
   

Consolidated Statements of Income For the Three Months Ended June 30, 2013 and 2012

 

                   3

         
   

Consolidated Statements of Income For the Six Months Ended June 30, 2013 and 2012

 

                   4

         
   

Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2013 and 2012

 

                   5

         
   

Consolidated Statement of Changes in Stockholders' Equity For the Six Months Ended June 30, 2013 and 2012

 

                   6

         
   

Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2013 and 2012

 

                   7

         
   

Notes to the Consolidated Financial Statements

 

8-27

         
 

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

27-54

         
 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

54-55

         
 

Item 4

Controls and Procedures

 

                 56

         

Part II 

OTHER INFORMATION

   
         
 

Item 1

Legal Proceedings

 

                 57

         
 

Item 1A

Risk Factors

 

                 57

         
 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

                 57

         
 

Item 3

Defaults upon Senior Securities

 

                 57

         
 

Item 4

Mine Safety Disclosures

 

                 57

         
 

Item 5

Other Information

 

                 57

         
 

Item 6

Exhibits

 

                 58

         

Signatures  

 

                 59

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES                

CONSOLIDATED BALANCE SHEETS (UNAUDITED)                

As of June 30, 2013 and December 31, 2012                

 

   

June 30,

2013

   

December 31,

2012

 

ASSETS

               

Cash and due from banks

  $ 44,316,890     $ 61,568,446  

Federal funds sold

    16,666,000       26,560,000  

Interest-bearing deposits at financial institutions

    34,573,775       22,359,490  

Securities held to maturity, at amortized cost

    105,201,749       72,079,385  

Securities available for sale, at fair value

    598,265,400       530,159,986  

Total securities

    703,467,149       602,239,371  
                 

Loans receivable held for sale

    2,083,075       4,577,233  

Loans/leases receivable held for investment

    1,528,643,027       1,282,810,406  

Gross loans/leases receivable

    1,530,726,102       1,287,387,639  

Less allowance for estimated losses on loans/leases

    (21,156,379 )     (19,925,204 )

Net loans/leases receivable

    1,509,569,723       1,267,462,435  
                 

Premises and equipment, net

    39,064,663       31,262,390  

Goodwill

    3,222,688       3,222,688  

Core deposit intangible

    3,440,076       -  

Bank-owned life insurance

    51,078,588       45,620,489  

Restricted investment securities

    16,875,975       15,747,850  

Other real estate owned, net

    3,858,629       3,954,538  

Other assets

    20,637,321       13,732,795  

Total assets

  $ 2,446,771,477     $ 2,093,730,492  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 493,963,650     $ 450,659,723  

Interest-bearing

    1,222,816,260       923,454,377  

Total deposits

    1,716,779,910       1,374,114,100  

Short-term borrowings

    157,186,204       171,082,961  

Federal Home Loan Bank advances

    209,949,500       202,350,000  

Other borrowings

    142,644,062       138,239,762  

Junior subordinated debentures

    40,210,175       36,085,000  

Other liabilities

    34,555,713       31,424,848  

Total liabilities

    2,301,325,564       1,953,296,671  
                 

STOCKHOLDERS' EQUITY

               

Preferred stock, $1 par value; shares authorized 250,000 June 2013 - 54,867 shares issued and outstanding December 2012 - 54,867 shares issued and outstanding

     54,867        54,867  

Common stock, $1 par value; shares authorized 20,000,000 June 2013 - 5,918,313 shares issued and 5,797,067 outstanding December 2012 - 5,039,448 shares issued and 4,918,202 outstanding

     5,918,313        5,039,448  

Additional paid-in capital

    91,514,136       78,912,791  

Retained earnings

    58,786,271       53,326,542  

Accumulated other comprehensive income (loss)

    (9,221,164 )     4,706,683  

Less treasury stock, June 30, 2013 and December 2012 - 121,246 common shares, at cost

    (1,606,510 )     (1,606,510 )

Total stockholders' equity

    145,445,913       140,433,821  

Total liabilities and stockholders' equity

  $ 2,446,771,477     $ 2,093,730,492  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES                

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)                

Three Months Ended June 30,                

 

   

2013

   

2012

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 16,369,605     $ 15,973,109  

Securities:

               

Taxable

    2,629,832       2,765,779  

Nontaxable

    944,100       538,285  

Interest-bearing deposits at financial institutions

    61,724       92,577  

Restricted investment securities

    131,151       164,778  

Federal funds sold

    2,989       -  

Total interest and dividend income

    20,139,401       19,534,528  
                 

Interest expense:

               

Deposits

    1,176,855       1,629,517  

Short-term borrowings

    103,435       77,287  

Federal Home Loan Bank advances

    1,726,622       1,829,120  

Other borrowings

    1,162,893       1,224,083  

Junior subordinated debentures

    261,544       259,028  

Total interest expense

    4,431,349       5,019,035  

Net interest income

    15,708,052       14,515,493  
                 

Provision for loan/lease losses

    1,520,137       1,048,469  

Net interest income after provision for loan/lease losses

    14,187,915       13,467,024  
                 

Noninterest income:

               

Trust department fees

    1,197,181       852,234  

Investment advisory and management fees

    695,094       679,326  

Deposit service fees

    1,054,223       875,073  

Gains on sales of residential real estate loans

    246,621       271,333  

Gains on sales government guaranteed portions of loans

    765,738       610,988  

Securities gains

    16,460       104,600  

Earnings on bank-owned life insurance

    423,883       358,660  

Bargain purchase gain on Community National acquisition

    1,841,385       -  

Credit card issuing fees, net of processing costs

    85,017       142,173  

Losses on other real estate owned, net

    (83,339 )     (389,465 )

Other

    706,493       562,587  

Total noninterest income

    6,948,756       4,067,509  
                 

Noninterest expense:

               

Salaries and employee benefits

    9,186,233       8,255,639  

Occupancy and equipment expense

    1,586,841       1,364,912  

Professional and data processing fees

    1,438,753       1,126,877  

FDIC and other insurance

    627,390       576,215  

Loan/lease expense

    251,868       263,166  

Advertising and marketing

    412,041       344,100  

Postage and telephone

    257,611       236,942  

Stationery and supplies

    150,718       135,211  

Bank service charges

    284,345       198,492  

Acquisition costs

    432,326       -  

Other-than-temporary impairment losses on securities

    -       62,400  

Other

    606,223       545,129  

Total noninterest expense

    15,234,349       13,109,083  

Net income before income taxes

    5,902,322       4,425,450  

Federal and state income tax expense

    1,857,091       1,152,071  

Net income

  $ 4,045,231     $ 3,273,379  

Less: Net income attributable to noncontrolling interests

    -       201,223  

Net income attributable to QCR Holdings, Inc.

  $ 4,045,231     $ 3,072,156  

Less: Preferred stock dividends

    810,838       935,786  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 3,234,393     $ 2,136,370  

Earnings per common share attributable to QCR Holdings, Inc. common shareholders

               

Basic

  $ 0.60     $ 0.44  

Diluted

  $ 0.59     $ 0.44  

Weighted average common shares outstanding

    5,393,062       4,835,773  

Weighted average common and common equivalent shares outstanding

    5,497,275       4,901,853  
                 

Cash dividends declared per common share

  $ 0.04     $ 0.04  
 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES                

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)                

Six Months Ended June 30,                

 

   

2013

   

2012

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 31,458,432     $ 31,943,946  

Securities:

               

Taxable

    5,090,281       5,571,593  

Nontaxable

    1,746,573       934,111  

Interest-bearing deposits at financial institutions

    121,478       212,582  

Restricted investment securities

    256,256       246,100  

Federal funds sold

    3,863       -  

Total interest and dividend income

    38,676,883       38,908,332  
                 

Interest expense:

               

Deposits

    2,293,646       3,345,257  

Short-term borrowings

    167,702       142,231  

Federal Home Loan Bank advances

    3,459,434       3,693,441  

Other borrowings

    2,353,648       2,481,476  

Junior subordinated debentures

    503,084       526,981  

Total interest expense

    8,777,514       10,189,386  

Net interest income

    29,899,369       28,718,946  
                 

Provision for loan/lease losses

    2,577,919       1,828,915  

Net interest income after provision for loan/lease losses

    27,321,450       26,890,031  
                 

Noninterest income:

               

Trust department fees

    2,236,851       1,735,966  

Investment advisory and management fees

    1,304,435       1,200,788  

Deposit service fees

    1,962,046       1,779,479  

Gains on sales of residential real estate loans

    537,772       562,766  

Gains on sales government guaranteed portions of loans

    1,610,962       718,645  

Security gains

    16,460       104,600  

Earnings on bank-owned life insurance

    862,570       797,062  

Bargain purchase gain on Community National acquisition

    1,841,385       -  

Credit card issuing fees, net of processing costs

    134,971       269,188  

Losses on other real estate owned, net

    (529,969 )     (578,669 )

Other

    2,175,302       1,434,562  

Total noninterest income

    12,152,785       8,024,387  
                 

Noninterest expense:

               

Salaries and employee benefits

    17,928,916       16,380,319  

Occupancy and equipment expense

    3,015,711       2,717,175  

Professional and data processing fees

    2,578,814       2,277,067  

FDIC and other insurance

    1,183,301       1,157,071  

Loan/lease expense

    496,959       481,900  

Advertising and marketing

    676,609       620,116  

Postage and telephone

    476,302       525,182  

Stationery and supplies

    261,388       278,177  

Bank service charges

    559,840       398,221  

Acquisition costs

    788,904       -  

Other-than-temporary impairment losses on securities

    -       62,400  

Other

    1,226,105       949,535  

Total noninterest expense 

    29,192,849       25,847,163  

Net income before income taxes

    10,281,386       9,067,255  

Federal and state income tax expense

    2,971,011       2,391,027  

Net income

  $ 7,310,375     $ 6,676,228  

Less: Net income attributable to noncontrolling interests

    -       367,254  

Net income attributable to QCR Holdings, Inc.

  $ 7,310,375     $ 6,308,974  

Less: Preferred stock dividends

    1,621,675       1,874,411  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 5,688,700     $ 4,434,563  
                 

Earnings per common share attributable to QCR Holdings, Inc. common shareholders

               

Basic

  $ 1.10     $ 0.92  

Diluted

  $ 1.08     $ 0.91  

Weighted average common shares outstanding

    5,160,327       4,818,090  

Weighted average common and common equivalent shares outstanding

    5,265,809       4,867,628  
                 

Cash dividends declared per common share

  $ 0.04     $ 0.04  
 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES                

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)                

Three and Six Months Ended June 30,                

 

   

Three Months Ended June 30,

 
   

2013

   

2012

 

Net income

  $ 4,045,231     $ 3,273,379  
                 

Other comprehensive income (loss):

               
                 

Unrealized gains (losses) on securities available for sale:

               

Unrealized holding gains (losses) arising during the period before tax

    (21,238,019 )     2,114,026  

Less reclassification adjustment for gains included in net income before tax

    16,460       104,600  
      (21,254,479 )     2,009,426  

Tax expense (benefit)

    (8,162,990 )     768,381  

Other comprehensive income (loss), net of tax

    (13,091,489 )     1,241,045  
                 

Comprehensive income (loss) attributable to QCR Holdings, Inc.

  $ (9,046,258 )   $ 4,514,424  

 

 

   

Six Months Ended June 30,

 
   

2013

   

2012

 

Net income

  $ 7,310,375     $ 6,676,228  
                 

Other comprehensive loss:

               
                 

Unrealized losses on securities available for sale:

               

Unrealized holding losses arising during the period before tax

    (22,594,571 )     (346,545 )

Less reclassification adjustment for gains included in net income before tax

    16,460       104,600  
      (22,611,031 )     (451,145 )

Tax benefit

    (8,683,184 )     (174,955 )

Other comprehensive loss, net of tax

    (13,927,847 )     (276,190 )
                 

Comprehensive income (loss) attributable to QCR Holdings, Inc.

  $ (6,617,472 )   $ 6,400,038  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Six Months Ended June 30, 2013 and 2012

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Noncontrolling

Interests

   

Treasury

Stock

   

Total

 

Balance December 31, 2012

  $ 54,867     $ 5,039,448     $ 78,912,791     $ 53,326,542     $ 4,706,683     $ -     $ (1,606,510 )   $ 140,433,821  

Net income

    -       -       -       3,265,144       -       -       -       3,265,144  

Other comprehensive loss, net of tax

    -       -       -       -       (836,358 )     -       -       (836,358 )

Preferred cash dividends declared

    -       -       -       (810,837 )     -       -       -       (810,837 )

Proceeds from issuance of 5,884 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       5,884       63,487       -       -       -       -       69,371  

Proceeds from issuance of 19,278 shares of common stock as a result of stock options exercised

    -       19,278       153,550       -       -       -       -       172,828  

Exchange of 7,048 shares of common stock in connection with stock options exercised

    -       (7,048 )     (111,628 )     -       -       -       -       (118,676 )

Stock compensation expense

    -       -       293,798                                       293,798  

Tax benefit of nonqualified stock options exercised

    -       -       35,251       -       -       -       -       35,251  

Restricted stock awards

    -       16,798       (16,798 )     -       -       -       -       -  

Exchange of 16,798 shares of common stock in connection with restricted stock vested, net

    -       (16,798 )     (289,113 )     -       -       -       -       (305,911 )

Balance March 31, 2013

  $ 54,867     $ 5,057,562     $ 79,041,338     $ 55,780,849     $ 3,870,325     $ -     $ (1,606,510 )   $ 142,198,431  

Net income

    -       -       -       4,045,231       -       -       -       4,045,231  

Other comprehensive loss, net of tax

    -       -       -       -       (13,091,489 )     -       -       (13,091,489 )

Common cash dividends declared, $0.04 per share

    -       -       -       (228,971 )     -       -       -       (228,971 )

Preferred cash dividends declared

    -       -       -       (810,838 )     -       -       -       (810,838 )

Issuance of 834,715 shares of common stock as a result of the acquisition of Community National Bancorporation, net

    -       834,715       12,181,894       -       -       -       -       13,016,609  

Proceeds from issuance of 9,560 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       9,560       104,221       -       -       -       -       113,781  

Proceeds from issuance of 3,769 shares of common stock as a result of stock options exercised

    -       3,769       33,070       -       -       -       -       36,839  

Stock compensation expense

    -       -       162,123                                       162,123  

Tax benefit of nonqualified stock options exercised

    -       -       4,197       -       -       -       -       4,197  

Restricted stock awards

    -       12,707       (12,707 )     -       -       -       -       -  

Balance June 30, 2013

  $ 54,867     $ 5,918,313     $ 91,514,136     $ 58,786,271     $ (9,221,164 )   $ -     $ (1,606,510 )   $ 145,445,913  

 

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Noncontrolling

Interests

   

Treasury

Stock

   

Total

 

Balance December 31, 2011

  $ 65,090     $ 4,879,435     $ 89,702,533     $ 44,585,902     $ 4,754,714     $ 2,051,538     $ (1,606,510 )   $ 144,432,702  

Net income

    -       -       -       3,236,818       -       166,031       -       3,402,849  

Other comprehensive loss, net of tax

    -       -       -       -       (1,517,235 )     -       -       (1,517,235 )

Preferred cash dividends declared

    -       -       -       (938,625 )     -       -       -       (938,625 )

Proceeds from issuance of 7,767 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       7,767       55,566       -       -       -       -       63,333  

Proceeds from issuance of 276 shares of common stock as a result of stock options exercised

    -       276       2,374       -       -       -       -       2,650  

Exchange of 576 shares of common stock in connection with payroll taxes for restricted stock

    -       (576 )     (2,103 )     -       -       -       -       (2,679 )

Stock compensation expense

    -       -       326,245                                       326,245  

Restricted stock awards

    -       57,770       (57,770 )     -       -       -       -       -  

Other adjustments to noncontrolling interests

    -       -       -       -       -       (2,066 )     -       (2,066 )

Balance March 31, 2012

  $ 65,090     $ 4,944,672     $ 90,026,845     $ 46,884,095     $ 3,237,479     $ 2,215,503     $ (1,606,510 )   $ 145,767,174  

Comprehensive income:

                                                               

Net income

    -       -       -       3,072,156       -       201,223       -       3,273,379  

Other comprehensive income, net of tax

    -       -       -       -       1,241,045       -       -       1,241,045  

Comprehensive income

                                                            4,514,424  

Common cash dividends declared, $0.04 per share

    -       -       -       (189,091 )     -       -       -       (189,091 )

Preferred cash dividends declared

    -       -       -       (935,786 )     -       -       -       (935,786 )

Redemption of 10,223 shares of Series F Noncumulative Perpetual Preferred Stock

    (10,223 )     -       (10,212,777 )     -       -       -       -       (10,223,000 )

Proceeds from issuance of 10,856 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       10,856       78,055       -       -       -       -       88,911  

Proceeds from issuance of 9,090 shares of common stock as a result of stock options exercised

    -       9,090       79,902       -       -       -       -       88,992  

Exchange of 611 shares of common stock in connection with stock options exercised

    -       (611 )     (7,125 )     -       -       -       -       (7,736 )

Proceeds from exercise of warrants to purchase 4,300 shares of common stock issued in conjunction with the Series A Subordinated Notes

    -       4,300       38,700       -       -       -       -       43,000  

Stock compensation expense

    -       -       177,269                                       177,269  

Other adjustments to noncontrolling interests

    -       -       -       -       -       (2,065 )     -       (2,065 )

Balance June 30, 2012

  $ 54,867     $ 4,968,307     $ 80,180,869     $ 48,831,374     $ 4,478,524     $ 2,414,661     $ (1,606,510 )   $ 139,322,092  

See Notes to Consolidated Financial Statements (Unaudited)

 

 
 6

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 

Six Months Ended June 30,

 

   

2013

   

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 7,310,375     $ 6,676,228  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation

    1,280,550       1,198,809  

Provision for loan/lease losses

    2,577,919       1,828,915  

Stock-based compensation expense

    455,921       503,514  

Losses on other real estate owned, net

    529,969       578,669  

Amortization of premiums on securities, net

    1,972,391       2,050,358  

Securities gains

    (16,460 )     (104,600 )

Other-than-temporary impairment losses on securities

    -       62,400  

Loans originated for sale

    (52,272,708 )     (51,881,417 )

Proceeds on sales of loans

    56,915,600       52,645,621  

Gains on sales of residential real estate loans, net

    (537,772 )     (562,766 )

Gains on sales of government guaranteed portions of loans, net

    (1,610,962 )     (718,645 )

Increase in cash value of bank-owned life insurance

    (862,570 )     (797,062 )

Bargain purchase gain on Community National acquisition

    (1,841,385 )     -  

Decrease (increase) in other assets

    6,556,417       (6,150,757 )

Decrease in other liabilities

    (797,225 )     (734,316 )

Net cash provided by operating activities

  $ 19,660,060     $ 4,594,951  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease in federal funds sold

