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QCR HOLDINGS INC - Quarter Report: 2014 March (Form 10-Q)

qcrh20140331_10q.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2014

 

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

For the transition period from           to________

 

Commission file number 0-22208

 

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

42-1397595 

(State or other jurisdiction of incorporation or organization)  

(I.R.S. Employer Identification No.) 

                                                                

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

 

(309) 743-7761

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           

 

Yes      [ X ]          No [   ]

 

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

Yes      [ X ]          No [   ]

 

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

Large accelerated filer [  ] 

Accelerated filer [  ] 

Non-accelerated filer [  ] 

Smaller reporting company [ X ] 

  

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

Yes      [   ]          No [ X ]    

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of May 1, 2014, the Registrant had outstanding 7,917,652 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, 2014 and December 31, 2013

                   2

         
     

Consolidated Statements of Income For the Three Months Ended March 31, 2014 and 2013

                   3

         
     

Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2014 and 2013

                   4

         
     

Consolidated Statement of Changes in Stockholders' Equity For the Three Months Ended March 31, 2014 and 2013

                   5

         
     

Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2014 and 2013

6-7

         
     

Notes to the Consolidated Financial Statements

8-26

         
   

Item 2

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

27-54

         
   

Item 3

Quantitative and Qualitative Disclosures About Market Risk

55-56

         
   

Item 4

Controls and Procedures

                 57

         

Part II

 

OTHER INFORMATION

 
         
   

Item 1

Legal Proceedings

                 58

         
   

Item 1A

Risk Factors

                 58

         
   

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

                 58

         
   

Item 3

Defaults upon Senior Securities

                 58

         
   

Item 4

Mine Safety Disclosures

                 58

         
   

Item 5

Other Information

                 58

         
   

Item 6

Exhibits

                 59

         

Signatures

 

                 60

 

 
1

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2014 and December 31, 2013

 

   

March 31,

2014

   

December 31,

2013

 

ASSETS

               

Cash and due from banks

  $ 55,444,302     $ 41,950,790  

Federal funds sold

    11,570,000       39,435,000  

Interest-bearing deposits at financial institutions

    44,389,277       33,044,917  
                 

Securities held to maturity, at amortized cost

    161,629,152       145,451,895  

Securities available for sale, at fair value

    545,477,537       551,758,458  

Total securities

    707,106,689       697,210,353  
                 

Loans receivable held for sale

    291,600       1,358,290  

Loans/leases receivable held for investment

    1,492,287,942        1,458,921,268  

Gross loans/leases receivable

    1,492,579,542       1,460,279,558  

Less allowance for estimated losses on loans/leases

    (22,653,270 )     (21,448,048 )

Net loans/leases receivable

    1,469,926,272        1,438,831,510  
                 

Premises and equipment, net

    36,625,837       36,755,364  

Goodwill

    3,222,688       3,222,688  

Core deposit intangible

    1,820,555       1,870,433  

Bank-owned life insurance

    52,456,205       52,002,041  

Restricted investment securities

    17,252,725       17,027,625  

Other real estate owned, net

    9,674,635       9,729,053  

Other assets

    16,830,025       23,873,150  

Total assets

  $ 2,426,319,210     $ 2,394,952,924  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 579,109,614     $ 542,566,087  

Interest-bearing

    1,092,784,029       1,104,425,156  

Total deposits

    1,671,893,643       1,646,991,243  
                 

Short-term borrowings

    165,569,112       149,292,967  

Federal Home Loan Bank advances

    235,700,000       231,350,000  

Other borrowings

    142,250,644       142,448,362  

Junior subordinated debentures

    40,322,765       40,289,830  

Other liabilities

    29,226,019       37,003,742  

Total liabilities

    2,284,962,183       2,247,376,144  
                 

STOCKHOLDERS' EQUITY

               

Preferred stock, $1 par value; shares authorized 250,000

    14,867       29,867  
March 2014 - 14,867 shares issued and outstanding                

December 2013 - 29,867 shares issued and outstanding

               

Common stock, $1 par value; shares authorized 20,000,000

    8,038,608       8,005,708  

March 2014 - 8,038,608 shares issued and 7,917,362 outstanding

               

December 2013 - 8,005,708 shares issued and 7,884,462 outstanding

               

Additional paid-in capital

    75,504,884       90,154,528  

Retained earnings

    67,818,380       64,637,173  

Accumulated other comprehensive loss

    (8,413,202 )     (13,643,986 )

Less treasury stock, March 2014 and December 2013 - 121,246 common shares, at cost

    (1,606,510 )     (1,606,510 )

Total stockholders' equity

    141,357,027       147,576,780  

Total liabilities and stockholders' equity

  $ 2,426,319,210      $ 2,394,952,924  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
2

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2014 and 2013

 

   

2014

   

2013

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 16,775,590     $ 15,088,827  

Securities:

               

Taxable

    2,582,794       2,460,449  

Nontaxable

    1,454,056       802,473  

Interest-bearing deposits at financial institutions

    90,527       59,754  

Restricted investment securities

    128,925       125,105  

Federal funds sold

    3,319       874  

Total interest and dividend income

    21,035,211       18,537,482  
                 

Interest expense:

               

Deposits

    1,101,593       1,116,791  

Short-term borrowings

    51,696       64,267  

Federal Home Loan Bank advances

    1,555,976       1,732,812  

Other borrowings

    1,171,531       1,190,755  

Junior subordinated debentures

    305,174       241,540  

Total interest expense

    4,185,970       4,346,165  

Net interest income

    16,849,241       14,191,317  
                 

Provision for loan/lease losses

    1,094,162       1,057,782  

Net interest income after provision for loan/lease losses

    15,755,079       13,133,535  
                 

Noninterest income:

               

Trust department fees

    1,500,342       1,039,670  

Investment advisory and management fees

    648,992       609,341  

Deposit service fees

    1,045,885       907,823  

Gains on sales of residential real estate loans

    63,487       291,151  

Gains on sales government guaranteed portions of loans

    194,019       845,224  

Securities gains

    20,625       -  

Earnings on bank-owned life insurance

    454,164       438,687  

Losses on other real estate owned, net

    (18,048 )     (446,630 )

Other

    837,375       1,518,763  

Total noninterest income

    4,746,841       5,204,029  
                 

Noninterest expense:

               

Salaries and employee benefits

    10,017,918       8,742,683  

Occupancy and equipment expense

    1,894,288       1,428,870  

Professional and data processing fees

    1,584,406       1,140,061  

FDIC and other insurance

    714,750       555,911  

Loan/lease expense

    345,636       245,091  

Advertising and marketing

    337,587       264,568  

Postage and telephone

    290,675       218,691  

Stationery and supplies

    151,751       110,670  

Bank service charges

    298,032       275,495  

Acquisition and data conversion costs

    -       356,578  

Other

    505,377       619,882  

Total noninterest expense

    16,140,420       13,958,500  

Net income before income taxes

    4,361,500       4,379,064  

Federal and state income tax expense

    472,285       1,113,920  

Net income

  $ 3,889,215     $ 3,265,144  
                 

Less: Preferred stock dividends

    708,008       810,837  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 3,181,207     $ 2,454,307  
                 

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

               

Basic

  $ 0.40     $ 0.50  

Diluted

  $ 0.40     $ 0.49  
                 

Weighted average common shares outstanding

    7,901,035       4,927,591  

Weighted average common and common equivalent shares outstanding

    8,030,043       5,034,342  
                 

Cash dividends declared per common share

  $ -     $ -  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
3

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2014 and 2013

 

 

   

2014

   

2013

 

Net income

  $ 3,889,215     $ 3,265,144  
                 

Other comprehensive income (loss):

               

Unrealized gains (losses) on securities available for sale:

               

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

    8,490,174       (1,356,552 )

Less reclassification adjustment for gains included in net income before tax

    20,625       -  
      8,469,549       (1,356,552 )

Tax expense (benefit)

    3,238,765       (520,194 )

Other comprehensive income (loss), net of tax

    5,230,784       (836,358 )
                 

Comprehensive income attributable to QCR Holdings, Inc.

  $ 9,119,999     $ 2,428,786  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
4

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2014 and 2013

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Treasury

Stock

   

Total

 

Balance December 31, 2013

  $ 29,867     $ 8,005,708     $ 90,154,528     $ 64,637,173     $ (13,643,986 )   $ (1,606,510 )   $ 147,576,780  

Net income

    -       -       -       3,889,215       -       -       3,889,215  

Other comprehensive income, net of tax

    -       -       -       -       5,230,784       -       5,230,784  

Preferred cash dividends declared

    -       -       -       (708,008 )     -       -       (708,008 )

Redemption of 15,000 shares of Series F Noncumulative Perpetual Preferred Stock

    (15,000 )     -       (14,985,000 )     -       -       -       (15,000,000 )

Proceeds from issuance of 6,189 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       6,189       78,256       -       -       -       84,445  

Proceeds from issuance of 9,814 shares of common stock as a result of stock options exercised

    -       9,814       85,582       -       -       -       95,396  

Stock compensation expense

    -       -       347,752                               347,752  

Tax benefit of nonqualified stock options exercised

    -       -       18,647       -       -       -       18,647  

Restricted stock awards

    -       27,197       (27,197 )     -       -       -       -  

Exchange of 10,300 shares of common stock in connection with restricted stock vested, net

    -       (10,300 )     (167,684 )     -       -       -       (177,984 )

Balance March 31, 2014

  $ 14,867     $ 8,038,608     $ 75,504,884     $ 67,818,380     $ (8,413,202 )   $ (1,606,510 )   $ 141,357,027  

 

   

Preferred

Stock

   

Common

Stock

   

Additional

Paid-In

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Treasury

Stock

   

Total

 

Balance December 31, 2012

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

Net income

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

Other comprehensive loss, net of tax

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

Preferred cash dividends declared

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

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

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

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

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

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

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

Stock compensation expense

    -       -       293,798                               293,798  

Tax benefit of nonqualified stock options exercised

    -       -       35,251       -       -       -       35,251  

Restricted stock awards

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

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

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

Balance March 31, 2013

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

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
5

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2014 and 2013

 

   

2014

   

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 3,889,215     $ 3,265,144  

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

               

Depreciation

    692,562       584,884  

Provision for loan/lease losses

    1,094,162       1,057,782  

Stock-based compensation expense

    347,752       293,798  

Deferred compensation expense accrued

    347,850       204,794  

Losses on other real estate owned, net

    18,048       446,630  

Amortization of premiums on securities, net

    535,951       974,045  

Securities gains

    (20,625 )     -  

Loans originated for sale

    (6,354,404 )     (26,928,996 )

Proceeds on sales of loans

    7,678,600       30,382,098  

Gains on sales of residential real estate loans

    (63,487 )     (291,151 )

Gains on sales of government guaranteed portions of loans

    (194,019 )     (845,224 )

Amortization of core deposit intangible

    49,878       -  

Accretion of acquisition fair value adjustments, net

    (161,042 )     -  

Increase in cash value of bank-owned life insurance

    (454,164 )     (438,687 )

