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QCR HOLDINGS INC - Quarter Report: 2017 September (Form 10-Q)

qcrh20170930_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 September 30, 2017

 

[    ] 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) 736-3580

(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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.      (Check one):

 

Large accelerated filer [  ]            Accelerated filer [ X ]            Non-accelerated filer [  ]     

Smaller reporting company [  ]          Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

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

 

Yes  [ X ]          No  [  ]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of November 2, 2017, the Registrant had outstanding 13,888,923 shares of common stock, $1.00 par value per share.

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

     

 Page Number(s) 

Part I

FINANCIAL INFORMATION

 
       
 

Item 1

Consolidated Financial Statements (Unaudited)

 
       
   

Consolidated Balance Sheets

                   3

   

As of September 30, 2017 and December 31, 2016

 
       
   

Consolidated Statements of Income

 
   

For the Three Months Ended September 30, 2017 and 2016

                   4

       
   

Consolidated Statements of Income

 
   

For the Nine Months Ended September 30, 2017 and 2016

                   5

       
   

Consolidated Statements of Comprehensive Income

 
   

For the Three and Nine Months Ended September 30, 2017 and 2016

                   6

       
   

Consolidated Statements of Changes in Stockholders' Equity

 
   

For the Three and Nine Months Ended September 30, 2017 and 2016

                   7

       
   

Consolidated Statements of Cash Flows

 
   

For the Nine Months Ended September 30, 2017 and 2016

                   9

       
   

Notes to Consolidated Financial Statements

 
       
   

Note 1.  Summary of Significant Accounting Policies

                 11

   

Note 2.  Investment Securities

                 13

   

Note 3.  Loans/Leases Receivable

                 18

   

Note 4.  Earnings Per Share

                 28

   

Note 5.  Fair Value

                 28

   

Note 6.  Business Segment Information

                 32

   

Note 7.  Regulatory Capital Requirements

                 33

   

Note 8.  Subsequent Event - Acquisition of Guaranty Bank and Trust Company

                 35

       
       
 

Item 2

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

 
       
   

Introduction

                 36

   

General

                 36

   

Executive Overview

                 37

   

Long-Term Financial Goals

                 39

   

Strategic Developments

                 40

   

GAAP to Non-GAAP Reconciliations

                 41

   

Net Interest Income (Tax Equivalent Basis)

                 43

   

Critical Accounting Policies

                 49

   

Results of Operations

 
   

Interest Income

                 50

   

Interest Expense

                 50

   

Provision for Loan/Lease Losses

                 51

   

Noninterest Income

                 52

   

Noninterest Expense

                 55

   

Income Taxes

                 57

 

 

   

Financial Condition

                57

   

Investment Securities

                 58

   

Loans/Leases

                 59

   

Allowance for Estimated Losses on Loans/Leases

                 62

   

Nonperforming Assets

                 64

   

Deposits

                 65

   

Borrowings

                 65

   

Stockholders' Equity

                 67

   

Liquidity and Capital Resources

                 68

   

Special Note Concerning Forward-Looking Statements

                 70

       
 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

                 71

       
 

Item 4

Controls and Procedures

                 73

       

Part II

OTHER INFORMATION

 
       
 

Item 1

Legal Proceedings

                 74

       
 

Item 1A

Risk Factors

                 74

       
 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

                 74

       
 

Item 3

Defaults upon Senior Securities

                 74

       
 

Item 4

Mine Safety Disclosures

                 74

       
 

Item 5

Other Information

                 74

       
 

Item 6

Exhibits

                 75

       

Signatures

 

                 76

 

Throughout the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations, as defined in Note 1.

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2017 and December 31, 2016

 

   

September 30,

   

December 31,

 
   

2017

   

2016

 

ASSETS

               

Cash and due from banks

  $ 56,274,561     $ 70,569,993  

Federal funds sold

    20,568,000       22,257,000  

Interest-bearing deposits at financial institutions

    41,221,383       63,948,925  
                 

Securities held to maturity, at amortized cost

    323,981,227       322,909,056  

Securities available for sale, at fair value

    259,954,422       251,113,139  

Total securities

    583,935,649       574,022,195  
                 

Loans receivable held for sale

    290,320       1,135,500  

Loans/leases receivable held for investment

    2,676,464,491       2,404,351,485  

Gross loans/leases receivable

    2,676,754,811       2,405,486,985  

Less allowance for estimated losses on loans/leases

    (34,982,341 )     (30,757,448 )

Net loans/leases receivable

    2,641,772,470       2,374,729,537  
                 

Bank-owned life insurance

    58,614,100       57,257,051  

Premises and equipment, net

    61,877,754       60,643,508  

Restricted investment securities

    18,585,400       14,997,025  

Other real estate owned, net

    5,134,845       5,523,104  

Goodwill

    13,110,913       13,110,913  

Core deposit intangible

    6,688,613       7,381,213  

Other assets

    42,679,406       37,503,284  

Total assets

  $ 3,550,463,094     $ 3,301,943,748  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 715,537,518     $ 797,415,090  

Interest-bearing

    2,178,730,964       1,871,846,183  

Total deposits

    2,894,268,482       2,669,261,273  
                 

Short-term borrowings

    16,010,805       39,971,387  

Federal Home Loan Bank advances

    169,055,000       137,500,000  

Other borrowings

    77,500,000       80,000,000  

Junior subordinated debentures

    33,578,744       33,480,202  

Other liabilities

    47,011,435       55,690,087  

Total liabilities

    3,237,424,466       3,015,902,949  
                 

STOCKHOLDERS' EQUITY

               

Preferred stock, $1 par value; shares authorized 250,000 September 2017 and December 2016 - No shares issued or outstanding

    -       -  

Common stock, $1 par value; shares authorized 20,000,000 September 2017 - 13,201,959 shares issued and outstanding December 2016 - 13,106,845 shares issued and outstanding

    13,201,959       13,106,845  

Additional paid-in capital

    158,459,072       156,776,642  

Retained earnings

    142,450,131       118,616,901  

Accumulated other comprehensive (loss):

