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

qcrh_10q-033113.htm
 
U.S. 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 March 31, 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 ID Number)
 
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices)

(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 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 definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 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 May 1, 2013, the Registrant had outstanding 4,946,362 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 March 31, 2013 and December 31, 2012
    2  
             
   
Consolidated Statements of Income
For the Three Months Ended March 31, 2013 and 2012
    3  
             
   
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2013 and 2012
    4  
             
   
Consolidated Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2013 and 2012
    5  
             
   
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2013 and 2012
    6  
             
   
Notes to the Consolidated Financial Statements
    7-25  
             
 
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
    26-52  
             
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    53-54  
             
 
Item 4.
Controls and Procedures
    55  
             
Part II
OTHER INFORMATION
       
             
 
Item 1.
Legal Proceedings
    56  
             
 
Item 1.A.
Risk Factors
    56  
             
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    56  
             
 
Item 3.
Defaults upon Senior Securities
    56  
             
 
Item 4.
Mine Safety Disclosures
    56  
             
 
Item 5.
Other Information
    56  
             
 
Item 6.
Exhibits
    57  
             
Signatures
 
    58  
 
 
1

 
 
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of March 31, 2013 and December 31, 2012
 
   
March 31,
2013
   
December 31,
2012
 
ASSETS
           
Cash and due from banks
  $ 33,254,137     $ 61,568,446  
Federal funds sold
    -       26,560,000  
Interest-bearing deposits at financial institutions
    33,781,655       22,359,490  
                 
Securities held to maturity, at amortized cost
    87,006,209       72,079,385  
Securities available for sale, at fair value
    605,545,374       530,159,986  
Total securities
    692,551,583       602,239,371  
                 
Loans receivable held for sale
    2,260,506       4,577,233  
Loans/leases receivable held for investment
    1,289,535,005       1,282,810,406  
Gross loans/leases receivable
    1,291,795,511       1,287,387,639  
Less allowance for estimated losses on loans/leases
    (20,769,462 )     (19,925,204 )
Net loans/leases receivable
    1,271,026,049       1,267,462,435  
                 
Premises and equipment, net
    31,453,220       31,262,390  
Goodwill
    3,222,688       3,222,688  
Bank-owned life insurance
    46,059,176       45,620,489  
Restricted investment securities
    15,297,700       15,747,850  
Other real estate owned, net
    3,679,419       3,954,538  
Other assets
    13,665,025       13,732,795  
                 
Total assets
  $ 2,143,990,652     $ 2,093,730,492  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing
  $ 496,513,304     $ 450,659,723  
Interest-bearing
    923,979,954       923,454,377  
Total deposits
    1,420,493,258       1,374,114,100  
                 
Short-term borrowings
    171,853,471       171,082,961  
Federal Home Loan Bank advances
    205,350,000       202,350,000  
Other borrowings
    138,241,912       138,239,762  
Junior subordinated debentures
    36,085,000       36,085,000  
Other liabilities
    29,768,580       31,424,848  
Total liabilities
    2,001,792,221       1,953,296,671  
                 
STOCKHOLDERS' EQUITY
               
Preferred stock, $1 par value; shares authorized 250,000 March 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 March 2013 - 5,057,562 shares issued and 4,936,316 outstanding December 2012 - 5,039,448 shares issued and 4,918,202 outstanding
    5,057,562       5,039,448  
Additional paid-in capital
    79,041,338       78,912,791  
Retained earnings
    55,780,849       53,326,542  
Accumulated other comprehensive income
    3,870,325       4,706,683  
Less treasury stock, March 2013 and December 2012 - 121,246 common shares, at cost
    (1,606,510 )     (1,606,510 )
Total stockholders' equity
    142,198,431       140,433,821  
Total liabilities and stockholders' equity
  $ 2,143,990,652     $ 2,093,730,492  
 
See Notes to Consolidated Financial Statements
 
 
2

 
 
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31,
 
   
2013
   
2012
 
Interest and dividend income:
           
Loans/leases, including fees
  $ 15,088,827     $ 15,970,837  
Securities:
               
Taxable
    2,460,449       2,805,814  
Nontaxable
    802,473       395,826  
Interest-bearing deposits at financial institutions
    59,754       120,005  
Restricted investment securities
    125,105       81,322  
Federal funds sold
    874       -  
Total interest and dividend income
    18,537,482       19,373,804  
                 
Interest expense:
               
Deposits
    1,116,791       1,715,740  
Short-term borrowings
    64,267       64,944  
Federal Home Loan Bank advances
    1,732,812       1,864,321  
Other borrowings
    1,190,755       1,257,393  
Junior subordinated debentures
    241,540       267,953  
Total interest expense
    4,346,165       5,170,351  
                 
Net interest income
    14,191,317       14,203,453  
                 
Provision for loan/lease losses
    1,057,782       780,446  
Net interest income after provision for loan/lease losses
    13,133,535       13,423,007  
                 
Noninterest income:
               
Trust department fees
    1,039,670       883,732  
Investment advisory and management fees
    609,341       521,462  
Deposit service fees
    907,823       904,406  
Gains on sales of residential real estate loans
    291,151       291,433  
Gains on sales of government guaranteed portions of loans
    845,224       107,657  
Earnings on bank-owned life insurance
    438,687       438,402  
Credit card issuing fees, net of processing costs
    49,954       127,015  
Losses on other real estate owned, net
    (446,630 )     (189,204 )
Other
    1,468,809       871,975  
Total noninterest income
    5,204,029       3,956,878  
                 
Noninterest expense:
               
Salaries and employee benefits
    8,742,683       8,124,680  
Occupancy and equipment expense
    1,428,870       1,352,263  
Professional and data processing fees
    1,140,061       1,150,190  
FDIC and other insurance
    555,911       580,856  
Loan/lease expense
    245,091       218,734  
Advertising and marketing
    264,568       276,016  
Postage and telephone
    218,691       288,240  
Stationery and supplies
    110,670       142,966  
Bank service charges
    275,495       199,729  
Acquisition costs (Note 8)
    356,578       -  
Other
    619,882       404,406  
Total noninterest expense
    13,958,500       12,738,080  
                 
Net income before income taxes
    4,379,064       4,641,805  
Federal and state income tax expense
    1,113,920       1,238,956  
Net income
  $ 3,265,144     $ 3,402,849  
Less: Net income attributable to noncontrolling interests
    -       166,031  
Net income attributable to QCR Holdings, Inc.
  $ 3,265,144     $ 3,236,818  
                 
                 
Less: Preferred stock dividends
    810,837       938,625  
Net income attributable to QCR Holdings, Inc. common stockholders
    2,454,307     $ 2,298,193  
                 
Earnings per common share attributable to QCR Holdings, Inc. common shareholders
 
Basic
  $ 0.50     $ 0.48  
Diluted
  $ 0.49     $ 0.48  
                 
Weighted average common shares outstanding
    4,927,591       4,800,407  
Weighted average common and common equivalent shares outstanding      5,034,342        4,833,399  
                 
Cash dividends declared per common share
  $ -     $ -  
 
See Notes to Consolidated Financial Statements
 
 
3

 
 
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
 
   
2013
   
2012
 
Net income
  $ 3,265,144     $ 3,402,849  
                 
Other comprehensive loss:
               
Unrealized gains (losses) on securities available for sale:
               
Unrealized holding losses arising during the period before tax
    (1,356,552 )     (2,460,571 )
Less reclassification adjustment for gains (losses) included in net income before tax
    -       -  
      (1,356,552 )     (2,460,571 )
Tax benefit
    (520,194 )     (943,336 )
Other comprehensive loss, net of tax
    (836,358 )     (1,517,235 )
                 
Comprehensive income attributable to QCR Holdings, Inc.
  $ 2,428,786     $ 1,885,614  
 
See Notes to Consolidated Financial Statements
 
 
4

 
 
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended March 31, 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 payroll taxes for restricted
    stock
    -       (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  
 
 
   
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  
 
See Notes to Consolidated Financial Statements.
 