Decrease in other assets

    3,804,360       587,964  

Decrease in other liabilities

    (8,049,459 )     (2,056,297 )

Net cash provided by operating activities

  $ 3,161,178     $ 7,236,784  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease in federal funds sold

    27,865,000       26,560,000  

Net increase in interest-bearing deposits at financial institutions

    (11,344,360 )     (11,422,165 )

Proceeds from sales of other real estate owned

    97,120       15,989  

Activity in securities portfolio:

               

Purchases

    (26,142,834 )     (187,650,573 )

Calls, maturities and redemptions

    10,563,599       82,114,256  

Paydowns

    6,547,632       12,893,508  

Sales

    7,020,625       -  

Activity in restricted investment securities:

               

Purchases

    (1,040,000 )     (1,743,750 )

Redemptions

    814,900       2,193,900  

Net increase in loans/leases originated and held for investment

    (33,066,658 )     (7,125,623 )

Purchase of premises and equipment

    (563,035 )     (775,714 )

Net cash used in investing activities

  $ (19,248,011 )   $ (84,940,172 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in deposit accounts

    24,915,536       46,379,158  

Net increase in short-term borrowings

    16,276,145       770,510  

Activity in Federal Home Loan Bank advances:

               

Advances

    60,700,000       46,000,000  

Calls and maturities

    (56,350,000 )     (43,000,000 )

Net decrease in other borrowings

    (200,000 )     -  

Payment of cash dividends on common and preferred stock

    (941,177 )     (1,002,789 )

Redemption of 15,000 shares of Series F Noncumulative Perpetual Preferred Stock, net

    (15,000,000 )     -  

Proceeds from issuance of common stock, net

    179,841       242,200  

Net cash provided by financing activities

  $ 29,580,345     $ 49,389,079  
                 

Net increase (decrease) in cash and due from banks

    13,493,512       (28,314,309 )

Cash and due from banks, beginning

    41,950,790       61,568,446  

Cash and due from banks, ending

  $ 55,444,302     $ 33,254,137  

 

(Continued)

 

 
6

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three Months Ended March 31, 2014 and 2013

 

   

2014

   

2013

 

Supplemental disclosure of cash flow information, cash payments for:

               

Interest

  $ 4,140,254     $ 4,472,977  

Income/franchise taxes

  $ 1,365,000     $ 717,300  
                 

Supplemental schedule of noncash investing activities:

               

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

  $ 5,230,784     $ (836,358 )

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

  $ (177,984 )   $ (424,587 )

Transfers of loans to other real estate owned

  $ 60,750     $ 187,500  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
7

 

 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

 

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, 2013, included in QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 10, 2014. 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, 2014, are not necessarily indicative of the results expected for the year ending December 31, 2014.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include three commercial banks: Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), and Rockford Bank & Trust Company (“RB&T”). On May 13, 2013, the Company acquired Community National Bancorporation (“Community National”) and its banking subsidiary Community National Bank (“CNB”). The Company operated CNB as a separate banking charter from the acquisition date until October 26, 2013, when CNB’s charter was merged with and into CRBT. CNB“s merged branch offices operate as a division of CRBT under the name of “Community Bank & Trust”. QCBT, CRBT, and RB&T are all state-chartered commercial banks. The Company also engages in direct financing lease contracts through m2 Lease Funds, LLC (“m2 Lease Funds”), a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

 

Recent accounting developments: In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Adoption did not have a significant impact on the Company’s consolidated financial statements.

 

In January 2014, FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of ASU 2014-04 is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Management is in the process of evaluating the impact of ASU 2014-04 on the Company’s consolidated financial statements.

 

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

 

 
8

 

 

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, 2014 and December 31, 2013 are summarized as follows:

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

(Losses)

   

Fair

Value

 

March 31, 2014

                               

Securities held to maturity:

                               

Municipal securities

  $ 160,579,152     $ 756,828     $ (4,768,120 )   $ 156,567,860  

Other securities

    1,050,000       -       -       1,050,000  
    $ 161,629,152     $ 756,828     $ (4,768,120 )   $ 157,617,860  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 363,901,863     $ 31,503     $ (13,595,807 )   $ 350,337,559  

Residential mortgage-backed and related securities

    159,343,903       1,377,020       (2,601,522 )     158,119,401  

Municipal securities

    34,495,776       997,316       (417,026 )     35,076,066  

Other securities

    1,378,550       565,961       -       1,944,511  
    $ 559,120,092     $ 2,971,800     $ (16,614,355 )   $ 545,477,537  
                                 

December 31, 2013:

                               

Securities held to maturity:

                               

Municipal securities

  $ 144,401,895     $ 299,789     $ (7,111,579 )   $ 137,590,105  

Other securities

    1,050,000       -       -       1,050,000  
    $ 145,451,895     $ 299,789     $ (7,111,579 )   $ 138,640,105  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 376,574,132     $ 41,696     $ (20,142,841 )   $ 356,472,987  

Residential mortgage-backed and related securities

    160,110,199       1,153,409       (3,834,157 )     157,429,451  

Municipal securities

    35,813,866       923,315       (778,324 )     35,958,857  

Other securities

    1,372,365       524,798       -       1,897,163  
    $ 573,870,562     $ 2,643,218     $ (24,755,322 )   $ 551,758,458  

 

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.

 

 
9

 

 

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, 2014 and December 31, 2013, 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, 2014:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 90,268,363     $ (3,972,217 )   $ 11,141,166     $ (795,903 )   $ 101,409,529     $ (4,768,120 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 330,406,007     $ (12,809,546 )   $ 11,194,076     $ (786,261 )   $ 341,600,083     $ (13,595,807 )

Residential mortgage-backed and related securities

    74,273,019       (1,586,915 )     21,330,340       (1,014,607 )     95,603,359       (2,601,522 )

Municipal securities

    12,715,294       (372,659 )     1,699,797       (44,367 )     14,415,091       (417,026 )
    $ 417,394,320     $ (14,769,120 )   $ 34,224,213     $ (1,845,235 )   $ 451,618,533     $ (16,614,355 )
                                                 

December 31, 2013:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 101,983,602     $ (6,711,240 )   $ 2,697,375     $ (400,339 )   $ 104,680,977     $ (7,111,579 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 333,194,820     $ (19,141,077 )   $ 10,978,390     $ (1,001,764 )   $ 344,173,210     $ (20,142,841 )

Residential mortgage-backed and related securities

    94,723,092       (2,947,770 )     14,117,719       (886,387 )     108,840,811       (3,834,157 )

Municipal securities

    13,890,692       (724,939 )     985,687       (53,385 )     14,876,379       (778,324 )
    $ 441,808,604     $ (22,813,786 )   $ 26,081,796     $ (1,941,536 )   $ 467,890,400     $ (24,755,322 )

 

At March 31, 2014, the investment portfolio included 539 securities. Of this number, 323 securities had current unrealized losses with aggregate depreciation of less than 4% from the total amortized cost basis. Of these, 38 securities had an unrealized loss for twelve months or more. 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, 2014 and December 31, 2013, 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, 2014 and 2013.

 

 
10

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

All sales of securities for the three months ended March 31, 2014 and 2013, respectively, were from securities identified as available-for-sale. Information on proceeds received, as well as pre-tax gross gains from sales on those securities is as follows:

 

   

Three Months Ended

 
   

March 31, 2014

   

March 31, 2013

 
                 

Proceeds from sales of securities

  $ 7,020,625     $ -  

Pre-tax gross gains from sales of securities

    20,625       -  

 

The amortized cost and fair value of securities as of March 31, 2014 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” available for sale 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

  $ 2,298,028     $ 2,299,876  

Due after one year through five years

    10,898,311       10,876,493  

Due after one year through five years

    148,432,813       144,441,491  
    $ 161,629,152     $ 157,617,860  
                 

Securities available for sale:

               

Due in one year or less

  $ 5,399,927     $ 5,412,462  

Due after one year through five years

    51,172,655       50,810,680  

Due after five years

    341,825,057       329,190,483  
    $ 398,397,639     $ 385,413,625  

Residential mortgage-backed and related securities

    159,343,903       158,119,401  

Other securities

    1,378,550       1,944,511  
    $ 559,120,092     $ 545,477,537  

 

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 par and at predetermined dates prior to the stated maturity, summarized as follows:

 

   

Amortized Cost

   

Fair Value

 

Securities held to maturity:

               

Municipal securities

  $ 107,791,951     $ 104,916,513  
                 

Securities available for sale:

               

U.S. govt. sponsored agency securities

    307,435,005       295,518,088  

Municipal securities

    22,063,064       22,190,224  
    $ 329,498,069     $ 317,708,312  

 

 
11

 

 

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, 2014 and December 31, 2013 is presented as follows:

 

   

As of March 31,

2014

   

As of December 31,

2013

 
                 

Commercial and industrial loans

  $ 442,350,475     $ 431,688,129  

Commercial real estate loans

               

Owner-occupied commercial real estate

    269,483,524       261,215,912  

Commercial construction, land development, and other land

    55,194,025       57,844,902  

Other non owner-occupied commercial real estate

    354,550,656       352,692,115  
      679,228,205       671,752,929  
                 

Direct financing leases *

    139,994,059       128,901,442  

Residential real estate loans **

    148,950,217       147,356,323  

Installment and other consumer loans

    76,809,540       76,033,810  
      1,487,332,496       1,455,732,633  

Plus deferred loan/lease origination costs, net of fees

    5,247,046       4,546,925  
      1,492,579,542       1,460,279,558  

Less allowance for estimated losses on loans/leases

    (22,653,270 )     (21,448,048 )
    $ 1,469,926,272     $ 1,438,831,510  
                 
                 

* Direct financing leases:

               

Net minimum lease payments to be received

  $ 158,423,507     $ 145,662,254  

Estimated unguaranteed residual values of leased assets

    1,611,999       1,694,499  

Unearned lease/residual income

    (20,041,447 )     (18,455,311 )
      139,994,059       128,901,442  

Plus deferred lease origination costs, net of fees

    5,347,779       4,814,183  
      145,341,838       133,715,625  

Less allowance for estimated losses on leases

    (2,820,239 )     (2,517,217 )
    $ 142,521,599     $ 131,198,408  

 

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, 2014 and 2013.

 

**Includes residential real estate loans held for sale totaling $291,600 and $1,358,290 as of March 31, 2014, and December 31, 2013, respectively.