    22,229,000       17,160,000  

Net increase in interest-bearing deposits at financial institutions

    (10,189,746 )     (1,701,827 )

Proceeds from sales of other real estate owned

    303,766       814,071  

Activity in securities portfolio:

               

Purchases

    (238,534,747 )     (311,369,517 )

Calls, maturities and redemptions

    124,663,560       201,683,047  

Paydowns

    27,762,742       14,403,547  

Sales

    6,167,531       19,215,075  

Activity in restricted investment securities:

               

Purchases

    (4,818,750 )     (1,003,850 )

Redemptions

    4,950,000       1,033,100  

Net increase in loans/leases originated and held for investment

    (51,708,379 )     (16,077,756 )

Purchase of premises and equipment

    (950,802 )     (898,464 )

Net cash received from Community National acquisition

    3,025,073       -  

Net cash used in investing activities

  $ (117,100,752 )   $ (76,742,574 )

 

(Continued)

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued 

Six Months Ended June 30,

 

   

2013

   

2012

 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net decrease in deposits

    87,620,739       110,012,711  

Net decrease in short-term borrowings

    (13,896,757 )     (28,137,412 )

Activity in Federal Home Loan Bank advances:

               

Advances

    119,000,000       14,000,000  

Calls and maturities

    (111,400,500 )     (15,000,000 )

Proceeds from other borrowings term note

    10,000,000       -  

Advance (payment) on 364-day revolving note, net

    (5,600,000 )     2,000,000  

Repayment of Community National's other borrowings at acquisition

    (3,950,000 )     -  

Payment of cash dividends on common and preferred stock

    (1,813,624 )     (2,278,183 )

Redemption of 10,223 shares of Series F Noncumulative Perpetual Preferred Stock

    -       (10,223,000 )

Proceeds from issuance of common stock, net

    229,278       276,471  

Net cash provided by financing activities

  $ 80,189,136     $ 70,650,587  

Net decrease in cash and due from banks

    (17,251,556 )     (1,497,036 )

Cash and due from banks, beginning

    61,568,446       53,136,710  

Cash and due from banks, ending

  $ 44,316,890     $ 51,639,674  
                 

Supplemental disclosure of cash flow information, cash payments for:

               

Interest

  $ 8,897,240     $ 10,343,656  

Income/franchise taxes

  $ 1,031,120     $ 881,000  
                 

Supplemental schedule of noncash investing activities:

               

Change in accumulated other comprehensive income (loss), unrealized losses on securities available for sale, net

  $ (13,927,847 )   $ (276,190 )

Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

  $ (424,587 )   $ (10,415 )

Transfers of loans to other real estate owned

  $ 187,500     $ 2,143,017  
                 

Supplemental disclosure of cash flow information for Community National acquisition:

               

Fair value of assets acquired:

               

Cash and due from banks * 

  $ 9,286,757     $ -  

Federal funds sold 

    12,335,000       -  

Interest-bearing deposits at financial institutions 

    2,024,539       -  

Securities available for sale 

    45,853,826       -  

Loans/leases receivable held for investment, net 

    195,658,486       -  

Premises and equipment, net 

    8,132,021       -  

Core deposit intangible 

    3,440,076       -  

Bank-owned life insurance 

    4,595,529       -  

Restricted investment securities 

    1,259,375       -  

Other real estate owned 

    550,326       -  

Other assets 

    5,178,583       -  

Total assets acquired 

  $ 288,314,518     $ -  
                 

Fair value of liabilities assumed:

               

Deposits 

  $ 255,045,071     $ -  

Other borrowings 

    3,950,000       -  

Junior subordinated debentures 

    4,125,175       -  

Other liabilities 

    3,911,053       -  

Total liabilities assumed 

  $ 267,031,299     $ -  

Net assets acquired 

  $ 21,283,219     $ -  

Consideration paid:

               

Cash paid *

  $ 6,261,684     $ -  

Issuance of 834,715 shares of common stock

    13,180,150       -  

Total consideration paid

  $ 19,441,834     $ -  

Bargain purchase gain

  $ 1,841,385     $ -  

 

* Net cash received at closing totaled $3,025,073

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
 8

 

 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

June 30, 2013

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation: The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2012, including QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 11, 2013. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

 

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim period ended June 30, 2013, are not necessarily indicative of the results expected for the year ending December 31, 2013.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include four commercial banks: Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), Rockford Bank & Trust Company (“RB&T”), and Community National Bank (“CNB”). On May 13, 2013, the Company acquired Community National Bancorporation (“Community National”) and CNB. See Note 2 for additional information on the acquisition. QCBT, CRBT, and RB&T are all state-chartered commercial banks; while CNB is a national-chartered commercial bank. The Company also engages in direct financing lease contracts through its wholly-owned equity investment by QCBT in m2 Lease Funds, LLC (“m2 Lease Funds”). All material intercompany transactions and balances have been eliminated in consolidation.

 

Recent accounting developments: In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. Both ASU 2011-11 and ASU 2013-01 were effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. Adoption did not have a significant impact on the Company’s consolidated financial statements.

 

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income (“AOCI”) in ASUs 2011-05 and 2011-12, which were adopted by the Company during the current year. The amendments require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required. Adoption did not have a significant impact on the Company’s consolidated financial statements.

 

In July 2013, FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  Management is in the process of evaluating the impact of ASU 2013-11 on the Company’s consolidated financial statements.

  

Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.

 

 
 9

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 2 – ACQUISITION OF COMMUNITY NATIONAL BANCORPORATION AND COMMUNITY NATIONAL BANK

 

On May 13, 2013, the Company acquired 100% of Community National’s outstanding common stock for aggregate consideration totaling $19,441,834, which consisted of 834,715 shares of QCR Holdings common stock valued at $13,180,150 and cash of $6,261,684. Community National was the bank holding company providing bank and bank related services through its wholly-owned bank subsidiary, CNB. CNB is a commercial bank headquartered in Waterloo, Iowa and serves Waterloo, Cedar Falls, and Mason City, Iowa and Austin, Minnesota. As a de novo bank, CNB commenced its operations in 1997. The Company has operated CNB as a separate banking charter since the acquisition.

 

The Company accounted for the business combination under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”). The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The excess of fair value of net assets over the carrying value is recorded as bargain purchase gain which is included in noninterest income on the statement of income. The market value adjustments are accreted or amortized on a level yield basis over the expected term. Additionally, the Company recorded a core deposit intangible totaling $3,440,076 which is the portion of the acquisition purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized by the straight-line method over the estimated useful life of the deposits.

 

The Company’s acquired loans were recorded at fair value at the acquisition date and no separate valuation allowance was established. The initial fair value was determined with the assistance of a valuation specialist that discounted expected cash flows at appropriate rates. The discount rates were based on market rates for new originations of comparable loans and did not include a factor for credit losses as that was included in the estimated cash flows. ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date. Based on this evaluation, the Company determined that the loans acquired from the Community National acquisition subject to ASC Topic 310-30 would be accounted for individually. At the acquisition date, the historical cost and fair value of these loans totaled $3,033,022 and $2,207,891, respectively.

 

The Company considered expected prepayments and estimated the total expected cash flows, which includes undiscounted expected principal and interest. The excess of that amount over the fair value of the loan is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the expected life of the loan. The excess of the contractual cash flows over expected cash flows is referred to as nonaccretable difference and is not accreted into income. Over the life of the loan, the Company continues to estimate expected cash flows. Subsequent decreases in expected cash flows are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in cash flows to be collected are first used to reverse any existing valuation allowance and any remaining increase is recognized prospectively through an adjustment of the loan’s yield over its remaining life. At the acquisition date, accretable yield totaled $4,128,315 and nonaccretable yield totaled $397,894.

 

The Company assumed junior subordinated debentures with principal outstanding of $6,702,000 and fair value of $4,125,175 after a discount of $2,576,825. The initial fair value was determined with the assistance of a valuation specialist that discounted expected cash flows at appropriate rates. The discount will be accreted as interest expense on a level yield basis over the expected remaining term of the junior subordinated debentures.

 

Results of the operations of the acquired business are included in the income statement from the effective date of the acquisition.

 

 
10 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting bargain purchase gain is as follows:

 

   

As of

May 13, 2013

 

ASSETS

       

Cash and due from banks

  $ 9,286,757  

Federal funds sold

    12,335,000  

Interest-bearing deposits at financial institutions

    2,024,539  

Securities available for sale

    45,853,826  

Loans/leases receivable, net

    195,658,486  

Premises and equipment

    8,132,021  

Core deposit intangible

    3,440,076  

Bank-owned life insurance

    4,595,529  

Restricted investment securities

    1,259,375  

Other real estate owned

    550,326  

Other assets

    5,178,583  

Total assets acquired

  $ 288,314,518  
         

LIABILITIES

       

Deposits

  $ 255,045,071  

Other borrowings

    3,950,000  

Junior subordinated debentures

    4,125,175  

Other liabilities

    3,911,053  

Total liabilties assumed

  $ 267,031,299  
         

Net assets acquired

  $ 21,283,219  
         

CONSIDERATION PAID:

       

Cash

  $ 6,261,684  

Issuance of 834,715 shares of common stock

    13,180,150  

Total consideration paid

  $ 19,441,834  

Bargain purchase gain

  $ 1,841,385  

 

In order to fund the cash portion of the consideration and pay off the $3,950,000 of Community National term debt at acquisition, the Company borrowed $4,400,000 on its 364-day revolving credit note. The outstanding balance on the 364-day revolving credit note totaled $10,000,000 until maturity at June 26, 2013. Upon maturity, the credit facility was restructured whereby the $10,000,000 of outstanding debt was restructured into a secured 3-year term note with principal due quarterly and interest due monthly where the interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.30% at June 30, 2013). Additionally, as part of the restructure, the Company maintained a secured 364-day revolving credit note with availability of $10,000,000 where the interest is calculated at the effective LIBOR rate plus 2.50% per annum. At June 30, 2013, the Company had not borrowed on this revolving credit note and had the full amount available.

 

The current note agreement contains certain covenants that place restrictions on additional debt and stipulate minimum capital and various asset quality and operating ratios.

 

The Company recorded a bargain purchase gain on the acquisition totaling $1,841,385 as the market value of the net assets acquired from Community National exceeded the total consideration paid. The consideration paid approximated a slight premium to the book value of Community National’s net assets at acquisition. The net impact of the market value adjustments resulted in a net increase to Community National’s net assets. The more significant market value adjustments were the core deposit intangible ($3,440,076) and the discount on the trust preferred securities ($2,576,825), as previously discussed.

 

 
11 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Unaudited combined pro forma operating results for the three and six months ended June 30, 2013 and 2012, giving effect to the Community National acquisition as if it had occurred as of January 1, 2012, are as follows:

 

   

Three months ended

June 30, 

   

Six months ended

June 30, 

 
   

2013  

   

2012  

   

2013  

   

2012  

 
                                 

Interest income 

  $ 21,275,698     $ 22,056,089     $ 42,364,836     $ 43,963,029  

Noninterest income 

  $ 5,511,338     $ 4,885,073     $ 11,339,794     $ 9,472,182  

Net income 

  $ 1,945,117     $ 3,610,172     $ 5,476,700     $ 7,153,770  

Net income attributable to QCR Holdings, Inc. common stockholders 

  $ 1,134,279     $ 2,473,163     $ 3,855,025     $ 4,912,105  
                                 

Earnings per common share attributable to QCR Holdings, Inc. common stockholders 

                               

Basic 

  $ 0.21     $ 0.46     $ 0.71     $ 0.91  

Diluted 

  $ 0.21     $ 0.45     $ 0.70     $ 0.89  

 

The pro forma results exclude the impact of the bargain purchase gain of $1,841,385.  Additionally, the pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2012 or of future results of operations of the consolidated entities.

 

On June 4, 2013, CNB signed a definitive agreement to sell certain assets and liabilities of the two Mason City branches of CNB. CNB will sell deposits of approximately $62 million and loans of approximately $26 million. The proposed transaction, which is subject to regulatory approval and customary closing conditions, is expected to be completed in the fourth quarter of 2013.

 

On July 8, 2013, CNB signed a definitive agreement to sell certain assets and liabilities of the two Austin, Minnesota branches of CNB. CNB will sell deposits of approximately $37 million and loans of approximately $31 million. The proposed transaction, which is subject to regulatory approval and customary closing conditions, is expected to be completed in the fourth quarter of 2013.

 

Based on the premiums the Company expects to receive at the closing of these two transactions, net of the core deposit intangible associated with the Austin and Mason City branches totaling approximately $1.4 million, the Company anticipates recognizing a pre-tax gain of approximately $1.5 million in the fourth quarter of 2013. The gain is a premium on the deposits; therefore, it is dependent upon the amount of deposits sold at closing.

 

 
12 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 3 – INVESTMENT SECURITIES

 

The amortized cost and fair value of investment securities as of June 30, 2013 and December 31, 2012 are summarized as follows:

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

(Losses)

   

Fair

Value

 

June 30, 2013:

                               

Securities held to maturity:

                               

Municipal securities

  $ 104,551,749     $ 152,017     $ (5,853,172 )   $ 98,850,594  

Other securities

    650,000       -       -       650,000  
    $ 105,201,749     $ 152,017     $ (5,853,172 )   $ 99,500,594  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 395,513,928     $ 238,359     $ (14,836,396 )   $ 380,915,891  

Residential mortgage-backed and related securities

    179,822,160       1,807,687       (3,084,293 )     178,545,554  

Municipal securities

    36,478,946       1,102,715       (752,811 )     36,828,850  

Trust preferred securities

    86,200       130,000       -       216,200  

Other securities

    1,362,730       396,393       (218 )     1,758,905  
    $ 613,263,964     $ 3,675,154     $ (18,673,718 )   $ 598,265,400  
                                 

December 31, 2012:

                               

Securities held to maturity:

                               

Municipal securities

  $ 71,429,385     $ 997,969     $ (71,648 )   $ 72,355,706  

Other securities

    650,000       -       -       650,000  
    $ 72,079,385     $ 997,969     $ (71,648 )   $ 73,005,706  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 336,570,995     $ 2,198,655     $ (160,279 )   $ 338,609,371  

Residential mortgage-backed and related securities

    160,035,196       3,736,821       (170,914 )     163,601,103  

Municipal securities

    24,508,015       1,696,555       (18,834 )     26,185,736  

Trust preferred securities

    86,200       53,200       -       139,400  

Other securities

    1,347,113       300,732       (23,469 )     1,624,376  
    $ 522,547,519     $ 7,985,963     $ (373,496 )   $ 530,159,986  

 

The Company’s held to maturity municipal securities consist largely of private issues of municipal debt. The municipalities are located within the Midwest with a portion in or adjacent to the communities of QCBT and CRBT. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

 

The Company’s residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.

 

 

 
13 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012, are summarized as follows:

 

   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

 

June 30, 2013:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 88,263,477     $ (5,853,172 )   $ -     $ -     $ 88,263,477     $ (5,853,172 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 351,380,421     $ (14,836,396 )   $ -     $ -     $ 351,380,421     $ (14,836,396 )

Residential mortgage-backed and related securities

    102,856,893       (3,054,077 )     2,065,109       (30,216 )     104,922,002       (3,084,293 )

Municipal securities

    14,212,014       (752,811 )     -       -       14,212,014       (752,811 )

Other securities

    -       -       241,345       (218 )     241,345       (218 )
    $ 468,449,328     $ (18,643,284 )   $ 2,306,454     $ (30,434 )   $ 470,755,782     $ (18,673,718 )
                                                 

December 31, 2012:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 4,282,352     $ (71,648 )   $ -     $ -     $ 4,282,352     $ (71,648 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 55,621,718     $ (160,279 )   $ -     $ -     $ 55,621,718     $ (160,279 )

Residential mortgage-backed and related securities

    29,324,928       (170,914 )     -       -       29,324,928       (170,914 )

Municipal securities

    1,039,625       (18,834 )     -       -       1,039,625       (18,834 )

Other securities

    -       -       217,500       (23,469 )     217,500       (23,469 )
    $ 85,986,271     $ (350,027 )   $ 217,500     $ (23,469 )   $ 86,203,771     $ (373,496 )

 

At June 30, 2013, the investment portfolio included 533 securities. Of this number, 350 securities had current unrealized losses with aggregate depreciation of less than 5% from the total amortized cost basis. Of these 350, only three had unrealized losses for twelve months or more and the amount of the unrealized losses was only $30,434. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At June 30, 2013 and December 31, 2012, equity securities represented less than 1% of the total portfolio.

 

The Company did not recognize other-than-temporary impairment on any debt securities for the three and six months ended June 30, 2013 and 2012.

 

The Company did not recognize other-than-temporary impairment on any equity securities for the three and six months ended June 30, 2013. During the second quarter of 2012, the Company’s evaluation determined that one privately held equity security experienced a decline in fair value that was other-than-temporary. As a result, the Company wrote down the value of this security and recognized a loss in the amount of $62,400. The Company did not recognize other-than-temporary impairment on any equity securities during the first quarter of 2012.

 

 
14 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

All sales of securities for the three and six months ended June 30, 2013 and 2012, respectively, were from securities identified as available-for-sale. Information on proceeds received, as well as pre-tax gross gains from sales on those securities is as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2013

   

June 30, 2012

   

June 30, 2013

   

June 30, 2012

 
                                 

Proceeds from sales of securities

  $ 6,167,531     $ 19,215,075     $ 6,167,531     $ 19,215,075  

Pre-tax gross gains from sales of securities

    16,460       104,600       16,460       104,600  

 

The amortized cost and fair value of securities as of June 30, 2013 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table. “Other securities” are excluded from the maturity categories as there is no fixed maturity date for those securities.