 
5

 
 
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 3,265,144     $ 3,402,849  
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
    584,884       591,465  
Provision for loan/lease losses
    1,057,782       780,446  
Stock-based compensation expense
    293,798       326,245  
Losses on other real estate owned, net
    446,630       189,204  
Amortization of premiums on securities, net
    974,045       983,617  
Loans originated for sale
    (26,928,996 )     (24,070,517 )
Proceeds on sales of loans
    30,382,098       24,972,257  
Gains on sales of residential real estate loans, net
    (291,151 )     (291,433 )
Gains on sales of government guaranteed portions of loans, net
    (845,224 )     (107,657 )
Increase in cash value of bank-owned life insurance
    (438,687 )     (438,402 )
Decrease in other assets
    587,964       565,316  
Decrease in other liabilities
    (1,853,653 )     (1,330,446 )
Net cash provided by operating activities
  $ 7,234,634     $ 5,572,944  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Net decrease in federal funds sold
    26,560,000       20,785,000  
Net (increase) decrease in interest-bearing deposits at financial institutions
    (11,422,165 )     1,262,389  
Proceeds from sales of other real estate owned
    15,989       209,383  
Activity in securities portfolio:
               
Purchases
    (187,650,573 )     (159,077,553 )
Calls, maturities and redemptions
    82,114,256       98,751,724  
Paydowns
    12,893,508       5,720,417  
Activity in restricted investment securities:
               
Purchases
    (1,743,750 )     (189,400 )
Redemptions
    2,193,900       334,000  
Net increase in loans/leases originated and held for investment
    (7,125,623 )     (12,234,648 )
Purchase of premises and equipment
    (775,714 )     (539,900 )
Net cash used in investing activities
  $ (84,940,172 )   $ (44,978,588 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposit accounts
    46,379,158       91,291,345  
Net increase (decrease) in short-term borrowings
    770,510       (63,635,950 )
Activity in Federal Home Loan Bank advances:
               
Advances
    46,000,000       4,000,000  
Calls and maturities
    (43,000,000 )     (5,000,000 )
Net increase in other borrowings
    2,150       2,025  
Payment of cash dividends on common and preferred stock
    (1,002,789 )     (1,214,611 )
Proceeds from issuance of common stock, net
    242,200       65,983  
Net cash provided by financing activities
  $ 49,391,229     $ 25,508,792  
                 
Net decrease in cash and due from banks
    (28,314,309 )     (13,896,852 )
Cash and due from banks, beginning
    61,568,446       53,136,710  
Cash and due from banks, ending
  $ 33,254,137     $ 39,239,858  
                 
Supplemental disclosure of cash flow information, cash payments for:
               
Interest
  $ 4,472,977     $ 5,141,834  
                 
Income/franchise taxes
  $ 717,300     $ 591,000  
                 
Supplemental schedule of noncash investing activities:
               
Change in accumulated other comprehensive income, unrealized losses on securities available for sale, net
  $ (836,358 )   $ (1,517,235 )
                 
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with
   stock options exercised
  $ (424,587 )   $ (2,679 )
                 
Transfers of loans to other real estate owned
  $ 187,500     $ 185,000  
 
See Notes to Consolidated Financial Statements
 
 
6

 
 
Part I
Item 1
QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 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 March 31, 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 three state-chartered commercial banks:  Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), and Rockford Bank & Trust Company (“RB&T”).  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.

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.

 
7

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 2 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2013 and December 31, 2012 are summarized as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
(Losses)
   
Fair
Value
 
March 31, 2013:
                       
Securities held to maturity:
                       
Municipal securities
  $ 86,356,209     $ 746,173     $ (407,348 )   $ 86,695,034  
Other securities
    650,000       -       -       650,000  
    $ 87,006,209     $ 746,173     $ (407,348 )   $ 87,345,034  
                                 
Securities available for sale:
                               
U.S. govt. sponsored agency securities
  $ 402,488,606     $ 1,769,562     $ (418,236 )   $ 403,839,932  
Residential mortgage-backed and related securities
    171,863,065       3,381,118       (441,951 )     174,802,232  
Municipal securities
    23,485,794       1,543,985       (38,738 )     24,991,041  
Trust preferred securities
    86,200       99,120       -       185,320  
Other securities
    1,365,794       366,719       (5,664 )     1,726,849  
    $ 599,289,459     $ 7,160,504     $ (904,589 )   $ 605,545,374  
                                 
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.
 
 
8

 

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 March 31, 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
 
March 31, 2013:
                                   
Securities held to maturity:
                                   
Municipal securities
  $ 25,634,890     $ (407,348 )   $ -     $ -     $ 25,634,890     $ (407,348 )
                                                 
Securities available for sale:
                                               
U.S. govt. sponsored agency securities
  $ 129,197,592     $ (418,236 )   $ -     $ -     $ 129,197,592     $ (418,236 )
Residential mortgage-backed and related securities
    46,924,954       (441,951 )     -       -       46,924,954       (441,951 )
Municipal securities
    2,223,597       (38,738 )     -       -       2,223,597       (38,738 )
Other securities
    -       -       235,625       (5,664 )     235,625       (5,664 )
    $ 178,346,143     $ (898,925 )   $ 235,625     $ (5,664 )   $ 178,581,768     $ (904,589 )
                                                 
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 March 31, 2013, the investment portfolio included 444 securities.  Of this number, 114 securities had current unrealized losses with aggregate depreciation of less than 1% from the total amortized cost basis.  Of these 114, only one had unrealized losses for twelve months or more and the amount of the unrealized loss was only $5,664.  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 March 31, 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 or equity securities for the three months ended March 31, 2013 and 2012.

The Company did not sell any securities during the three months ended March 31, 2013 and 2012.

 
9

 

Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The amortized cost and fair value of securities as of March 31, 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
  $ 1,465,502     $ 1,465,266  
Due after one year through five years
    13,406,654       13,426,853  
Due after one year through five years
    72,134,053       72,452,915  
    $ 87,006,209     $ 87,345,034  
                 
Securities available for sale:
               
Due in one year or less
  $ 695,000     $ 700,650  
Due after one year through five years
    29,282,063       29,712,248  
Due after five years
    396,083,537       398,603,395  
    $ 426,060,600     $ 429,016,293  
Residential mortgage-backed and related securities
    171,863,065       174,802,232  
Other securities
    1,365,794       1,726,849  
    $ 599,289,459     $ 605,545,374  
 
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
  $ 57,540,331     $ 57,327,912  
                 
Securities available for sale:
               
U.S. govt. sponsored agency securities
    370,595,745       371,574,015  
Municipal securities
    13,494,268       14,270,490  
    $ 384,090,013     $ 385,844,505  
 
 
10

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31, 2013 and December 31, 2012 is presented as follows:
 
   
As of March 31,
2013
   
As of December 31,
2012
 
             
Commercial and industrial loans
  $ 398,122,240     $ 394,244,252  
Commercial real estate loans
               
Owner-occupied commercial real estate
    212,301,539       204,911,308  
Commercial construction, land development, and other land
    46,449,160       44,962,381  
Other non owner-occupied commercial real estate
    339,882,919       344,105,550  
      598,633,618       593,979,239  
                 
Direct financing leases *
    109,654,314       103,685,656  
Residential real estate loans **
    115,548,209       115,581,573  
Installment and other consumer loans
    66,293,903       76,720,514  
      1,288,252,284       1,284,211,234  
Plus deferred loan/lease origination costs, net of fees
    3,543,227       3,176,405  
      1,291,795,511       1,287,387,639  
Less allowance for estimated losses on loans/leases
    (20,769,462 )     (19,925,204 )
    $ 1,271,026,049     $ 1,267,462,435  
                 
                 
* Direct financing leases:
               
Net minimum lease payments to be received
  $ 124,469,580     $ 117,719,380  
Estimated unguaranteed residual values of leased assets
    1,060,990       1,095,848  
Unearned lease/residual income
    (15,876,256 )     (15,129,572 )
      109,654,314       103,685,656  
Plus deferred lease origination costs, net of fees
    4,198,286       3,907,140  
      113,852,600       107,592,796  
Less allowance for estimated losses on leases
    (2,296,523 )     (1,990,395 )
    $ 111,556,077     $ 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 months ended March 31, 2013 and 2012.

**Includes residential real estate loans held for sale totaling $2,260,506 and $4,577,233 as of March 31, 2013, and December 31, 2012, respectively.

 
11

 
 
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 March 31, 2013 and December 31, 2012 is presented as follows:

   
As of March 31, 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
  $ 396,879,932     $ 182,414     $ 89,771     $ -     $ 970,123     $ 398,122,240  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    210,645,611       1,037,596       -       -       618,332       212,301,539  
Commercial Construction, Land Development, and Other Land
    43,557,385       -       337,500       -       2,554,275       46,449,160  
Other Non Owner-Occupied Commercial Real Estate
    326,644,315       1,097,226       1,403,803       -       10,737,575       339,882,919  
Direct Financing Leases
    107,181,954       1,204,354       57,070       -       1,210,936       109,654,314  
Residential Real Estate
    113,860,680       751,593       -       -       935,936       115,548,209  
Installment and Other Consumer
    64,326,002       574,357       379,924       519       1,013,101       66,293,903  
    $ 1,263,095,879     $ 4,847,540     $ 2,268,068     $ 519     $ 18,040,278     $ 1,288,252,284  
                                                 
As a percentage of total loan/lease portfolio
    98.05 %     0.38 %     0.18 %     0.00 %     1.40 %     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 %
 
 
12

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

   
As of March 31, 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
  $ -     $ 970,123     $ 900,924     $ 1,871,047       9.49 %
Commercial Real Estate
                                       
Owner-Occupied Commercial Real Estate
    -       618,332       47,958       666,290       3.38 %
Commercial Construction, Land Development, and Other Land
    -       2,554,275       337,500       2,891,775       14.66 %
Other Non Owner-Occupied Commercial Real Estate
    -       10,737,575       284,433       11,022,008       55.89 %
Direct Financing Leases
    -       1,210,936       -       1,210,936       6.14 %
Residential Real Estate
    -       935,936       -       935,936       4.75 %
Installment and Other Consumer
    519       1,013,101       110,982       1,124,602       5.70 %
    $ 519     $ 18,040,278     $ 1,681,797     $ 19,722,594       100.00 %
 
*Nonaccrual loans/leases includes $6,425,305 of troubled debt restructurings, including $170,027 in commercial and industrial loans,  $5,782,572 in commercial real estate loans, $228,178 in residential real estate loans, and $244,528 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.