 

 
12

 

 

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, 2014 and December 31, 2013 is presented as follows:

 

   

As of March 31, 2014

 

 

 

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

  $ 440,037,552     $ 679,842     $ 82,110     $ 4,838     $ 1,546,133     $ 442,350,475  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    268,087,219       217,205       101,723       -       1,077,377       269,483,524  

Commercial Construction, Land Development, and Other Land

    53,069,537       943,219       -       -       1,181,269       55,194,025  

Other Non Owner-Occupied Commercial Real Estate

    342,951,740       246,141       1,104,646       -       10,248,129       354,550,656  

Direct Financing Leases

    136,956,753       1,684,403       120,969       735       1,231,199       139,994,059  

Residential Real Estate

    145,891,697       1,562,455       -       -       1,496,065       148,950,217  

Installment and Other Consumer

    75,402,962       429,310       104,031       2       873,235       76,809,540  
    $ 1,462,397,460     $ 5,762,575     $ 1,513,479     $ 5,575     $ 17,653,407     $ 1,487,332,496  
                                                 

As a percentage of total loan/lease portfolio

    98.32 %     0.39 %     0.10 %     0.00 %     1.19 %     100.00 %

 

 

   

As of December 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

  $ 429,557,699     $ 199,949     $ 185,500     $ -     $ 1,744,981     $ 431,688,129  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    258,557,660       465,418       993,163       60,286       1,139,385       261,215,912  

Commercial Construction, Land Development, and Other Land

    56,301,186       358,626       -       -       1,185,090       57,844,902  

Other Non Owner-Occupied Commercial Real Estate

    341,743,730       476,877       151,017       -       10,320,491       352,692,115  

Direct Financing Leases

    126,878,515       714,464       414,005       -       894,458       128,901,442  

Residential Real Estate

    142,353,936       3,088,516       275,262       20,126       1,618,483       147,356,323  

Installment and Other Consumer

    74,811,489       127,082       116,468       3,762       975,009       76,033,810  
    $ 1,430,204,215     $ 5,430,932     $ 2,135,415     $ 84,174     $ 17,877,897     $ 1,455,732,633  
                                                 

As a percentage of total loan/lease portfolio

    98.25 %     0.37 %     0.15 %     0.01 %     1.23 %     100.00 %

 

 
13

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Nonperforming loans/leases by classes of loans/leases as of March 31, 2014 and December 31, 2013 are presented as follows:

 

   

As of March 31, 2014

 

 

 

 

 

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

  $ 4,838     $ 1,546,133     $ 179,695     $ 1,730,666       9.29 %

Commercial Real Estate

                                       

Owner-Occupied Commercial Real Estate

    -       1,077,377       -       1,077,377       5.78 %

Commercial Construction, Land Development, and Other Land

    -       1,181,269       -       1,181,269       6.34 %

Other Non Owner-Occupied Commercial Real Estate

    -       10,248,129       -       10,248,129       55.00 %

Direct Financing Leases

    735       1,231,199       89,443       1,321,377       7.09 %

Residential Real Estate

    -       1,496,065       347,543       1,843,608       9.89 %

Installment and Other Consumer

    2       873,235       357,000       1,230,237       6.60 %
    $ 5,575     $ 17,653,407     $ 973,681     $ 18,632,663       100.00 %

 

*Nonaccrual loans/leases includes $10,666,735 of troubled debt restructurings, including $75,371 in commercial and industrial loans, $9,862,220 in commercial real estate loans, $70,144 in direct financing leases, $449,525 in residential real estate loans, and $209,475 in installment loans.

 

 

   

As of December 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

  $ -     $ 1,744,981     $ 878,381     $ 2,623,362       12.81 %

Commercial Real Estate

                                       

Owner-Occupied Commercial Real Estate

    60,286       1,139,385       -       1,199,671       5.86 %

Commercial Construction, Land Development, and Other Land

    -       1,185,090       -       1,185,090       5.79 %

Other Non Owner-Occupied Commercial Real Estate

    -       10,320,491       905,205       11,225,696       54.80 %

Direct Financing Leases

    -       894,458       -       894,458       4.37 %

Residential Real Estate

    20,126       1,618,483       371,995       2,010,604       9.82 %

Installment and Other Consumer

    3,762       975,009       367,000       1,345,771       6.57 %
    $ 84,174     $ 17,877,897     $ 2,522,581     $ 20,484,652       100.00 %

 

**Nonaccrual loans/leases includes $10,890,785 of troubled debt restructurings, including $77,072 in commercial and industrial loans, $10,077,501 in commercial real estate loans, $446,996 in residential real estate loans, and $289,216 in installment loans.

 

 
14

 

 

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, 2014 and 2013, respectively, are presented as follows:

 

   

Three Months Ended March 31, 2014

 
   

 

Commercial and

Industrial

   

Commercial Real

Estate

   

Direct Financing 

Leases

   

Residential Real 

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 5,648,774     $ 10,705,434     $ 2,517,217     $ 1,395,849     $ 1,180,774     $ 21,448,048  

Provisions (credits) charged to expense

    976,790       (229,985 )     352,647       (4,355 )     (935 )     1,094,162  

Loans/leases charged off

    (4,023 )     (4,098 )     (65,733 )     (2,712 )     (2,755 )     (79,321 )

Recoveries on loans/leases previously charged off

    26,117       116,306       16,108       103       31,747       190,381  

Balance, ending

  $ 6,647,658     $ 10,587,657     $ 2,820,239     $ 1,388,885     $ 1,208,831     $ 22,653,270  

 

   

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 (credits) 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  

 

 

The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of March 31, 2014 and December 31, 2013 is presented as follows:

 

   

As of March 31, 2014

 
   

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

  $ 732,427     $ 2,712,472     $ 298,303     $ 224,972     $ 396,897     $ 4,365,071  

Allowance for loans/leases collectively evaluated for impairment

    5,915,231       7,875,185       2,521,936       1,163,913       811,934       18,288,199  
    $ 6,647,658     $ 10,587,657     $ 2,820,239     $ 1,388,885     $ 1,208,831     $ 22,653,270  
                                                 
                                                 

Loans/leases individually evaluated for impairment

  $ 1,400,758     $ 12,076,304     $ 1,320,642     $ 1,843,608     $ 1,230,235     $ 17,871,547  

Loans/leases collectively evaluated for impairment

    440,949,717       667,151,901       138,673,417       147,106,609       75,579,305       1,469,460,949  
    $ 442,350,475     $ 679,228,205     $ 139,994,059     $ 148,950,217     $ 76,809,540     $ 1,487,332,496  
                                                 
                                                 

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

    52.29 %     22.46 %     22.59 %     12.20 %     32.26 %     24.42 %

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

    1.34 %     1.18 %     1.82 %     0.79 %     1.07 %     1.24 %
      1.50 %     1.56 %     2.01 %     0.93 %     1.57 %     1.52 %

 

   

As of December 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

  $ 927,453     $ 3,174,704     $ 192,847     $ 246,266     $ 467,552     $ 5,008,822  

Allowance for loans/leases collectively evaluated for impairment

    4,721,321       7,530,730       2,324,370       1,149,583       713,222       16,439,226  
    $ 5,648,774     $ 10,705,434     $ 2,517,217     $ 1,395,849     $ 1,180,774     $ 21,448,048  
                                                 

Loans/leases individually evaluated for impairment

  $ 1,761,850     $ 12,956,915     $ 894,458     $ 2,116,747     $ 1,350,450     $ 19,080,420  

Loans/leases collectively evaluated for impairment

    429,926,279       658,796,014       128,006,984       145,239,576       74,683,360       1,436,652,213  
    $ 431,688,129     $ 671,752,929     $ 128,901,442     $ 147,356,323     $ 76,033,810     $ 1,455,732,633  
                                                 

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

    52.64 %     24.50 %     21.56 %     11.63 %     34.62 %     26.25 %

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

    1.10 %     1.14 %     1.82 %     0.79 %     0.95 %     1.14 %
      1.31 %     1.59 %     1.95 %     0.95 %     1.55 %     1.47 %

 

 
15

 

 

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, 2014 are 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

  $ 441,945     $ 517,833     $ -     $ 482,151     $ 1,888     $ 1,888  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    389,876       389,876       -       436,412       -       -  

Commercial Construction, Land Development, and Other Land

    2,124,350       2,247,550       -       2,127,392       -       -  

Other Non Owner-Occupied Commercial Real Estate

    1,983,846       1,983,846       -       2,376,752       13,283       13,283  

Direct Financing Leases

    619,800       619,800       -       586,567       -       -  

Residential Real Estate

    977,436       977,436       -       1,222,955       1,455       1,455  

Installment and Other Consumer

    833,338       833,338       -       897,665       890       890  
    $ 7,370,591     $ 7,569,679     $ -     $ 8,129,894     $ 17,516     $ 17,516  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 958,813     $ 1,449,488     $ 732,427     $ 910,410     $ -     $ -  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    224,892       224,892       117,555       112,438       -       -  

Commercial Construction, Land Development, and Other Land

    685,292       796,492       477,293       685,834       -       -  

Other Non Owner-Occupied Commercial Real Estate

    6,668,048       7,373,330       2,117,624       6,682,038       -       -  

Direct Financing Leases

    700,842       700,842       298,303       467,524       -       -  

Residential Real Estate

    866,172       866,172       224,972       793,141       774       774  

Installment and Other Consumer

    396,897       396,897       396,897       397,897       -       -  
    $ 10,500,956     $ 11,808,113     $ 4,365,071     $ 10,049,282     $ 774     $ 774  
                                                 

Total Impaired Loans/Leases:

                                               

Commercial and Industrial

  $ 1,400,758     $ 1,967,321     $ 732,427     $ 1,392,561     $ 1,888     $ 1,888  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    614,768       614,768       117,555       548,850       -       -  

Commercial Construction, Land Development, and Other Land

    2,809,642       3,044,042       477,293       2,813,226       -       -  

Other Non Owner-Occupied Commercial Real Estate

    8,651,894       9,357,176       2,117,624       9,058,790       13,283       13,283  

Direct Financing Leases

    1,320,642       1,320,642       298,303       1,054,091       -       -  

Residential Real Estate

    1,843,608       1,843,608       224,972       2,016,096       2,229       2,229  

Installment and Other Consumer

    1,230,235       1,230,235       396,897       1,295,562       890       890  
    $ 17,871,547     $ 19,377,792     $ 4,365,071     $ 18,179,176     $ 18,290     $ 18,290  

 

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 and for the three months ended March 31, 2013 are 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.