               

Securities available for sale

    (250,107 )     (1,527,433 )

Interest rate cap derivatives

    (822,427 )     (932,156 )

Total stockholders' equity

    313,038,628       286,040,799  

Total liabilities and stockholders' equity

  $ 3,550,463,094     $ 3,301,943,748  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30,

 

   

2017

   

2016

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 29,245,320     $ 23,001,107  

Securities:

               

Taxable

    1,367,212       1,057,204  

Nontaxable

    2,862,208       2,510,169  

Interest-bearing deposits at financial institutions

    141,331       103,216  

Restricted investment securities

    172,776       132,047  

Federal funds sold

    52,018       12,992  

Total interest and dividend income

    33,840,865       26,816,735  
                 

Interest expense:

               

Deposits

    3,556,189       1,472,031  

Short-term borrowings

    33,248       12,541  

Federal Home Loan Bank advances

    607,751       420,570  

Other borrowings

    724,854       974,634  

Junior subordinated debentures

    362,475       306,182  

Total interest expense

    5,284,517       3,185,958  

Net interest income

    28,556,348       23,630,777  
                 

Provision for loan/lease losses

    2,086,436       1,607,986  

Net interest income after provision for loan/lease losses

    26,469,912       22,022,791  
                 

Noninterest income:

               

Trust department fees

    1,721,401       1,518,600  

Investment advisory and management fees

    968,452       765,977  

Deposit service fees

    1,522,461       1,150,869  

Gains on sales of residential real estate loans, net

    98,409       144,105  

Gains on sales of government guaranteed portions of loans, net

    91,974       218,785  

Swap fee income

    194,256       333,772  

Securities gains (losses), net

    (63,588 )     4,251,773  

Earnings on bank-owned life insurance

    428,002       450,251  

Debit card fees

    754,803       475,182  

Correspondent banking fees

    239,060       253,823  

Other

    746,073       860,264  

Total noninterest income

    6,701,303       10,423,401  
                 

Noninterest expense:

               

Salaries and employee benefits

    13,423,943       11,202,460  

Occupancy and equipment expense

    2,516,274       2,086,331  

Professional and data processing fees

    2,950,839       1,931,329  

Acquisition costs

    407,997       1,036,904  

Post-acquisition transition and integration costs

    522,740       1,009,132  

FDIC insurance, other insurance and regulatory fees

    690,894       582,835  

Loan/lease expense

    257,540       102,678  

Net cost of (income from) operations of other real estate

    (160,640 )     133,055  

Advertising and marketing

    669,923       547,768  

Bank service charges

    460,153       415,401  

Losses on debt extinguishment, net

    -       4,137,310  

Correspondent banking expense

    204,189       205,998  

Other

    1,451,895       1,089,282  

Total noninterest expense

    23,395,747       24,480,483  

Net income before income taxes

    9,775,468       7,965,709  

Federal and state income tax expense

    1,921,533       1,858,208  

Net income

  $ 7,853,935     $ 6,107,501  
                 

Basic earnings per common share

  $ 0.60     $ 0.47  

Diluted earnings per common share

  $ 0.58     $ 0.46  
                 

Weighted average common shares outstanding

    13,151,350       13,066,777  

Weighted average common and common equivalent shares outstanding

    13,507,955       13,269,703  
                 

Cash dividends declared per common share

  $ 0.05     $ 0.04  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine Months Ended September 30,

 

   

2017

   

2016

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 84,571,466     $ 62,939,656  

Securities:

               

Taxable

    3,770,022       3,605,948  

Nontaxable

    8,198,173       7,028,387  

Interest-bearing deposits at financial institutions

    559,697       225,775  

Restricted investment securities

    435,096       396,157  

Federal funds sold

    104,778       36,155  

Total interest and dividend income

    97,639,232       74,232,078  
                 

Interest expense:

               

Deposits

    8,779,548       4,106,227  

Short-term borrowings

    76,365       73,672  

Federal Home Loan Bank advances

    1,365,433       1,278,207  

Other borrowings

    2,103,731       2,624,154  

Junior subordinated debentures

    1,042,227       912,706  

Total interest expense

    13,367,304       8,994,966  

Net interest income

    84,271,928       65,237,112  
                 

Provision for loan/lease losses

    6,214,538       4,878,821  

Net interest income after provision for loan/lease losses

    78,057,390       60,358,291  
                 

Noninterest income:

               

Trust department fees

    5,153,609       4,606,590  

Investment advisory and management fees

    2,798,886       2,117,100  

Deposit service fees

    4,297,210       3,028,758  

Gains on sales of residential real estate loans, net

    307,360       288,904  

Gains on sales of government guaranteed portions of loans, net

    1,129,668       2,701,203  

Swap fee income

    635,353       1,358,312  

Securities gains (losses), net

    (25,124 )     4,628,283  

Earnings on bank-owned life insurance

    1,357,049       1,324,380  

Debit card fees

    2,201,125       1,126,581  

Correspondent banking fees

    684,306       800,892  

Other

    2,228,133       2,027,272  

Total noninterest income

    20,767,575       24,008,275  
                 

Noninterest expense:

               

Salaries and employee benefits

    39,662,218       32,920,840  

Occupancy and equipment expense

    7,716,829       5,797,875  

Professional and data processing fees

    7,374,930       4,921,064  

Acquisition costs

    407,997       1,363,987  

Post-acquisition transition and integration costs

    522,740       1,037,018  

FDIC insurance, other insurance and regulatory fees

    1,957,413       1,866,804  

Loan/lease expense

    811,362       419,846  

Net cost of (income from) operations of other real estate

    (118,453 )     513,149  

Advertising and marketing

    1,846,942       1,367,478  

Bank service charges

    1,331,499       1,246,682  

Losses on debt extinguishment, net

    -       4,220,507  

Correspondent banking expense

    604,233       564,763  

Other

    3,955,783       2,938,721  

Total noninterest expense

    66,073,493       59,178,734  

Net income before income taxes

    32,751,472       25,187,832  

Federal and state income tax expense

    6,946,555       6,030,375  

Net income

  $ 25,804,917     $ 19,157,457  
                 

Basic earnings per common share

  $ 1.96     $ 1.55  

Diluted earnings per common share

  $ 1.91     $ 1.52  
                 

Weighted average common shares outstanding

    13,151,672       12,398,491  

Weighted average common and common equivalent shares outstanding

    13,509,566       12,580,042  
                 

Cash dividends declared per common share

  $ 0.15     $ 0.12  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine Months Ended September 30, 2017 and 2016