 
13

 
 
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 months ended March 31, 2013 and 2012, respectively, are presented as follows:

   
Three Months Ended March 31, 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
    (87,807 )     1,114,294       378,623       8,899       (356,227 )     1,057,782  
Loans/leases charged off
    (215 )     -       (73,049 )     (112,891 )     (116,612 )     (302,767 )
Recoveries on loans/leases previously charged off
    22,741       5,157       554       -       60,791       89,243  
Balance, ending
  $ 4,466,264     $ 12,188,953     $ 2,296,523     $ 966,336     $ 851,386     $ 20,769,462  
 
   
Three Months Ended March 31, 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
    (90,900 )     257,864       315,446       262,968       35,068       780,446  
Loans/leases charged off
    (376,408 )     -       (315,721 )     (4,757 )     (127,866 )     (824,752 )
Recoveries on loans/leases previously charged off
    174,769       620       27,307       -       58,992       261,688  
Balance, ending
  $ 4,585,467     $ 10,855,442     $ 1,366,528     $ 963,157     $ 1,236,050     $ 19,006,644  
 
The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of March 31, 2013 and December 31, 2012 is presented as follows:

   
As of March 31, 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
  $ 498,260     $ 3,507,839     $ 325,294     $ 95,232     $ 117,131     $ 4,543,756  
Allowance for loans/leases collectively evaluated for impairment
    3,968,004       8,681,114       1,971,229       871,104       734,255       16,225,706  
    $ 4,466,264     $ 12,188,953     $ 2,296,523     $ 966,336     $ 851,386     $ 20,769,462  
                                                 
                                                 
Loans/leases individually evaluated for impairment
  $ 614,021     $ 14,460,687     $ 1,210,936     $ 935,936     $ 1,124,082     $ 18,345,662  
Loans/leases collectively evaluated for impairment
    397,508,219       584,172,931       108,443,378       114,612,273       65,169,821       1,269,906,622  
    $ 398,122,240     $ 598,633,618     $ 109,654,314     $ 115,548,209     $ 66,293,903     $ 1,288,252,284  
                                                 
                                                 
Allowance as a percentage of loans/leases individually evaluated for impairment
    81.15 %     24.26 %     26.86 %     10.18 %     10.42 %     24.77 %
Allowance as a percentage of loans/leases collectively evaluated for impairment
    1.00 %     1.49 %     1.82 %     0.76 %     1.13 %     1.28 %
      1.12 %     2.04 %     2.09 %     0.84 %     1.28 %     1.61 %
 
 
   
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 %
 
 
14

 
 
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 three months ended March 31, 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
  $ 402,621     $ 775,004     $ -     $ 767,929     $ 1,924     $ 1,924  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    498,946       498,946       -       507,451       -       -  
Commercial Construction, Land Development, and Other Land
    -       -       -       -       -       -  
Other Non Owner-Occupied Commercial Real Estate
    47,958       47,958       -       3,198,617       40,116       40,116  
Direct Financing Leases
    789,346       789,346       -       831,677       -       -  
Residential Real Estate
    630,324       630,324       -       810,583       -       -  
Installment and Other Consumer
    196,615       196,615       -       187,590       2,093       2,093  
    $ 2,565,810     $ 2,938,193     $ -     $ 6,303,847     $ 44,133     $ 44,133  
                                                 
Impaired Loans/Leases with Specific Allowance Recorded:
                                               
Commercial and Industrial
  $ 211,400     $ 264,334     $ 498,260     $ 216,133     $ -     $ -  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    -       -       -       -       -       -  
Commercial Construction, Land Development, and Other Land
    3,929,839       3,929,839       1,154,155       3,933,530       2,703       2,703  
Other Non Owner-Occupied Commercial Real Estate
    9,983,944       10,236,903       2,353,684       10,046,487       4,501       4,501  
Direct Financing Leases
    421,590       421,590       325,294       273,192       -       -  
Residential Real Estate
    305,612       305,612       95,232       308,841       -       -  
Installment and Other Consumer
    927,467       927,467       117,131       629,810       333       333  
    $ 15,779,852     $ 16,085,745     $ 4,543,756     $ 15,407,993     $ 7,537     $ 7,537  
                                                 
Total Impaired Loans/Leases:
                                               
Commercial and Industrial
  $ 614,021     $ 1,039,338     $ 498,260     $ 984,062     $ 1,924     $ 1,924  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    498,946       498,946       -       507,451       -       -  
Commercial Construction, Land Development, and Other Land
    3,929,839       3,929,839       1,154,155       3,933,530       2,703       2,703  
Other Non Owner-Occupied Commercial Real Estate
    10,031,902       10,284,861       2,353,684       13,245,104       44,617       44,617  
Direct Financing Leases
    1,210,936       1,210,936       325,294       1,104,869       -       -  
Residential Real Estate
    935,936       935,936       95,232       1,119,424       -       -  
Installment and Other Consumer
    1,124,082       1,124,082       117,131       817,400       2,426       2,426  
    $ 18,345,662     $ 19,023,938     $ 4,543,756     $ 21,711,840     $ 51,670     $ 51,670  
 
 
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

 
15

 

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 March 31, 2012 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
  $ 358,028     $ 1,005,019     $ -     $ 396,127     $ -     $ -  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    581,747       581,747       -       637,245       -       -  
Commercial Construction, Land Development, and Other Land
    337,500       337,500       -       112,500       2,168       2,168  
Other Non Owner-Occupied Commercial Real Estate
    3,735,092       3,735,092       -       4,367,673       894       894  
Direct Financing Leases
    602,456       602,456       -       922,197       -       -  
Residential Real Estate
    676,244       676,244       -       815,292       1,673       1,673  
Installment and Other Consumer
    951,431       951,431       -       950,111       23       23  
    $ 7,242,498     $ 7,889,489     $ -     $ 8,201,145     $ 4,758     $ 4,758  
                                                 
Impaired Loans/Leases with Specific Allowance Recorded:
                                               
Commercial and Industrial
  $ 1,441,155     $ 1,791,155     $ 371,974     $ 1,648,384     $ 1,980     $ 1,980  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    199,427       199,427       30,279       199,427       -       -  
Commercial Construction, Land Development, and Other Land
    7,941,358       7,941,358       2,166,666       7,891,719       -       -  
Other Non Owner-Occupied Commercial Real Estate
    11,451,204       11,951,204       1,627,176       11,496,658       67,551       67,551  
Direct Financing Leases
    118,275       118,275       35,000       91,501       -       -  
Residential Real Estate
    467,007       467,007       155,102       383,095       -       -  
Installment and Other Consumer
    19,911       19,911       19,911       20,021       -       -  
    $ 21,638,337     $ 22,488,337     $ 4,406,108     $ 21,730,805     $ 69,531     $ 69,531  
                                                 
Total Impaired Loans/Leases:
                                               
Commercial and Industrial
  $ 1,799,183     $ 2,796,174     $ 371,974     $ 2,044,511     $ 1,980     $ 1,980  
Commercial Real Estate
                                               
Owner-Occupied Commercial Real Estate
    781,174       781,174       30,279       836,672       -       -  
Commercial Construction, Land Development, and Other Land
    8,278,858       8,278,858       2,166,666       8,004,219       2,168       2,168  
Other Non Owner-Occupied Commercial Real Estate
    15,186,296       15,686,296       1,627,176       15,864,331       68,445       68,445  
Direct Financing Leases
    720,731       720,731       35,000       1,013,698       -       -  
Residential Real Estate
    1,143,251       1,143,251       155,102       1,198,387       1,673       1,673  
Installment and Other Consumer
    971,342       971,342       19,911       970,132       23       23  
    $ 28,880,835     $ 30,377,826     $ 4,406,108     $ 29,931,950     $ 74,289     $ 74,289  
 
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.

 
16

 
 
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.

 
17

 
 
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 March 31, 2013 and December 31, 2012:
 
   
As of March 31, 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)
  $ 374,705,482     $ 203,077,969     $ 37,563,441     $ 303,600,297     $ 918,947,189  
Special Mention (Rating 6)
    10,752,887       4,276,925       3,536,555       9,043,854       27,610,221  
Substandard (Rating 7)
    12,663,871       4,946,645       5,349,164       27,238,768       50,198,448  
Doubtful (Rating 8)
    -       -       -       -       -  
    $ 398,122,240     $ 212,301,539     $ 46,449,160     $ 339,882,919     $ 996,755,858  
 
 
   
As of March 31, 2013
         
Delinquency Status *
 
Direct Financing
Leases
   
Residential Real
Estate
   
Installment and
Other Consumer
   
Total
         
                                         
Performing
  $ 108,443,378     $ 114,612,273     $ 65,169,301     $ 288,224,952          
Nonperforming
    1,210,936       935,936       1,124,602       3,271,474          
    $ 109,654,314     $ 115,548,209     $ 66,293,903     $ 291,496,426          
 
   
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.
 