 

 
17

 

 

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, 2013 are 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

  $ 492,622     $ 568,951     $ -  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    392,542       392,542       -  

Commercial Construction, Land Development, and Other Land

    1,943,168       2,054,368       -  

Other Non Owner-Occupied Commercial Real Estate

    1,790,279       1,902,279       -  

Direct Financing Leases

    557,469       557,469       -  

Residential Real Estate

    1,071,927       1,071,927       -  

Installment and Other Consumer

    509,667       509,667       -  
    $ 6,757,674     $ 7,057,203     $ -  
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                       

Commercial and Industrial

  $ 1,269,228     $ 1,956,755     $ 927,453  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    159,247       159,247       67,498  

Commercial Construction, Land Development, and Other Land

    888,547       1,011,747       503,825  

Other Non Owner-Occupied Commercial Real Estate

    7,783,132       8,488,414       2,603,381  

Direct Financing Leases

    336,989       336,989       192,847  

Residential Real Estate

    1,044,820       1,044,820       246,266  

Installment and Other Consumer

    840,783       840,783       467,552  
    $ 12,322,746     $ 13,838,755     $ 5,008,822  
                         

Total Impaired Loans/Leases:

                       

Commercial and Industrial

  $ 1,761,850     $ 2,525,706     $ 927,453  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    551,789       551,789       67,498  

Commercial Construction, Land Development, and Other Land

    2,831,715       3,066,115       503,825  

Other Non Owner-Occupied Commercial Real Estate

    9,573,411       10,390,693       2,603,381  

Direct Financing Leases

    894,458       894,458       192,847  

Residential Real Estate

    2,116,747       2,116,747       246,266  

Installment and Other Consumer

    1,350,450       1,350,450       467,552  
    $ 19,080,420     $ 20,895,958     $ 5,008,822  

 

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

 

 
18

 

 

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, 2014 and December 31, 2013:

 

   

As of March 31, 2014

 
           

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)

  $ 419,982,030     $ 250,623,915     $ 50,250,005     $ 327,819,856     $ 1,048,675,806  

Special Mention (Rating 6)

    12,464,206       10,356,128       -       1,765,205       24,585,539  

Substandard (Rating 7)

    9,904,239       8,503,481       4,944,020       24,965,595       48,317,335  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 442,350,475     $ 269,483,524     $ 55,194,025     $ 354,550,656     $ 1,121,578,680  

 

   

As of March 31, 2014

 

Delinquency Status *

 

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and 

Other Consumer

   

Total

 
                                 

Performing

  $ 138,672,682     $ 147,106,609     $ 75,579,303     $ 361,358,594  

Nonperforming

    1,321,377       1,843,608       1,230,237       4,395,222  
    $ 139,994,059     $ 148,950,217     $ 76,809,540     $ 365,753,816  

 

   

As of December 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)

  $ 407,294,743     $ 250,028,731     $ 51,868,919     $ 326,168,882     $ 1,035,361,275  

Special Mention (Rating 6)

    11,355,713       8,318,232       1,588,086       3,310,017       24,572,048  

Substandard (Rating 7)

    13,037,673       2,868,949       4,387,897       23,213,216       43,507,735  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 431,688,129     $ 261,215,912     $ 57,844,902     $ 352,692,115     $ 1,103,441,058  

 

   

As of December 31, 2013

 

Delinquency Status *

 

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                 

Performing

  $ 128,006,984     $ 145,345,719     $ 74,688,039     $ 348,040,742  

Nonperforming

    894,458       2,010,604       1,345,771       4,250,833  
    $ 128,901,442     $ 147,356,323     $ 76,033,810     $ 352,291,575  

 

*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.

 

 
19

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of March 31, 2014 and December 31, 2013, troubled debt restructurings totaled $11,640,416 and $13,413,366, 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, 2014 and 2013. 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, 2014

   

For the three months ended March 31, 2013

 

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     $ -  

Direct Financing Leases

    1     $ 89,443     $ 89,443     $ -       -     $ -     $ -     $ -  
      1     $ 89,443     $ 89,443     $ -       1     $ 47,958     $ 47,958     $ -  
                                                                 

CONCESSION - Extension of maturity

                                                               

Commercial and Industrial

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

Direct Financing Leases

    1     $ 70,144     $ 70,144     $ 24,246       -     $ -     $ -     $ -  
      1     $ 70,144     $ 70,144     $ 24,246       3     $ 809,494     $ 809,494     $ 188,700  
                                                                 

TOTAL

    2     $ 159,587     $ 159,587     $ 24,246       4     $ 857,452     $ 857,452     $ 188,700  

 

Of the troubled debt restructurings reported above, one with a post-modification recorded investment totaling $70,144 was on nonaccrual as of March 31, 2014, and two with post-modification recorded investments totaling $80,426 were on nonaccrual as of March 31, 2013.

 

For the three months ended March 31, 2014 and 2013, 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.

 

 

 
20

 

 

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,

 
   

2014

   

2013

 
                 

Net income

  $ 3,889,215     $ 3,265,144  
                 

Less: Preferred stock dividends

    708,008       810,837  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 3,181,207     $ 2,454,307  
                 

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

               

Basic

  $ 0.40     $ 0.50  

Diluted

  $ 0.40     $ 0.49  
                 

Weighted average common shares outstanding

    7,901,035       4,927,591  

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

    129,008       106,751  

Weighted average common and common equivalent shares outstanding

    8,030,043       5,034,342  

 

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. CRBT includes CNB’s operations from its acquisition on May 13, 2013. Each of these three 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.

 

 
21

 

 

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, 2014 and 2013.   

 

   

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, 2014

                                                       

Total revenue

  $ 11,938,133     $ 8,303,625     $ 3,482,876     $ 2,149,334     $ 5,223,865     $ (5,315,781 )   $ 25,782,052  

Net interest income

  $ 8,921,038     $ 5,902,059     $ 2,475,682     $ -     $ (449,538 )   $ -     $ 16,849,241  

Net income

  $ 2,341,283     $ 1,934,770     $ 471,039     $ 459,294     $ 3,889,215     $ (5,206,386 )   $ 3,889,215  

Total assets

  $ 1,269,106,354     $ 819,179,681     $ 346,365,023     $ -     $ 203,666,846     $ (211,998,694 )   $ 2,426,319,210  

Provision for loan/lease losses

  $ 609,162     $ 300,000     $ 185,000     $ -     $ -     $ -     $ 1,094,162  

Goodwill

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

Core deposit intangible

  $ -     $ 1,820,555     $ -     $ -     $ -     $ -     $ 1,820,555  
                                                         

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

  $ 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  

 

 
22

 

 

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, 2014 and December 31, 2013:

 

           

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, 2014:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 350,337,559     $ -     $ 350,337,559     $  -  

Residential mortgage-backed and related securities

    158,119,401       -       158,119,401        -  

Municipal securities

    35,076,066       -       35,076,066        -  

Other securities

    1,944,511       317,137       1,627,374       -  
    $ 545,477,537     $ 317,137     $ 545,160,400     $ -  
                                 

December 31, 2013:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 356,472,987     $ -     $ 356,472,987     $ -  

Residential mortgage-backed and related securities

    157,429,451       -       157,429,451       -  

Municipal securities

    35,958,857       -       35,958,857       -  

Other securities

    1,897,163       317,698       1,579,465       -  
    $ 551,758,458     $ 317,698     $ 551,440,760     $ -  

 

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, 2014 and 2013.

 

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).

 

 
23

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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, 2014 and December 31, 2013:

 

           

Fair Value Measurements at Reporting Date Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

March 31, 2014:

                               

Impaired loans/leases

  $ 7,524,198     $ -     $ -     $ 7,524,198  

Other real estate owned

    10,448,606       -       -       10,448,606  
    $ 17,972,804     $ -     $ -     $ 17,972,804  
                                 

December 31, 2013:

                               

Impaired loans/leases

  $ 9,009,557     $ -     $ -     $ 9,009,557  

Other real estate owned

    10,507,377       -       -       10,507,377  
    $ 19,516,934     $ -     $ -     $ 19,516,934  

 

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.

 

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

 

   

Quantitave Information about Level Fair Value Measurments

   

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

March 31, 2014:

                     

Impaired loans/leases

  $ 7,524,198  

Appraisal of collateral

Appraisal adjustments

  -10.00% to -50.00 %

Other real estate owned

    10,448,606  

Appraisal of collateral

Appraisal adjustments

  0.00% to -35.00 %

 

   

Quantitave Information about Level Fair Value Measurments

   

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

December 31, 2013:

                     

Impaired loans/leases

  $ 9,009,557  

Appraisal of collateral

Appraisal adjustments

  -10.00% to -50.00 %

Other real estate owned

    10,507,377  

Appraisal of collateral

Appraisal adjustments

  0.00% to -35.00 %

 

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.

 

 
24

 

 

There have been no changes in valuation techniques used for any assets measured at fair value during the three months ended March 31, 2014 and 2013.

 

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, 2014

   

As of December 31, 2013

 
 

Hierarchy

Level

 

Carrying

Value

   

Estimated

Fair Value

   

Carrying

Value

   

Estimated

Fair Value

 
                                   

Cash and due from banks

Level 1

  $ 55,444,302     $ 55,444,302     $ 41,950,790     $ 41,950,790  

Federal funds sold

Level 2

    11,570,000       11,570,000       39,435,000       39,435,000  

Interest-bearing deposits at financial institutions

Level 2

    44,389,277       44,389,277       33,044,917       33,044,917  

Investment securities:

                                 

Held to maturity

Level 3

    161,629,152       157,617,860       145,451,895       138,640,105  

Available for sale

See Previous Table

    545,477,537       545,477,537       551,758,458       551,758,458  

Loans/leases receivable, net

Level 3

    6,966,850       7,524,198       8,342,182       9,009,557  

Loans/leases receivable, net

Level 2

    1,462,959,422       1,472,150,150       1,430,489,328       1,441,952,443  

Deposits:

                                 

Nonmaturity deposits

Level 2

    1,296,408,620       1,296,408,620       1,256,209,352       1,256,209,352  

Time deposits

Level 2

    375,485,023       376,596,000       390,781,891       391,923,000  

Short-term borrowings

Level 2

    165,569,112       165,569,112       149,292,967       149,292,967  

Federal Home Loan Bank advances

Level 2

    235,700,000       245,555,000       231,350,000       241,623,000  

Other borrowings

Level 2

    142,250,644       152,184,000       142,448,362       152,761,000  

Junior subordinated debentures

Level 2

    40,322,765       28,218,054       40,289,830       28,094,228  

 

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.

 

 
25

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 7 – PARTIAL REDEMPTION OF SERIES F PREFERRED STOCK

 

On March 31, 2014, the Company redeemed 15,000 shares of its Series F Non-Cumulative Perpetual Preferred Stock (the “Series F Preferred Stock”) from the United States Department of the Treasury (“Treasury”) for an aggregate redemption amount of $15,000,000 plus unpaid dividends to the date of redemption of $337,500.

 

Previously, on September 15, 2011, the Company issued 40,090 shares of Series F Preferred Stock to the Treasury for an aggregate purchase price of $40,090,000. The sale of Series F Preferred Stock was the result of an investment by Treasury under the Small Business Lending Fund (“SBLF”). 

 

On June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock. In total, the Company has redeemed 25,223 shares of the Series F Preferred Stock with 14,867 shares remaining at March 31, 2014. The Company’s dividend rate increased from 5% to 9% with the dividend for the first quarter of 2014, which was paid on April 1, 2014.

 

The Series F Preferred Stock may be redeemed at any time at the option of the Company, subject to the approval, if required, of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares (if less than 25% of the originally issued shares). The Company intends to fully redeem the remaining 14,867 shares during 2014.

 

 
26

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

QCR Holdings, Inc. is the parent company of QCBT, CRBT, 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. On October 26, 2013, Community National Bank (“CNB”), which was acquired by the Company on May 13, 2013, merged with and into CRBT. CNB’s merged branch offices operate as a division of CRBT under the name “Community Bank & Trust,” and serve Cedar Falls and Waterloo, Iowa and adjacent communities through its three offices (two in Waterloo and one in Cedar Falls).