 

   

Amortized Cost

   

Fair Value

 

Securities held to maturity:

               

Due in one year or less

  $ 1,785,269     $ 1,784,577  

Due after one year through five years

    10,214,545       10,126,030  

Due after one year through five years

    93,201,935       87,589,987  
    $ 105,201,749     $ 99,500,594  
                 

Securities available for sale:

               

Due in one year or less

  $ 5,334,543     $ 5,329,272  

Due after one year through five years

    33,501,636       33,339,485  

Due after five years

    393,242,895       379,292,184  
    $ 432,079,074     $ 417,960,941  

Residential mortgage-backed and related securities

    179,822,160       178,545,554  

Other securities

    1,362,730       1,758,905  
    $ 613,263,964     $ 598,265,400  

 

Portions of the U.S. government sponsored agency securities and municipal securities contain call options, at the discretion of the issuer, to terminate the security at predetermined dates prior to the stated maturity, summarized as follows:

 

   

Amortized Cost

   

Fair Value

 

Securities held to maturity:

               

Municipal securities

  $ 69,862,451     $ 65,051,896  
                 

Securities available for sale:

               

U.S. govt. sponsored agency securities

    355,831,837       342,070,506  

Municipal securities

    22,786,922       22,750,101  
    $ 378,618,759     $ 364,820,607  

 

 
15 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 4 – LOANS/LEASES RECEIVABLE

 

The composition of the loan/lease portfolio as of June 30, 2013 and December 31, 2012 is presented as follows:

 

   

As of June 30,

2013

   

As of December 31,

2012

 
                 

Commercial and industrial loans

  $ 470,416,356     $ 394,244,252  

Commercial real estate loans

               

Owner-occupied commercial real estate

    266,927,092       204,911,308  

Commercial construction, land development, and other land

    48,013,677       44,962,381  

Other non owner-occupied commercial real estate

    409,065,105       344,105,550  
      724,005,874       593,979,239  
                 

Direct financing leases *

    114,754,757       103,685,656  

Residential real estate loans **

    143,093,342       115,581,573  

Installment and other consumer loans

    74,568,755       76,720,514  
      1,526,839,084       1,284,211,234  

Plus deferred loan/lease origination costs, net of fees

    3,887,018       3,176,405  
      1,530,726,102       1,287,387,639  

Less allowance for estimated losses on loans/leases

    (21,156,379 )     (19,925,204 )
    $ 1,509,569,723     $ 1,267,462,435  
                 
                 

* Direct financing leases:

               

Net minimum lease payments to be received

  $ 129,915,909     $ 117,719,380  

Estimated unguaranteed residual values of leased assets

    1,344,853       1,095,848  

Unearned lease/residual income

    (16,506,005 )     (15,129,572 )
      114,754,757       103,685,656  

Plus deferred lease origination costs, net of fees

    4,318,828       3,907,140  
      119,073,585       107,592,796  

Less allowance for estimated losses on leases

    (2,187,605 )     (1,990,395 )
    $ 116,885,980     $ 105,602,401  

 

Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors and management’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and six months ended June 30, 2013 and 2012.

 

**Includes residential real estate loans held for sale totaling $2,083,075 and $4,577,233 as of June 30, 2013, and December 31, 2012, respectively.

 

 
16 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The aging of the loan/lease portfolio by classes of loans/leases as of June 30, 2013 and December 31, 2012 is presented as follows:

 

   

As of June 30, 2013

 

Classes of Loans/Leases

 

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases

   

Total

 
                                                 

Commercial and Industrial

  $ 465,430,639     $ 1,349,678     $ 262,201     $ -     $ 3,373,838     $ 470,416,356  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    259,065,675       193,040       77,828       -       7,590,549       266,927,092  

Commercial Construction, Land Development, and Other Land

    46,609,905       -       270,796       -       1,132,976       48,013,677  

Other Non Owner-Occupied Commercial Real Estate

    392,880,893       1,851,491       1,695,414       -       12,637,307       409,065,105  

Direct Financing Leases

    112,797,068       998,918       258,197       -       700,574       114,754,757  

Residential Real Estate

    141,298,113       369,329       149,816       -       1,276,084       143,093,342  

Installment and Other Consumer

    73,194,203       283,495       16,932       3,248       1,070,877       74,568,755  
    $ 1,491,276,496     $ 5,045,951     $ 2,731,184     $ 3,248     $ 27,782,205     $ 1,526,839,084  
                                                 

As a percentage of total loan/lease portfolio

    97.67 %     0.33 %     0.18 %     0.00 %     1.82 %     100.00 %

 

 

   

As of December 31, 2012

 

Classes of Loans/Leases

 

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases

   

Total

 
                                                 

Commercial and Industrial

  $ 388,825,307     $ 3,724,506     $ 9,940     $ 120,000     $ 1,564,499     $ 394,244,252  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    204,141,070       142,993       -       -       627,245       204,911,308  

Commercial Construction, Land Development, and Other Land

    42,180,819       -       -       -       2,781,562       44,962,381  

Other Non Owner-Occupied Commercial Real Estate

    332,644,532       86,986       1,111,856       -       10,262,176       344,105,550  

Direct Financing Leases

    101,635,084       877,210       174,560       -       998,802       103,685,656  

Residential Real Estate

    111,993,859       2,254,730       283,466       -       1,049,518       115,581,573  

Installment and Other Consumer

    75,711,203       301,025       20,112       39,481       648,693       76,720,514  
    $ 1,257,131,874     $ 7,387,450     $ 1,599,934     $ 159,481     $ 17,932,495     $ 1,284,211,234  
                                                 

As a percentage of total loan/lease portfolio

    97.89 %     0.58 %     0.12 %     0.01 %     1.40 %     100.00 %
 

 
17 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Nonperforming loans/leases by classes of loans/leases as of June 30, 2013 and December 31, 2012 is presented as follows:

 

   

As of June 30, 2013

 

Classes of Loans/Leases

 

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases *

   

Troubled Debt Restructurings - Accruing

   

Total Nonperforming Loans/Leases

   

Percentage of Total Nonperforming Loans/Leases

 
                                         

Commercial and Industrial

  $ -     $ 3,373,838     $ 893,875     $ 4,267,713       14.24 %

Commercial Real Estate

                                       

Owner-Occupied Commercial Real Estate

    -       7,590,549       47,958       7,638,507       25.49 %

Commercial Construction, Land Development, and Other Land

    -       1,132,976       300,000       1,432,976       4.78 %

Other Non Owner-Occupied Commercial Real Estate

    -       12,637,307       269,327       12,906,634       43.08 %

Direct Financing Leases

    -       700,574       -       700,574       2.34 %

Residential Real Estate

    -       1,276,084       296,436       1,572,520       5.25 %

Installment and Other Consumer

    3,248       1,070,877       370,000       1,444,125       4.82 %
    $ 3,248     $ 27,782,205     $ 2,177,596     $ 29,963,049       100.00 %

 

*Nonaccrual loans/leases includes $7,740,416 of troubled debt restructurings, including $145,914 in commercial and industrial loans, $6,934,208 in commercial real estate loans, $379,769 in residential real estate loans, and $280,525 in installment loans.

 

   

As of December 31, 2012

 

Classes of Loans/Leases

 

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases **

   

Troubled Debt Restructurings - Accruing

   

Total Nonperforming Loans/Leases

   

Percentage of Total Nonperforming Loans/Leases

 
                                         

Commercial and Industrial

  $ 120,000     $ 1,564,499     $ 184,084     $ 1,868,583       7.36 %

Commercial Real Estate

                                       

Owner-Occupied Commercial Real Estate

    -       627,245       -       627,245       2.47 %

Commercial Construction, Land Development, and Other Land

    -       2,781,562       1,016,023       3,797,585       14.96 %

Other Non Owner-Occupied Commercial Real Estate

    -       10,262,176       5,820,765       16,082,941       63.34 %

Direct Financing Leases

    -       998,802       -       998,802       3.93 %

Residential Real Estate

    -       1,049,518       167,739       1,217,257       4.79 %

Installment and Other Consumer

    39,481       648,693       110,982       799,156       3.15 %
    $ 159,481     $ 17,932,495     $ 7,299,593     $ 25,391,569       100.00 %

 

**Nonaccrual loans/leases includes $5,658,781 of troubled debt restructurings, including $99,804 in commercial and industrial loans, $5,173,589 in commercial real estate loans, $64,722 in residential real estate loans, and $320,666 in installment loans.

 

 
18 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Changes in the allowance for estimated losses on loans/leases by portfolio segment for the three and six months ended June 30, 2013 and 2012, respectively, are presented as follows:

 

   

Three Months Ended June 30, 2013

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 4,466,264     $ 12,188,953     $ 2,296,523     $ 966,336     $ 851,386     $ 20,769,462  

Provisions charged to expense

    348,298       672,077       340,137       195,774       (36,149 )     1,520,137  

Loans/leases charged off

    (38,685 )     (820,725 )     (449,622 )     -       (23,875 )     (1,332,907 )

Recoveries on loans/leases previously charged off

    14,951       150,192       567       3,231       30,746       199,687  

Balance, ending

  $ 4,790,828     $ 12,190,497     $ 2,187,605     $ 1,165,341     $ 822,108     $ 21,156,379  

 

   

Three Months Ended June 30, 2012

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 4,585,467     $ 10,855,442     $ 1,366,528     $ 963,157     $ 1,236,050     $ 19,006,644  

Provisions charged to expense

    (683,718 )     1,275,510       258,469       23,557       174,651       1,048,469  

Loans/leases charged off

    (79,334 )     (1,427,987 )     (27,543 )     -       (199,935 )     (1,734,799 )

Recoveries on loans/leases previously charged off

    358,377       7,026       13,545       -       25,273       404,221  

Balance, ending

  $ 4,180,792     $ 10,709,991     $ 1,610,999     $ 986,714     $ 1,236,039     $ 18,724,535  

 

   

Six Months Ended June 30, 2013

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 4,531,545     $ 11,069,502     $ 1,990,395     $ 1,070,328     $ 1,263,434     $ 19,925,204  

Provisions charged to expense

    260,491       1,786,371       718,760       204,673       (392,376 )     2,577,919  

Loans/leases charged off

    (38,900 )     (820,725 )     (522,671 )     (112,891 )     (140,487 )     (1,635,674 )

Recoveries on loans/leases previously charged off

    37,692       155,349       1,121       3,231       91,537       288,930  

Balance, ending

  $ 4,790,828     $ 12,190,497     $ 2,187,605     $ 1,165,341     $ 822,108     $ 21,156,379  

 

   

Six Months Ended June 30, 2012

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 4,878,006     $ 10,596,958     $ 1,339,496     $ 704,946     $ 1,269,856     $ 18,789,262  

Provisions charged to expense

    (774,618 )     1,533,374       573,915       286,525       209,719       1,828,915  

Loans/leases charged off

    (455,742 )     (1,427,987 )     (343,264 )     (4,757 )     (327,801 )     (2,559,551 )

Recoveries on loans/leases previously charged off

    533,146       7,646       40,852       -       84,265       665,909  

Balance, ending

  $ 4,180,792     $ 10,709,991     $ 1,610,999     $ 986,714     $ 1,236,039     $ 18,724,535  
 

 
19 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of June 30, 2013 and December 31, 2012 is presented as follows:

 

   

As of June 30, 2013

 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Allowance for loans/leases individually evaluated for impairment 

  $ 1,039,328     $ 4,303,557     $ 116,077     $ 90,235     $ 35,927     $ 5,585,124  

Allowance for loans/leases collectively evaluated for impairment 

    3,751,500       7,886,940       2,071,528       1,075,106       786,181       15,571,255  
    $ 4,790,828     $ 12,190,497     $ 2,187,605     $ 1,165,341     $ 822,108     $ 21,156,379  
                                                 
                                                 

Loans/leases individually evaluated for impairment 

  $ 2,907,420     $ 18,873,036     $ 700,574     $ 1,572,520     $ 1,440,877     $ 25,494,427  

Loans/leases collectively evaluated for impairment 

    467,508,936       705,132,838       114,054,183       141,520,822       73,127,878       1,501,344,657  
    $ 470,416,356     $ 724,005,874     $ 114,754,757     $ 143,093,342     $ 74,568,755     $ 1,526,839,084  
                                                 
                                                 

Allowance as a percentage of loans/leases individually evaluated for impairment 

    35.75 %     22.80 %     16.57 %     5.74 %     2.49 %     21.91 %

Allowance as a percentage of loans/leases collectively evaluated for impairment 

    0.80 %     1.12 %     1.82 %     0.76 %     1.08 %     1.04 %
      1.02 %     1.68 %     1.91 %     0.81 %     1.10 %     1.38 %

 

 

   

As of December 31, 2012 

 
   

Commercial and Industrial 

   

Commercial Real Estate 

   

Direct Financing Leases 

   

Residential Real Estate 

   

Installment and Other Consumer 

   

Total 

 
                                                 

Allowance for loans/leases individually evaluated for impairment 

  $ 280,170     $ 4,005,042     $ 125,000     $ 105,565     $ 71,992     $ 4,587,769  

Allowance for loans/leases collectively evaluated for impairment 

    4,251,375       7,064,460       1,865,395       964,763       1,191,442       15,337,435  
    $ 4,531,545     $ 11,069,502     $ 1,990,395     $ 1,070,328     $ 1,263,434     $ 19,925,204  
                                                 

Loans/leases individually evaluated for impairment 

  $ 1,006,952     $ 20,383,846     $ 998,802     $ 1,217,256     $ 687,355     $ 24,294,211  

Loans/leases collectively evaluated for impairment 

    393,237,300       573,595,393       102,686,854       114,364,317       76,033,159       1,259,917,023  
    $ 394,244,252     $ 593,979,239     $ 103,685,656     $ 115,581,573     $ 76,720,514     $ 1,284,211,234  
                                                 

Allowance as a percentage of loans/leases individually evaluated for impairment 

    27.82 %     19.65 %     12.51 %     8.67 %     10.47 %     18.88 %

Allowance as a percentage of loans/leases collectively evaluated for impairment 

    1.08 %     1.23 %     1.82 %     0.84 %     1.57 %     1.22 %
      1.15 %     1.86 %     1.92 %     0.93 %     1.65 %     1.55 %
 

 
20 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Information for impaired loans/leases is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

 

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the six months ended June 30, 2013 is presented as follows:

 

Classes of Loans/Leases

 

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

   

Average Recorded Investment

   

Interest Income Recognized

   

Interest Income Recognized for Cash Payments Received

 
                                                 

Impaired Loans/Leases with No Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 678,239     $ 1,149,252     $ -     $ 690,717     $ 3,861     $ 3,861  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    3,554,904       4,934,815       -       1,318,703       -       -  

Commercial Construction, Land Development, and Other Land

    300,000       300,000       -       331,250       -       -  

Other Non Owner-Occupied Commercial Real Estate

    224,719       224,719       -       1,782,488       40,773       40,773  

Direct Financing Leases

    542,497       542,497       -       845,413       -       -  

Residential Real Estate

    1,271,905       1,538,919       -       934,120       -       -  

Installment and Other Consumer

    1,019,980       1,032,521       -       792,024       5,112       5,112  
    $ 7,592,244     $ 9,722,723     $ -     $ 6,694,715     $ 49,746     $ 49,746  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 2,229,181     $ 2,238,999     $ 1,039,328     $ 722,935     $ 15,307     $ 15,307  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    980,236       980,236       400,000       326,908       -       -  

Commercial Construction, Land Development, and Other Land

    3,652,434       3,652,434       1,428,466       3,626,128       5,419       5,419  

Other Non Owner-Occupied Commercial Real Estate

    10,160,743       10,413,703       2,475,091       10,088,904       4,501       4,501  

Direct Financing Leases

    158,077       158,077       116,077       124,691       -       -  

Residential Real Estate

    300,615       300,615       90,235       305,587       -       -  

Installment and Other Consumer

    420,897       420,897       35,927       289,628       -       -  
    $ 17,902,183     $ 18,164,961     $ 5,585,124     $ 15,484,781     $ 25,199     $ 25,199  
                                                 

Total Impaired Loans/Leases:

                                               

Commercial and Industrial

  $ 2,907,420     $ 3,388,251     $ 1,039,328     $ 1,413,652     $ 19,168     $ 19,168  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    4,535,140       5,915,051       400,000       1,645,611       -       -  

Commercial Construction, Land Development, and Other Land

    3,952,434       3,952,434       1,428,466       3,957,378       5,419       5,419  

Other Non Owner-Occupied Commercial Real Estate

    10,385,462       10,638,422       2,475,091       11,871,392       45,274       45,274  

Direct Financing Leases

    700,574       700,574       116,077       970,104       -       -  

Residential Real Estate

    1,572,520       1,839,534       90,235       1,239,707       -       -  

Installment and Other Consumer

    1,440,877       1,453,418       35,927       1,081,652       5,112       5,112  
    $ 25,494,427     $ 27,887,684     $ 5,585,124     $ 22,179,496     $ 74,973     $ 74,973  

 

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

 

 
21 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended June 30, 2013 and 2012, respectively, is presented as follows:

 

   

Three Months Ended June 30, 2013

   

Three Months Ended June 30, 2012

 

Classes of Loans/Leases

 

Average Recorded Investment

   

Interest Income Recognized

   

Interest Income Recognized for Cash Payments Received

   

Average Recorded Investment

   

Interest Income Recognized

   

Interest Income Recognized for Cash Payments Received

 
                                                 

Impaired Loans/Leases with No Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 613,506     $ 1,937     $ 1,937     $ 870,085     $ -     $ -  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    3,107,106       -       -       668,313       -       -  

Commercial Construction, Land Development, and Other Land

    325,000       -       -       4,773,032       1,683       1,683  

Other Non Owner-Occupied Commercial Real Estate

    353,972       657       657       6,997,797       -       -  

Direct Financing Leases

    822,718       -       -       585,845       -       -  

Residential Real Estate

    1,057,657       -       -       734,485       1,673       1,673  

Installment and Other Consumer

    915,478       2,686       2,686       974,591       101       101  
    $ 7,195,437     $ 5,280     $ 5,280     $ 15,604,148     $ 3,457     $ 3,457  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 1,229,737     $ 15,307     $ 15,307     $ 314,872     $ 1,971     $ 1,971  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    653,815       -       -       66,660       -       -  

Commercial Construction, Land Development, and Other Land

    3,656,226       2,716       2,716       2,348,194       -       -  

Other Non Owner-Occupied Commercial Real Estate

    10,143,708       -       -       8,354,604       83,113       83,113  

Direct Financing Leases

    133,038       -       -       118,275       -       -  

Residential Real Estate

    302,334       -       -       462,406       -       -  

Installment and Other Consumer

    430,427       -       -       1,998       -       -  
    $ 16,549,285     $ 18,023     $ 18,023     $ 11,667,009     $ 85,084     $ 85,084  
                                                 

Total Impaired Loans/Leases:

                                               

Commercial and Industrial

  $ 1,843,243     $ 17,244     $ 17,244     $ 1,184,957     $ 1,971     $ 1,971  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    3,760,921       -       -       734,973       -       -  

Commercial Construction, Land Development, and Other Land

    3,981,226       2,716       2,716       7,121,226       1,683       1,683  

Other Non Owner-Occupied Commercial Real Estate

    10,497,680       657       657       15,352,401       83,113       83,113  

Direct Financing Leases

    955,756       -       -       704,120       -       -  

Residential Real Estate

    1,359,991       -       -       1,196,891       1,673       1,673  

Installment and Other Consumer

    1,345,905       2,686       2,686       976,589       101       101  
    $ 23,744,722     $ 23,303     $ 23,303     $ 27,271,157     $ 88,541     $ 88,541  

 

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

 

 
22 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2012 is presented as follows:

 

Classes of Loans/Leases

 

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                       

Commercial and Industrial

  $ 438,355     $ 1,203,710     $ -  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    503,321       503,321       -  

Commercial Construction, Land Development, and Other Land

    678,523       678,523       -  

Other Non Owner-Occupied Commercial Real Estate

    495,702       495,702       -  

Direct Financing Leases

    777,645       777,645       -  

Residential Real Estate

    944,211       1,127,242       -  

Installment and Other Consumer

    534,368       534,368       -  
    $ 4,372,125     $ 5,320,511     $ -  
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                       

Commercial and Industrial

  $ 568,597     $ 590,849     $ 280,170  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    -       -       -  

Commercial Construction, Land Development, and Other Land

    3,967,583       3,967,583       1,105,795  

Other Non Owner-Occupied Commercial Real Estate

    14,738,717       14,991,676       2,899,247  

Direct Financing Leases

    221,157       221,157       125,000  

Residential Real Estate

    273,045       273,045       105,565  

Installment and Other Consumer

    152,987       152,987       71,992  
    $ 19,922,086     $ 20,197,297     $ 4,587,769  
                         

Total Impaired Loans/Leases:

                       

Commercial and Industrial

  $ 1,006,952     $ 1,794,559     $ 280,170  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    503,321       503,321       -  

Commercial Construction, Land Development, and Other Land

    4,646,106       4,646,106       1,105,795  

Other Non Owner-Occupied Commercial Real Estate

    15,234,419       15,487,378       2,899,247  

Direct Financing Leases

    998,802       998,802       125,000  

Residential Real Estate

    1,217,256       1,400,287       105,565  

Installment and Other Consumer

    687,355       687,355       71,992  
    $ 24,294,211     $ 25,517,808     $ 4,587,769  

 

Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

 

 
23 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

For commercial and industrial and commercial real estate loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as needed basis depending on the specific circumstances of the loan.