 

   

Three Months Ended September 30,

 
   

2017

   

2016

 

Net income

  $ 7,853,935     $ 6,107,501  
                 

Other comprehensive income (loss):

               
                 

Unrealized gains (losses) on securities available for sale:

               

Unrealized holding gains arising during the period before tax

    289,086       3,682,514  

Less reclassification adjustment for gains (losses) included in net income before tax

    (63,588 )     4,251,773  
      352,674       (569,259 )

Unrealized gains (losses) on interest rate cap derivatives:

               

Unrealized holding losses arising during the period before tax

    (8,446 )     (49,573 )

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

    (95,361 )     (33,246 )
      86,915       (16,327 )
                 

Other comprehensive income (loss), before tax

    439,589       (585,586 )

Tax expense (benefit)

    165,012       (224,402 )

Other comprehensive income (loss), net of tax

    274,577       (361,184 )
                 

Comprehensive income

  $ 8,128,512     $ 5,746,317  

 

 

   

Nine Months Ended September 30,

 
   

2017

   

2016

 

Net income

  $ 25,804,917     $ 19,157,457  
                 

Other comprehensive income:

               
                 

Unrealized gains (losses) on securities available for sale:

               

Unrealized holding gains arising during the period before tax

    2,057,586       10,628,032  

Less reclassification adjustment for gains (losses) included in net income before tax

    (25,124 )     4,628,283  
      2,082,710       5,999,749  

Unrealized gains (losses) on interest rate cap derivatives:

               

Unrealized holding losses arising during the period before tax

    (186,000 )     (634,791 )

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

    (354,813 )     (82,281 )
      168,813       (552,510 )
                 

Other comprehensive income, before tax

    2,251,523       5,447,239  

Tax expense

    864,468       2,102,379  

Other comprehensive income, net of tax

    1,387,055       3,344,860  
                 

Comprehensive income

  $ 27,191,972     $ 22,502,317  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine Months Ended September 30, 2017 and 2016

 

                           

Accumulated

         
           

Additional

           

Other

         
   

Common

   

Paid-In

   

Retained

   

Comprehensive

         
   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Total

 

Balance December 31, 2016

  $ 13,106,845     $ 156,776,642     $ 118,616,901     $ (2,459,589 )   $ 286,040,799  

Net income

    -       -       9,184,965       -       9,184,965  

Other comprehensive income, net of tax

    -       -       -       410,739       410,739  

Common cash dividends declared, $0.05 per share

    -       -       (656,574 )     -       (656,574 )

Proceeds from issuance of 3,573 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    3,573       83,091       -       -       86,664  

Proceeds from issuance of 44,284 shares of common stock as a result of stock options exercised

    44,284       630,290       -       -       674,574  

Stock compensation expense

    -       388,753                       388,753  

Restricted stock awards - 13,289 shares of common stock

    13,289       (13,289 )     -       -       -  

Exchange of 6,772 shares of common stock in connection with stock options exercised and restricted stock vested

    (6,772 )     (283,518 )     -       -       (290,290 )

Balance March 31, 2017

  $ 13,161,219     $ 157,581,969     $ 127,145,292     $ (2,048,850 )   $ 295,839,630  

Net income

    -       -       8,766,017       -       8,766,017  

Other comprehensive income, net of tax

    -       -       -       701,739       701,739  

Common cash dividends declared, $0.05 per share

    -       -       (657,003 )     -       (657,003 )

Proceeds from issuance of 4,582 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    4,582       170,061       -       -       174,643  

Proceeds from issuance of 8,027 shares of common stock as a result of stock options exercised

    8,027       109,392       -       -       117,419  

Stock compensation expense

    -       168,314                       168,314  

Restricted stock awards - 2,000 shares of common stock

    2,000       (2,000 )     -       -       -  

Exchange of 594 shares of common stock in connection with stock options exercised

    (594 )     (26,730 )     -       -       (27,324 )

Balance June 30, 2017

  $ 13,175,234     $ 158,001,006     $ 135,254,306     $ (1,347,111 )   $ 305,083,435  

Net income

    -       -       7,853,935       -       7,853,935  

Other comprehensive loss, net of tax

    -       -       -       274,577       274,577  

Common cash dividends declared, $0.05 per share

    -       -       (658,110 )     -       (658,110 )

Proceeds from issuance of 2,319 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    2,319       88,052       -       -       90,371  

Proceeds from issuance of 19,906 shares of common stock as a result of stock options exercised

    19,906       73,915       -       -       93,821  

Stock compensation expense

    -       300,599       -       -       300,599  

Restricted stock awards - 4,500 shares of common stock

    4,500       (4,500 )     -       -       -  

Balance September 30, 2017

  $ 13,201,959     $ 158,459,072     $ 142,450,131     $ (1,072,534 )   $ 313,038,628  

 

(Continued)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - continued

Three and Nine Months Ended September 30, 2017 and 2016

 

                           

Accumulated

         
           

Additional

           

Other

         
   

Common

   

Paid-In

   

Retained

   

Comprehensive

         
   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Total

 

Balance December 31, 2015

  $ 11,761,083     $ 123,282,851     $ 92,965,645     $ (2,123,829 )   $ 225,885,750  

Net income

    -       -       6,373,489       -       6,373,489  

Other comprehensive income, net of tax

    -       -       -       2,525,411       2,525,411  

Common cash dividends declared, $0.04 per share

    -       -       (470,873 )     -       (470,873 )

Proceeds from issuance of 5,054 shares of  common stock as a result of stock purchased under the Employee Stock Purchase Plan