 

 

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

 

OVERVIEW

 

The Company recognized net income of $3.9 million for the quarter ended March 31, 2014. After preferred stock dividends of $708 thousand, the Company reported net income attributable to common stockholders of $3.2 million, or diluted earnings per common share of $0.40. By comparison, for the first quarter of 2013, the Company recognized net income of $3.3 million. 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.

 

Although earnings increased nearly 30% in the first quarter of 2014 compared to the first quarter of 2013, diluted earnings per common share decreased by $0.09, or 18%, due to the issuance of new common stock related to the CNB acquisition in the second quarter of 2013 (834,715 shares issued), as well as the conversion of Series E Preferred Stock to common stock that was executed in the fourth quarter of 2013 (2,057,502 shares issued). These two events increased weighted average common shares outstanding approximately 57%, resulting in the lower diluted earnings per share.

 

 
27

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

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

 

    For the three months ended  
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 
                         

Net income

  $ 3,889,215     $ 3,815,926     $ 3,265,144  

Less: Preferred stock dividends

    708,008       735,790       810,837  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 3,181,207     $ 3,080,136     $ 2,454,307  
                         

Diluted earnings per common share

  $ 0.40     $ 0.50     $ 0.49  
                         

Weighted average common and common equivalent shares outstanding

    8,030,043       6,140,809       5,034,342  

 

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

 

    For the three months ended  
    March 31, 2014     December 31, 2013     March 31, 2013  
                         

Net interest income

  $ 16,849,241     $ 16,895,732     $ 14,191,317  

Provision for loan/lease losses

    (1,094,162 )     (1,985,517 )     (1,057,782 )

Noninterest income

    4,746,841       7,726,390       5,204,029  

Noninterest expense

    (16,140,420 )     (18,212,541 )     (13,958,500 )

Federal and state income tax

    (472,285 )     (608,138 )     (1,113,920 )

Net income

  $ 3,889,215     $ 3,815,926     $ 3,265,144  

 

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

 

 

Provision for loan/lease losses decreased 45% due to continued credit improvement.

 

Noninterest income decreased $3.0 million compared to the fourth quarter of 2013. The fourth quarter of 2013, however, included $2.3 million of gains from the sale of CNB branches, as well as $576 thousand of gains recognized on the sale of nonperforming loans. Excluding these nonrecurring items, noninterest income remained relatively flat.

 

Noninterest expense decreased 11%. CNB acquisition costs are no longer being incurred ($1.2 million of acquisition costs were incurred in the fourth quarter of 2013) and the Company has now realized the full impact of the reduced cost structure created by the acquisition.

 

 
28

 

 

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 $2.9 million, or 20%, to $17.7 million for the quarter ended March 31, 2014, from $14.7 million for the same period of 2013. The increase in net interest income was primarily driven by the acquisition of CNB in May 2013. The Company has also improved net interest income as the result of:

 

 

Organic loan/lease growth,

 

Further diversification of the Company’s securities portfolio with increased investment in tax-exempt municipal securities,

 

Continued reductions in the cost of deposits, and

 

Continued growth in noninterest bearing deposits.

 

A comparison of yields, spread and margin from the first quarter of 2014 to the first quarter of 2013 is as follows (on a tax equivalent basis):

 

 

The average yield on interest-earning assets decreased 5 basis points.

  The average cost of interest-bearing liabilities decreased 20 basis points.
  The net interest spread increased 15 basis points from 2.68% to 2.83%.
  The net interest margin improved 9 basis points from 3.02% to 3.11%.

 

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 while balancing interest rate risk. Management continually addresses this issue with pricing and other balance sheet management strategies including, but not limited to, the use of alternative funding sources. Over the past several years, the Company’s management has emphasized improving its funding mix by reducing its reliance on long-term wholesale funding, which tends to be at a higher cost than deposits. Also, the Company’s management has focused on reducing the cost of portions of the Company’s existing wholesale funding. 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.

 

 
29

 

 

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,

 
   

2014

   

2013

 
   

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

  $ 10,995     $ 3       0.11 %   $ 2,349     $ 1       0.17 %

Interest-bearing deposits at financial institutions

    88,376       91       0.42 %     37,834       60       0.64 %

Investment securities (1)

    722,220       4,655       2.61 %     648,638       3,656       2.29 %

Restricted investment securities

    17,249       129       3.03 %     15,415       125       3.29 %

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

    1,465,061       16,968       4.70 %     1,279,040       15,251       4.84 %

Total interest earning assets

  $ 2,303,901       21,846       3.85 %   $ 1,983,276       19,093       3.90 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 43,830                     $ 39,908                  

Premises and equipment

    36,732                       31,202                  

Less allowance for estimated losses on loans/leases

    (21,894 )                     (20,224 )                

Other

    71,589                       75,850                  

Total assets

  $ 2,434,158                     $ 2,110,012                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 715,054       446       0.25 %   $ 562,905       409       0.29 %

Time deposits

    382,721       656       0.70 %     333,696       708       0.86 %

Short-term borrowings

    149,989       52       0.14 %     175,706       64       0.15 %

Federal Home Loan Bank advances

    234,627       1,556       2.69 %     202,618       1,733       3.47 %

Junior subordinated debentures

    40,306       305       3.07 %     36,085       241       2.71 %

Other borrowings

    142,317       1,171       3.34 %     138,210       1,191       3.49 %

Total interest-bearing liabilities

  $ 1,665,014       4,186       1.02 %   $ 1,449,220       4,346       1.22 %

Noninterest-bearing demand deposits

  $ 585,441                     $ 487,264                  

Other noninterest-bearing liabilities

    33,640                       32,345                  

Total liabilities

  $ 2,284,095                     $ 1,968,829                  

Stockholders' equity

    150,063                       141,183                  

Total liabilities and stockholders' equity

  $ 2,434,158                     $ 2,110,012                  

Net interest income

          $ 17,660                     $ 14,747          

Net interest spread

                    2.83 %                     2.68 %

Net interest margin

                    3.11 %                     3.02 %

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

    138.37

%

                    136.85 %                

 

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

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

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

 

 
30

 

 

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, 2014 

 

   

Inc./(Dec.)

from

   

Components

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2014 vs. 2013

 
   

(dollars in thousands)

 

INTEREST INCOME

                       

Federal funds sold

  $ 2     $ (2 )   $ 4  

Interest-bearing deposits at financial institutions

    31       (128 )     159  

Investment securities (2)

    999       558       441  

Restricted investment securities

    4       (46 )     50  

Gross loans/leases receivable (2) (3) (4)

    1,717       (2,681 )     4,398  
                         

Total change in interest income

  $ 2,753     $ (2,299 )   $ 5,052  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ 37     $ (296 )   $ 333  

Time deposits

    (52 )     (508 )     456  

Short-term borrowings

    (12 )     (3 )     (9 )

Federal Home Loan Bank advances

    (177 )     (1,408 )     1,231  

Junior subordinated debentures

    64       34       30  

Other borrowings

    (20 )     (185 )     165  
                         

Total change in interest expense

  $ (160 )   $ (2,366 )   $ 2,206  
                         

Total change in net interest income

  $ 2,913     $ 67     $ 2,846  

 

 

(1)

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

(2)

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

(3)

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

(4)

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

 

 

 
31

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

CRITICAL ACCOUNTING POLICIES

 

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

 

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for estimated losses on loans/leases (“allowance”). The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Management may report a materially different amount for the provision for loan/leases losses (“provision”) in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance. Although management believes the level of the allowance as of March 31, 2014 was 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.

 

 
32

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

RESULTS OF OPERATIONS

 

INTEREST INCOME

 

Interest income grew $2.5 million, or 13%, comparing the first quarter of 2014 to the same period of 2013. The majority of this growth was the result of the acquisition of CNB and the addition of its earning assets. Additionally, the Company’s loan/lease yield expanded 5 basis points during the first quarter of 2014 (from 4.65% to 4.70%) marking the first quarter of expansion since the recession. The securities portfolio yield continued to increase (from 2.29% for the first quarter of 2013 to 2.61% for the first quarter of 2014) as the Company continues to focus on diversifying its securities portfolio, including increasing its portfolio of agency-sponsored mortgage-backed securities as well as municipal securities, in an effort to increase interest income. 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 2014 declined $160 thousand, or 4%, from the first quarter of 2013. Considering the growth of interest-bearing liabilities (average balances grew $215.8 million, or 15%, from the first quarter of 2013 to the same quarter of 2014) from the acquisition of CNB as well as organic growth at the Company’s legacy charters, the Company has been successful in maintaining pricing discipline on deposits and decreasing the cost of borrowings, which has more than offset the growth impact and contributed to the net decline in interest expense. Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have been replaced by core deposits, or, to a lesser extent, have been replaced by new wholesale funds at significantly reduced cost. Continuing this trend will strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

 

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. An important consideration to these strategies is the impact on the Company’s interest rate risk position, as some of its wholesale funding was originally borrowed to help strengthen the Company’s net interest income in rising interest rate scenarios.

 

 
33

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

PROVISION FOR LOAN/LEASE LOSSES

 

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

 

Provision totaled $1.1 million for the first quarter of 2014, which was down $892 thousand from the prior quarter, and essentially flat from the first quarter of 2013. The Company had net recoveries of $111 thousand for the first quarter of 2014 which, when coupled with the provision of $1.1 million, increased the Company’s allowance to $22.7 million at March 31, 2014. As of March 31, 2014, the Company’s allowance to total loans/leases was 1.52%, which was up from 1.47% at December 31, 2013, and down from 1.61% at March 31, 2013.

 

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

 

NONINTEREST INCOME

 

The following tables set forth the various categories of noninterest income for the three months ended March 31, 2014 and 2013.

 

    Three Months Ended                  
   

March 31, 2014

   

March 31, 2013

   

$ Change

   

% Change

 
                                 

Trust department fees

  $ 1,500,342     $ 1,039,670     $ 460,672       44.3

%

Investment advisory and management fees

    648,992       609,341       39,651       6.5  

Deposit service fees

    1,045,885       907,823       138,062       15.2  

Gains on sales of residential real estate loans

    63,487       291,151       (227,664 )     (78.2 )

Gains on sales of government guaranteed portions of loans

    194,019       845,224       (651,205 )     (77.0 )

Earnings on bank-owned life insurance

    454,164       438,687       15,477       3.5  

Subtotal

  $ 3,906,889     $ 4,131,896     $ (225,007 )     (5.4 )

Losses on other real estate owned, net

    (18,048 )     (446,630 )     428,582       (96.0 )

Securities gains

    20,625       -       20,625       100.0  

Other

    837,375       1,518,763       (681,388 )     (44.9 )

Total noninterest income

  $ 4,746,841     $ 5,204,029     $ (457,188 )     (8.8

)%

 

Trust department fees continue to be a significant contributor to noninterest income. Trust department fees grew 44% from the first quarter of 2013 to the first quarter of 2014. Part of the increase stems from the addition of CNB’s trust department which recognized $269 thousand of trust department fees for the first quarter of 2014. The majority of the trust department fees are determined based on the value of the investments within the managed trusts. As markets have strengthened with the national economy’s continued recovery from recession, the Company’s fee income has experienced similar growth. Additionally, the Company has been successful in organically expanding its customer base at its legacy charters, which has helped to drive the recent increases in fee income.