 

For direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.

 

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of June 30, 2013 and December 31, 2012:

 

   

As of June 30, 2013

 
           

Commercial Real Estate

         
                   

Non Owner-Occupied

         

Internally Assigned Risk Rating

 

Commercial and Industrial

   

Owner-Occupied Commercial Real Estate

   

Commercial Construction, Land Development, and Other Land

   

Other Commercial Real Estate

   

Total

 
                                         

Pass (Ratings 1 through 5)

  $ 444,731,963     $ 254,134,556     $ 34,521,499     $ 374,410,742     $ 1,107,798,760  

Special Mention (Rating 6)

    10,507,646       3,349,849       6,843,887       8,026,958       28,728,340  

Substandard (Rating 7)

    15,176,747       9,442,687       6,648,291       26,627,405       57,895,130  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 470,416,356     $ 266,927,092     $ 48,013,677     $ 409,065,105     $ 1,194,422,230  

 

 

   

As of June 30, 2013

         

Delinquency Status *

 

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

         
                                         

Performing

  $ 114,054,183     $ 141,520,822     $ 73,124,630     $ 328,699,635          

Nonperforming

    700,574       1,572,520       1,444,125       3,717,219          
    $ 114,754,757     $ 143,093,342     $ 74,568,755     $ 332,416,854          

 

   

As of December 31, 2012

 
           

Commercial Real Estate

         
                   

Non Owner-Occupied

         

Internally Assigned Risk Rating

 

Commercial and Industrial

   

Owner-Occupied Commercial Real Estate

   

Commercial Construction, Land Development, and Other Land

   

Other Commercial Real Estate

   

Total

 
                                         

Pass (Ratings 1 through 5)

  $ 371,856,380     $ 195,567,523     $ 38,125,793     $ 312,370,393     $ 917,920,089  

Special Mention (Rating 6)

    8,008,866       5,488,602       1,238,152       7,319,902       22,055,522  

Substandard (Rating 7)

    14,379,006       3,855,183       5,598,436       24,415,255       48,247,880  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 394,244,252     $ 204,911,308     $ 44,962,381     $ 344,105,550     $ 988,223,491  

 

 

   

As of December 31, 2012

         

Delinquency Status *

 

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

         
                                         

Performing

  $ 102,686,854     $ 114,364,316     $ 75,921,358     $ 292,972,528          

Nonperforming

    998,802       1,217,257       799,156       3,015,215          
    $ 103,685,656     $ 115,581,573     $ 76,720,514     $ 295,987,743          

 

*Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing troubled debt restructurings.

 

 
24 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of June 30, 2013 and December 31, 2012, troubled debt restructurings totaled $9,918,012 and $12,958,374, respectively.

 

For each class of financing receivable, the following presents the number and recorded investment of troubled debt restructurings, by type of concession, that were restructured during the three and six months ended June 30, 2013 and 2012. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

 

   

For the three months ended June 30, 2013 

   

For the three months ended June 30, 2012 

 

Classes of Loans/Leases 

 

Number of Loans / Leases 

   

Pre-Modification Recorded Investment 

   

Post-Modification Recorded Investment 

   

Specific Allowance 

   

Number of Loans / Leases 

   

Pre-Modification Recorded Investment 

   

Post-Modification Recorded Investment 

   

Specific Allowance 

 
                                                                 

CONCESSION - Significant payment delay 

                                                               

Residential Real Estate 

    1     $ 91,581     $ 91,581     $ -       -     $ -     $ -     $ -  

Installment and Other Consumer 

    1       370,000       370,000       -       -       -       -       -  
      2     $ 461,581     $ 461,581     $ -       -     $ -     $ -     $ -  
                                                                 

CONCESSION - Interest rate adjusted below market 

                                                               

Commercial Construction, Land Development, and Other Land 

    1     $ 337,500     $ 337,500     $ -       -     $ -     $ -     $ -  

Residential Real Estate 

    1       160,627       160,627       -       -       -       -       -  
      2     $ 498,127     $ 498,127     $ -       -     $ -     $ -     $ -  
                                                                 

TOTAL 

    4     $ 959,708     $ 959,708     $ -       -     $ -     $ -     $ -  

 

 

   

For the six months ended June 30, 2013 

   

For the six months ended June 30, 2012 

 

Classes of Loans/Leases 

 

Number of Loans / Leases 

   

Pre-Modification Recorded Investment 

   

Post-Modification Recorded Investment 

   

Specific Allowance 

   

Number of Loans / Leases 

   

Pre-Modification Recorded Investment 

   

Post-Modification Recorded Investment 

   

Specific Allowance 

 
                                                                 

CONCESSION - Extension of maturity 

                                                               

Commercial and Industrial 

    3     $ 809,494     $ 809,494     $ 188,700       -     $ -     $ -     $ -  
      3     $ 809,494     $ 809,494     $ 188,700       -     $ -     $ -     $ -  
                                                                 

CONCESSION - Significant payment delay 

                                                               

Owner-Occupied Commercial Real Estate 

    1     $ 47,958     $ 47,958     $ -       -     $ -     $ -     $ -  

Residential Real Estate 

    1       91,581       91,581       -       -       -       -       -  

Installment and Other Consumer 

    1       370,000       370,000       -       -       -       -       -  

Commercial Construction, Land Development, and Other Land 

    -       -       -       -       2       200,000       200,000       144,000  
      3     $ 509,539     $ 509,539     $ -       2     $ 200,000     $ 200,000     $ 144,000  
                                                                 

CONCESSION - Interest rate adjusted below market 

                                                               

Commercial Construction, Land Development, and Other Land 

    1     $ 337,500     $ 337,500     $ -       1     $ 337,500     $ 337,500     $ -  

Residential Real Estate 

    1       160,627       160,627       -       1       167,739       167,739       -  

Installment and Other Consumer 

    -       -       -       -       1       16,043       16,043       -  
      2     $ 498,127     $ 498,127     $ -       3     $ 521,282     $ 521,282     $ -  
                                                                 

TOTAL 

    8     $ 1,817,160     $ 1,817,160     $ 188,700       5     $ 721,282     $ 721,282     $ 144,000  

 

Of the troubled debt restructurings reported above, three with post-modification recorded investments totaling $178,007 were on nonaccrual as of June 30, 2013, and two with post-modification recorded investments totaling $200,000 were on nonaccrual as of June 30, 2012.

 

For the three and six months ended June 30, 2013 and 2012, none of the Company’s troubled debt restructurings had redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

 

 
25 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 5 – JUNIOR SUBORDINATED DEBENTURES

 

As part of the acquisition of Community National, the Company assumed two junior subordinated debentures detailed as follows:

 

The first debenture assumed was issued in September 2004 in the amount of $3,093,000, and provides that interest is payable quarterly with the interest rate adjusted to equal three-month LIBOR plus 2.17% (2.45% at June 30, 2013). Principal is due September 20, 2034, but is callable at any time. The second debenture assumed was issued in March 2007 in the amount of $3,609,000, and provides that interest is payable quarterly with the interest rate adjusted to equal three-month LIBOR plus 1.75% (2.03% at June 30, 2013). Principal is due March 15, 2037, but is callable at any time.

 

Junior subordinated debentures are summarized as of June 30, 2013 and December 31, 2012 as follows:

 

   

2013

   

2012

 
                 

Note Payable to QCR Holdings Capital Trust II

  $ 12,372,000     $ 12,372,000  

Note Payable to QCR Holdings Capital Trust III

    8,248,000       8,248,000  

Note Payable to QCR Holdings Capital Trust IV

    5,155,000       5,155,000  

Note Payable to QCR Holdings Capital Trust V

    10,310,000       10,310,000  

Note Payable to Community National Trust II

    3,093,000       -  

Note Payable to Community National Trust III

    3,609,000       -  

Market Value Discount per ASC 805

    (2,576,825 )     -  
    $ 40,210,175     $ 36,085,000  
 

The fair value of Community National’s junior subordinated debentures totaled $4,125,175 at the acquisition date which resulted in a discount of $2,576,825. The discount will be accreted as interest expense on a level yield basis over the expected remaining term of the junior subordinated debentures.

 

A schedule of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities including the amounts outstanding as of June 30, 2013 and December 31, 2012, is as follows:

 

Name

Date Issued

 

Amount Issued

 

Interest Rate

 

Interest Rate as of 6/30/2013

   

Interest Rate as of 12/31/2012

 
                             

QCR Holdings Statutory Trust II

February 2004

  $ 12,372,000  

2.85% over 3-month LIBOR

    3.13 %     3.21 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000  

2.85% over 3-month LIBOR

    3.13 %     3.21 %

QCR Holdings Statutory Trust IV

May 2005

    5,155,000  

1.80% over 3-month LIBOR

    2.08 %     2.14 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000  

1.55% over 3-month LIBOR

    1.83 %     1.89 %

Community National Statutory Trust II

September 2004

    3,093,000  

2.17% over 3-month LIBOR

    2.45 %    

N/A

 

Community National Statutory Trust III

March 2007

    3,609,000  

1.75% over 3-month LIBOR

    2.03 %    

N/A

 
      $ 42,787,000  

Weighted Average Rate 

    2.55 %     2.68 %
 

Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but all are currently callable at par at any time. 

 

 
26 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 6 - EARNINGS PER SHARE

 

The following information was used in the computation of earnings per share on a basic and diluted basis:

 

   

Three months ended

June 30, 

   

Six months ended

June 30, 

 
   

2013  

   

2012  

   

2013  

   

2012  

 
                                 

Net income 

  $ 4,045,231     $ 3,273,379     $ 7,310,375     $ 6,676,228  

Less: Net income attributable to noncontrolling interests 

    -       201,223       -       367,254  

Net income attributable to QCR Holdings, Inc. 

  $ 4,045,231     $ 3,072,156     $ 7,310,375     $ 6,308,974  
                                 

Less: Preferred stock dividends 

    810,838       935,786       1,621,675       1,874,411  

Net income attributable to QCR Holdings, Inc. common stockholders 

  $ 3,234,393     $ 2,136,370     $ 5,688,700     $ 4,434,563  
                                 

Earnings per common share attributable to QCR Holdings, Inc. common stockholders 

                               

Basic 

  $ 0.60     $ 0.44     $ 1.10     $ 0.92  

Diluted 

  $ 0.59     $ 0.44     $ 1.08     $ 0.91  
                                 

Weighted average common shares outstanding 

    5,393,062       4,835,773       5,160,327       4,818,090  

Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan 

    104,213       66,080       105,482       49,538  

Weighted average common and common equivalent shares outstanding 

    5,497,275       4,901,853       5,265,809       4,867,628  

 

NOTE 7 – BUSINESS SEGMENT INFORMATION

 

Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters.

 

The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the four subsidiary banks wholly-owned by the Company: QCBT, CRBT, RB&T, and CNB (which was acquired on May 13, 2013). Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

 

The Company’s Wealth Management segment represents the trust and asset management and investment management and advisory services offered at the Company’s four subsidiary banks in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

 

 
27 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The Company’s All Other segment includes the operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds. This segment includes the corporate operations of the parent company.

 

Selected financial information on the Company’s business segments is presented as follows for the three and six months ended June 30, 2013 and 2012.

 

   

Commercial Banking

                                 
   

Quad City

Bank & Trust

   

Cedar Rapids

Bank & Trust

   

Rockford

Bank & Trust

   

Community

National Bank

   

Wealth

Management

   

All Other

   

Intercompany

Eliminations

   

Consolidated

Total

 

Three Months Ended June 30, 2013

                                                               

Total revenue

  $ 11,810,586     $ 6,468,480     $ 3,649,811     $ 1,672,243     $ 1,728,074     $ 6,439,309     $ (4,680,346 )   $ 27,088,157  

Net interest income

  $ 8,485,092     $ 3,951,787     $ 2,434,391     $ 1,225,612     $ -     $ (388,830 )   $ -     $ 15,708,052  

Net income attributable to QCR Holdings, Inc.

  $ 1,951,271     $ 1,624,472     $ 719,480     $ 239,902     $ 232,035     $ 4,045,231     $ (4,767,160 )   $ 4,045,231  

Total assets

  $ 1,226,928,751     $ 619,443,210     $ 333,996,843     $ 277,425,832     $ -     $ 211,484,709     $ (222,507,868 )   $ 2,446,771,477  

Provision for loan/lease losses

  $ 1,020,123     $ 100,000     $ 400,000     $ 14     $ -     $ -     $ -     $ 1,520,137  

Goodwill

  $ 3,222,688     $ -     $ -     $ -     $ -     $ -     $ -     $ 3,222,688  

Core deposit intangible

  $ -     $ -     $ -     $ 3,440,076     $ -     $ -     $ -     $ 3,440,076  
                                                                 

Three Months Ended June 30, 2012

                                                               

Total revenue

  $ 11,936,569     $ 6,536,887     $ 3,648,057     $ -     $ 1,531,560     $ 4,379,005     $ (4,430,041 )   $ 23,602,037  

Net interest income

  $ 8,532,585     $ 3,896,184     $ 2,458,333     $ -     $ -     $ (371,609 )   $ -     $ 14,515,493  

Net income attributable to QCR Holdings, Inc.

  $ 2,327,046     $ 1,413,869     $ 402,494     $ -     $ 156,523     $ 3,110,821     $ (4,338,597 )   $ 3,072,156  

Total assets

  $ 1,157,927,167     $ 581,059,340     $ 301,189,716     $ -     $ -     $ 194,399,498     $ (191,149,975 )   $ 2,043,425,746  

Provision for loan/lease losses

  $ 392,469     $ 225,000     $ 431,000     $ -     $ -     $ -     $ -     $ 1,048,469  

Goodwill

  $ 3,222,688     $ -     $ -     $ -     $ -     $ -     $ -     $ 3,222,688  
                                                                 

Six Months Ended June 30, 2013

                                                               

Total revenue

  $ 23,866,247     $ 13,396,831     $ 6,833,870     $ 1,672,243     $ 3,377,085     $ 11,171,879     $ (9,488,487 )   $ 50,829,668  

Net interest income

  $ 16,876,630     $ 7,796,669     $ 4,739,468     $ 1,225,612     $ -     $ (739,010 )   $ -     $ 29,899,369  

Net income attributable to QCR Holdings, Inc.

  $ 4,448,296     $ 3,345,283     $ 815,722     $ 239,902     $ 445,042     $ 7,310,375     $ (9,294,245 )   $ 7,310,375  

Total assets

  $ 1,226,928,751     $ 619,443,210     $ 333,996,843     $ 277,425,832     $ -     $ 211,484,709     $ (222,507,868 )   $ 2,446,771,477  

Provision for loan/lease losses

  $ 1,377,905     $ 400,000     $ 800,000     $ 14     $ -     $ -     $ -     $ 2,577,919  

Goodwill

  $ 3,222,688     $ -     $ -             $ -     $ -     $ -     $ 3,222,688  

Core deposit intangible

  $ -     $ -     $ -     $ 3,440,076     $ -     $ -     $ -     $ 3,440,076  
                                                                 

Six Months Ended June 30, 2012

                                                               

Total revenue

  $ 24,201,602     $ 13,123,036     $ 6,768,852     $ -     $ 2,936,754     $ 8,990,997     $ (9,088,522 )   $ 46,932,719  

Net interest income

  $ 16,921,627     $ 7,664,183     $ 4,891,039     $ -     $ -     $ (757,903 )   $ -     $ 28,718,946  

Net income attributable to QCR Holdings, Inc.

  $ 5,016,730     $ 2,681,135     $ 795,969     $ -     $ 316,406     $ 6,407,185     $ (8,908,451 )   $ 6,308,974  

Total assets

  $ 1,157,927,167     $ 581,059,340     $ 301,189,716     $ -     $ -     $ 194,399,498     $ (191,149,975 )   $ 2,043,425,746  

Provision for loan/lease losses

  $ 787,915     $ 575,000     $ 466,000     $ -     $ -     $ -     $ -     $ 1,828,915  

Goodwill

  $ 3,222,688     $ -     $ -     $ -     $ -     $ -     $ -     $ 3,222,688  
 

 
28 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 8 – FAIR VALUE

 

Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

 

 

 

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

 

 

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

 

 

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

Assets measured at fair value on a recurring basis comprise the following at June 30, 2013 and December 31, 2012:

 

           

Fair Value Measurements at Reporting Date Using

 
   

Fair Value

   

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

   

Significant

Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
                                 

June 30, 2013:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 380,915,891     $ -     $ 380,915,891     $ -  

Residential mortgage-backed and related securities

    178,545,554       -       178,545,554       -  

Municipal securities

    36,828,850       -       36,828,850       -  

Trust preferred securities

    216,200       -       216,200       -  

Other securities

    1,758,905       264,869       1,494,036       -  
    $ 598,265,400     $ 264,869     $ 598,000,531     $ -  
                                 

December 31, 2012:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 338,609,371     $ -     $ 338,609,371     $ -  

Residential mortgage-backed and related securities

    163,601,103       -       163,601,103       -  

Municipal securities

    26,185,736       -       26,185,736       -  

Trust preferred securities

    139,400       -       139,400       -  

Other securities

    1,624,376       234,453       1,389,923       -  
    $ 530,159,986     $ 234,453     $ 529,925,533     $ -  

 

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and six months ended June 30, 2013 and 2012.