    5,054       94,560       -       -       99,614  

Proceeds from issuance of 46,020 shares of common stock as a result of stock options exercised

    46,020       729,473       -       -       775,493  

Tax benefit of nonqualified stock options exercised

            -                       -  

Stock compensation expense

    -       382,761       -       -       382,761  

Tax benefit of nonqualified stock options exercised

    -       22,508       -       -       22,508  

Restricted stock awards - 22,382 shares of common stock

    22,382       (22,382 )     -       -       -  

Exchange of 19,628 shares of common stock in connection with restricted stock vested, net

    (19,628 )     (431,806 )     -       -       (451,434 )

Balance March 31, 2016

  $ 11,814,911     $ 124,057,965     $ 98,868,261     $ 401,582     $ 235,142,719  

Net income

    -       -       6,676,467       -       6,676,467  

Other comprehensive loss, net of tax

    -       -       -       1,180,633       1,180,633  

Common cash dividends declared, $0.04 per share

    -       -       (520,701 )     -       (520,701 )

Proceeds from issuance of 1,215,000 shares of common stock, net of issuance costs

    1,215,000       28,613,916       -       -       29,828,916  

Proceeds from issuance of 6,982 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    6,982       142,887       -       -       149,869  

Proceeds from issuance of 20,975 shares of common stock as a result of stock options exercised

    20,975       230,671       -       -       251,646  

Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds

    -       2,132,415       -       -       2,132,415  

Stock compensation expense

    -       187,569       -       -       187,569  

Tax benefit of nonqualified stock options exercised

    -       87,858       -       -       87,858  

Restricted stock awards - 500 shares of common stock

    (500 )     500       -       -       -  

Balance June 30, 2016

  $ 13,057,368     $ 155,453,781     $ 105,024,027     $ 1,582,215     $ 275,117,391  

Net income

    -       -       6,107,501       -       6,107,501  

Other comprehensive loss, net of tax

    -       -       -       (361,184 )     (361,184 )

Common cash dividends declared, $0.04 per share

    -       -       (521,384 )     -       (521,384 )

Proceeds from issuance of 4,085 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    4,085       85,217       -       -       89,302  

Proceeds from issuance of 14,692 shares of common stock as a result of stock options exercised

    14,692       173,890       -       -       188,582  

Stock compensation expense

    -       190,211       -       -       190,211  

Tax benefit of nonqualified stock options exercised

    -       72,694       -       -       72,694  

Exchange of 838 shares of common stock in connection with stock options exercised

    (838 )     (25,115 )     -       -       (25,953 )

Balance September 30, 2016

  $ 13,075,307     $ 155,950,678     $ 110,610,144     $ 1,221,031     $ 280,857,160  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2017 and 2016

 

   

2017

   

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 25,804,917     $ 19,157,457  

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

               

Depreciation

    2,810,971       2,422,257  

Provision for loan/lease losses

    6,214,538       4,878,821  

Stock-based compensation expense

    857,666       760,541  

Deferred compensation expense accrued

    1,098,741       910,439  

Losses (gains) on other real estate owned, net

    (154,743 )     130,280  

Amortization of premiums on securities, net

    1,330,946       968,553  

Securities losses (gains), net

    25,124       (4,628,283 )

Loans originated for sale

    (40,423,117 )     (57,160,485 )

Proceeds on sales of loans

    42,705,325       59,838,717  

Gains on sales of residential real estate loans

    (307,360 )     (288,904 )

Gains on sales of government guaranteed portions of loans

    (1,129,668 )     (2,701,203 )

Losses on debt extinguishment, net

    -       4,220,507  

Amortization of core deposit intangible

    692,600       210,469  

Accretion of acquisition fair value adjustments, net

    (4,063,435 )     (690,379 )

Increase in cash value of bank-owned life insurance

    (1,357,049 )     (1,324,380 )

Decrease (increase) in other assets

    1,666,921       (2,480,461 )

Increase (decrease) in other liabilities

    (8,610,333 )     1,614,477  

Net cash provided by operating activities

  $ 27,162,044     $ 25,838,423  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease (increase) in federal funds sold

    1,689,000       (474,000 )

Net decrease (increase) in interest-bearing deposits at financial institutions

    22,727,542       (23,981,295 )

Proceeds from sales of other real estate owned

    829,213       1,913,775  

Activity in securities portfolio:

               

Purchases

    (103,509,208 )     (111,622,489 )

Calls, maturities and redemptions

    40,435,714       109,421,584  

Paydowns

    30,123,674       21,939,878  

Sales

    21,969,870       87,772,898  

Activity in restricted investment securities:

               

Purchases

    (3,788,275 )     (25,700 )

Redemptions

    199,900       1,375,100  

Net increase in loans/leases originated and held for investment

    (269,891,345 )     (144,605,204 )

Purchase of premises and equipment

    (4,045,217 )     (3,871,166 )

Net cash paid for Community State Bank acquisition

    -       (69,905,355 )

Cash prepaid for Guaranty Bank acquisition

    (7,803,420 )     -  

Net cash used in investing activities

  $ (271,062,552 )   $ (132,061,974 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in deposit accounts

    225,109,315       227,918,002  

Net decrease in short-term borrowings

    (23,960,582 )     (84,647,299 )

Activity in Federal Home Loan Bank advances:

               

Term advances

    1,600,000       -  

Calls and maturities

    (6,000,000 )     (19,000,000 )

Net change in short-term and overnight advances

    35,955,000       1,300,000  

Prepayments

    -       (10,524,197 )

Activity in other borrowings:

               

Proceeds from other borrowings

    7,000,000       35,000,000  

Calls, maturities and scheduled principal payments

    (9,500,000 )     -  

Prepayments

    -       (50,320,407 )

Retirement of junior subordinated debentures

    -       (3,955,000 )

Payment of cash dividends on common stock

    (1,836,150 )     (1,460,157 )