 
18

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of March 31, 2013 and December 31, 2012, troubled debt restructurings totaled $8,107,102 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 months ended March 31, 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 March 31, 2013
   
For the three months ended March 31, 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
                                               
Owner-Occupied Commercial Real Estate
    1     $ 47,958     $ 47,958     $ -       -     $ -     $ -     $ -  
Commercial Constructuion, Land Development, and Other Land
    -       -       -       -       2     $ 200,000     $ 200,000     $ 144,000  
      1     $ 47,958     $ 47,958     $ -       2     $ 200,000     $ 200,000     $ 144,000  
                                                                 
CONCESSION - Extension of maturity
                                                               
Commercial and Industrial
    3     $ 809,494     $ 809,494     $ 188,700       -     $ -     $ -     $ -  
      3     $ 809,494     $ 809,494     $ 188,700       -     $ -     $ -     $ -  
                                                                 
CONCESSION - Interest rate adjusted below market
                                                               
Commercial Constructuion, Land Development, and Other Land
    -     $ -     $ -     $ -       1     $ 337,500     $ 337,500     $ -  
Residential Real Estate
    -       -       -       -       1       167,739       167,739       -  
Installment and Other Consumer
    -       -       -       -       1       16,043       16,043       -  
      -     $ -     $ -     $ -       3     $ 521,282     $ 521,282     $ -  
                                                                 
TOTAL
    4     $ 857,452     $ 857,452     $ 188,700       5     $ 721,282     $ 721,282     $ 144,000  
 
Of the troubled debt restructurings reported above, two with post-modification recorded investments totaling $86,426 were on nonaccrual as of March 31, 2013, and two with post-modification recorded investments totaling $200,000 were on nonaccrual as of March 31, 2012.

For the three months ended March 31, 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.

 
19

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 4 - EARNINGS PER SHARE

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

   
Three months ended
 
   
March 31,
 
   
2013
   
2012
 
             
Net income
  $ 3,265,144     $ 3,402,849  
Less:  Net income attributable to noncontrolling interests
    -       166,031  
Net income attributable to QCR Holdings, Inc.
  $ 3,265,144     $ 3,236,818  
                 
Less:  Preferred stock dividends
    810,837       938,625  
Net income attributable to QCR Holdings, Inc. common stockholders
  $ 2,454,307     $ 2,298,193  
                 
Earnings per common share attributable to QCR Holdings, Inc. common stockholders
               
Basic
  $ 0.50     $ 0.48  
Diluted
  $ 0.49     $ 0.48  
                 
Weighted average common shares outstanding
    4,927,591       4,800,407  
                 
Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan
    106,751       32,992  
Weighted average common and common equivalent shares outstanding
    5,034,342       4,833,399  

 
NOTE 5 – 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 three subsidiary banks wholly-owned by the Company:  QCBT, CRBT, and RB&T.  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 three 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.

 
20

 
 
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 months ended March 31, 2013 and 2012.
 
   
Commercial Banking
                         
   
Quad City
Bank & Trust
   
Cedar Rapids
Bank & Trust
   
Rockford
Bank & Trust
   
Wealth
Management
   
All Other
   
Intercompany
Eliminations
   
Consolidated
Total
 
Three Months Ended March 31, 2013
                                         
Total revenue
  $ 12,055,661     $ 6,928,351     $ 3,184,059     $ 1,649,011     $ 4,732,570     $ (4,808,141 )   $ 23,741,511  
Net interest income
  $ 8,391,538     $ 3,844,882     $ 2,305,077     $ -     $ (350,180 )   $ -     $ 14,191,317  
Net income attributable to QCR Holdings, Inc.
  $ 2,497,025     $ 1,720,811     $ 96,242     $ 213,007     $ 3,265,144     $ (4,527,085 )   $ 3,265,144  
Total assets
  $ 1,223,662,809     $ 598,842,406     $ 322,544,243     $ -     $ 199,591,558     $ (200,650,364 )   $ 2,143,990,652  
Provision for loan/lease losses
  $ 357,782     $ 300,000     $ 400,000     $ -     $ -     $ -     $ 1,057,782  
Goodwill
  $ 3,222,688     $ -     $ -     $ -     $ -     $ -     $ 3,222,688  
                                                         
Three Months Ended March 31, 2012
                                                       
Total revenue
  $ 12,265,033     $ 6,586,149     $ 3,120,795     $ 1,405,194     $ 4,611,992     $ (4,658,481 )   $ 23,330,682  
Net interest income
  $ 8,389,042     $ 3,767,999     $ 2,432,706     $ -     $ (356,376 )   $ (29,918 )   $ 14,203,453  
Net income attributable to QCR Holdings, Inc.
  $ 2,689,685     $ 1,267,266     $ 393,475     $ 159,883     $ 3,296,363     $ (4,569,854 )   $ 3,236,818  
Total assets
  $ 1,114,376,297     $ 566,158,474     $ 312,595,782     $ -     $ 198,977,794     $ (199,110,154 )   $ 1,992,998,193  
Provision for loan/lease losses
  $ 395,446     $ 350,000     $ 35,000     $ -     $ -     $ -     $ 780,446  
Goodwill
  $ 3,222,688     $ -     $ -     $ -     $ -     $ -     $ 3,222,688  
 
 
21

 
 
Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 6 – 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 March 31, 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)
 
                         
March 31, 2013:
                       
Securities available for sale:
                       
U.S. govt. sponsored agency securities
  $ 403,839,932     $ -     $ 403,839,932     $ -  
Residential mortgage-backed and related securities
    174,802,232       -       174,802,232       -  
Municipal securities
    24,991,041       -       24,991,041       -  
Trust preferred securities
    185,320       -       185,320       -  
Other securities
    1,726,849       255,370       1,471,479       -  
    $ 605,545,374     $ 255,370     $ 605,290,004     $ -  
                                 
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 months ended March 31, 2013 and 2012.

 
22

 
 
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 March 31, 2013 and December 31, 2012:

         
Fair Value Measurements at Reporting Date Using
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2013:
                       
Impaired loans/leases
  $ 12,569,814     $ -     $ -     $ 12,569,814  
Other real estate owned
    3,973,773       -       -       3,973,773  
    $ 16,543,587     $ -     $ -     $ 16,543,587  
                                 
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 months ended March 31, 2013 and 2012.

 
23

 
 
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 March 31, 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
  $ 33,254,137     $ 33,254,137     $ 61,568,446     $ 61,568,446  
Federal funds sold
 Level 2
    -       -       26,560,000       26,560,000  
Interest-bearing deposits at financial institutions
 Level 2
    33,781,655       33,781,655       22,359,490       22,359,490  
Investment securities:
                                 
Held to maturity
 Level 3
    87,006,209       87,345,034       72,079,385       73,005,706  
Available for sale
 See Previous Table
    605,545,374       605,545,374       530,159,986       530,159,986  
Loans/leases receivable, net
 Level 3
    11,638,717       12,569,814       16,716,883       18,054,234  
Loans/leases receivable, net
 Level 2
    1,259,387,332       1,269,628,186       1,250,745,552       1,262,090,766  
Deposits:
                                 
Nonmaturity deposits
 Level 2
    1,083,387,164       1,083,387,164       1,039,572,326       1,039,572,326  
Time deposits
 Level 2
    337,106,094       339,550,000       334,541,774       337,343,000  
Short-term borrowings
 Level 2
    171,853,471       171,853,471       171,082,961       171,082,961  
Federal Home Loan Bank advances
 Level 2
    205,350,000       222,673,000       202,350,000       220,815,000  
Other borrowings
 Level 2
    138,241,912       149,671,000       138,239,762       154,101,000  
Junior subordinated debentures
 Level 2
    36,085,000       18,862,000       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.

 
24

 

Part I
Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 7 – SALE OF CREDIT CARD LOAN RECEIVABLES AND CREDIT CARD ISSUING OPERATIONS AT QCBT

On January 31, 2013, QCBT entered into an agreement to sell its credit card loan receivables totaling $10,179,318. This transaction closed on February 15, 2013 and resulted in a pre-tax gain of $495,405.  As part of the agreement, QCBT also agreed to sell its credit card issuing operations to the purchaser.  The gain recognized on this transaction was $355,268.  QCBT incurred pre-tax expenses related to these transactions of $257,476 for the three months ended March 31, 2013, resulting in a net pre-tax gain on the transactions of $593,197.

NOTE 8 – ACQUISITION OF COMMUNITY NATIONAL BANCORPORATION AND COMMUNITY NATIONAL BANK

On February 13, 2013, the Company signed a definitive agreement to acquire Community National Bancorporation (“Community National”) and Community National Bank (“CNB”).  Community National is a 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.  As of December 31, 2012, Community National had total assets of $287.7 million, net loans receivable of $205.2 million, deposits of $247.8 million, and stockholders’ equity of $19.3 million.

The Company intends to acquire 100% of Community National’s outstanding common stock for aggregate consideration consisting of approximately 70% QCR Holdings common stock and 30% cash.  The Company has received approval for the transaction from banking regulators, and the transaction is expected to close on or about May 13, 2013, subject to approval by Community National shareholders and the completion of certain customary closing conditions.

 
25

 
 
Part I
Item 2

MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
GENERAL

QCR Holdings, Inc. is the parent company of QCBT, CRBT, and RB&T.

QCBT and CRBT are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank.  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 in downtown Rockford and its branch facility on Guilford Road at Alpine Road in Rockford.
 
 
26

 
 
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 $3.3 million for the quarter ended March 31, 2013.  After preferred stock dividends of $811 thousand, the Company reported net income attributable to common stockholders of $2.5 million, or diluted earnings per common share of $0.49.  By comparison, for the first quarter of 2012, the Company recognized net income of $3.4 million and net income attributable to QCR holdings, Inc. of $3.2 million, which excludes the net income attributable to noncontrolling interests of $166 thousand.  After preferred stock dividends of $939 thousand, the Company reported net income attributable to common stockholders of $2.3 million, or diluted earnings per common share of $0.48.