 

 
29 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

A small portion of the securities available for sale portfolio consists of common stock issued by various unrelated bank holding companies. The fair values used by the Company are obtained from an independent pricing service and represent quoted market prices for the identical securities (Level 1 inputs).

 

The remainder of the securities available for sale portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

 

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2013 and December 31, 2012:

 

           

Fair Value Measurements at Reporting Date Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

June 30, 2013:

                               

Impaired loans/leases

  $ 16,005,797     $ -     $ -     $ 16,005,797  

Other real estate owned

    4,167,319       -       -       4,167,319  
    $ 20,173,116     $ -     $ -     $ 20,173,116  
                                 

December 31, 2012:

                               

Impaired loans/leases

  $ 18,054,234     $ -     $ -     $ 18,054,234  

Other real estate owned

    4,270,901       -       -       4,270,901  
    $ 22,325,135     $ -     $ -     $ 22,325,135  

 

Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy.  Fair value is measured based on the value of the collateral securing these loans/leases.  Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  

 

Other real estate owned in the table above consists of property acquired through foreclosures and settlements of loans.  Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company.  Appraised and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.

 

For the impaired loans/leases and other real estate owned, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

 

There have been no changes in valuation techniques used for any assets measured at fair value during the three and six months ended June 30, 2013 and 2012.

 

 
30 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

 

 

Fair Value

 

As of June 30, 2013

   

As of December 31, 2012

 
 

Hierarchy

 

Carrying

   

Estimated

   

Carrying

   

Estimated

 
 

Level

 

Value

   

Fair Value

   

Value

   

Fair Value

 
                                   

Cash and due from banks

Level 1

  $ 44,316,890     $ 44,316,890     $ 61,568,446     $ 61,568,446  

Federal funds sold

Level 2

    16,666,000       16,666,000       26,560,000       26,560,000  

Interest-bearing deposits at financial institutions

Level 2

    34,573,775       34,573,775       22,359,490       22,359,490  

Investment securities:

                                 

Held to maturity

Level 3

    105,201,749       99,500,594       72,079,385       73,005,706  

Available for sale

See Previous Table

    598,265,400       598,265,400       530,159,986       530,159,986  

Loans/leases receivable, net

Level 3

    14,820,182       16,005,797       16,716,883       18,054,234  

Loans/leases receivable, net

Level 2

    1,494,749,541       1,496,225,203       1,250,745,552       1,262,090,766  

Deposits:

                                 

Nonmaturity deposits

Level 2

    1,204,708,666       1,204,708,666       1,039,572,326       1,039,572,326  

Time deposits

Level 2

    512,071,244       517,791,000       334,541,774       337,343,000  

Short-term borrowings

Level 2

    157,186,204       157,186,204       171,082,961       171,082,961  

Federal Home Loan Bank advances

Level 2

    209,949,500       221,501,000       202,350,000       220,815,000  

Other borrowings

Level 2

    142,644,062       154,228,000       138,239,762       154,101,000  

Junior subordinated debentures

Level 2

    40,210,175       27,856,246       36,085,000       18,786,000  
 

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

 

Securities held to maturity: The fair values are estimated using pricing models that consider certain observable market data, however, as most of the securities have limited or no trading activity and are not rated, the fair value is partially dependent upon unobservable inputs.

 

Loans/leases receivable: The fair values for all types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market.

 

Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.

 

FHLB advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

 

Other borrowings: The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value.

 

Commitments to extend credit: The fair value of these commitments is not material.

 

 
31 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

QCR Holdings, Inc. is the parent company of QCBT, CRBT, RB&T, and as the result of the May 13, 2013 acquisition, CNB. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company’s acquisition of CNB.


QCBT and CRBT are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank. CNB is a national-chartered commercial bank headquartered in Iowa. All are members of the Federal Reserve System with depository accounts insured to the maximum amount permitted by law by the Federal Deposit Insurance Corporation (“FDIC”).

 

 

 

QCBT commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services, to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. QCBT also provides leasing services through its wholly-owned subsidiary, m2 Lease Funds, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC, which is an investment management and advisory company.

 

 

 

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services, to Cedar Rapids, Iowa and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. Previously, CRBT had provided residential real estate mortgage lending services through its 50%-owned joint venture, Cedar Rapids Mortgage Company. During the first quarter of 2013, CRBT and the partner mutually terminated the joint venture. CRBT continues to provide residential real estate mortgage lending services through its consumer banking division.

 

 

 

RB&T commenced operations in January 2005 and provides full-service commercial and consumer banking, and trust and asset management services, to Rockford, Illinois and adjacent communities through its main office located on Guilford Road at Alpine Road in Rockford and its branch facility in downtown Rockford.

 

 

 

CNB commenced operations in 1997 and provides full-service commercial and consumer banking, and trust and asset management services, to Cedar Falls, Mason City, and Waterloo, Iowa and Austin, Minnesota. CNB has a total of eight branch facilities with four in the Waterloo/Cedar Falls area which is where CNB is headquartered, two in Mason City, and two in Austin. Recently, CNB signed separate definite agreements to sell certain assets and liabilities of the two Mason City branches and the two Austin branches. The proposed transactions, which are subject to regulatory approval and customary closing conditions, are expected to be completed in the fourth quarter of 2013. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company’s sales of the Mason City and Austin branches.

 

 
32 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

OVERVIEW

 

The Company recognized net income and net income attributable to QCR Holdings, Inc. of $4.0 million for the quarter ended June 30, 2013. After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $3.2 million, or diluted earnings per common share of $0.59. By comparison, for the second quarter of 2012, the Company recognized net income of $3.3 million and net income attributable to QCR holdings, Inc. of $3.1 million, which excludes the net income attributable to noncontrolling interests of $201 thousand. After preferred stock dividends of $936 thousand, the Company reported net income attributable to common stockholders of $2.1 million, or diluted earnings per common share of $0.44. For the first half of 2013, the Company recognized net income and net income attributable to QCR Holdings, Inc. of $7.3 million, or diluted earnings per share of $1.08 after preferred stock dividends of $1.6 million. This is an increase of $1.0 million, or 16%, over the same period of 2012.

 

Following is a table that represents the various net income measurements for the Company.

 

   

For the three months ended

   

For the six months ended

 
   

June 30, 2013

   

June 30, 2012

   

June 30, 2013

   

June 30, 2012

 
                                 

Net income

  $ 4,045,231     $ 3,273,379     $ 7,310,375     $ 6,676,228  

Less: Net income attributable to noncontrolling interests

    -       201,223       -       367,254  

Net income attributable to QCR Holdings, Inc.

  $ 4,045,231     $ 3,072,156     $ 7,310,375     $ 6,308,974  
                                 

Less: Preferred stock dividends

    810,838       935,786       1,621,675       1,874,411  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 3,234,393     $ 2,136,370     $ 5,688,700     $ 4,434,563  
                                 

Diluted earnings per common share

  $ 0.59     $ 0.44     $ 1.08     $ 0.91  
                                 

Weighted average common and common equivalent shares outstanding

    5,497,275       4,901,853       5,265,809       4,867,628  

 

Following is a table that represents the major income and expense categories for the Company.

 

   

For the three months ended

   

For the six months ended

 
   

June 30, 2013

   

March 31, 2013

   

June 30, 2012

   

June 30, 2013

   

June 30, 2012

 
                                         

Net interest income 

  $ 15,708,052     $ 14,191,317     $ 14,515,493     $ 29,899,369     $ 28,718,946  

Provision for loan/lease losses 

    (1,520,137 )     (1,057,782 )     (1,048,469 )     (2,577,919 )     (1,828,915 )

Noninterest income 

    6,948,756       5,204,029       4,067,509       12,152,785       8,024,387  

Noninterest expense 

    (15,234,349 )     (13,958,500 )     (13,109,083 )     (29,192,849 )     (25,847,163 )

Federal and state income tax 

    (1,857,091 )     (1,113,920 )     (1,152,071 )     (2,971,011 )     (2,391,027 )

Net income 

  $ 4,045,231     $ 3,265,144     $ 3,273,379     $ 7,310,375     $ 6,676,228  

 

With the acquisition of Community National and CNB on May 13, 2013, the Company’s quarterly results include a partial quarter of CNB’s earnings. Specifically, CNB recognized net income of $240 thousand.

 

In comparing quarter-over-quarter, following are some noteworthy fluctuations:

 

 

 

Net interest income grew $1.5 million, or 11%, propelled by the addition of CNB for the partial quarter as well as organic growth in earning assets.

 

 

Provision for loan/lease losses (“provision”) increased $462 thousand as specific reserves were established for certain commercial credits at the Company’s largest bank.

 

 

Noninterest income increased $1.7 million, or 34%, which consisted primarily of a bargain purchase gain ($1.8 million) that was recorded on the Community National acquisition.

 

 

The Company incurred $1.3 million more in noninterest expenses as a result of the acquisition of CNB’s existing cost structure, as well as additional acquisition related expenses.

 

 
33 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NET INTEREST INCOME

 

Net interest income, on a tax equivalent basis, increased $1.4 million, or 9%, to $16.4 million for the quarter ended June 30, 2013, from $15.0 million for the same period of 2012. The increase in net interest income was driven by the addition of CNB for a partial quarter ($1.2 million at a net interest margin of approximately 3.72%). Exclusive of CNB, the Company was successful in growing net interest income. This was the result of organic loan/lease growth and continued reductions in the cost of deposits as well as growth in noninterest bearing deposits more than offsetting the impact of declining yields on loans.

 

A comparison of yields, spread and margin from the second quarter of 2013 to the second quarter of 2012 is as follows (on a tax equivalent basis):

 

 

 

The average yield on interest-earning assets decreased 48 basis points.

 

 

The average cost of interest-bearing liabilities decreased 32 basis points.

 

 

The net interest spread declined 16 basis points from 2.88% to 2.72%.

 

 

The net interest margin declined 22 basis points from 3.21% to 2.99%.

 

Net interest income, on a tax equivalent basis, increased $1.6 million, or 5%, to $31.1 million for the first half of 2013, from $29.5 million for the same period of 2012. The increase in net interest income was driven primarily by the addition of CNB for a partial quarter ($1.2 million at a net interest margin of approximately 3.72%). As with the quarterly comparison, the Company expanded net interest income excluding CNB through organic earning asset growth and declining cost of funds more than offsetting the continued declining yields on loans.

 

A comparison of yields, spread and margin from the first half of 2013 to the same period of 2012 is as follows (on a tax equivalent basis):

 

 

 

The average yield on interest-earning assets decreased 41 basis points.

 

 

The average cost of interest-bearing liabilities decreased 28 basis points.

 

 

The net interest spread declined 13 basis points from 2.84% to 2.71%.

 

 

The net interest margin declined 16 basis points from 3.16% to 3.00%.

 

The Company’s management closely monitors and manages net interest margin. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their net interest margins. Management continually addresses this issue with pricing and other balance sheet management strategies. As an example, during the first quarter of 2013, QCBT modified $50.0 million of fixed rate wholesale structured repurchase agreements (“structured repos”) with a weighted average interest rate of 3.21% and a weighted average maturity of February 2016 into new fixed rate structured repos with a weighted average interest rate of 2.65% and a weighted average maturity of May 2020. This modification serves to reduce interest expense and improve net interest margin, and minimizes the exposure to rising rates through duration extension of fixed rate liabilities.

 

Over the past several years, the Company’s management has emphasized improving its funding mix by reducing its reliance on long-term wholesale funding, which tends to be at a higher cost than deposits. In addition, with deposit growth continuing to outpace loan growth, the Company’s management has focused on growing and diversifying its securities portfolio.

 

 

 
34 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:

 

   

For the three months ended June 30,

 
   

2013

   

2012

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Earned

   

Yield or

   

Average

   

Earned

   

Yield or

 
   

Balance

   

or Paid

   

Cost

   

Balance

   

or Paid

   

Cost

 
                                                 
   

(dollars in thousands)

 

ASSETS

                                               

Interest earning assets:

                                               

Federal funds sold

  $ 8,410     $ 3       0.14 %   $ -     $ -       0.00 %

Interest-bearing deposits at financial institutions

    35,158       62       0.71 %     36,478       92       1.01 %

Investment securities (1)

    714,808       4,040       2.27 %     615,089       3,569       2.33 %

Restricted investment securities

    16,531       131       3.18 %     15,282       165       4.34 %

Gross loans/leases receivable (1) (2) (3)

    1,418,389       16,530       4.67 %     1,211,595       16,165       5.37 %
                                                 

Total interest earning assets

  $ 2,193,296       20,766       3.80 %   $ 1,878,444       19,991       4.28 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 41,791                     $ 39,896                  

Premises and equipment

    35,698                       31,529                  

Less allowance for estimated losses on loans/leases…

    (22,192 )                     (19,183 )                

Other

    74,743                       74,938                  
                                                 

Total assets

  $ 2,323,336                     $ 2,005,624                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 632,932       398       0.25 %   $ 532,718       722       0.55 %

Time deposits

    416,085       779       0.75 %     354,285       908       1.03 %

Short-term borrowings

    195,202       103       0.21 %     179,979       77       0.17 %

Federal Home Loan Bank advances

    216,725       1,727       3.20 %     205,162       1,829       3.59 %

Junior subordinated debentures

    41,398       261       2.53 %     36,085       259       2.89 %

Other borrowings

    140,091       1,163       3.33 %     136,648       1,224       3.60 %
                                                 

Total interest-bearing liabilities

  $ 1,642,433       4,431       1.08 %   $ 1,444,877       5,019       1.40 %
                                                 

Noninterest-bearing demand deposits

  $ 502,078                     $ 391,475                  

Other noninterest-bearing liabilities

    32,154                       25,331                  

Total liabilities

  $ 2,176,665                     $ 1,861,683                  
                                                 

Stockholders' equity

    146,671                       143,941                  
                                                 

Total liabilities and stockholders' equity

  $ 2,323,336                     $ 2,005,624                  
                                                 

Net interest income

          $ 16,335                     $ 14,972          
                                                 

Net interest spread

                    2.72 %                     2.88 %
                                                 

Net interest margin

                    2.99 %                     3.21 %
                                                 

Ratio of average interest-earning assets to average interest-bearing liabilities

    133.54 %                     130.01 %                

 

(1) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate.

(2) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 

 
35 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Analysis of Changes of Interest Income/Interest Expense

For the three months ended June 30, 2013  

 

 

   

Inc./(Dec.)

   

Components

 
   

from

   

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2013 vs. 2012

 
   

(dollars in thousands)

 

INTEREST INCOME

                       

Federal funds sold

  $ 3     $ -     $ 3  

Interest-bearing deposits at financial institutions

    (30 )     (27 )     (3 )

Investment securities (2)

    471       (628 )     1,099  

Restricted investment securities

    (34 )     (109 )     75  

Gross loans/leases receivable (3) (4) (5)

    365       (9,392 )     9,757  
                         

Total change in interest income

  $ 775     $ (10,156 )   $ 10,931  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ (324 )   $ (1,049 )   $ 725  

Time deposits

    (129 )     (854 )     725  

Short-term borrowings

    26       19       7  

Federal Home Loan Bank advances

    (102 )     (613 )     511  

Junior subordinated debentures

    2       (139 )     141  

Other borrowings

    (61 )     (232 )     171  
                         

Total change in interest expense

  $ (588 )   $ (2,868 )   $ 2,280  
                         

Total change in net interest income

  $ 1,363     $ (7,288 )   $ 8,651  

 

(1)

The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume. 

 

(2)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate.

 

(3)

Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

 

(4)

Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 

 
36 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

   

For the six months ended June 30,

 
   

2013

   

2012

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Earned

   

Yield or

   

Average

   

Earned

   

Yield or

 
   

Balance

   

or Paid

   

Cost

   

Balance

   

or Paid

   

Cost

 
                                                 
   

(dollars in thousands)

 

ASSETS

                                               

Interest earning assets:

                                               

Federal funds sold

  $ 5,379     $ 4       0.15 %   $ -     $ -       0.00 %

Interest-bearing deposits at financial institutions

    36,496       122       0.67 %     60,423       213       0.71 %

Investment securities (1)

    681,723       7,697       2.28 %     595,810       6,959       2.35 %

Restricted investment securities

    15,973       256       3.23 %     15,281       246       3.24 %

Gross loans/leases receivable (1) (2) (3)

    1,348,715       31,782       4.75 %     1,204,820       32,297       5.39 %
                                                 

Total interest earning assets

    2,088,286       39,861       3.85 %   $ 1,876,334       39,715       4.26 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 40,849                     $ 40,459                  

Premises and equipment

    33,450                       31,600                  

Less allowance for estimated losses on loans/leases…

    (21,208 )                     (19,047 )                

Other

    75,297                       75,837                  
                                                 

Total assets

  $ 2,216,674                     $ 2,005,183                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 597,918       807       0.27 %   $ 536,976       1,465       0.55 %

Time deposits

    374,890       1,487       0.80 %     350,043       1,880       1.08 %

Short-term borrowings

    185,454       167       0.18 %     179,480       142       0.16 %

Federal Home Loan Bank advances

    209,672       3,460       3.33 %     205,650       3,693       3.61 %

Junior subordinated debentures

    38,742       502       2.61 %     36,085       527       2.94 %

Other borrowings (4)

    139,151       2,354       3.41 %     136,273       2,482       3.66 %
                                                 

Total interest-bearing liabilities

    1,545,826       8,777       1.14 %   $ 1,444,507       10,189       1.42 %
                                                 

Noninterest-bearing demand deposits

    494,671                     $ 390,748                  

Other noninterest-bearing liabilities

    32,250                       26,046                  

Total liabilities

    2,072,747                     $ 1,861,301                  
                                                 

Stockholders' equity

    143,927                       143,882                  
                                                 

Total liabilities and stockholders' equity

    2,216,674                     $ 2,005,183                  
                                                 

Net interest income

          $ 31,084                     $ 29,526          
                                                 

Net interest spread

                    2.71 %                     2.84 %
                                                 

Net interest margin

                    3.00 %                     3.16 %
                                                 

Ratio of average interest-earning assets to average interest-bearing liabilities

    135.09 %                     129.89 %                

 

(1)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate.

(2)

Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(3)

Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 

 
37 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Analysis of Changes of Interest Income/Interest Expense

For the six months ended June 30, 2013

 

   

Inc./(Dec.)

   

Components

 
   

from

   

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2013 vs. 2012

 
   

(dollars in thousands)

                 

INTEREST INCOME

                       

Federal funds sold

  $ 4     $ -     $ 4  

Interest-bearing deposits at financial institutions

    (91 )     (10 )     (81 )

Investment securities (2)

    738       (578 )     1,316  

Restricted investment securities

    10       (1 )     11  

Gross loans/leases receivable (3) (4) (5)

    (515 )     (7,983 )     7,468  
                         

Total change in interest income

  $ 146     $ (8,572 )   $ 8,718  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ (658 )   $ (1,083 )   $ 425  

Time deposits

    (393 )     (730 )     337  

Short-term borrowings

    25       20       5  

Federal Home Loan Bank advances

    (233 )     (419 )     186  

Junior subordinated debentures

    (25 )     (109 )     84  

Other borrowings (5)

    (128 )     (259 )     131  
                         

Total change in interest expense

  $ (1,412 )   $ (2,580 )   $ 1,168  
                         

Total change in net interest income

  $ 1,558     $ (5,992 )   $ 7,550  

 

 

 

(1)

The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

(2)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate.