Net proceeds from the common stock offering, 1,215,000 shares issued

    -       29,828,916  

Proceeds from issuance of common stock, net

    1,237,492       1,554,506  

Net cash provided by financing activities

  $ 229,605,075     $ 125,694,364  

Net increase (decrease) in cash and due from banks

    (14,295,433 )     19,470,813  

Cash and due from banks, beginning

    70,569,993       41,742,321  

Cash and due from banks, ending

  $ 56,274,560     $ 61,213,134  

 

(Continued)

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Nine Months Ended September 30, 2017 and 2016

 

   

2017

   

2016

 

Supplemental disclosure of cash flow information, cash payments for:

               

Interest

  $ 13,140,273     $ 9,081,850  

Income/franchise taxes

  $ 10,881,610     $ 9,487,002  
                 

Supplemental schedule of noncash investing activities:

               

Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net

  $ 1,387,055     $ 3,344,860  

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

  $ (317,614 )   $ (477,387 )

Tax benefit of nonqualified stock options exercised

  $ N/A     $ 183,060  

Transfers of loans to other real estate owned

  $ 286,212     $ 51,000  

Due from broker for sales of securities

  $ -     $ 32,078,011  

Due to broker for purchases of securities

  $ 1,300,000     $ 15,190,000  

Due to counterparties for prepayment of FHLB advances and other borrowings

  $ -     $ (24,575,903 )

Dividends payable

  $ 658,110     $ 521,384  

Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds

  $ -     $ 2,132,415  

Increase in the fair value of interest rate swap assets and liabilities

  $ 264,721     $ 6,341,738  
                 
                 

Supplemental disclosure of cash flow information for Community State Bank acquisition:

               

Fair value of assets acquired:

               

Cash and due from banks *

  $ -     $ 10,094,645  

Federal funds sold

    -       698,000  

Interest-bearing deposits at financial institutions

    -       14,730,157  

Securities

    -       102,640,029  

Loans/leases receivable held for investment, net

    -       419,029,277  

Premises and equipment, net

    -       20,684,880  

Core deposit intangible

    -       6,352,653  

Restricted investment securities

    -       1,512,900  

Other real estate owned

    -       650,000  

Other assets

    -       4,763,224  

Total assets acquired

  $ -     $ 581,155,765  
                 

Fair value of liabilities assumed:

               

Deposits

  $ -     $ 486,298,262  

FHLB advances

    -       20,368,877  

Other liabilities

    -       4,897,564  

Total liabilities assumed

  $ -     $ 511,564,703  

Net assets acquired

  $ -     $ 69,591,062  
                 

Consideration paid:

               

Cash paid *

  $ -     $ 80,000,000  

Total consideration paid

  $ -     $ 80,000,000  
                 

Goodwill

  $ -     $ 10,408,938  

* Net cash paid at closing totaled $69,905,355

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2017

 

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, 2016, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2017. 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 GAAP 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 September 30, 2017, are not necessarily indicative of the results expected for the year ending December 31, 2017, or for any other period.

 

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.

 

 

Allowance: Allowance for estimated losses on loans/leases

 

Guaranty Bank: Guaranty Bank and Trust Company

 

AOCI: Accumulated other comprehensive income (loss)

 

HTM: Held to maturity

 

AFS: Available for sale

 

m2: m2 Lease Funds, LLC

 

ASC: Accounting Standards Codification

 

NIM: Net interest margin

 

ASU: Accounting Standards Update

 

NPA: Nonperforming asset

 

BOLI: Bank-owned life insurance

 

NPL: Nonperforming loan

 

Caps: Interest rate cap derivatives

 

OREO: Other real estate owned

 

Community National: Community National Bancorporation

 

OTTI: Other-than-temporary impairment

 

CRBT: Cedar Rapids Bank & Trust Company

 

PCI: Purchased credit impaired

 

CRE: Commercial real estate

 

Provision: Provision for loan/lease losses

 

CSB: Community State Bank

 

QCBT: Quad City Bank & Trust Company

 

C&I: Commercial and industrial

 

RB&T: Rockford Bank & Trust Company

 

Dodd-Frank Act: Dodd-Frank Wall Street Reform and 

 

ROAA: Return on Average Assets

 

     Consumer Protection Act

 

SBA: U.S. Small Business Administration

 

EPS: Earnings per share

 

SEC: Securities and Exchange Commission

 

Exchange Act: Securities Exchange Act of 1934, as amended

 

TA: Tangible assets

 

FASB: Financial Accounting Standards Board

 

TCE: Tangible common equity

 

FDIC: Federal Deposit Insurance Corporation

 

TDRs: Troubled debt restructurings

 

FHLB: Federal Home Loan Bank

 

TEY: Tax equivalent yield

 

FRB: Federal Reserve Bank of Chicago

 

The Company: QCR Holdings, Inc.

 

GAAP: Generally Accepted Accounting Principles

 

USDA: U.S. Department of Agriculture

 

Guaranty: Guaranty Bankshares, Ltd.

 

 

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include four commercial banks: QCBT, CRBT, CSB and RB&T. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

 

The acquisition of CSB occurred on August 31, 2016; therefore, the financial results of CSB for the periods since acquisition are included in this report.

 

On October 2, 2017, the Company announced the completion of its previously announced acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty. The financial results of Guaranty Bank are not included in this report because the closing was effective October 1, 2017. See Note 8 to the Consolidated Financial Statements for additional information about the acquisition.

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Recent accounting developments: In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally effective for the Company on January 1, 2017; however, FASB issued ASU 2015-14 which defers the effective date in order to provide additional time for both public and private entities to evaluate the impact. ASU 2014-09 will now be effective for the Company on January 1, 2018 and it is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In January 2016, FASB issued ASU 2016-01, Financial Instruments–Overall. ASU 2016-01 makes targeted adjustments to GAAP by eliminating the AFS classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity’s other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and it is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases. Under ASU 2016-02, lessees will be required to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases (with the exception of short-term leases). Lessor accounting is largely unchanged under ASU 2016-02. However, the definition of initial direct costs was updated to include only initial direct costs that are considered incremental. This change in definition will change the manner in which the Company recognizes the costs associated with originating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is in the process of analyzing the impact of adoption on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. Under the standard, assets measured at amortized costs (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Companies may choose to early adopt for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption on the Company’s consolidated financial statements.