 

 
34

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

In recent years, the Company has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Fee income for investment advisory and management services grew 7% comparing the first quarter of 2014 to the same period of 2013. Similar to trust department fees, these fees are largely determined based on the value of the investments managed. Continued expansion of the customer base in the Company’s legacy markets has helped drive the recent increases in fee income. CNB did not provide investment advisory and management services; however, the Company is in the process of leveraging its existing infrastructure to efficiently offer these services in the communities served by CNB.

 

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

 

Deposit service fees expanded 15% comparing the first quarter of 2014 to the same period in 2013. Most of this growth is attributable to the acquisition of CNB and its deposit portfolio. Additionally, the Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

 

Gains on sales of residential real estate loans fell 78% comparing the first quarter of 2014 to the first quarter of 2013. 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.

 

Gains on sales of government guaranteed portions of loans were down 77% year-over-year. 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, this remains a core strategy for the Company and the pipelines are active.

 

During the first quarter of 2013, the Company wrote down one existing individual other real estate owned (“OREO”) property by $463 thousand as a result of a further decline in appraised value. Management continues to proactively manage its OREO portfolio in an effort to sell the properties timely at minimal loss, as evidenced by the minimal losses recognized thus far in 2014.

 

 
35

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The following table sets forth the various categories of other noninterest income for the three months ended March 31, 2014 and 2013.

 

    Three Months Ended                   
   

March 31, 2014

   

March 31, 2013

   

$ Change

   

% Change

 
                                 

Debit card fees

  $ 230,605     $ 229,900     $ 705       0.3

%

Correspondent banking fees

    232,143       158,111       74,032       46.8  

Participation service fees on commercial loan participations

    206,194       167,326       38,868       23.2  

Fees on interest rate swaps on commercial loans

    62,000       6,720       55,280       822.6  

Gain on sale of credit card loan portfolio

    -       495,405       (495,405 )     (100.0 )

Gain on sale of credit card issuing operations

    -       355,268       (355,268 )     (100.0 )

Miscellaneous

    106,433       106,033       400       0.4  

Other noninterest income

  $ 837,375     $ 1,518,763     $ (681,388 )     (44.9

)%

 

Debit card fees are the interchange fees paid on certain debit card customer transactions. The debit card fees were relatively flat comparing the first quarter of 2014 to the first quarter of 2013. As an opportunity to maximize fees, the Company’s legacy charters offer a deposit product with a modest increased rate that incentivizes debit card activity. Offering a similar product in the Company’s newest market is currently under strategic review.

 

Correspondent banking fees increased 47%, when comparing the first quarter of 2014 to the first quarter of 2013. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund additional loan growth as well as a steady source of fee income.

 

Participation service fees on commercial loan participations represent fees paid annually to the Company by the participant(s) to cover servicing expenses incurred by the Company. The fee is generally 25 basis points of the participated loan amount. Participation service fees grew 23% year-over-year as a result of the acquisition of CNB’s participated loan portfolio as well as organic growth of commercial loan participations across the Company’s legacy charters.

 

In recent years, as a result of the sustained historically low interest rate environment, CRBT 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 of its subsidiary banks as the circumstances are appropriate for the borrower and the Company.

 

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.

 

 
36

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONINTEREST EXPENSE

 

The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2014 and 2013.

 

    Three Months Ended                   
   

March 31,

2014

   

March 31,

2013

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits

  $ 10,017,918     $ 8,742,683     $ 1,275,235       14.6

%

Occupancy and equipment expense

    1,894,288       1,428,870       465,418       32.6  

Professional and data processing fees

    1,584,406       1,140,061       444,345       39.0  

FDIC and other insurance

    714,750       555,911       158,839       28.6  

Loan/lease expense

    345,636       245,091       100,545       41.0  

Advertising and marketing

    337,587       264,568       73,019       27.6  

Postage and telephone

    290,675       218,691       71,984       32.9  

Stationery and supplies

    151,751       110,670       41,081       37.1  

Bank service charges

    298,032       275,495       22,537       8.2  

Subtotal

  $ 15,635,043     $ 12,982,040     $ 2,653,003       20.4  

Acquisition and data conversion costs

    -       356,578       (356,578 )     (100.0 )

Other

    505,377       619,882       (114,505 )     (18.5 )

Total noninterest expense

  $ 16,140,420     $ 13,958,500     $ 2,181,920       15.6

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. The addition of CNB’s cost structure impacted the Company’s noninterest expenses. Management executed on its integration plan for CNB over the second half of 2013 to help increase efficiency and realize cost savings.

 

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2013 to the first quarter of 2014 by 15%. This increase was largely the result of:

 

 

The addition of CNB’s cost structure. Specifically, CNB accounted for approximately $900 thousand of the increase in salaries and benefits expense year-over-year.

 

Customary annual salary and benefits increases for the majority of the Company’s employee base in 2014.

 

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

 

Higher accrued incentive compensation based on improved financial performance for the first three months of 2014.

 

Occupancy and equipment expense increased from the prior year with the addition of CNB’s branch network. Additionally, throughout 2013, the Company purchased additional technology for enhanced customer service and for improved fraud detection and prevention systems.

 

Professional and data processing fees increased year-over-year due to the addition of CNB’s cost structure. In addition, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing these one-time costs and driving those recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

 

 
37

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

FDIC and other insurance expense has generally fallen over the past several years since the FDIC modified its assessment calculation to more closely align with bank performance and risk. The 29% increase year-over-year was primarily attributable to the addition of CNB’s deposit base.

 

Loan/lease expense increased 41% comparing the first quarter of 2014 to the same quarter of 2013. Some of the increase was the result of the addition of CNB’s cost structure. Moreover, the Company incurred elevated levels of expense at the legacy banks for certain existing nonperforming loans as workouts progressed. Generally, loan/lease expense has a direct relationship with the level of nonperforming loans/leases; however, it may deviate depending upon the individual nonperforming loans/leases. Management expects these historically elevated levels of expense to continue to decline in line with the declining trend in nonperforming loans/leases.

 

The Company incurred additional expenses for advertising and marketing in the first quarter of 2014 compared to the first quarter of 2013. Most of the increase was the addition of CNB’s advertising and marketing costs.

 

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

 

With the acquisition of CNB on May 13, 2013, the Company incurred acquisition costs totaling $357 thousand for the first quarter of 2013 as the Company incurred professional fees (legal, investment banking, and accounting) in preparation for the closing of the acquisition. In accordance with generally accepted accounting principles, the Company expensed these costs as incurred.

 

 
38

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

 

The provision for income taxes totaled $472 thousand, or an effective tax rate of 11%, for the first quarter of 2014 compared to $1.1 million, or an effective tax rate of 25%, for the same quarter of 2013. The decline in effective tax rate was partly the result of continued growth in nontaxable income from increased investments in tax-exempt municipal securities, as the Company grew its portfolio of tax-exempt municipal securities by nearly 35% from March 31, 2013 to March 31, 2014. The growth in nontaxable income outpaced the growth in taxable income which helped to reduce the effective tax rate. Additionally, the Company recognized a one-time tax benefit of $381 thousand as a result of the finalization of the tax issues related to the Community National acquisition following the filing of the acquired entity’s final tax returns.

 

FINANCIAL CONDITION

 

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

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Cash, federal funds sold, and interest-bearing deposits

  $ 111,403       5 %   $ 114,431       5 %   $ 67,036       3 %

Securities

    707,107       29 %     697,210       29 %     692,552       32 %

Net loans/leases

    1,469,926       61 %     1,438,832       60 %     1,271,026       59 %

Other assets

    137,883       5 %     144,480       6 %     113,377       6 %

Total assets

  $ 2,426,319       100 %   $ 2,394,953       100 %   $ 2,143,991       100 %
                                                 

Total deposits

  $ 1,671,893       69 %   $ 1,646,991       68 %   $ 1,420,493       66 %

Total borrowings

    583,843       24 %     563,381       24 %     551,531       26 %

Other liabilities

    29,226       1 %     37,004       2 %     29,769       1 %

Total stockholders' equity

    141,357       6 %     147,577       6 %     142,198       7 %

Total liabilities and stockholders' equity

  $ 2,426,319       100 %   $ 2,394,953       100 %   $ 2,143,991       100 %

 

 

During the first quarter of 2014, the Company’s total assets grew $31.4 million, or 1%, to a total of $2.43 billion. Gross loans/leases grew $32.3 million, or 2%; while securities grew 1%. Most of the asset growth was funded with deposits which grew $24.9 million, or 2%. The remaining growth was funded with short-term borrowings.

 

 
39

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

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

 

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

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

 

 

 

 

 

   

 

 

   

(dollars in thousands)

                 

U.S. govt. sponsored agency securities

  $ 350,338       50 %   $ 356,473       51 %   $ 403,840       58 %

Residential mortgage-backed and related securities

    158,119       22 %     157,429       23 %     174,802       25 %

Municipal securities

    195,655       28 %     180,361       26 %     111,347       17 %

Other securities

    2,995       0 %     2,947       0 %     2,563       0 %
    $ 707,107       100 %   $ 697,210       100 %   $ 692,552       100 %
                                                 

As a % of Total Assets

    29.14 %             29.11 %             32.30 %        

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

    -2.45 %             -4.02 %             0.96 %        

Duration (in years)

    4.6               4.7               2.9          

 

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

 

 

 
40

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The duration of the securities portfolio has lengthened over the recent years for two reasons:

 

 

A portion of the government-sponsored agency securities contain call options at the discretion of the issuer whereby the issuer can call the security at par at certain times which vary by individual security. With the sharp increase in longer-term rates in 2013, the duration of these callable agency securities lengthened as the likelihood of a call became remote.

 

The increased investment in tax-exempt municipal securities which tend to be longer term (average maturity is approximately 7 years). Management understands that this extended the duration of its securities portfolio and continually evaluates the combined benefit of increased interest income and reduced effective income tax rate and the impact on interest rate risk.

 

The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities. Additionally, the Company has not invested in the types of securities subject to the Volcker Rule (a provision of the Dodd-Frank Act).

 

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

 

LOANS/LEASES. Total loans/leases grew 2% during the first quarter of 2014. Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more commercial and industrial loans, owner-occupied commercial real estate loans, and leases and fewer non owner-occupied commercial real estate and construction loans. The addition of CNB’s portfolio helped maintain this shift in mix as CNB’s portfolio mix was similar to the Company’s three legacy banks. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

 

 

 

(dollars in thousands)

 

Commercial and industrial loans

  $ 442,350       30 %   $ 431,688       30 %   $ 398,122       31 %

Commercial real estate loans

    679,228       46 %     671,753       46 %     598,634       46 %

Direct financing leases

    139,994       9 %     128,902       9 %     109,654       9 %

Residential real estate loans

    148,950       10 %     147,356       10 %     115,548       9 %

Installment and other consumer loans

    76,810       5 %     76,034       5 %     66,294       5 %

Total loans/leases

  $ 1,487,332       100 %   $ 1,455,733       100 %   $ 1,288,252       100 %

Plus deferred loan/lease origination costs, net of fees

    5,247               4,547               3,543          

Less allowance for estimated losses on loans/leases

    (22,653 )             (21,448 )             (20,769 )        

Net loans/leases

  $ 1,469,926             $ 1,438,832             $ 1,271,026          

 

 

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, 2014 and December 31, 2013, approximately 40% and 39%, respectively, of the commercial real estate loan portfolio was owner-occupied.