(3)

Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(4)

Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

 
38 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

 

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for estimated losses on loans/leases (“allowance”). The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Management may report a materially different amount for the provision in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance. Although management believes the level of the allowance as of June 30, 2013 is adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

 

The Company’s assessment of other-than-temporary impairment of its available-for-sale securities portfolio is another critical accounting policy as a result of the level of judgment required by management. Available-for-sale securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary. In estimating other-than-temporary impairment losses, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the intent of the Company to not sell the security prior to recovery and whether it is not more-likely-than-not that the Company will be required to sell the security prior to recovery. The discussion regarding the Company’s assessment of other-than-temporary impairment should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein.

 

 
39 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

RESULTS OF OPERATIONS

 

INTEREST INCOME

 

Interest income grew $604 thousand, or 3%, comparing the second quarter of 2013 to the same period of 2012. For the first half of 2013, interest income declined $231 thousand, or 1%, compared to the same period of 2012. Excluding CNB’s interest income for the partial quarter which totaled $1.3 million, the trend in declining interest income continued as the effect of declines in loan and securities yields, caused primarily by the continuing low interest rate environment, more than offset the growth in loans and securities. The Company continues to focus on diversifying its securities portfolio, including increasing its portfolio of agency-sponsored mortgage-backed securities as well as municipal securities. Of the latter, all are located in the Midwest with strong underwriting conducted before investment.

 

The Company intends to continue to grow quality loans and leases as well as to diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.

 

INTEREST EXPENSE

 

Interest expense for the second quarter of 2013 declined $588 thousand, or 12%, from the second quarter of 2012. For the first half of 2013, the Company’s interest expense fell $1.4 million, or 14%, compared to the first half of 2012. CNB’s interest expense for the partial second quarter of 2013 totaled $115 thousand which is exclusively cost of deposits as CNB has no borrowings. The Company has been successful in maintaining pricing discipline on deposits and decreasing the cost of borrowings, which has contributed to the decline in interest expense. Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have not been replaced, or, to a lesser extent, have been replaced at significantly reduced cost. Additionally, over the recent years, the Company has been successful in modifying a portion of its wholesale funding portfolio which serves to reduce interest expense through extending maturities while minimizing the exposure to rising rates.

 

Management continues to consider strategies to accelerate the reduction of the reliance on wholesale funding and continue the shift in mix to a funding base consisting of a higher percentage of core deposits, including noninterest-bearing deposits.

 

 
40 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

PROVISION FOR LOAN/LEASE LOSSES

 

The provision is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.

 

Provision totaled $1.5 million for the second quarter of 2013, which is up $462 thousand from the prior quarter, and an increase of $472 thousand from the second quarter of 2012. For the first half of 2013, the Company’s provision totaled $2.6 million which is an increase of $749 thousand, or 41%, from the same period of 2012. The increased provision in the second quarter of 2013 was the result of specific reserves established on certain, isolated commercial credits at the Company’s largest subsidiary bank. With the provision of $1.5 million more than offsetting the net charge-offs totaling $1.1 million (only 8 basis points of average loans/leases during the current quarter), the Company’s allowance grew to $21.2 million at June 30, 2013. In accordance with generally accepted accounting principles for acquisition accounting, CNB’s loans are recorded at fair value; therefore, there is no allowance associated with CNB’s loans at June 30, 2013. As a result, the Company’s allowance to total loans/leases fell to 1.38% from 1.61% at March 31, 2013, and from 1.54% at June 30, 2012. Had CNB’s loans remained at their historical carrying value with the related allowance as of the acquisition, the allowance to total loans/leases would be approximately 1.60%. Further, the Company’s allowance to total nonperforming loans/leases was 71% at June 30, 2013 which is down from 105% at March 31, 2013 and up from 69% at June 30, 2012. Similarly, adjusting for CNB’s loans at their historical carrying value with the related allowance as of the acquisition, the resulting ratio of allowance to nonperforming loans/leases would increase to approximately 82%.

 

A more detailed discussion of the Company’s allowance can be found in the “Financial Condition” section of this report.

 

 
41 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

NONINTEREST INCOME

 

The following tables set forth the various categories of noninterest income for the three and six months ended June 30, 2013 and 2012.

 

   

Three Months Ended

                 
   

June 30, 2013

   

June 30, 2012

   

$ Change

   

% Change

 
                                 

Trust department fees 

  $ 1,197,181     $ 852,234     $ 344,947       40.5

% 

Investment advisory and management fees 

    695,094       679,326       15,768       2.3  

Deposit service fees 

    1,054,223       875,073       179,150       20.5  

Gains on sales of residential real estate loans 

    246,621       271,333       (24,712 )     (9.1 )

Gains on sales of government guaranteed portions of loans 

    765,738       610,988       154,750       25.3  

Earnings on bank-owned life insurance 

    423,883       358,660       65,223       18.2  

Credit card fees, net of processing costs 

    85,017       142,173       (57,156 )     (40.2 )

Subtotal 

  $ 4,467,757     $ 3,789,787     $ 677,970       17.9  

Losses on other real estate owned, net 

    (83,339 )     (389,465 )     306,126       (78.6 )

Securities gains 

    16,460       104,600       (88,140 )     (84.3 )

Bargain purchase gain on Community National acquisition 

    1,841,385       -       1,841,385       100.0  

Other 

    706,493       562,587       143,906       25.6  

Total noninterest income 

  $ 6,948,756     $ 4,067,509     $ 2,881,247       70.8

% 

 

 

   

Six Months Ended

                 
   

June 30, 2013 

   

June 30, 2012 

   

$ Change 

   

% Change 

 
                                 

Trust department fees 

  $ 2,236,851     $ 1,735,966     $ 500,885       28.9

% 

Investment advisory and management fees 

    1,304,435       1,200,788       103,647       8.6  

Deposit service fees 

    1,962,046       1,779,479       182,567       10.3  

Gains on sales of residential real estate loans 

    537,772       562,766       (24,993 )     (4.4 )

Gains on sales of government guaranteed portions of loans 

    1,610,962       718,645       892,316       124.2  

Earnings on bank-owned life insurance 

    862,570       797,062       65,508       8.2  

Credit card fees, net of processing costs 

    134,971       269,188       (134,217 )     (49.9 )

Subtotal 

  $ 8,649,607     $ 7,063,894     $ 1,585,713       22.4  

Losses on other real estate owned, net 

    (529,969 )     (578,669 )     48,700       (8.4 )

Securities gains 

    16,460       104,600       (88,140 )     (84.3 )

Bargain purchase gain on Community National acquisition 

    1,841,385       -       1,841,385       100.0  

Other 

    2,175,302       1,434,562       740,740       51.6  

Total noninterest income 

  $ 12,152,785     $ 8,024,387     $ 4,128,398       51.4

% 

 

Trust department fees continue to be a significant contributor to noninterest income. Trust department fees grew 40% from the second quarter of 2012 to the second quarter of 2013. For the first half of 2013, trust department fees are up 29% compared to the same period of 2012. CNB recognized $164 thousand of trust department fees for the partial second quarter. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As markets have strengthened with the national economy’s continued recovery from recession, the Company’s fee income has experienced similar growth. Additionally, the Company has been successful in expanding its customer base, which has helped to drive the recent increases in fee income.

 

 
 42

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

In recent years, the Company has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Fee income for investment advisory and management services grew 2% comparing the second quarter of 2013 to the same period of 2012, and grew 9% in the first half of 2013 over the first half of 2012. CNB does not currently provide investment advisory and management services; however, the Company expects to leverage its existing infrastructure to efficiently offer these services in the communities served by CNB. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. Continued expansion of the customer base has helped drive the recent increases in fee income.

 

As management focuses on growing fee income, expanding market share in trust and investment advisory services across all of the Company’s markets will continue to be a primary strategic focus.

 

Deposit service fees have generally expanded over the past several years. This expansion continued into the second quarter of 2013 with increases of 20% quarter-over-quarter and 10% year-over-year. CNB’s deposit service fees for the partial second quarter were $125 thousand. Excluding CNB, the Company organically grew deposit service fees in the second quarter. The Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits. With this shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

 

Gains on sales of residential real estate loans fell 9% comparing second quarter of 2013 to second quarter of 2012, and were down 4% year-over-year. With the sustained historically low interest rate environment, refinancing activity has slowed as most of the Company’s existing and prospective customers have already executed a refinancing.

 

As one of its core strategies, the Company continues to leverage its small business lending expertise by taking advantage of programs offered by the Small Business Administration (“SBA”) and the United States Department of Agriculture (“USDA”). The Company’s portfolio of government guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government guaranteed portions of the loans on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government guaranteed portions of loans tends to fluctuate depending on the demand for small business loans that fit the criteria for the government guarantee. Further, some of the transactions can be large and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can be large. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing. Despite the fluctuation, the Company will continue to focus on growing small business lending and selling the government guaranteed portion as it continues to be beneficial.

 

During the first quarter of 2013, the Company wrote down one existing individual other real estate owned (“OREO”) property by $463 thousand as a result of a further decline in appraised value. Management continues to proactively manage its OREO portfolio in an effort to sell the properties timely at minimal loss.

 

 
43 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

In accordance with acquisition accounting rules, the Company recognized a bargain purchase gain of $1.8 million in recording the acquisition of Community National. The Company adjusted the acquired assets and assumed liabilities to fair value as determined by an independent valuation specialist. The gain resulted primarily from the recording of a core deposit intangible based on the value of the acquired deposit portfolio, and the recognition of a discount on the trust preferred securities that were previously issued by Community National and were assumed by the Company in the transaction. Net of other more modest valuation adjustments, and the resulting deferred income tax liabilities, the $1.8 million bargain purchase gain was included noninterest income. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company’s acquisition of Community National.

 

The following table sets forth the various categories of other noninterest income for the three and six months ended June 30, 2013 and 2012.

 

   

Three Months Ended

                 
   

June 30, 2013 

   

June 30, 2012 

   

$ Change 

   

% Change 

 
                                 

Debit card fees 

  $ 257,200     $ 251,800     $ 5,400       2.1

% 

Fees on interest rate swaps on commercial loans 

    -       -       -       -  

Miscellaneous 

    449,293       310,787       138,506       44.6  

Other noninterest income 

  $ 706,493     $ 562,587     $ 143,906       25.6

% 

 

 

   

Six Months Ended 

                 
   

June 30, 2013 

   

June 30, 2012 

   

$ Change 

   

% Change 

 
                                 

Gain on sale of credit card portfolio 

  $ 495,405     $ -     $ 495,405       100.0

% 

Gain on sale of credit card issuing operations 

    355,268       -       355,268       100.0  

Debit card fees 

    487,100       489,600       (2,500 )     (0.5 )

Fees on interest rate swaps on commercial loans 

    6,720       206,640       (199,920 )     (96.7 )

Miscellaneous 

    830,809       738,322       92,487       12.5  

Other noninterest income 

  $ 2,175,302     $ 1,434,562     $ 740,740       51.6

% 

 

During the first quarter of 2013, QCBT sold its credit card loan portfolio for a pre-tax gain on sale of $495 thousand. In addition, QCBT sold its credit card issuing operations to the same purchaser for a pre-tax gain on sale of $355 thousand. The latter was the primary reason for the decline in the credit card fees, net of processing costs, during the first half of 2013.

 

In recent years as a result of the sustained historically low interest rate environment, CRBT has introduced the execution of interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while CRBT receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position CRBT more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all four of its subsidiary banks as the circumstances are appropriate for the borrower and the Company.

 

 
44 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONINTEREST EXPENSE

 

The following tables set forth the various categories of noninterest expense for the three and six months ended June 30, 2013 and 2012.

 

   

Three Months Ended

                 
   

June 30, 2013

   

June 30, 2012

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits

  $ 9,186,233     $ 8,255,639     $ 930,594       11.3

%

Occupancy and equipment expense 

    1,586,841       1,364,912       221,929       16.3  

Professional and data processing fees 

    1,438,753       1,126,877       311,876       27.7  

FDIC and other insurance 

    627,390       576,215       51,175       8.9  

Loan/lease expense 

    251,868       263,166       (11,298 )     (4.3 )

Advertising and marketing 

    412,041       344,100       67,941       19.7  

Postage and telephone 

    257,611       236,942       20,669       8.7  

Stationery and supplies 

    150,718       135,211       15,507       11.5  

Bank service charges 

    284,345       198,492       85,853       43.3  

Subtotal 

  $ 14,195,800     $ 12,501,554     $ 1,694,246       13.6  

Acquisition costs 

    432,326       -       432,326       100.0  

Other-than-temporary impairment losses on securities 

    -       62,400       (62,400 )     (100.0 )

Other 

    606,223       545,129       61,094       11.2  

Total noninterest expense 

  $ 15,234,349     $ 13,109,083     $ 2,125,266       16.2

%

 

   

Six Months Ended

                 
   

June 30, 2013

   

June 30, 2012

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits 

  $ 17,928,916     $ 16,380,319     $ 1,548,597       9.5

%

Occupancy and equipment expense 

    3,015,711       2,717,175       298,536       11.0  

Professional and data processing fees 

    2,578,814       2,277,067       301,747       13.3  

FDIC and other insurance 

    1,183,301       1,157,071       26,230       2.3  

Loan/lease expense 

    496,959       481,900       15,059       3.1  

Advertising and marketing 

    676,609       620,116       56,493       9.1  

Postage and telephone 

    476,302       525,182       (48,880 )     (9.3 )

Stationery and supplies 

    261,388       278,177       (16,789 )     (6.0 )

Bank service charges 

    559,840       398,221       161,619       40.6  

Subtotal 

  $ 27,177,840     $ 24,835,228     $ 2,342,612       9.4  

Acquisition costs 

    788,904       -       788,904       100.0  

Other-than-temporary impairment losses on securities 

    -       62,400       (62,400 )     (100.0 )

Other 

    1,226,105       949,535       276,570       29.1  

Total noninterest expense 

  $ 29,192,849     $ 25,847,163     $ 3,345,686       12.9

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. The addition of CNB’s cost structure for the partial second quarter impacts the Company’s noninterest expenses. Management fully intends to continue to execute the integration plan for CNB over the next few quarters and increase efficiency and realize cost savings.

 

 

 
45 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the second quarter of 2012 to the second quarter of 2013 by 11%, and increased from the first half of 2012 to the first half of 2013 by 10%. This increase is largely the result of:

 

 

 

Addition of CNB’s cost structure for a partial quarter. Specifically, CNB incurred salaries and benefits cost of $691 thousand for the partial second quarter.

 

 

Customary annual salary and benefits increases for the majority of the Company’s employee base in 2013.

 

 

Continued increases in health insurance-related employee benefits for the majority of the Company’s employee base.

 

 

Targeted talent additions in early 2012. Specifically, the Company added four business development officers (three in the Wealth Management Division and one in the Correspondent Banking Division) in an effort to continue to grow market share.

 

Occupancy and equipment expense increased from the prior year with the purchases of additional technology for enhanced customer service and for improved fraud detection and prevention systems. In addition, the largest branch of RB&T was renovated to allow for existing and future expansion. Lastly, CNB’s occupancy and equipment expense totaled $131 thousand for the partial second quarter.

 

Professional and data processing fees increased from prior year primarily due to the addition of CNB’s cost structure. CNB incurred $163 thousand of professional and data processing fees for the partial second quarter. The remaining increase was the result of one-time expenses.

 

FDIC and other insurance expense has generally fallen over the past several years since the FDIC modified its assessment calculation to more closely align with bank performance and risk. CNB incurred $39 thousand of FDIC and other insurance expense for the partial second quarter. Excluding CNB, the expense was relatively flat from quarter-to-quarter and year-over-year.

 

Bank service charges, which include costs incurred to provide services to QCBT’s correspondent banking customer portfolio, have increased over the past several quarters. The increase is due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio over the recent years.

 

With the acquisition of Community National on May 13, 2013, the Company incurred acquisition costs totaling $432 thousand for the second quarter of 2013, and $789 thousand for the first half of 2013. In accordance with generally accepted accounting principles, the Company expensed these costs as incurred. With the conversion of CNB’s systems set to occur over the second half of 2013, management expects to incur further acquisition related costs.

 

In conjunction with the sales of QCBT’s credit card loan portfolio and issuing operations in the first quarter of 2013, the Company incurred pre-tax expenses related to those transactions totaling $257 thousand ($143 thousand in other noninterest expenses and $114 thousand of professional fees).

 

 

 
46 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

INCOME TAXES

 

The provision for income taxes totaled $1.9 million, or an effective tax rate of 31%, for the second quarter of 2013 compared to $1.2 million, or an effective tax rate of 26%, for the same quarter in 2012. For the first half of 2013, provision for income taxes totaled $3.0 million, or an effective tax rate of 29%, compared to $2.4 million, or an effective tax rate of 26%, for the first half of 2012. The increases in effective tax rate are the result of the following:

 

 

 

The acquisition costs incurred are capitalized for tax purposes; therefore, the Company’s taxable income is not reduced for these costs; and

 

 

CNB’s effective tax rate for the partial second quarter was 38%. CNB has a smaller proportion of tax exempt income from securities and loans as compared to the Company’s legacy banks.

 

FINANCIAL CONDITION

 

Following is a table that represents the major categories of the Company’s balance sheet.

 

    As of  
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                                                 
   

(dollars in thousands)

 
                                                 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Cash, federal funds sold, and interest-bearing deposits

  $ 95,557       4 %   $ 110,488       5 %   $ 83,717       4 %

Securities

    703,467       29 %     602,239       29 %     638,838       31 %

Net loans/leases

    1,509,570       62 %     1,267,462       61 %     1,194,579       58 %

Other assets

    138,177       5 %     113,541       5 %     126,292       7 %

Total assets

  $ 2,446,771       100 %   $ 2,093,730       100 %   $ 2,043,426       100 %
                                                 

Total deposits

  $ 1,716,780       70 %   $ 1,374,114       66 %   $ 1,315,470       64 %

Total borrowings

    549,990       22 %     547,758       26 %     563,470       28 %

Other liabilities

    34,555       1 %     31,424       1 %     25,164       1 %

Total stockholders' equity

    145,446       6 %     140,434       7 %     139,322       7 %

Total liabilities and stockholders' equity

  $ 2,446,771       100 %   $ 2,093,730       100 %   $ 2,043,426       100 %

 

During the second quarter of 2013, the Company’s total assets grew $302.8 million, or 14%, to a total of $2.45 billion. Excluding the impact of the CNB acquisition, the Company grew total assets organically by $25.4 million, or 1%. Loans/leases grew $238.5 million, or 19%, with $190.7 million attributed to CNB and $47.8 million, or 4%, of organic growth. Most of the organic loan/lease growth was funded with deposits (organic growth of $50.7 million, or 4%) and proceeds from calls, maturities, or sales of securities (decline of the existing portfolio by $33.5 million, or 5%).