Following is a table that represents the various net income measurements for the Company.
 
 
For the three months ended
 
 
March 31,
2013
   
December 31,
2012
   
March 31,
2012
 
                 
Net income
$ 3,265,144     $ 3,245,502     $ 3,402,849  
Less: Net income (loss) attributable to noncontrolling interests
  -       (5,958 )     166,031  
Net income attributable to QCR Holdings, Inc.
$ 3,265,144     $ 3,251,460     $ 3,236,818  
                       
Less: Preferred stock dividends
  810,837       810,838       938,625  
Net income attributable to QCR Holdings, Inc. common stockholders
$ 2,454,307     $ 2,440,622     $ 2,298,193  
                       
Diluted earnings per common share
$ 0.49     $ 0.49     $ 0.48  
                       
Weighted average common and common equivalent shares outstanding
  5,034,342       4,983,939       4,833,399  
 
Following is a table that represents the major income and expense categories for the Company.

   
For the three months ended
 
   
March 31,
2013
   
December 31,
2012
   
March 31,
2012
 
                   
Net interest income
  $ 14,191,317     $ 14,300,796     $ 14,203,453  
Provision for loan/lease losses
    (1,057,782 )     (1,045,658 )     (780,446 )
Noninterest income
    5,204,029       4,479,726       3,956,878  
Noninterest expense
    (13,958,500 )     (13,380,267 )     (12,738,080 )
Federal and state income tax
    (1,113,920 )     (1,109,095 )     (1,238,956 )
Net income
  $ 3,265,144     $ 3,245,502     $ 3,402,849  
 
Noninterest income and noninterest expenses were both elevated from the fourth quarter of 2012 to the first quarter of 2013.  The increases were partly the result of nonrecurring items, as follows:

 
·
In the first quarter of 2013, QCBT sold its credit card loan portfolio and issuing operations for a pre-tax gain on sales totaling $850 thousand.  The Company incurred $257 thousand of pre-tax expenses related to the transactions during the first quarter of 2013 resulting in a net pre-tax gain on sales of $593 thousand.
 
·
As a result of the planned acquisition of Community National (see Note 8 to the Consolidated Financial Statements), the Company incurred $357 thousand of pre-tax costs related to the acquisition in the first quarter of 2013.
 
 
27

 
 
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 $186 thousand, or 1%, to $14.8 million for the quarter ended March 31, 2013, from $14.6 million for the same period of 2012.  The slight increase in net interest income was driven primarily by reduced interest expense.  This was the result of continued reductions in the cost of deposits as well as growth in noninterest bearing deposits, which funded the earning asset growth and allowed the level of interest-bearing funding to remain relatively flat.  Interest income, on a tax equivalent basis, fell $638 thousand, or 3%, as the continued decline in yields more than offset the growth in loans and securities.

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

 
·
The average yield on interest-earning assets decreased 33 basis points.
 
·
The average cost of interest-bearing liabilities decreased 22 basis points.
 
·
The net interest spread declined 11 basis points from 2.79% to 2.68%.
 
·
The net interest margin declined 10 basis points from 3.12% to 3.02%.

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 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.

 
28

 
 
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 March 31,
 
   
2013
   
2012
 
   
Average
Balance
   
Interest
Earned
or Paid
   
Average
Yield or
Cost
   
Average
Balance
   
Interest
Earned
or Paid
   
Average
Yield or
Cost
 
   
(dollars in thousands)
 
ASSETS
                                   
Interest earning assets:
                                   
Federal funds sold
  $ 2,349     $ 1       0.17 %   $ -     $ -       0.00 %
Interest-bearing deposits at financial institutions
    37,834       60       0.64 %     84,367       120       0.57 %
Investment securities (1)
    648,638       3,656       2.29 %     576,530       3,391       2.37 %
Restricted investment securities
    15,415       125       3.29 %     15,280       81       2.13 %
Gross loans/leases receivable (1) (2) (3)
    1,279,040       15,251       4.84 %     1,198,047       16,139       5.42 %
                                                 
Total interest earning assets (1)
  $ 1,983,276     $ 19,093       3.90 %   $ 1,874,224     $ 19,731       4.23 %
                                                 
Noninterest-earning assets:
                                               
Cash and due from banks
  $ 39,908                     $ 41,021                  
Premises and equipment
    31,202                       31,670                  
Less allowance for estimated losses on loans/leases
    (20,224 )                     (18,911 )                
Other
    75,850                       76,738                  
                                                 
Total assets
  $ 2,110,012                     $ 2,004,742                  
                                                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Interest-bearing liabilities:
                                               
Interest-bearing deposits
  $ 562,905     $ 409       0.29 %   $ 541,236     $ 744       0.55 %
Time deposits
    333,696       708       0.86 %     345,800       972       1.13 %
Short-term borrowings
    175,706       64       0.15 %     178,981       65       0.15 %
Federal Home Loan Bank advances
    202,618       1,733       3.47 %     206,137       1,864       3.64 %
Junior subordinated debentures
    36,085       241       2.71 %     36,085       268       2.99 %
Other borrowings
    138,210       1,191       3.49 %     135,898       1,257       3.72 %
                                                 
Total interest-bearing liabilities
  $ 1,449,220     $ 4,346       1.22 %   $ 1,444,137     $ 5,170       1.44 %
                                                 
Noninterest-bearing demand deposits
  $ 487,264                     $ 390,021                  
Other noninterest-bearing liabilities
    32,345                       26,761                  
Total liabilities
  $ 1,968,829                     $ 1,860,919                  
                                                 
Stockholders' equity
    141,183                       143,823                  
                                                 
Total liabilities and stockholders' equity
  $ 2,110,012                     $ 2,004,742                  
           
Net interest income (1)
          $ 14,747                     $ 14,561          
           
Net interest spread (1)
                    2.68 %                     2.79 %
           
Net interest margin (1)
                    3.02 %                     3.12 %
                                                 
Ratio of average interest-earning assets to average interest-bearing liabilities
    136.85 %                     129.78 %                
 
(1)
Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 34% tax rate fo reach period presented.
   
(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.
 
 
29

 
 
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 March 31, 2013 and 2012
 
   
Inc./(Dec.)
from
   
Components
of Change (1)
 
   
Prior Period
   
Rate
   
Volume
 
   
2013 vs. 2012
 
   
(dollars in thousands)
 
INTEREST INCOME
                 
Federal funds sold
  $ 1     $ -     $ 1  
Interest-bearing deposits at financial institutions
    (60 )     87       (147 )
Investment securities (2)
    265       (668 )     933  
Restricted investment securities
    44       43       1  
Gross loans/leases receivable (2) (3) (4)
    (888 )     (5,932 )     5,044  
                         
          Total change in interest income (2)
  $ (638 )   $ (6,470 )   $ 5,832  
                         
INTEREST EXPENSE
                       
Interest-bearing deposits
  $ (335 )   $ (530 )   $ 195  
Time deposits
    (264 )     (230 )     (34 )
Short-term borrowings
    (1 )     3       (4 )
Federal Home Loan Bank advances
    (131 )     (96 )     (35 )
Junior subordinated debentures
    (27 )     (27 )     -  
Other borrowings
    (66 )     (186 )     120  
                         
          Total change in interest expense
  $ (824 )   $ (1,066 )   $ 242  
                         
Total change in net interest income (2)
  $ 186     $ (5,404 )   $ 5,590  
 
(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 for each period presented.
   
(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.
 
 
30

 
 
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.  The Company’s allowance for estimated losses on loans/leases methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for estimated losses on loans/leases 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 for loan/lease losses in the statement of operations to change the allowance for estimated losses on loans/leases 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 for estimated losses on loans/leases.  Although management believes the level of the allowance as of March 31, 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.

 
31

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
RESULTS OF OPERATIONS

INTEREST INCOME

Interest income declined $836 thousand, or 4%, comparing the first quarter of 2013 to the same period of 2012.  The effect of declines in loan and securities yields more than offset the growth in loans and securities.  Specifically, over the year, the average balance for loans/leases grew $81.0 million, or 7%, while yields declined 58 basis points.  For securities over the year, the average balance increased $72.1 million, or 13%, while yields fell 8 basis points.  As deposit growth continues to outpace loan growth, the Company has focused on growing and 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 first quarter of 2013 declined $824 thousand, or 16%, from the first quarter of 2012.  The Company continued to grow noninterest bearing deposits (average balances grew $97.2 million, or 25%, from the first quarter of 2012 to the same period of 2013), which has provided management increased flexibility to decrease pricing on its interest-bearing deposits.  The Company has been successful in decreasing the cost of borrowings, which has also contributed to the decline in interest expense.  Management has placed a strong focus on reducing the reliance on 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.

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.

PROVISION FOR LOAN/LEASE LOSSES

The provision for loan/lease losses 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.

The Company’s provision for loan/lease losses totaled $1.1 million for the first quarter of 2013, flat from the prior quarter, and an increase of $278 thousand from the first quarter of 2012.  With the provision of $1.1 million more than offsetting the net charge-offs totaling $214 thousand (only 2 basis points of average loans/leases during the current quarter), the Company’s allowance for loan/lease losses grew to $20.8 million at March 31, 2013.  With modest loan/lease growth during the first quarter of 2013, the Company’s allowance for loan/lease losses to total loans/leases increased to 1.61% at March 31, 2013 from 1.55% at December 31, 2012, and increased from 1.57% at March 31, 2012.