 

Effective January 1, 2017, the Company adopted ASU 2016-09, Compensation – Stock Compensation. Under the standard, the excess tax benefit (deficiency) related to stock options exercised and restricted stock awards vested is recorded as an adjustment to income tax expense. In the past, this tax benefit (deficiency) was recorded directly to equity. This change in accounting resulted in $191 thousand of reduced income tax in the third quarter of 2017 and $814 thousand of reduced income tax expense in the first nine months of 2017.

 

 

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 September 30, 2017 and December 31, 2016 are summarized as follows:

 

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

(Losses)

   

Value

 

September 30, 2017:

                               

Securities HTM:

                               

Municipal securities

  $ 322,931,227     $ 2,084,997     $ (2,629,646 )   $ 322,386,578  

Other securities

    1,050,000       -       -       1,050,000  
    $ 323,981,227     $ 2,084,997     $ (2,629,646 )   $ 323,436,578  
                                 

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 39,340,306     $ 129,768     $ (129,906 )   $ 39,340,168  

Residential mortgage-backed and related securities

    160,329,128       266,806       (1,627,425 )     158,968,509  

Municipal securities

    56,621,412       435,356       (293,708 )     56,763,060  

Other securities

    4,077,128       826,135       (20,578 )     4,882,685  
    $ 260,367,974     $ 1,658,065     $ (2,071,617 )   $ 259,954,422  
                                 

December 31, 2016:

                               

Securities HTM:

                               

Municipal securities

  $ 321,859,056     $ 2,200,577     $ (4,694,734 )   $ 319,364,899  

Other securities

    1,050,000       -       -       1,050,000  
    $ 322,909,056     $ 2,200,577     $ (4,694,734 )   $ 320,414,899  
                                 

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 46,281,306     $ 132,886     $ (330,585 )   $ 46,083,607  

Residential mortgage-backed and related securities

    150,465,222       174,993       (2,938,088 )     147,702,127  

Municipal securities

    52,816,541       425,801       (637,916 )     52,604,426  

Other securities

    4,046,332       703,978       (27,331 )     4,722,979  
    $ 253,609,401     $ 1,437,658     $ (3,933,920 )   $ 251,113,139  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The Company’s HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. 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 private mortgage-backed securities or pooled trust preferred securities.

 

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 September 30, 2017 and December 31, 2016, are summarized as follows:

 

 

   

Less than 12 Months

   

12 Months or More

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

September 30, 2017:

                                               

Securities HTM:

                                               

Municipal securities

  $ 17,779,999     $ (254,147 )   $ 68,663,362     $ (2,375,499 )   $ 86,443,361     $ (2,629,646 )
                                                 

Securities AFS:

                                               

U.S. govt. sponsored agency securities

  $ 23,607,646     $ (129,906 )   $ -     $ -     $ 23,607,646     $ (129,906 )

Residential mortgage-backed and related securities

    111,996,030       (1,255,971 )     12,648,688       (371,454 )     124,644,718       (1,627,425 )

Municipal securities

    18,776,501       (169,253 )     12,872,616       (124,455 )     31,649,117       (293,708 )

Other securities

    928,772       (20,578 )     -       -       928,772       (20,578 )
    $ 155,308,949     $ (1,575,708 )   $ 25,521,304     $ (495,909 )   $ 180,830,253     $ (2,071,617 )
                                                 

December 31, 2016:

                                               

Securities HTM:

                                               

Municipal securities

  $ 122,271,533     $ (4,076,647 )   $ 13,010,803     $ (618,087 )   $ 135,282,336     $ (4,694,734 )
                                                 

Securities AFS:

                                               

U.S. govt. sponsored agency securities

  $ 21,788,139     $ (257,640 )   $ 5,499,012     $ (72,945 )   $ 27,287,151     $ (330,585 )

Residential mortgage-backed and related securities

    121,506,582       (2,641,664 )     7,437,615       (296,424 )     128,944,197       (2,938,088 )

Municipal securities

    34,152,822       (618,462 )     338,099       (19,454 )     34,490,921       (637,916 )

Other securities

    3,177,414       (27,331 )     -       -       3,177,414       (27,331 )
    $ 180,624,957     $ (3,545,097 )   $ 13,274,726     $ (388,823 )   $ 193,899,683     $ (3,933,920 )

 

 

At September 30, 2017, the investment portfolio included 567 securities. Of this number, 203 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.8% of the total amortized cost of the portfolio. Of these 203 securities, 80 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 lacks the intent 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 September 30, 2017 and December 31, 2016, equity securities represented less than 1% of the total portfolio.

 

The Company did not recognize OTTI on any debt or equity securities for the three or nine months ended September 30, 2017 and 2016.   

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

All sales of securities for the three and nine months ended September 30, 2017 and 2016 were from securities identified as AFS. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2017

   

September 30, 2016

   

September 30, 2017

   

September 30, 2016

 
                                 

Proceeds from sales of securities*

  $ 8,415,795     $ 58,775,764     $ 21,969,870     $ 119,850,909  

Pre-tax gross gains from sales of securities

    6,312       4,281,828       65,880       4,815,373  

Pre-tax gross losses from sales of securities

    (69,900 )     (30,055 )     (91,004 )     (187,090 )

 

  *

Proceeds from sales of securities for the nine months ended September 30, 2016 includes $32.1 million receivable from the broker for the sale of securities

 

The amortized cost and fair value of securities as of September 30, 2017 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 prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table. “Other securities” AFS are excluded from the maturity categories as there is no fixed maturity date for those securities.