 

 

 
47 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on asset-liability position and maximizing return. With the strong growth in deposits more than offsetting the pace of loan growth over the past several years, the Company has grown and diversified its securities portfolio, including increasing the portfolio of agency-sponsored mortgage-backed securities as well as more than tripling the portfolio of municipal securities. Of the latter, the large majority are located in the Midwest with some in or near the Company’s existing markets and require a thorough underwriting process before investment. As the portfolio has grown over recent years, management has elevated its focus on maximizing return while minimizing credit and interest rate risk. Additionally, management will continue to diversify the portfolio with further growth strictly dictated by the pace of growth in deposits and loans. Ideally, management expects to fund future loan growth partially with cash flow from the securities portfolio (calls and maturities of government sponsored agencies and/or paydowns on residential mortgage-backed securities).

 

Following is a breakdown of the Company’s securities portfolio by type, the percentage of unrealized gains (losses) to amortized cost on the total portfolio, and the portfolio duration:

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
                   

(dollars in thousands)

                         

U.S. govt. sponsored agency securities

  $ 380,916       54 %   $ 338,609       57 %   $ 389,600       61 %

Residential mortgage-backed and related securities

    178,546       25 %     163,601       27 %     165,827       26 %

Municipal securities

    141,381       21 %     97,615       16 %     81,072       13 %

Other securities

    2,624       0 %     2,414       0 %     2,339       0 %
    $ 703,467       100 %   $ 602,239       100 %   $ 638,838       100 %
                                                 

As a % of Total Assets

    28.75 %             28.76 %             31.26 %        

Net Unrealized Gains/(Losses) as a % of Amortized Cost

    -2.88 %             1.44 %             1.15 %        

Duration (in years)

    4.1               2.8               2.7          

 

With the increase in long-term interest rates during the second quarter of 2013, the Company’s securities portfolio shifted from a net unrealized gain position to a net unrealized loss position. Management expected this shift to occur with the increase in long-term interest rates. Management performs an evaluation of the portfolio quarterly to understand the current market value as well as projections of market value in a variety of rising and falling interest rate scenarios. In addition, management has evaluated those securities with an unrealized loss position to determine whether the loss is derived from credit deterioration or the movement in interest rates. The evaluation determined that there were no securities with other-than-temporary impairment. See the “Critical Accounting Policies” section for further discussion on this evaluation.

 

The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.

 

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.

 

 

 
48 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Total loans/leases grew $238.5 million, or 19%, during the second quarter of 2013, with $190.7 million attributed to CNB with the remainder consisting of organic growth ($47.8 million, or 4%). Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more commercial and industrial loans, owner-occupied commercial real estate loans, and leases and fewer non owner-occupied commercial real estate and construction loans. The addition of CNB’s portfolio helped maintain this shift in mix as CNB’s portfolio mix is similar to the three legacy banks. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
                                                 
   

(dollars in thousands)

 
                                                 

Commercial and industrial loans

  $ 470,416       31 %   $ 394,244       31 %   $ 350,780       29 %

Commercial real estate loans

    724,006       47 %     593,979       46 %     576,287       48 %

Direct financing leases

    114,755       8 %     103,686       8 %     98,568       8 %

Residential real estate loans

    143,093       9 %     115,582       9 %     107,450       9 %

Installment and other consumer loans

    74,569       5 %     76,720       6 %     77,417       6 %
                                                 

Total loans/leases

  $ 1,526,839       100 %   $ 1,284,211       100 %   $ 1,210,502       100 %
                                                 

Plus deferred loan/lease origination costs, net of fees

    3,887               3,176               2,802          

Less allowance for estimated losses on loans/leases

    (21,156 )             (19,925 )             (18,725 )        
                                                 

Net loans/leases

  $ 1,509,570             $ 1,267,462             $ 1,194,579          

 

Regarding the Company’s levels of qualified small business lending as defined by the U.S. Department of the Treasury (“Treasury”) as part of the Company’s participation in the Small Business Lending Fund (“SBLF”), see the discussion later in this section of the Management’s Discussion and Analysis.

 

Following is the mix of CNB’s loan portfolio as of June 30, 2013 (dollars in thousands):

 

   

June 30, 2013

 
   

Amount

   

%

 

Commercial and industrial loans

  $ 58,624       31 %

Commercial real estate loans

    102,820       54 %

Direct financing leases

    -       0 %

Residential real estate loans

    20,977       11 %

Installment and other consumer loans

    8,306       4 %
                 
Total loans/leases   $ 190,727       100 %

 

As commercial real estate loans are the largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio. Management tracks the level of owner-occupied commercial real estate loans versus non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of June 30, 2013 and December 31, 2012, approximately 37% and 34%, respectively, of the commercial real estate loan portfolio was owner-occupied. CNB’s portfolio of owner-occupied commercial real estate loans was 44% of total commercial real estate loans as of June 30, 2013. Additionally, CNB only had $3.4 million of commercial construction, land development, and other land loans.

 

 

 
49 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Following is a listing of significant industries within the Company’s commercial real estate loan portfolio as of June 30, 2013 and December 31, 2012:

 

   

As of June 30,

   

As of December 31,

 
   

2013

   

2012

 
   

Amount

   

%

   

Amount

   

%

 
                                 
   

(dollars in thousands)

 
                                 

Lessors of Nonresidential Buildings

  $ 228,182       32 %   $ 178,060       30 %

Lessors of Residential Buildings

    78,405       11 %     61,460       10 %

Land Subdivision

    29,900       4 %     28,854       5 %

New Car Dealers

    23,603       3 %     27,079       5 %

Hotels

    24,171       3 %     26,710       4 %

Other *

    339,745       47 %     271,816       46 %
                                 

Total Commercial Real Estate Loans

  $ 724,006       100 %   $ 593,979       100 %

 

* “Other” consists of all other industries. None of these had concentrations greater than $17.5 million, or 2.5% of total commercial real estate loans.

 

The Company’s residential real estate loan portfolio consists of the following:

 

 

 

Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid the long-term interest rate risk.

 

 

A limited amount of 15-year fixed rate residential real estate loans that met certain credit guidelines.

 

The remaining residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. In addition, the Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

 

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company’s loan/lease portfolio.

 

 
50 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

Changes in allowance for the three and six months ended June 30, 2013 and 2012 are presented as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2013

   

June 30, 2012

   

June 30, 2013

   

June 30, 2012

 
                                 
   

(dollars in thousands)

 
                                 

Balance, beginning

  $ 20,769     $ 19,007     $ 19,925     $ 18,789  

Provisions charged to expense

    1,520       1,049       2,578       1,829  

Loans/leases charged off

    (1,333 )     (1,735 )     (1,636 )     (2,559 )

Recoveries on loans/leases previously charged off

    200       404       289       666  

Balance, ending

  $ 21,156     $ 18,725     $ 21,156     $ 18,725  

 

The allowance was $21.2 million at June 30, 2013 compared to $19.9 million at December 31, 2012 and $18.7 million at June 30, 2012. The allowance was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase/decrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed monthly with specific detailed reviews completed on all loans risk-rated worse than “fair quality” and carrying aggregate exposure in excess of $100 thousand. The adequacy of the allowance for estimated losses on loans/leases is monitored by the loan review staff and reported to management and the board of directors.

 

The Company’s levels of criticized and classified loans are reported in the following table.

 

   

As of

 

Internally Assigned Risk Rating *

 

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                         
    (dollars in thousands)  
                         

Special Mention (Rating 6)

  $ 28,728     $ 22,056     $ 21,337  

Substandard (Rating 7)

    57,895       48,248       52,030  

Doubtful (Rating 8)

    -       -       -  
    $ 86,623     $ 70,304     $ 73,367  
                         
                         

Criticized Loans **

  $ 86,623     $ 70,304     $ 73,367  

Classified Loans ***

  $ 57,895     $ 48,248     $ 52,030  
 

 

* Amounts above include the government guaranteed portion, if any. For the calculation of allowance for estimated losses on loans/leases, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.

** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

 

 

 
51 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

At June 30, 2013, CNB had Special Mention loans of $3.0 million and Substandard Loans of $3.5 million for a total of $6.5 million of criticized loans. Excluding CNB, the Company experienced some increase in criticized and classified loans during the second quarter which translated over to an increase in nonperforming loans. The increase was the result of a few specific, isolated commercial credits moving to Substandard and nonaccrual.

 

The following table summarizes the trend in the allowance as a percentage of gross loans/leases and as a percentage of nonperforming loans/leases as of June 30, 2013, December 31, 2012, and June 30, 2012.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                         

Allowance / Gross Loans/Leases

    1.38 %     1.55 %     1.54 %

Allowance / Nonperforming Loans/Leases *

    70.61 %     78.47 %     68.60 %

 

*Nonperforming loan/leases consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing troubled debt restructurings.

 

In accordance with generally accepted accounting principles for acquisition accounting, CNB’s loans are recorded at market value; therefore, there is no allowance associated with CNB’s loans at June 30, 2013. As a result, the Company’s allowance to total loans/leases fell to 1.38% from 1.55% at December 31, 2012, and from 1.54% at June 30, 2012. Had CNB’s loans remained at their historical carrying value with the related allowance as of the acquisition, the allowance to total loans/leases would be approximately 1.60%. Further, the Company’s allowance to total nonperforming loans/leases was 71% at June 30, 2013 which is down from 78% at December 31, 2012 and up from 69% at June 30, 2012. Similarly, adjusting for CNB’s loans at their historical carrying value with the related allowance as of the acquisition, the resulting ratio of allowance to nonperforming loans/leases would increase to approximately 82%.

 

Although management believes that the allowance at June 30, 2013 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

 

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company’s allowance for estimated losses on loans/leases.

 

 

 
52 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The table below presents the amounts of nonperforming assets.

 

   

As of June 30,

2013

   

As of December 31,

2012

   

As of June 30,

2012

   

As of December 31,

2011

 
                                 
   

(dollars in thousands)

 
                                 

Nonaccrual loans/leases (1) (2)

  $ 27,782     $ 17,932     $ 16,247     $ 18,995  

Accruing loans/leases past due 90 days or more

    3       159       1,152       1,111  

Troubled debt restructurings - accruing

    2,178       7,300       9,897       11,904  

Other real estate owned

    3,860       3,955       9,136       8,386  

Other repossessed assets

    244       212       25       109  
    $ 34,067     $ 29,558     $ 36,457     $ 40,505  
                                 

Nonperforming loans/leases to total loans/leases 

    1.96 %     1.97 %     2.25 %     2.67 %

Nonperforming assets to total loans/leases plus reposessed property

    2.22 %     2.29 %     2.98 %     3.35 %

Nonperforming assets to total assets

    1.39 %     1.41 %     1.78 %     2.06 %

Texas ratio (3)

    21.15 %     18.68 %     23.91 %     25.58 %

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

 

(2)

Includes troubled debt restructurings of $7.7 million at June 30, 2013, $5.7 million at December 31, 2012, $6.1 million at June 30, 2012, and $8.6 million at December 31, 2011.

 

(3)

Texas Ratio = Nonperforming Assets (excluding Other Repossessed Assets) / Tangible Equity plus Allowance for Estimated Losses on Loans/Leases. Texas Ratio is a non-GAAP financial measure. Management included this ratio as this is considered by many investors and analysts to be a metric with which to analyze and evaluate asset quality. Other companies may calculate this ratio differently.

 

The large majority of the nonperforming assets consist of nonaccrual loans/leases, accruing troubled debt restructurings (“TDRs”), and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate. Additionally, a portion of several of the nonaccrual loans are guaranteed by the government. At June 30, 2013, government guaranteed amounts of nonaccrual loans totaled approximately $4.2 million, or 15% of the $27.8 million of total nonaccrual loans/leases. OREO is carried at the lower of carrying amount or fair value less costs to sell.

 

Nonperforming assets at June 30, 2013 were $34.1 million, which is up $10.4 million, or 44%, from March 31, 2013, and down $2.4 million, or 7%, from June 30, 2012. In addition, the ratio of nonperforming assets-to-total assets was 1.39% at June 30, 2013, which was up from 1.10% at March 31, 2013, and down from 1.78% at June 30, 2012. The growth in nonperforming assets during the current quarter was driven by a few specific commercial credits moving to nonaccrual at our existing banks ($7.5 million) as well as the addition of CNB’s nonperforming assets as a result of the Community National acquisition ($2.9 million). Of the former, half of the exposure is guaranteed by the government through the SBA.

 

The Company’s lending/leasing practices remain unchanged and asset quality remains a top priority for management.

 

Deposits grew $342.7 million, or 25%, during the first half of 2013. CNB’s deposits totaled $245.6 million at June 30, 2013. Excluding CNB, the Company organically grew deposits $97.1 million, or 7%, over the first half of 2013. The table below presents the composition of the Company’s deposit portfolio.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                                                 
   

(dollars in thousands)

 
                                                 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Noninterest bearing demand deposits

  $ 493,964       29 %   $ 450,660       33 %   $ 390,762       30 %

Interest bearing demand deposits

    710,745       42 %     587,201       43 %     555,804       42 %

Time deposits

    451,991       26 %     290,933       21 %     316,445       24 %

Brokered time deposits

    60,080       3 %     45,320       3 %     52,459       4 %
    $ 1,716,780       100 %   $ 1,374,114       100 %   $ 1,315,470       100 %
 

 

 
53 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The table below presents the composition of CNB’s deposits at June 30, 2013 (dollars in thousands):

 

   

June 30, 2013

 
   

Amount

   

%

 

Noninterest bearing demand deposits

  $ 40,650       17 %

Interest bearing demand deposits

    130,370       53 %

Time deposits

    64,286       26 %

Brokered time deposits

    10,272       4 %
    $ 245,578       100 %

 

The Company has been successful in growing its noninterest bearing deposit portfolio over the past few years and this continued in the first half of 2013. Most of this growth continues to be derived from QCBT’s correspondent banking business. The continued strength of the noninterest bearing deposit portfolio has provided flexibility to manage down deposit pricing and reduce reliance on higher cost wholesale funds, which has helped drive down the Company’s interest expense.

 

Additionally, during the first half of 2013, the Company’s subsidiary banks (excluding CNB) have been successful in growing its portfolio of time deposits with local municipalities.  The average maturity of this portfolio is less than 6 months and the cost has been consistently lower than retail or wholesale alternatives.  

 

The subsidiary banks offer short-term repurchase agreements to some of their significant customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the Federal Reserve Bank or from their correspondent banks. CNB did not have any overnight repurchase agreements or federal funds purchased as of June 30, 2013. The table below presents the composition of the Company’s short-term borrowings.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                         
   

(dollars in thousands)

 
                         

Overnight repurchase agreements with customers

  $ 115,326     $ 104,943     $ 105,249  

Federal funds purchased

    41,860       66,140       80,150  
    $ 157,186     $ 171,083     $ 185,399  

 

As a result of their memberships in either the Federal Home Loan Bank (“FHLB”) of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits. FHLB advances increased slightly by $4.6 million, or 2%, during the second quarter of 2013. During the second quarter of 2013, CRBT and RB&T had some short-term funding needs and borrowed via short-term FHLB advances, as the cost was less than federal funds purchased. CNB did not have any FHLB advances as of June 30, 2013.

 

 

 
54 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Other borrowings consist largely of structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. CNB did not have any structured repos as of June 30, 2013. The table below presents the composition of the Company’s other borrowings.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
                         
   

(dollars in thousands)

 
                         

Structured repos

  $ 130,000     $ 130,000     $ 130,000  

Term note

    10,000       -       -  

364-day revolving note

    -       5,600       5,600  

Series A subordinated notes

    2,644       2,640       2,636  
    $ 142,644     $ 138,240     $ 138,236  

 

In order to fund the cash portion of the consideration for the acquisition and pay off the $3.95 million of Community National term debt at acquisition, the Company borrowed $4.4 million on its 364-day revolving note. The outstanding balance on the 364-day revolving note totaled $10.0 million until maturity at June 26, 2013. Upon maturity, the credit facility was restructured whereby the $10.0 million of outstanding debt was restructured into a secured 3-year term note with principal due quarterly and interest due monthly where the interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.30% at June 30, 2013). Additionally, as part of the restructure, the Company maintained a secured 364-day revolving credit note with availability of $10.0 million where the interest is calculated at the effective LIBOR rate plus 2.50%-per annum. At June 30, 2013, the Company had not borrowed on this revolving credit note and had the full amount available.

 

It is management’s intention to continue to reduce the reliance on wholesale funding, including FHLB advances, structured repos, and brokered time deposits. Replacement of this funding with core deposits helps to reduce interest expense as the wholesale funding tends to be higher funding cost. The table below presents the maturity schedule including weighted average cost for the Company’s combined wholesale funding portfolio.

 

   

June 30, 2013

   

December 31, 2012

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Interest Rate

           

Interest Rate

 

Maturity:

 

Amount Due

   

at Quarter-End

   

Amount Due

   

at Year-End

 
                                 

Year ending December 31:

 

(dollar amounts in thousands)

 
                                 

2013

  $ 44,097       0.65 %   $ 34,508       1.29 %

2014

    48,380       2.49       39,170       2.88  

2015

    36,000       2.22       66,000       2.59  

2016

    63,435       3.91       85,992       3.72  

2017

    48,075       3.57       46,000       3.70  

Thereafter

    160,042       3.28       106,000       3.66  

Total Wholesale Funding

  $ 400,029       2.94     $ 377,670       3.20  

 

Importantly, a large portion of the above FHLB advances and structured repos have putable options which allow the lender (FHLB or counterparty), at its discretion, to terminate the borrowing and require the subsidiary banks to repay at predetermined dates prior to the stated maturity.

 

 
55 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

As previously discussed, during the first quarter of 2013, QCBT modified $50.0 million of fixed rate structured repos with a weighted average interest rate of 3.21% and a weighted average maturity of February 2016 into new fixed rate structured repos with a weighted average interest rate of 2.65% and a weighted average maturity of May 2020. This modification serves to reduce interest expense and improve net interest margin, and minimize the exposure to rising rates through duration extension of fixed rate liabilities.

 

In April 2011, CNB was named as one of 36 co-defendants in a complaint alleging unjust enrichment relating to participation loans originated, sold and repaid in a fraudulent scheme perpetuated by a loan broker.  Some of the co-defendants have settled the claims.  CNB has not settled the claims and, using all available information, including settlement amounts of many of the initial co-defendants, CNB's management recorded a contingent liability of $1,028,000 which is included in other liabilities on the Company’s balance sheet.