A more detailed discussion of the Company’s allowance for estimated losses on loans/leases can be found in the “Financial Condition” section of this report.
 
 
32

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
NONINTEREST INCOME

The following table sets forth the various categories of noninterest income for the three months ended March 31, 2013 and 2012.
 
 
Three Months Ended
             
   
March 31,
2013
   
March 31,
2012
   
$ Change
   
% Change
 
                         
Trust department fees
  $ 1,039,670     $ 883,732     $ 155,938       17.6 %
Investment advisory and management fees
    609,341       521,462       87,879       16.9  
Deposit service fees
    907,823       904,406       3,417       0.4  
Gains on sales of residential real estate loans
    291,151       291,433       (282 )     (0.1 )
Gains on sales of government guaranteed portions of loans
    845,224       107,657       737,567       685.1  
Earnings on bank-owned life insurance
    438,687       438,402       285       0.1  
Credit card fees, net of processing costs
    49,954       127,015       (77,061 )     (60.7 )
Subtotal
  $ 4,181,850     $ 3,274,107     $ 907,743       27.7  
Losses on other real estate owned, net
    (446,630 )     (189,204 )     (257,426 )     136.1  
Other
    1,468,809       871,975       596,834       68.4  
Total noninterest income
  $ 5,204,029     $ 3,956,878     $ 1,247,151       31.5 %
 
Trust department fees continue to be a significant contributor to noninterest income.  Trust department fees grew 18% from the first quarter of 2012 to the first quarter of 2013.  The majority of the trust department fees are determined based on the value of the investments within the managed trusts.  As markets have experienced volatility with the national economy’s recovery from recession, the Company’s fee income has experienced similar volatility and fluctuation.  In recent years, the Company has been successful in expanding its customer base, which has helped to drive the recent increases in fee income.

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 17% comparing the first quarter of 2013 to the same period of 2012.  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 will continue to be a primary strategic focus.

Deposit service fees were up slightly from the first quarter of 2012 to the first quarter of 2013.  Deposit service fees have generally expanded over the past several years.  The Company has placed an 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.  Management periodically evaluates fee levels and fully understands the importance of this recurring source of fee income.  In particular, the Company has recently evaluated the level of fee reduction and compensating balances for the noninterest-bearing correspondent bank deposits and restructured the program to minimize the reduction of fees effective in 2013.
 
 
33

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Gains on sales of residential real estate loans were flat comparing the first quarter of 2013 to the first quarter of 2012.  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.  In addition, based on historical experience, the first quarter is generally a slower time for residential real estate lending  activity.
 
In recent years, the Company elevated its focus on small business lending by taking advantage of programs offered by the Small Business Administration (“SBA”) and the United State 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 timely at minimal loss.

The following table sets forth the various categories of other noninterest income for the three months ended March 31, 2013 and 2012.
 
   
Three Months Ended
             
   
March 31, 2013
   
March 31, 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
    229,900       237,800       (7,900 )     (3.3 )
Fees on interest rate swaps on commercial loans
    6,720       206,640       (199,920 )     (96.7 )
Miscellaneous
    381,516       427,535       (46,019 )     (10.8 )
Other noninterest income
  $ 1,468,809     $ 871,975     $ 596,834       68.4 %
 
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 quarter 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 three of its subsidiary banks as the circumstances are appropriate for the borrower and the Company.
 
 
34

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
NONINTEREST EXPENSE

The following table sets forth the various categories of noninterest expense for the three months ended March 31, 2013 and 2012.
 
   
Three Months Ended
             
   
March 31, 2013
   
March 31, 2012
   
$ Change
   
% Change
 
                         
Salaries and employee benefits
  $ 8,742,683     $ 8,124,680     $ 618,003       7.6 %
Occupancy and equipment expense
    1,428,870       1,352,263       76,607       5.7  
Professional and data processing fees
    1,140,061       1,150,190       (10,129 )     (0.9 )
FDIC and other insurance
    555,911       580,856       (24,945 )     (4.3 )
Loan/lease expense
    245,091       218,734       26,357       12.0  
Advertising and marketing
    264,568       276,016       (11,448 )     (4.1 )
Postage and telephone
    218,691       288,240       (69,549 )     (24.1 )
Stationery and supplies
    110,670       142,966       (32,296 )     (22.6 )
Bank service charges
    275,495       199,729       75,766       37.9  
Subtotal
  $ 12,982,040     $ 12,333,674     $ 648,366       5.3  
Acquisition costs
    356,578       -       356,578       100.0  
Other
    619,882       404,406       215,476       53.3  
Total noninterest expense
  $ 13,958,500     $ 12,738,080     $ 1,220,420       9.6 %
 
 
Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2012 to the first quarter of 2013 by 8%.  This increase is largely the result of:

 
·
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.

FDIC and other insurance expense has generally fallen over the past several years.  FDIC insurance premiums are calculated using a variety of factors, including, but not limited to, balance sheet levels, funding mix, and regulatory compliance.  The subsidiary banks have been successful in managing these factors and driving down FDIC insurance cost.  In addition, the FDIC modified the calculation for premiums effective during the second quarter of 2011.  The modification was favorable for the Company’s subsidiary banks.

 
35

 
 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Loan/lease expense increased 12% comparing the first quarter of 2013 to the first quarter of 2012.  Despite the increase this quarter, loan/lease expense has generally declined over the past several quarters as the Company has been successful in resolving several nonperforming loans that had previously incurred significant recurring costs.  Generally, loan/lease expense has a direct relationship with the level of nonperforming loans/leases.

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 past year.

On February 13, 2013, the Company signed a definitive agreement to acquire Community National and CNB.  See Note 8 to the Consolidated Financial Statements for further discussion of the acquisition.  For the quarter ended March 31, 2013, the Company incurred pre-tax acquisition costs totaling $357 thousand.  In accordance with generally accepted accounting principles, the Company expensed these costs as incurred.  With the closing expected during the second quarter of 2013, management expects to incur further acquisition costs.

In conjunction with the sales of QCBT’s credit card loan portfolio and issuing operations, 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) for the three months ended March 31, 2013.

INCOME TAXES

The provision for income taxes totaled $1.1 million, or an effective tax rate of 25%, for the first quarter of 2013 compared to $1.2 million, or an effective tax rate of 27%, for the same quarter in 2012.  The decrease in effective tax rate is the result of the proportion of taxable to nontaxable income.  The Company’s growth in nontaxable income (primarily related to the Company more than doubling its tax exempt municipal securities portfolio over the past year) comparing the first quarter of 2013 to the first quarter of 2012 more than offsets the impact of the growth in taxable income.

 
36

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                                     
   
(dollars in thousands)
 
                                     
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Cash, federal funds sold, and interest-bearing deposits
  $ 67,036       3 %   $ 110,488       5 %   $ 64,728       3 %
Securities
    692,552       32 %     602,239       29 %     616,391       31 %
Net loans/leases
    1,271,026       59 %     1,267,462       61 %     1,192,723       60 %
Other assets
    113,377       6 %     113,541       5 %     119,156       6 %
Total assets
  $ 2,143,991       100 %   $ 2,093,730       100 %   $ 1,992,998       100 %
                                                 
Total deposits
  $ 1,420,493       66 %   $ 1,374,114       66 %   $ 1,296,749       65 %
Total borrowings
    551,531       26 %     547,758       26 %     525,970       26 %
Other liabilities
    29,769       1 %     31,424       1 %     24,512       1 %
Total stockholders' equity
    142,198       7 %     140,434       7 %     145,767       7 %
Total liabilities and stockholders' equity
  $ 2,143,991       100 %   $ 2,093,730       100 %   $ 1,992,998       100 %
 
During the first quarter of 2013, the Company’s total assets grew $50.3 million, or 2%, to a total of $2.14 billion.  With modest loan/lease growth, the Company’s securities portfolio grew $90.3 million, or 15%, funded primarily by deposit growth ($46.4 million) and utilization of excess liquidity as the Company’s cash and federal funds sold positions declined ($43.5 million).  The majority of the deposit growth continues be in noninterest bearing deposits, which now comprise 35% of the Company’s total deposits.

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 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).

 
37

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Following is a breakdown of the Company’s securities portfolio by type, the percentage of unrealized gains to amortized cost on the total portfolio, and the portfolio duration:
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
               
(dollars in thousands)
             
U.S. govt. sponsored agency securities
  $ 403,840       58 %   $ 338,609       57 %   $ 432,169       70 %
Residential mortgage-backed and related securities
    174,802       25 %     163,601       27 %     128,533       21 %
Municipal securities
    111,347       17 %     97,615       16 %     53,813       9 %
Other securities
    2,563       0 %     2,414       0 %     1,876       0 %
    $ 692,552       100 %   $ 602,239       100 %   $ 616,391       100 %
                                                 
As a % of Total Assets
    32.30 %             28.76 %             30.93 %        
Net Unrealized Gains as a % of Amortized Cost
    0.96 %             1.38 %             0.27 %        
Duration (in years)
    2.9               2.8               2.5          
 
The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.