 

 

   

Amortized Cost

   

Fair Value

 

Securities HTM:

               

Due in one year or less

  $ 2,940,492     $ 2,940,378  

Due after one year through five years

    18,268,264       18,374,059  

Due after five years

    302,772,471       302,122,141  
    $ 323,981,227     $ 323,436,578  
                 

Securities AFS:

               

Due in one year or less

  $ 3,135,008     $ 3,143,223  

Due after one year through five years

    26,545,903       26,712,930  

Due after five years

    66,280,807       66,247,075  
      95,961,718       96,103,228  

Residential mortgage-backed and related securities

    160,329,128       158,968,509  

Other securities

    4,077,128       4,882,685  
    $ 260,367,974     $ 259,954,422  

 

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. These callable securities are summarized as follows:

 

   

Amortized Cost

   

Fair Value

 

Securities HTM:

               

Municipal securities

  $ 170,900,193     $ 171,633,005  
                 

Securities AFS:

               

U.S. govt. sponsored agency securities

    5,048,652       5,033,292  

Municipal securities

    45,727,004       45,640,630  
    $ 50,775,656     $ 50,673,922  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of September 30, 2017, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 119 issuers with fair values totaling $100.4 million and revenue bonds issued by 132 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $278.7 million. The Company held investments in general obligation bonds in 21 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 14 states, including six states in which the aggregate fair value exceeded $5.0 million.

 

As of December 31, 2016, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 116 issuers with fair values totaling $116.5 million and revenue bonds issued by 120 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $255.5 million. The Company held investments in general obligation bonds in 21 states, including five states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 12 states, including six states in which the aggregate fair value exceeded $5.0 million.

 

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuer’s state:

 

September 30, 2017:

                               

U.S. State:

 

Number of

Issuers

   

Amortized Cost

   

Fair Value

   

Average

Exposure Per

Issuer
(Fair Value)

 
                                 

North Dakota

    7     $ 21,625,068     $ 21,593,895     $ 3,084,842  

Illinois

    21       18,319,644       18,501,854       881,041  

Iowa

    21       17,990,978       17,993,895       856,852  

Missouri

    16       8,956,396       8,983,511       561,469  

Ohio

    9       8,289,069       8,180,432       908,937  

Texas

    10       6,609,101       6,543,660       654,366  

Other

    35       18,520,725       18,626,763       532,193  

Total general obligation bonds

    119     $ 100,310,981     $ 100,424,010     $ 843,899  

 

 

December 31, 2016:

                               

U.S. State:

 

Number of

Issuers

   

Amortized Cost

   

Fair Value

   

Average

Exposure

Per Issuer
(Fair Value)

 
                                 

Iowa

    27     $ 32,258,612     $ 32,231,936     $ 1,193,775  

Illinois

    19       29,214,559       29,308,438       1,542,549  

North Dakota

    7       22,169,050       21,499,075       3,071,296  

Missouri

    14       8,291,192       8,323,245       594,518  

Ohio

    8       6,790,398       6,651,897       831,487  

Other

    41       18,481,496       18,458,044       450,196  

Total general obligation bonds

    116     $ 117,205,307     $ 116,472,635     $ 1,004,074  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuer’s state:

 

September 30, 2017:

                               

U.S. State:

 

Number of

Issuers

   

Amortized Cost

   

Fair Value

   

Average

Exposure

Per Issuer
(Fair Value)

 
                                 

Missouri

    55     $ 107,274,712     $ 107,108,520     $ 1,947,428  

Iowa

    28       62,468,124       62,615,875       2,236,281  

Indiana

    23       50,080,705       49,560,095       2,154,787  

Ohio

    5       19,674,376       19,523,478       3,904,696  

Kansas

    6       12,877,308       12,879,871       2,146,645  

North Dakota

    5       11,496,420       11,471,544       2,294,309  

Other

    10       15,370,013       15,566,245       1,556,625  

Total revenue bonds

    132     $ 279,241,658     $ 278,725,628     $ 2,111,558  

 

 

December 31, 2016:

                               

U.S. State:

 

Number of

Issuers

   

Amortized Cost

   

Fair Value

   

Average

Exposure

Per Issuer
(Fair Value)

 
                                 

Missouri

    47     $ 90,784,441     $ 89,664,013     $ 1,907,745  

Iowa

    31       70,788,393       71,142,393       2,294,916  

Indiana

    22       47,994,737       47,582,138       2,162,824  

Kansas

    6       13,476,366       13,427,491       2,237,915  

North Dakota

    4       8,089,067       7,796,381       1,949,095  

Ohio

    3       13,650,000       13,405,222       4,468,407  

Other

    7       12,687,286       12,479,052       1,782,722  

Total revenue bonds

    120     $ 257,470,290     $ 255,496,690     $ 2,129,139  

 

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2017 and December 31, 2016, the Company did not hold general obligation or revenue bonds of any single issuer, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. Of the general obligation and revenue bonds in the Company’s portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

 

The Company’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of September 30, 2017, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter’s total risk-based capital.

 

As of September 30, 2017, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

 

 

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 September 30, 2017 and December 31, 2016 is presented as follows:

 

   

As of September 30,

   

As of December 31,

 
   

2017

   

2016

 
                 

C&I loans***

  $ 1,034,530,786     $ 827,637,263  

CRE loans

               

Owner-occupied CRE

    327,144,766       332,387,621  

Commercial construction, land development, and other land

    168,992,704       165,149,491  

Other non owner-occupied CRE

    661,718,193       595,921,748  
                 

Direct financing leases *

    147,062,893       165,419,360  

Residential real estate loans **

    239,957,916       229,233,104  

Installment and other consumer loans

    89,605,855       81,665,695  
      2,669,013,113       2,397,414,282  

Plus deferred loan/lease origination costs, net of fees

    7,741,698       8,072,703  
      2,676,754,811       2,405,486,985  

Less allowance

    (34,982,341 )     (30,757,448 )
    $ 2,641,772,470     $ 2,374,729,537  
                 

* Direct financing leases:

               

Net minimum lease payments to be received

  $ 162,728,461     $ 184,274,802  

Estimated unguaranteed residual values of leased assets

    1,085,154       1,085,154  

Unearned lease/residual income

    (16,750,722 )     (19,940,596 )
      147,062,893       165,419,360  

Plus deferred lease origination costs, net of fees

    4,800,719       5,881,778  
      151,863,612       171,301,138  

Less allowance

    (2,652,758 )     (3,111,898 )
    $ 149,210,854     $ 168,189,240  

 

*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, which is combined with management’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and nine months ended September 30, 2017 and 2016.