 

The table below presents the composition of the Company’s stockholders’ equity, including the common and preferred equity components.

 

   

As of

 
   

June 30, 2013

   

December 31, 2012

   

June 30, 2012

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
                                                 
   

(dollars in thousands)

 
                                                 

Common stock

  $ 5,918             $ 5,039             $ 4,968          

Additional paid in capital - common

    38,406               25,804               27,071          

Retained earnings

    58,786               53,327               48,831          

Accumulated other comprehensive income (loss)

    (9,221 )             4,707               4,479          

Noncontrolling interests

    -               -               2,415          

Less: Treasury stock

    (1,606 )             (1,606 )             (1,606 )        

Total common stockholders' equity

    92,283       63 %     87,271       62 %     86,158       62 %
                                                 

Preferred stock

    55               55               55          

Additional paid in capital - preferred

    53,108               53,108               53,109          

Total preferred stockholders' equity

    53,163       37 %     53,163       38 %     53,164       38 %
                                                 

Total stockholders' equity

  $ 145,446       100 %   $ 140,434       100 %   $ 139,322       100 %
                                                 

Tangible common equity* / total tangible assets

    3.51 %             4.02 %             3.94 %        

TCE/TA excluding accumulated other comprehensive income (loss) 

    3.89 %             3.80 %             3.72 %        

 

*Tangible common equity is defined as total common stockholders’ equity excluding equity of noncontrolling interests and excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. Management included this ratio as it is considered by many investors and analysts to be a metric with which to analyze and evaluate the equity composition. Other companies may calculate this ratio differently.

 

The following table presents the rollforward of stockholders equity for the three and six months ended June 30, 2013 and 2012, respectively.

 

   

For the quarter ended June 30,

   

For the six months ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 
   

(dollars in thousands)

 

Beginning balance

  $ 142,198     $ 145,767     $ 140,434     $ 144,433  

Net income

    4,045       3,273       7,310       6,676  

Other comprehensive income (loss), net of tax

    (13,091 )     1,241       (13,928 )     (276 )

Preferred and common cash dividends declared

    (1,040 )     (1,125 )     (1,852 )     (2,064 )

Issuance of 834,715 shares of common stock for acquisition of CNB, net

    13,017       -       13,017       -  

Redemption of 10,223 shares of Series F Preferred Stock

    -       (10,223 )     -       (10,223 )

Other *

    317       389       465       776  

Ending balance

  $ 145,446     $ 139,322     $ 145,446     $ 139,322  

 

*Includes mostly common stock issued for options exercised and the employee stock purchase plans, as well as stock-based compensation.

 

 

 
56

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The following table presents the details of the preferred stock issued and outstanding as of June 30, 2013.

 

 

Date Issued

 

Aggregate Purchase Price

   

Stated Dividend Rate

   

Annual Dividend

 
                           

Series E Non-Cumulative Convertible Perpetual Preferred Stock

June 2010

  $ 25,000,000       7.00 %   $ 1,750,000  

Series F Non-Cumulative Perpetual Preferred Stock

September 2011

    29,867,000       5.00 %     1,493,350  
      $ 54,867,000             $ 3,243,350  

 

The Series E Non-Cumulative Convertible Perpetual Preferred Stock (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 anti-dilution adjustments upon the occurrence of certain events. In addition, the Company can exercise a conversion option on or after the third anniversary of the issuance date (June 30, 2013) at the same $12.15 conversion price if the Company’s common stock price equals or exceeds $17.22 for at least 20 trading days in a period of 30 consecutive trading days.

 

Regarding the Series F Non-Cumulative Perpetual Preferred Stock (the “Series F Preferred Stock”), non-cumulative dividends are payable quarterly, and the dividend rate is based on changes in the level of “Qualified Small Business Lending” or “QSBL” by the Company’s wholly owned bank subsidiaries, QCBT, CRBT and RB&T. CNB’s acquired loans are not eligible; however, any loans originated subsequent to acquisition would be eligible as QSBL should the specific loans meet all of the requirements. Based upon the change in the banks’ level of QSBL over the baseline level (as defined by the SBLF, the baseline is the average of QSBL for the last two quarters of 2009 and the first two quarters of 2010), the dividend rate for the first 10 calendar quarters may be adjusted to between 1% and 5%. For the 11th calendar quarter through 4.5 years after issuance, the dividend rate will be fixed at between 1% and 5%, based upon the increase in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e. as of September 30, 2013), or will be fixed at 7% if there is no increase or there is a decrease in QSBL during such period. In addition, beginning on April 1, 2014 and ending on April 1, 2016, if there is no increase or there is a decrease in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e. as of September 30, 2013), because of the Company’s participation in the Treasury Capital Purchase Program, the Company will be subject to an additional lending incentive fee of 2% per year, or 9% dividend rate. After 4.5 years from issuance, regardless of QSBL growth over the baseline, the dividend rate will increase to 9%.

 

 

 
 57

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

As of June 30, 2013, the Company reported its QSBL in accordance with SBLF guidelines and calculated a net decline from the baseline of $61.1 million, or 11%. As a result, the Company’s dividend rate remains at 5% for the dividend payable October 1, 2013. The decline is primarily the result of the following:

 

 

 

The Company’s strategic introduction into SBA and USDA lending in 2010. The government guaranteed portion of these loans (typically 50% to 85% of the total amount outstanding) is not eligible as QSBL per SBLF guidelines.

 

 

Based on the size of the Company and its legal lending limit, the majority of commercial loan growth over the past several years has been to businesses whose revenues exceeded the limits defined as QSBL per SBLF guidelines.

 

 

The Company had a strong small business loan portfolio as of the baseline, which coupled with the residual impact of the economic downturn and the increased competition for small business loans (as many competitor lenders shifted their focus from construction and non-owner occupied commercial real estate lending to small business lending), resulted in originations being outpaced by payments and maturities in the second half of 2010 and all of 2011.

 

The Company continues to support the lending needs of small businesses, although some of this support may be ineligible as QSBL per SBLF guidelines. Regardless of eligibility, the Company will continue to focus strongly on small business lending.

 

On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock from the Treasury for an aggregate redemption amount of $10.2 million plus unpaid dividends to the date of redemption of $125 thousand. The remaining Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to approval of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to the lesser of at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which totaled $95.6 million at June 30, 2013, and averaged $98.6 million during 2012 and $128.0 million during 2011. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

 

 

 
58 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, structured repos, brokered time deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its residential mortgage-backed securities portfolio. At June 30, 2013, the subsidiary banks had 31 lines of credit totaling $328.5 million, of which $42.5 million was secured and $286.0 million was unsecured. At June 30, 2013, $306.5 million was available as $22.0 million was utilized for short-term borrowing needs at QCBT. At December 31, 2012, the subsidiary banks had 31 lines of credit totaling $311.7 million, of which $52.7 million was secured and $259.0 million was unsecured. At December 31, 2012, $271.7 million was available as $40.0 million was utilized for short-term borrowing needs at QCBT. The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company restructured its credit facility during the second quarter of 2013. Previously, the Company had a single $20.0 million secured revolving credit note with variable interest rate and a maturity of June 27, 2013 with $14.4 million available as the note carried an outstanding balance of $5.6 million as of March 31, 2013. To help fund the acquisition of Community National on May 13, 2013, the Company borrowed an additional $4.4 million on the revolving credit note bringing the total borrowed to $10.0 million. At maturity, the $10.0 million was converted to a secured term note with a variable interest rate and a maturity of June 27, 2016. The Company maintained a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 26, 2014.

 

Investing activities used cash of $117.1 million during the first half of 2013 compared to $76.7 million for the same period of 2012. Proceeds from calls, maturities, and paydowns of securities were $152.4 million for the first half of 2013 compared to $216.1 million for the same period of 2012. Purchases of securities used cash of $238.5 million for the first half of 2013 compared to $311.4 million for the same period of 2012. The net increase in loans/leases used cash of $51.7 million for the first half of 2013 compared to $16.1 million for the same period of 2012. Net cash received from the Community National acquisition totaled $3.0 million in 2013.

 

Financing activities provided cash of $80.2 million for the first half of 2013 compared to $70.7 million for same period of 2012. Net increases in deposits totaled $87.6 million for the first half of 2013 compared to $110.0 million for the same period of 2012. During the first half of 2012, the Company’s short-term borrowings decreased $28.1 million. Also, during 2012, the Company redeemed Series F Preferred Stock totaling $10.2 million.

 

Total cash provided by operating activities was $19.7 million for the first half of 2013 compared to $4.6 million for the same period of 2012.

 

 

 
59 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

Throughout its history, the Company has secured additional capital through various resources, including the issuance of preferred stock (discussed above) and trust preferred securities. Trust preferred securities are reported on the Company’s balance sheet as liabilities, but currently qualify for treatment as regulatory capital.

 

The following table presents the details of the trust preferred securities issued and outstanding as of June 30, 2013.

 

Name

Date Issued

 

Amount Issued

 

Interest Rate

 

Interest Rate as of 6/30/2013

   

Interest Rate as of 12/31/2012

 
                             

QCR Holdings Statutory Trust II

February 2004

  $ 12,372,000  

2.85% over 3-month LIBOR

    3.13 %     3.21 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000  

2.85% over 3-month LIBOR

    3.13 %     3.21 %

QCR Holdings Statutory Trust IV

May 2005

    5,155,000  

1.80% over 3-month LIBOR

    2.08 %     2.14 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000  

1.55% over 3-month LIBOR

    1.83 %     1.89 %

Community National Statutory Trust II

September 2004

    3,093,000  

2.17% over 3-month LIBOR

    2.45 %    

N/A

 

Community National Statutory Trust III

March 2007

    3,609,000  

1.75% over 3-month LIBOR

    2.03 %    

N/A

 
      $ 42,787,000  

Weighted Average Rate 

    2.55 %     2.68 %

 

The Company assumed the trust preferred securities originally issued by Community National. As a result of acquisition accounting, the liabilities were recorded a fair value upon acquisition with the resulting discount (totaling $2.6 million) to be accreted as interest expense on a level yield basis over the expected term. See Note 5 to the Consolidated Financial Statements for additional information regarding the Company’s trust preferred securities.

 

 

 
60 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of June 30, 2013 and December 31, 2012, that the Company and the subsidiary banks met all capital adequacy requirements to which they were subject.

 

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of June 30, 2013 and December 31, 2012 are also presented in the following table (dollars in thousands). As of June 30, 2013 and December 31, 2012, the subsidiary banks met the requirements to be “well capitalized”.

 

                   

For Capital

   

To Be Well

Capitalized Under

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

      Ratio    

Amount

     

Ratio

 

As of June 30, 2013:

                                                   

Company:

                                                   

Total risk-based capital

  $ 210,884       12.20 %   $ 138,240  

 

 

>

8.0 %  

N/A

     

N/A

 

Tier 1 risk-based capital

    186,906       10.82 %     69,120  

 

 

>

4.0    

N/A

     

N/A

 

Leverage ratio

    186,906       8.07 %     92,666  

 

 

>

4.0    

N/A

     

N/A

 

Quad City Bank & Trust:

                                                   

Total risk-based capital

  $ 98,130       12.01 %   $ 65,383  

 

 

>

8.0 %   $ 81,729      

>

10.00 %

Tier 1 risk-based capital

    89,494       10.95 %     32,692  

 

 

>

4.0       49,037  

 

 

>

6.00 %

Leverage ratio

    89,494       7.19 %     49,773  

 

 

>

4.0       62,216      

>

5.00 %

Cedar Rapids Bank & Trust:

                                                   

Total risk-based capital

  $ 56,513       12.27 %   $ 36,860  

 

 

>

8.0 %   $ 46,075  

 

 

>

10.00 %

Tier 1 risk-based capital

    50,732       11.01 %     18,430  

 

 

>

4.0       27,645  

 

 

>

6.00 %

Leverage ratio

    50,732       8.31 %     24,422  

 

 

>

4.0       30,528  

 

 

>

5.00 %

Rockford Bank & Trust:

                                                   

Total risk-based capital

  $ 37,768       14.70 %   $ 20,549  

 

 

>

8.0 %   $ 25,686  

 

 

>

10.00 %

Tier 1 risk-based capital

    34,535       13.45 %     10,274  

 

 

>

4.0       15,412  

 

 

>

6.00 %

Leverage ratio

    34,535       10.56 %     13,081  

 

 

>

4.0       16,351  

 

 

>

5.00 %

Community National Bank:

                                                   

Total risk-based capital

  $ 25,468       12.91 %   $ 15,778  

 

 

>

8.0 %   $ 19,722  

 

 

>

10.00 %

Tier 1 risk-based capital

    25,463       12.91 %     7,889  

 

 

>

4.0       11,833  

 

 

>

6.00 %

Leverage ratio

    25,463       9.13 %     11,160  

 

 

>

4.0       13,949  

 

 

>

5.00 %

 

 

 
 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

 

                   

For Capital

   

To Be Well

Capitalized Under

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

      Ratio    

Amount

     

Ratio

 

As of December 31, 2012:

                                                   

Company:

                                                   

Total risk-based capital

  $ 188,841       12.71 %   $ 118,878  

 

 

>

8.0 %  

N/A

     

N/A

 

Tier 1 risk-based capital

    167,475       11.27 %     59,439  

 

 

>

4.0    

N/A

     

N/A

 

Tier 1 leverage ratio

    167,475       8.13 %     82,357  

 

 

>

4.0    

N/A

     

N/A

 

Quad City Bank & Trust:

                                                   

Total risk-based capital

  $ 98,789       12.12 %   $ 65,218  

 

 

>

8.0 %   $ 81,522      

>

10.00 %

Tier 1 risk-based capital

    90,533       11.11 %     32,609  

 

 

>

4.0       48,913  

 

 

>

6.00 %

Tier 1 leverage ratio

    90,533       7.74 %     46,784  

 

 

>

4.0       58,480      

>

5.00 %

Cedar Rapids Bank & Trust:

                                                   

Total risk-based capital

  $ 55,736       12.87 %   $ 34,652  

 

 

>

8.0 %   $ 43,315  

 

 

>

10.00 %

Tier 1 risk-based capital

    50,297       11.61 %     17,326  

 

 

>

4.0       25,989  

 

 

>

6.00 %

Tier 1 leverage ratio

    50,297       8.49 %     23,685  

 

 

>

4.0       29,606  

 

 

>

5.00 %

Rockford Bank & Trust:

                                                   

Total risk-based capital

  $ 36,894       15.33 %   $ 19,255  

 

 

>

8.0 %   $ 24,609  

 

 

>

10.00 %

Tier 1 risk-based capital

    33,870       14.07 %     9,628  

 

 

>

4.0       14,441  

 

 

>

6.00 %

Tier 1 leverage ratio

    33,870       11.13 %     12,177  

 

 

>

4.0       15,221  

 

 

>

5.00 %

 

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million).  The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expand the definition of capital as in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital.  A number of instruments that now qualify as Tier 1 Capital will not qualify, or their qualifications will change.  The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1 Capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more.  Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015.  Management is in the process of assessing the effect the Basel III Rules may have on the Company’s and the subsidiary banks’ capital positions and will monitor developments in this area.

 

 
62 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued 

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995. This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors which could have a material adverse effect on the Company’s operations and future prospects are detailed in the “Risk Factors” section included under Item 1A of Part I of the Company’s Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including the Company, which could have a material adverse effect on the Company’s operations and future prospects of the Company and its subsidiaries.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

 

 
63 

 

 

Part I

Item 3

 

QUANTITATIVE AND QUALITATVE DISCLOSURES ABOUT MARKET RISK

 

The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

 

 

In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank. Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

 

In adjusting the Company’s asset/liability position, the board of directors and management attempt to manage the Company’s interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.

 

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 300 basis point upward shift, the model assumes an instantaneous and parallel upward shift in rates. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve. The asset/liability management committee of the board of directors has established policy limits of a 10% decline in net interest income for the 200 and the newly added 300 basis point upward shifts and the 100 basis point downward shift.

 

 

 
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Part I

Item 3

 

QUANTITATIVE AND QUALITATVE DISCLOSURES ABOUT MARKET RISK

 

Application of the simulation model analysis at the most recent quarter-end available is presented in the following table. Please note the simulation model analysis as of June 30, 2013 is not yet available.

 

   

NET INTEREST INCOME EXPOSURE in YEAR 1

 

INTEREST RATE SCENARIO

 

As of March 31, 2013

   

As of December 31, 2012

   

As of December 31, 2011

 
                         

100 basis point downward shift

    -1.8 %     -1.5 %     -1.5 %

200 basis point upward shift

    -1.7 %     -0.9 %     -3.1 %

300 basis point upward shock

    -1.7 %     0.8 %     -4.2 %
 

The simulation is within the board-established policy limit of a 10% decline in net interest income for all three scenarios.

 

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company’s interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

 

 
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Part I 

Item 4

 

CONTROLS AND PROCEDURES

 

 

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of June 30, 2013. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

 

Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
66 

 

 

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings

   
 

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

   
Item 1A Risk Factors
   
 

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s 2012 Annual Report on Form 10-K. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

   
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
   
  None
   
Item 3 Defaults Upon Senior Securities
   
 

None

   
Item 4 Mine Safety Disclosures
   
 

Not applicable

   
Item 5 Other Information
   
  None

 

 
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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION - continued

 

Item 6           Exhibits

 

4.1 Amended and Restated Rights Agreement, between QCR Holdings, Inc., and Quad City Bank and Trust Company, as Rights Agent, including exhibits, dated May 8, 2013, incorporated herein by reference to Exhibit 4.1 of the Form 8-K filed by QCR Holdings, Inc., with the Securities and Exchange Commission on May 8, 2013.

 

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

 

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

 

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101*

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012; (ii) Consolidated Statements of Income for the three months ended June 30, 2013 and June 30, 2012; (iii) Consolidated Statements of Comprehensive Income for the three months ended June 30, 2013 and June 30, 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended June 30, 2013 and June 30, 2012; (v) Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and June 30, 2012; and (vi) Notes to Consolidated Financial Statements.

 

* As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.

 

 
68 

 

 

SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

QCR HOLDINGS, INC.

(Registrant)

 

 

Date August 14, 2013                     /s/ Douglas M. Hultquist  
    Douglas M. Hultquist, President  
    Chief Executive Officer  

 

 

Date August 14, 2013                     /s/ Todd A. Gipple  
   

Todd A. Gipple, Executive Vice President

 
   

Chief Operating Officer

 
   

Chief Financial Officer

 

 

 

Date August 14, 2013                     /s/ John R. Oakes  
   

John R. Oakes, Vice President

 
   

Controller

 
   

Director of Financial Reporting

 
    Principal Accounting Officer  

                                                      

 

69