See Note 2 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.

 
38

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Total loans/leases grew modestly during the first quarter of 2013; however, excluding the impact of the sale of QCBT’s $10.2 million credit card loan portfolio, the net growth exceeded 1%.  Over the past year, total loans/leases have grown $79.2 million, or 7%.  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 mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
                                     
   
(dollars in thousands)
 
                                     
Commercial and industrial loans
  $ 398,122       31 %   $ 394,244       31 %   $ 352,749       29 %
Commercial real estate loans
    598,634       46 %     593,979       46 %     580,946       48 %
Direct financing leases
    109,654       9 %     103,686       8 %     96,314       8 %
Residential real estate loans
    115,548       9 %     115,582       9 %     103,528       9 %
Installment and other consumer loans
    66,294       5 %     76,720       6 %     75,546       6 %
                                                 
Total loans/leases
  $ 1,288,252       100 %   $ 1,284,211       100 %   $ 1,209,083       100 %
                                                 
Plus deferred loan/lease origination costs, net of fees
    3,543               3,176               2,647          
Less allowance for estimated losses on loans/leases
    (20,769 )             (19,925 )             (19,007 )        
                                                 
Net loans/leases
  $ 1,271,026             $ 1,267,462             $ 1,192,723          
 
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.

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 March 31, 2013 and December 31, 2012, approximately 35% and 34%, respectively, of the commercial real estate loan portfolio was owner-occupied.  The Company’s commercial real estate portfolio grew $4.7 million, or less than 1%, over the first three months of 2013.  Further, there was a favorable shift in mix as owner-occupied loans grew $7.4 million, or 4%, while non owner-occupied loans (including commercial construction and land development) declined $2.7 million, or l%.

 
39

 

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 March 31, 2013 and December 31, 2012:
 
   
As of March 31,
   
As of December 31,
 
   
2013
   
2012
 
   
Amount
   
%
   
Amount
   
%
 
                         
   
(dollars in thousands)
 
                         
Lessors of Nonresidential Buildings
  $ 179,370       30 %   $ 178,060       30 %
Lessors of Residential Buildings
    60,672       10 %     61,460       10 %
Land Subdivision
    29,620       5 %     28,854       5 %
New Car Dealers
    25,951       4 %     27,079       5 %
Hotels
    24,046       4 %     26,710       4 %
Other *
    278,975       47 %     271,816       46 %
                                 
Total Commercial Real Estate Loans
  $ 598,634       100 %   $ 593,979       100 %
 
*   “Other” consists of all other industries.  None of these had concentrations greater than $15 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 3 to the Consolidated Financial Statements for additional information regarding the Company’s loan/lease portfolio.

 
40

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Changes in the allowance for estimated losses on loans/leases for the three months ended March 31, 2013 and 2012 are presented as follows:
 
   
Three Months Ended
 
   
March 31, 2013
   
March 31, 2012
 
             
   
(dollars in thousands)
 
             
Balance, beginning
  $ 19,925     $ 18,789  
Provisions charged to expense
    1,058       780  
Loans/leases charged off
    (303 )     (825 )
Recoveries on loans/leases previously charged off
    89       262  
Balance, ending
  $ 20,769     $ 19,006  
 
The allowance for estimated losses on loans/leases was $20.8 million at March 31, 2013 compared to $19.9 million at December 31, 2012 and $19.0 million at March 31, 2012.  The allowance for estimated losses on loans/leases 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 *
 
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                   
         
(dollars in thousands)
 
                   
Special Mention (Rating 6)
  $ 27,610     $ 22,056     $ 21,075  
Substandard (Rating 7)
    50,198       48,248       60,815  
Doubtful (Rating 8)
    -       -       -  
    $ 77,808     $ 70,304     $ 81,890  
                         
                         
Criticized Loans **
  $ 77,808     $ 70,304     $ 81,890  
Classified Loans ***
  $ 50,198     $ 48,248     $ 60,815  
                         
 
* 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.

 
41

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
Despite the modest increase in criticized and classified loans during the first quarter of 2013, the general declining trend in criticized and classified loans over the past several years has translated to a reduction in nonperforming loans/leases and that trend continued during the first quarter of 2013 as nonperforming loans/leases fell $5.7 million, or 22%.  Furthermore, nonperforming loans/leases have declined $27.6 million, or 58%, from their peak at September 30, 2010.  As a direct result, the Company’s ratio of allowance to nonperforming loans/leases has strengthened considerably as shown below.  The following table summarizes the trend in allowance as a percentage of gross loans/leases and as a percentage of nonperforming loans/leases as of March 31, 2013, December 31, 2012, and March 31, 2012.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                   
                   
Allowance / Gross Loans/Leases
    1.61 %     1.55 %     1.57 %
Allowance / Nonperforming Loans/Leases *
    105.30 %     78.47 %     62.11 %
 
*Nonperforming loan/leases consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing troubled debt restructurings.

Although management believes that the allowance for estimated losses on loans/leases at March 31, 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 3 to the Consolidated Financial Statements for additional information regarding the Company’s allowance for estimated losses on loans/leases.

 
42

 

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 March 31,
2013
   
As of December 31,
2012
   
As of March 31,
2012
   
As of December 31,
2011
 
                         
   
(dollars in thousands)
 
                         
Nonaccrual loans/leases (1) (2)
  $ 18,040     $ 17,932     $ 19,013     $ 18,995  
Accruing loans/leases past due 90 days or more
    1       159       721       1,111  
Troubled debt restructurings - accruing
    1,682       7,300       10,868       11,904  
Other real estate owned
    3,679       3,955       8,172       8,386  
Other repossessed assets
    282       212       125       109  
    $ 23,684     $ 29,558     $ 38,899     $ 40,505  
                                 
Nonperforming loans/leases to total loans/leases
    1.53 %     1.97 %     2.53 %     2.67 %
Nonperforming assets to total loans/leases plus reposessed property
    1.83 %     2.29 %     3.19 %     3.35 %
Nonperforming assets to total assets
    1.10 %     1.41 %     1.95 %     2.06 %
Texas ratio (3)
    14.65 %     18.68 %     24.34 %     25.58 %
 
(1)
Includes government guaranteed portion of loans, as applicable.
 
(2)
Includes troubled debt restructurings of $6.4 million at March 31, 2013, $5.7 million at December 31, 2012, $8.8 million at March 31, 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 invesetors 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.  OREO is carried at the lower of carrying amount or fair value less costs to sell.

Nonperforming assets at March 31, 2013 were $23.7 million, which is a decline of $5.9 million, or 20%, from December 31, 2012.  Further, nonperforming assets have declined $35.7 million, or 60%, from their peak position of $59.4 million at September 30, 2010.  Accruing TDRs fell $5.6 million, or 77%, during the first quarter of 2013 as several loans restructured at market rates in prior years sustained performance under the restructured terms and were thus removed from TDR status.

Deposits grew $46.4 million, or 3%, during the first quarter of 2013.  The table below presents the composition of the Company’s deposit portfolio.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                                     
   
(dollars in thousands)
 
                                     
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Noninterest bearing demand deposits
  $ 496,513       35 %   $ 450,660       33 %   $ 385,806       30 %
Interest bearing demand deposits
    586,874       41 %     587,201       43 %     561,048       43 %
Time deposits
    297,768       21 %     290,933       21 %     297,737       23 %
Brokered time deposits
    39,338       3 %     45,320       3 %     52,157       4 %
    $ 1,420,493       100 %   $ 1,374,114       100 %   $ 1,296,748       100 %
 
The Company has been successful in growing its noninterest bearing deposit portfolio over the past few years and this continued in the first quarter of 2013 with an increase of $45.9 million, or 10%. 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.

 
43

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
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.  The table below presents the composition of the Company’s short-term borrowings.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                   
   
(dollars in thousands)
 
                   
Overnight repurchase agreements with customers
  $ 141,674     $ 104,943     $ 107,910  
Federal funds purchased
    30,180       66,140       41,990  
    $ 171,854     $ 171,083     $ 149,900  
 
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 $3.0 million, or 1%, during the first quarter of 2013.  During the first 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.

Other borrowings consist largely of structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits.  The table below presents the composition of the Company’s other borrowings.
 
   
As of
 
   
March 31,
2013
   
December 31,
2012
   
March 31,
2012
 
   
(dollars in thousands)
 
                   
Structured repos
  $ 130,000     $ 130,000     $ 130,000  
364-day revolving note
    5,600       5,600       3,600  
Series A subordinated notes
    2,642       2,640       2,635  
    $ 138,242     $ 138,240     $ 136,235  
 
 
44

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
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.

   
March 31, 2013
   
December 31, 2012
 
Maturity:
 
Amount Due
   
Weighted
Average
Interest Rate
at Quarter-End
   
Amount Due
   
Weighted
Average
Interest Rate
at Year-End
 
                         
Year ending December 31:
 
(dollar amounts in thousands)
             
                         
2013
  $ 31,500       0.86 %   $ 34,508       1.29 %
2014
    39,170       2.88       39,170       2.88  
2015
    36,000       2.22       66,000       2.59  
2016
    66,018       3.80       85,992       3.72  
2017
    46,000       3.70       46,000       3.70  
Thereafter
    156,000       3.34       106,000       3.66  
Total Wholesale Funding
  $ 374,688       3.10     $ 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.