 

 
41

 

 

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, 2014 and December 31, 2013:

 

   

As of March 31,

2014

   

As of December 31,

2013

 
   

Amount

   

%

   

Amount

   

%

 

 

 

 

(dollars in thousands)

 

Lessors of Nonresidential Buildings

  $ 231,341       34 %   $ 229,284       34 %

Lessors of Residential Buildings

    60,982       9 %     64,659       10 %

Land Subdivision

    30,802       5 %     29,117       4 %

Nursing Care Facilities

    21,938       3 %     19,212       3 %

Hotels

    20,644       3 %     20,975       3 %

Lessors of Other Real Estate Property

    16,861       3 %     15,509       2 %

New Car Dealers

    16,183       2 %     16,597       2 %

Other *

    280,477       41 %     276,400       42 %

Total Commercial Real Estate Loans

  $ 679,228       100 %   $ 671,753       100 %

 

* “Other” consists of all other industries. None of these had concentrations greater than $16.0 million, or 2.4% 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.

 

 
42

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES. Changes in the allowance for the three months ended March 31, 2014 and 2013 are presented as follows:

 

   

Three Months Ended

 
   

March 31, 2014

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 
                 

Provisions charged to expense

    1,094       1,058  

Loans/leases charged off

    (79 )     (303 )

Recoveries on loans/leases previously charged off

    190       89  

Balance, ending

  $ 22,653     $ 20,769  

 

The allowance was $22.7 million at March 31, 2014 compared to $21.4 million at December 31, 2013 and $20.8 million at March 31, 2013. The allowance was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase/decrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is 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 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, 2014

   

December 31, 2013

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 
Special Mention (Rating 6)   $ 24,586     $ 24,572     $ 27,610  

Substandard (Rating 7)

    48,317       43,508       50,198  

Doubtful (Rating 8)

    -       -       -  
    $ 72,903     $ 68,080     $ 77,808  
                         
                         

Criticized Loans **

  $ 72,903     $ 68,080     $ 77,808  

Classified Loans ***

  $ 48,317     $ 43,508     $ 50,198  

 

* 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.

 

 
43

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The Company experienced some increase in criticized and classified loans during the first quarter of 2014, as compared to December 31, 2013, but this did not translate to an increase in nonperforming loans. Nonperforming loans/leases actually decreased $1.9 million, or 9%, during the same period.

 

The following table summarizes the trend in the allowance as a percentage of gross loans/leases and as a percentage of nonperforming loans/leases.

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 
                         

Allowance / Gross Loans/Leases

    1.52 %     1.47 %     1.61 %

Allowance / Nonperforming Loans/Leases *

    121.58 %     104.70 %     105.30 %

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

 

In accordance with generally accepted accounting principles for acquisition accounting, the acquired CNB loans were recorded at market value; therefore, there was no allowance associated with CNB’s loans at acquisition which caused a drop in the Company’s allowance to total loans/leases during the second quarter of 2013. This ratio has steadily increased since then. Further, the Company’s allowance to total nonperforming loans/leases was 122% at March 31, 2014 which was up from all prior periods presented in the table above.

 

Although management believes that the allowance at March 31, 2014 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 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.

 

 
44

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONPERFORMING ASSETS. The table below presents the amounts of nonperforming assets.

 

 

   

As of March 31,

2014

   

As of December 31,

2013

   

As of March 31,

2013

   

As of December 31,

2012

 

 

 

 

(dollars in thousands)

 

Nonaccrual loans/leases (1) (2)

  $ 17,653     $ 17,878     $ 18,040     $ 17,932  

Accruing loans/leases past due 90 days or more

    5       84       1       159  

Troubled debt restructurings - accruing

    974       2,523       1,682       7,300  

Total nonperforming loans/leases

    18,632       20,485       19,723       25,391  

Other real estate owned

    9,675       9,729       3,679       3,955  

Other repossessed assets

    252       346       282       212  

Total nonperforming assets

  $ 28,559     $ 30,560     $ 23,684     $ 29,558  
                                 

Nonperforming loans/leases to total loans/leases

    1.25 %     1.40 %     1.53 %     1.97 %

Nonperforming assets to total loans/leases plus reposessed property

    1.90 %     2.08 %     1.83 %     2.29 %

Nonperforming assets to total assets

    1.18 %     1.28 %     1.10 %     1.41 %

Texas ratio (3)

    17.81 %     18.43 %     14.65 %     18.68 %

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

 

(2)

Includes troubled debt restructurings of $10.7 million at March 31, 2014, $10.9 million at December 31, 2013, $6.4 million at March 31, 2013, and $5.7 million at December 31, 2012.

 

(3)

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

 

The large majority of the nonperforming assets consist of nonaccrual loans/leases, accruing troubled debt restructurings (“TDRs”), and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate. Additionally, a portion of several of the nonaccrual loans are guaranteed by the government. At March 31, 2014, government guaranteed amounts of nonaccrual loans totaled approximately $664 thousand, or 4% of the $17.7 million of total nonaccrual loans/leases. OREO is carried at the lower of carrying amount or fair value less costs to sell.

 

Nonperforming assets at March 31, 2014 were $28.6 million, which were down $2.0 million, or 7%, from December 31, 2013, and up $4.9 million, or 21%, from March 31, 2013. In addition, the ratio of nonperforming assets to total assets was 1.18% at March 31, 2014, which was down from 1.28% at December 31, 2013, and up from 1.10% at March 31, 2013. During the quarter, the Company had several large accruing TDRs that became performing according to the applicable accounting guidance. Additionally, several nonperforming loans paid off during the current quarter.

 

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

 

 
45

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

DEPOSITS. Deposits grew $24.9 million, or 2%, during the first quarter of 2014. Most of the growth was in noninterest bearing and short-term low cost brokered time deposits. The table below presents the composition of the Company’s deposit portfolio.

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Noninterest bearing demand deposits

  $ 579,110       34 %   $ 542,566       33 %   $ 496,513       35 %

Interest bearing demand deposits

    717,299       43 %     715,643       43 %     586,874       41 %

Time deposits

    296,102       18 %     326,852       20 %     297,768       21 %

Brokered time deposits

    79,382       5 %     61,930       4 %     39,338       3 %
    $ 1,671,893       100 %   $ 1,646,991       100 %   $ 1,420,493       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 2014. 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.

 

BORROWINGS. 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, 2014

   

December 31, 2013

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 

Overnight repurchase agreements with customers

  $ 136,649     $ 98,823     $ 141,674  

Federal funds purchased

    28,920       50,470       30,180  
    $ 165,569     $ 149,293     $ 171,854  

 

As a result of their memberships in either the Federal Home Loan Bank (“FHLB”) of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates, and when these advances provide a less costly or more readily available source of funds than customer deposits. FHLB advances increased slightly by $4.4 million, or 2%, during the first quarter of 2014. The net growth was exclusively short-term advances (maturities of less than 3 months) at low cost (interest rates ranging from 10 basis points to 25 basis points).

 

 
46

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Other borrowings consist largely of structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. The table below presents the composition of the Company’s other borrowings.

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 

 

 

 

(dollars in thousands)

 

Structured repos

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

Term note

    9,600       9,800       -  

364-day revolving note

    -       -       5,600  

Series A subordinated notes

    2,651       2,648       2,642  
    $ 142,251     $ 142,448     $ 138,242  

 

In order to fund the cash portion of the consideration for the CNB acquisition and pay off the $3.95 million of Community National term debt at acquisition, the Company borrowed $4.4 million on its 364-day revolving note in May 2013. The outstanding balance on the 364-day revolving note totaled $10.0 million until maturity at June 26, 2013. Upon maturity, the credit facility was restructured whereby the $10.0 million of outstanding debt was restructured into a secured 3-year term note with principal due quarterly and interest due monthly where the interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.21% at March 31, 2014). As the Company makes scheduled quarterly principal payments, the outstanding balance on the term note was $9.6 million at March 31, 2014. Additionally, as part of the restructuring, the Company maintained a secured 364-day revolving credit note with availability of $10.0 million where the interest is calculated at the effective LIBOR rate plus 2.50% per annum. At March 31, 2014, the Company had not borrowed on this revolving credit note and had the full amount available.

 

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

 

   

March 31, 2014

   

December 31, 2013

 
   

Amount Due

   

Weighted

Average

Interest Rate

at Quarter-End

   

Amount Due

   

Weighted

Average

Interest Rate

at Year-End

 

 

 

 

(dollar amounts in thousands)

 
Maturity:                                
Year ending December 31:                                

2014

  $ 127,323       0.58     $ 110,521       1.24  

2015

    46,000       1.82       41,000       2.00  

2016

    48,642       3.63       48,642       3.63  

2017

    43,075       3.43       43,075       3.43  

2018

    58,042       3.47       58,042       3.47  

Thereafter

    122,000       3.33       122,000       3.33  

Total Wholesale Funding

  $ 445,082       2.45     $ 423,280       2.72  

 

Importantly, a large portion of the Company’s 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.

 

 
47

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

During the first quarter of 2014, wholesale funding maturing in 2014 increased by $16.8 million. This is the net result of a $20.0 million maturity more than offset by the addition of $36.8 million in short-term, low cost FHLB advances and brokered time deposits.

 

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

 

   

As of

 
   

March 31, 2014

   

December 31, 2013

   

March 31, 2013

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

 

 

 

(dollars in thousands)

 

Common stock

  $ 8,039             $ 8,006             $ 5,058          

Additional paid in capital - common

    60,696               60,360               25,932          

Retained earnings

    67,817               64,637               55,781          

Accumulated other comprehensive income (loss)

    (8,413 )             (13,644 )             3,870          

Less: Treasury stock

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

Total common stockholders' equity

    126,533       90 %     117,753       80 %     89,035       63 %
                                                 

Preferred stock

    15               30               55          

Additional paid in capital - preferred

    14,809               29,794               53,108          

Total preferred stockholders' equity

    14,824       10 %     29,824       20 %     53,163       37 %
                                                 

Total stockholders' equity

  $ 141,357       100 %   $ 147,577       100 %   $ 142,198       100 %
                                                 

Tangible common equity (TCE)* / total tangible assets (TA)

    5.02 %             4.71 %             4.01 %        

TCE/TA excluding accumulated other comprehensive income (loss)

    5.36 %             5.29 %             3.83 %        

 

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

 

The following table presents the rollforward of stockholders’ equity for the three months ended March 31, 2014 and 2013, respectively.