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.

 
45

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
The table below presents the composition of the Company’s stockholders’ equity, including the common and preferred equity components.
 
   
As of
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
                                     
   
(dollars in thousands)
 
                                     
Common stock
  $ 5,058           $ 5,039           $ 4,945        
Additional paid in capital - common
    25,932             25,804             26,705        
Retained earnings
    55,781             53,327             46,884        
Accumulated other comprehensive income
    3,870             4,707             3,237        
Noncontrolling interests
    -             -             2,216        
Less:  Treasury stock
    (1,606 )           (1,606 )           (1,606 )      
Total common stockholders' equity
    89,035       63 %     87,271       62 %     82,381       57 %
                                                 
Preferred stock
    55               55               65          
Additional paid in capital - preferred
    53,108               53,108               63,321          
Total preferred stockholders' equity
    53,163       37 %     53,163       38 %     63,386       43 %
                                                 
Total stockholders' equity
  $ 142,198       100 %   $ 140,434       100 %   $ 145,767       100 %
                                                 
Tangible common equity* / total tangible assets
    4.01 %             4.02 %             3.86 %        
 
*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.

Stockholders’ equity increased $1.8 million, or 1%, during the first quarter of 2013.  Net income of $3.3 million grew retained earnings; however, this was partially offset by the declaration of preferred stock dividends totaling $811 thousand ($438 thousand for Series E Preferred Stock, as defined below, and $373 thousand for Series F Preferred Stock, as defined below).  Also, the available for sale portion of the securities portfolio experienced a decline in fair value for the first three months of 2013 totaling $837 thousand, net of tax, as a result of increases in certain market interest rates.

The following table presents the details of the preferred stock issued and outstanding as of March 31, 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.

 
46

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
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.  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%.

As of March 31, 2013, the Company reported its QSBL in accordance with SBLF guidelines and calculated a net decline from the baseline of $66.2 million, or 14%.  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.

 
47

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
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 $67.0 million at March 31, 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.  During the first quarter of 2013, the Company invested some of its excess liquidity as its overall liquidity position (both on and off balance sheet liquidity) had strengthened.

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 March 31, 2013, the subsidiary banks had 31 lines of credit totaling $304.5 million, of which $45.5 million was secured and $259.0 million was unsecured.  At March 31, 2013, all of the credit was available.  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 has a single $20.0 million secured revolving credit note with a maturity of June 27, 2013.  As of March 31, 2013, the Company had $14.4 million available as the note carried an outstanding balance of $5.6 million.

Investing activities used cash of $84.9 million during the first quarter of 2013 compared to $45.0 million for the same period of 2012.  Proceeds from calls, maturities, and paydowns of securities were $82.1 million for the first quarter of 2013 compared to $98.8 million for the same period of 2012.  Purchases of securities used cash of $187.7 million for the first quarter of 2013 compared to $159.1 million for the same period of 2012.  The net increase in loans/leases used cash of $7.1 million for the first quarter of 2013 compared to $12.2 million for the same period of 2012.

Financing activities provided cash of $49.4 million for the first quarter of 2013 compared to $25.5 million for same period of 2012.  Net increases in deposits totaled $46.4 million for the first quarter of 2013 compared to $91.3 million for the same period of 2012.  During the first quarter of 2012, the Company’s short-term borrowings decreased $63.6 million.

Total cash provided by operating activities was $7.2 million for the first quarter of 2013 compared to $5.6 million for the same period of 2012.

 
48

 

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 March 31, 2013.
 
Name
Date Issued
 
Amount Issued
 
Interest Rate
 
Interest Rate
as of
3/31/2013
   
Interest Rate
as of
12/31/2012
 
                       
QCR Holdings Statutory Trust II
February 2004
  $ 12,372,000  
2.85% over 3-month LIBOR
    3.16 %     3.21 %
QCR Holdings Statutory Trust III
February 2004
    8,248,000  
2.85% over 3-month LIBOR
    3.16 %     3.21 %
QCR Holdings Statutory Trust IV
May 2005
    5,155,000  
1.80% over 3-month LIBOR
    2.10 %     2.14 %
QCR Holdings Statutory Trust V
February 2006
    10,310,000  
1.55% over 3-month LIBOR
    1.85 %     1.89 %
      $ 36,085,000  
Weighted Average Rate
    2.63 %     2.68 %
 
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 March 31, 2013 and December 31, 2012, that the Company and the subsidiary banks met all capital adequacy requirements to which they were subject.

 
49

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
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 March 31, 2013 and December 31, 2012 are also presented in the following table (dollars in thousands).  As of March 31, 2013 and December 31, 2012, the subsidiary banks met the requirements to be “well capitalized”.
 
   
Actual
   
For Capital
Adequacy Purposes
   
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
 
Ratio
   
Amount
 
Ratio
 
As of March 31, 2013:
                                   
Company:
                                   
Total risk-based capital
  $ 191,244       13.04 %   $ 117,296  
 >
8.0 %     N/A     N/A  
Tier 1 risk-based capital
    170,080       11.60 %     58,648  
 >
4.0       N/A     N/A  
Leverage ratio
    170,080       8.07 %     84,271  
 >
4.0       N/A     N/A  
Quad City Bank & Trust:
                                           
Total risk-based capital
  $ 99,820       12.63 %   $ 63,250  
 >
8.0 %   $ 79,063  
 >
10.00 %
Tier 1 risk-based capital
    91,297       11.55 %     31,625  
 >
4.0       47,438  
 >
6.00 %
Leverage ratio
    91,297       7.57 %     48,239  
 >
4.0       60,298  
 >
5.00 %
Cedar Rapids Bank & Trust:
                                           
Total risk-based capital
  $ 56,444       13.18 %   $ 34,265  
 >
8.0 %   $ 42,831  
 >
10.00 %
Tier 1 risk-based capital
    51,060       11.92 %     17,132  
 >
4.0       25,699  
 >
6.00 %
Leverage ratio
    51,060       8.60 %     23,745  
 >
4.0       29,681  
 >
5.00 %
Rockford Bank & Trust:
                                           
Total risk-based capital
  $ 37,162       15.05 %   $ 19,754  
 >
8.0 %   $ 24,692  
 >
10.00 %
Tier 1 risk-based capital
    34,059       13.79 %     9,877  
 >
4.0       14,815  
 >
6.00 %
Leverage ratio
    34,059       10.85 %     12,555  
 >
4.0       15,694  
 >
5.00 %
 
 
50

 
 
Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
 
   
Actual
   
For Capital
Adequacy Purposes
   
To Be Well
Capitalized Under
Prompt Corrective
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
    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
    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
    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
    33,870       11.13 %     12,177  
 >
4.0       15,221  
 >
5.00 %
 
In June 2012, the federal bank regulatory agencies issued joint proposed rules that would implement an international capital accord called “Basel III,” developed by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors.  The proposed rules would apply to all depository organizations in the United States and most of their parent companies and would increase minimum capital ratios, add a new minimum common equity ratio, add a new capital conservation buffer, include unrealized gains and losses on available-for-sale securities as Tier 1 Capital, and would change the risk-weightings of certain assets for the purposes of calculating certain capital ratios.  The proposed changes, if implemented, would be phased in from 2013 through 2019.  The comment period with respect to the proposed rules expired on October 22, 2012.  Various banking associations, industry groups, individual financial institutions (including the Company) provided comments on the proposed rules to the regulators.  On November 9, 2012, the federal bank regulatory agencies announced that the implementation of the proposed rules under Basel III in the United States was indefinitely delayed.  It is unclear when the final rules will be adopted and what changes, if any, may be made to the proposed rules.  Management continues to assess the effect of the proposed rules on the Company and the subsidiary banks’ capital positions and will monitor development regarding the proposed rules.

 
51

 
 
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 1.A. 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.
 
 
52

 
 
Part I
Item 3

QUANTITATIVE AND QUALITATVE DISCUSSION 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.

 
53

 

Part I
Item 3

QUANTITATIVE AND QUALITATVE DISCUSSION 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 March 31, 2013 is not yet available.
 
   
NET INTEREST INCOME EXPOSURE in YEAR 1
 
INTEREST RATE SCENARIO
 
As of December 31, 2012
   
As of March 31, 2012
   
As of December 31, 2011
 
                   
100 basis point downward shift
    -1.5 %     -1.6 %     -1.5 %
200 basis point upward shift
    -0.9 %     -4.1 %     -3.1 %
300 basis point upward shock
    0.8 %     -6.8 %     -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.

 
54

 
 
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 March 31, 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 affect, the Company’s internal control over financial reporting.

 
55

 
 
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 1.A.
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
 
 
56

 
 
Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION - continued
 
Item 6 Exhibits
   
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 March 31, 2013 and December 31, 2012; (ii) Consolidated Statements of Income for the three months ended March 31, 2013 and March 31, 2012; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and March 31, 2012; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and March 31, 2012; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and March 31, 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.
 
 
57

 
 
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
May 6, 2013
 
/s/ Douglas M. Hultquist
 
     
Douglas M. Hultquist, President
 
     
Chief Executive Officer
 
         
         
         
Date
May 6, 2013
 
/s/ Todd A. Gipple
 
     
Todd A. Gipple, Executive Vice President
 
     
Chief Operating Officer
 
     
Chief Financial Officer
 
 
 
 
58