 

   

For the quarter ended March 31,

 
   

2014

   

2013

 

 

 

 

(dollars in thousands)

 

Beginning balance

  $ 147,577     $ 140,434  

Net income

    3,889       3,265  

Other comprehensive income (loss), net of tax

    5,231       (836 )

Preferred and common cash dividends declared

    (708 )     (811 )

Redemption of 15,000 shares of Series F Preferred Stock

    (15,000 )     -  

Other *

    368       146  

Ending balance

  $ 141,357     $ 142,198  

 

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

 

 
48

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The following table presents the details of the preferred stock issued and outstanding as of March 31, 2014.

 

Date Issued

 

Aggregate

Purchase Price

   

Stated Dividend

Rate

   

Annual

Dividend

 
                           

Series F Non-Cumulative Perpetual Preferred Stock

September 2011

  $ 14,867,000       9.00 %   $ 1,338,030  

 

Regarding the Series F Preferred Stock, non-cumulative dividends are payable quarterly, and the dividend rate is 9%. On March 31, 2014 the Company redeemed an additional 15,000 shares of Series F Preferred Stock from Treasury for an aggregate redemption amount of $15.0 million plus unpaid dividends to the date of redemption of $338 thousand. Previously, on June 29, 2012, the Company redeemed 10,223 shares of Series F Preferred Stock from Treasury for an aggregate redemption amount of $10.2 million plus unpaid dividends to the date of redemption of $125 thousand. In total, the Company had 14,867 shares of Series F Preferred Stock remaining at March 31, 2014.

 

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, if required. All redemptions must be in amounts equal to the lesser of at least 25% of the number of originally issued shares, or 100% of the then-outstanding shares.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $143.2 million during the first quarter of 2014, $102.8 million during 2013 and $98.6 million during 2012. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

 

 
49

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, structured repos, brokered time deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its residential mortgage-backed securities portfolio. At March 31, 2014, the subsidiary banks had 33 lines of credit totaling $348.1 million, of which $18.6 million was secured and $329.5 million was unsecured. At March 31, 2014, $319.2 million was available as $28.9 million was utilized for short-term borrowing needs at the three banks. At December 31, 2013, the subsidiary banks had 33 lines of credit totaling $351.3 million, of which $26.8 million was secured and $324.5 million was unsecured. At December 31, 2013, $315.3 million was available as $36.0 million was utilized for short-term borrowing needs at QCBT. The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company restructured its credit facility during the second quarter of 2013. Previously, the Company had a single $20.0 million secured revolving credit note with variable interest rate and a maturity of June 27, 2013 with $14.4 million available as the note carried an outstanding balance of $5.6 million. To help fund the acquisition of CNB on May 13, 2013, the Company borrowed an additional $4.4 million on the revolving credit note bringing the total borrowed to $10.0 million. At maturity, the $10.0 million was converted to a secured term note with a variable interest rate and a maturity of June 27, 2016. The Company maintained a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 26, 2014. At March 31, 2014, the Company had not borrowed on this revolving credit note and had the full amount available.

 

Investing activities used cash of $19.2 million during the first three months of 2014 compared to $84.9 million for the same period of 2013. Proceeds from calls, maturities, paydowns, and sales of securities were $24.1 million for the first three months of 2014 compared to $95.0 million for the same period of 2013. Purchases of securities used cash of $26.1 million for the first three months of 2014 compared to $187.7 million for the same period of 2013. The net increase in loans/leases used cash of $33.1 million for the first three months of 2014 compared to $7.1 million for the same period of 2013.

 

Financing activities provided cash of $29.6 million for the first three months of 2014 compared to $49.4 million for same period of 2013. Net increases in deposits totaled $24.9 million for the first three months of 2014 compared to $46.4 million for the same period of 2013. During the first quarter of 2014, the Company’s short-term borrowings increased $16.3 million. Also, during the first quarter, the Company partially redeemed its outstanding shares of Series F Preferred Stock totaling $15.0 million.

 

Total cash provided by operating activities was $3.2 million for the first three months of 2014 compared to $7.2 million for the same period of 2013.

 

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.

 

 
50

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The following table presents the details of the trust preferred securities issued and outstanding as of March 31, 2014.

 

Name

Date Issued

 

Amount Issued

 

Interest Rate

 

Interest Rate

as of

3/31/2014

   

Interest Rate

as of

12/31/2013

 
                             

QCR Holdings Statutory Trust II

February 2004

  $ 12,372,000  

2.85% over 3-month LIBOR

    3.10 %     3.10 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000  

2.85% over 3-month LIBOR

    3.10 %     3.10 %

QCR Holdings Statutory Trust IV

May 2005

    5,155,000  

1.80% over 3-month LIBOR

    2.04 %     2.04 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000  

1.55% over 3-month LIBOR

    1.79 %     1.79 %

Community National Statutory Trust II

September 2004

    3,093,000  

2.17% over 3-month LIBOR

    2.42 %     2.42 %

Community National Statutory Trust III

March 2007

    3,609,000  

1.75% over 3-month LIBOR

    1.99 %     1.99 %
      $ 42,787,000  

Weighted Average Rate

    2.51 %     2.51 %

 

The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. As a result of acquisition accounting, the liabilities were recorded at fair value upon acquisition with the resulting discount (totaling $2.6 million) being accreted as interest expense on a level yield basis over the expected term.

 

 
51

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The Company (on a consolidated basis) and its 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 tables) 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, 2014 and December 31, 2013, that the Company and the subsidiary banks met all capital adequacy requirements to which they were subject.

 

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2014 and December 31, 2013 are also presented in the following tables (dollars in thousands). As of March 31, 2014 and December 31, 2013, 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, 2014:

                                                     

Company:

                                                     

Total risk-based capital

  $ 206,050          12.03 %   $ 137,032  

>

    8.0 %  

N/A

     

N/A

 

Tier 1 risk-based capital

    181,723          10.61 %     68,516  

>

    4.0    

N/A

     

N/A

 

Leverage ratio

    181,723          7.49 %     97,083  

>

    4.0    

N/A

     

N/A

 

Quad City Bank & Trust:

                                                     

Total risk-based capital

  $ 102,495         12.08 %   $ 67,887  

>

    8.0 %   $ 84,858  

>

    10.00 %

Tier 1 risk-based capital

    92,582         10.91 %     33,943  

>

    4.0       50,915  

>

    6.00 %

Leverage ratio

    92,582         7.07 %     52,360  

>

    4.0       65,450  

>

    5.00 %

Cedar Rapids Bank & Trust:

                                                     

Total risk-based capital

  $ 76,218         12.48 %   $ 48,847  

>

    8.0 %   $ 61,058  

>

    10.00 %

Tier 1 risk-based capital

    68,573         11.23 %     24,423  

>

    4.0       36,635  

>

    6.00 %

Leverage ratio

    68,573         8.62 %     31,838  

>

    4.0       39,797  

>

    5.00 %

Rockford Bank & Trust:

                                                     

Total risk-based capital

  $ 34,245         12.60 %   $ 21,751  

>

    8.0 %   $ 27,189  

>

    10.00 %

Tier 1 risk-based capital

    30,838         11.34 %     10,876  

>

    4.0       16,314  

>

    6.00 %

Leverage ratio

    30,838         9.07 %     13,604  

>

    4.0       17,005  

>

    5.00 %

 

 
52

 

 

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, 2013:

                                                     

Company:

                                                     

Total risk-based capital

  $ 217,011         12.87 %   $ 134,935  

>

    8.0 %  

N/A

     

N/A

 

Tier 1 risk-based capital

    193,044         11.45 %     67,468  

>

    4.0 %  

N/A

     

N/A

 

Tier 1 leverage

    193,044         7.96 %     97,029  

>

    4.0 %  

N/A

     

N/A

 

Quad City Bank & Trust:

                                                     

Total risk-based capital

  $ 101,168         12.25 %   $ 66,049  

>

    8.0 %   $ 82,562  

>

    10.00 %

Tier 1 risk-based capital

    91,820         11.12 %     33,025  

>

    4.0       49,537  

>

    6.00 %

Tier 1 leverage

    91,820         7.13 %     51,527  

>

    4.0       64,408  

>

    5.00 %

Cedar Rapids Bank & Trust:

                                                     

Total risk-based capital

  $ 74,912         12.54 %   $ 47,808  

>

    8.0 %   $ 59,760  

>

    10.00 %

Tier 1 risk-based capital

    67,432         11.28 %     23,904  

>

    4.0       35,856  

>

    6.00 %

Tier 1 leverage

    67,432         8.78 %     30,736  

>

    4.0       38,420  

>

    5.00 %

Rockford Bank & Trust:

                                                     

Total risk-based capital

  $ 38,778         14.59 %   $ 21,263  

>

    8.0 %   $ 26,579  

>

    10.00 %

Tier 1 risk-based capital

    35,449         13.34 %     10,631  

>

    4.0       15,947  

>

    6.00 %

Tier 1 leverage

    35,449         10.54 %     13,459  

>

    4.0       16,824  

>

    5.00 %

 

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

 

 
53

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

 
54

 

 

Part I

Item 3

 

QUANTITATIVE AND QUALITATVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

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

 

 
55

 

 

Part I

Item 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 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. Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift upward 100, 200, 300, and 400 basis points and a parallel and instantaneous shift downward 100 basis points. The Company will run additional interest rate scenarios on an as-needed basis. The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit has been increased to 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

 

Application of the simulation model analysis for select interest rate scenarios at the most recent quarter-end available is presented in the following table:

 

           

NET INTEREST INCOME EXPOSURE in YEAR 1

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

   

As of  December 31, 2013

   

As of  March 31, 2013

   

As of December 31, 2012

 
                                 

100 basis point downward shift

    -10.0 %     -1.0 %     -1.8 %     -1.5 %

200 basis point upward shift

    -10.0 %     -4.8 %     -1.7 %     -0.9 %

300 basis point upward shock

    -25.0 %     -11.0 %     -1.7 %     0.8 %

 

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 2013 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn’t have a specific policy limit).

 

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.

 

 
56

 

 

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 Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2014. 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, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

 

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

 

 
57

 

 

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings                                        

   

 

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

   

Item 1A

Risk Factors

   

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s 2013 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               

 

 

 
58

 

 

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, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three months ended March 31, 2014 and March 31, 2013; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and March 31, 2013; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and March 31, 2013; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and March 31, 2013; and (vi) Notes to Consolidated Financial Statements.

 

 
59

 

 

 

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 7, 2014 

 

/s/ Douglas M. Hultquist 

 

 

 

Douglas M. Hultquist, President

 

 

 

Chief Executive Officer

       
       
       
Date May 7, 2014   /s/ Todd A. Gipple    
      Todd A. Gipple, Executive Vice President
      Chief Operating Officer
      Chief Financial Officer
       
       
Date  May 7, 2014     /s/ John R. Oakes
      John R. Oakes, 1st Vice President
      Controller
      Director of Financial Reporting
      Principal Accounting Officer

                    

 

          

 

            

 

 60