 

**Includes residential real estate loans held for sale totaling $290,320 and $1,135,500 as of September 30, 2017, and December 31, 2016, respectively.

 

*** Includes equipment financing agreements outstanding at m2 totaling $60,981,381 and $38,668,209 as of September 30, 2017 and December 31, 2016, respectively.

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Changes in accretable yield for acquired loans were as follows:

   

Three months ended September 30, 2017

   

Nine months ended September 30, 2017

 
   

PCI

   

Performing

           

PCI

   

Performing

         
   

Loans

   

Loans

   

Total

   

Loans

   

Loans

   

Total

 

Balance at the beginning of the period

  $ (83,860 )   $ (5,325,471 )   $ (5,409,331 )   $ (194,306 )   $ (9,115,614 )   $ (9,309,920 )

Accretion recognized

    25,158       658,547       683,705       135,604       4,448,690       4,584,294  

Balance at the end of the period

  $ (58,702 )   $ (4,666,924 )   $ (4,725,626 )   $ (58,702 )   $ (4,666,924 )   $ (4,725,626 )

 

 

 

   

Three months ended September 30, 2016

   

Nine months ended September 30, 2016

 
   

PCI

   

Performing

           

PCI

   

Performing

         
   

Loans

   

Loans

   

Total

   

Loans

   

Loans

   

Total

 

Balance at the beginning of the period

  $ -     $ -     $ -     $ -     $ -     $ -  

Discount added at acquisition

    (277,579 )     (11,916,009 )     (12,193,588 )     (277,579 )     (11,916,009 )     (12,193,588 )

Accretion recognized

    29,317       366,293       395,610       29,317       366,293       395,610  

Balance at the end of the period

  $ (248,262 )   $ (11,549,716 )   $ (11,797,978 )   $ (248,262 )   $ (11,549,716 )   $ (11,797,978 )

 

 

 

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2017 and December 31, 2016 is presented as follows:

 

   

As of September 30, 2017

 

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

 
                                                 

C&I

  $ 1,031,800,612     $ 1,149,469     $ -     $ 12,892     $ 1,567,813     $ 1,034,530,786  

CRE

                                               

Owner-Occupied CRE

    326,879,997       109,749       -       -       155,020       327,144,766  

Commercial Construction, Land Development, and Other Land

    164,647,962       -       -       -       4,344,742       168,992,704  

Other Non Owner-Occupied CRE

    650,410,884       325,464       -       -       10,981,845       661,718,193  

Direct Financing Leases

    142,413,187       1,558,490       852,844       -       2,238,372       147,062,893  

Residential Real Estate

    237,860,369       116,095       755,919       307,676       917,857       239,957,916  

Installment and Other Consumer

    89,153,013       73,731       39,311       102,312       237,488       89,605,855  
    $ 2,643,166,024     $ 3,332,998     $ 1,648,074     $ 422,880     $ 20,443,137     $ 2,669,013,113  
                                                 

As a percentage of total loan/lease portfolio

    99.03 %     0.12 %     0.06 %     0.02 %     0.77 %     100.00 %

 

 

   

As of December 31, 2016

 

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

 
                                                 

C&I

  $ 821,637,507     $ 1,455,185     $ 10,551     $ 346,234     $ 4,187,786     $ 827,637,263  

CRE

                                               

Owner-Occupied CRE

    331,812,571       -       242,902       -       332,148       332,387,621  

Commercial Construction, Land Development, and Other Land

    160,760,034       35,638       -       -       4,353,819       165,149,491  

Other Non Owner-Occupied CRE

    594,384,926       100,673       -       -       1,436,149       595,921,748  

Direct Financing Leases

    161,452,627       730,627       574,700       215,225       2,446,181       165,419,360  

Residential Real Estate

    227,023,552       473,478       365,581       294,854       1,075,639       229,233,104  

Installment and Other Consumer

    81,199,766       204,973       63,111       110,501       87,344       81,665,695  
    $ 2,378,270,983     $ 3,000,574     $ 1,256,845     $ 966,814     $ 13,919,066     $ 2,397,414,282  
                                                 

As a percentage of total loan/lease portfolio

    99.20 %     0.13 %     0.05 %     0.04 %     0.58 %     100.00 %

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NPLs by classes of loans/leases as of September 30, 2017 and December 31, 2016 are presented as follows:

 

   

As of September 30, 2017

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

   

Nonaccrual

Loans/Leases *

   

Accruing
TDRs

   

Total NPLs

   

Percentage of

Total NPLs

 
                                         

C&I

  $ 12,892     $ 1,567,813     $ 5,298,358     $ 6,879,063       24.19 %

CRE

                                       

Owner-Occupied CRE

    -       155,020       -       155,020       0.55 %

Commercial Construction, Land Development, and Other Land

    -       4,344,742       -       4,344,742       15.28 %

Other Non Owner-Occupied CRE

    -       10,981,845       -       10,981,845       38.63 %

Direct Financing Leases

    -       2,238,372       1,899,707       4,138,079       14.56 %

Residential Real Estate

    307,676       917,857       349,538       1,575,071       5.54 %

Installment and Other Consumer

    102,312       237,488       15,218       355,018       1.25 %
    $ 422,880     $ 20,443,137     $ 7,562,821     $ 28,428,838       100.00 %

 

*Nonaccrual loans/leases included $2,291,666 of TDRs, including $258,598 in C&I loans, $1,198,439 in CRE loans, $607,882 in direct financing leases, $177,606 in construction loans, $40,405 in residential real estate loans, and $8,736 in installment loans.

 

   

As of December 31, 2016

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

   

Nonaccrual

Loans/Leases **

   

Accruing
TDRs

   

Total NPLs

   

Percentage of

Total NPLs

 
                                         

C&I

  $ 346,234     $ 4,187,786     $ 4,733,997     $ 9,268,017       43.65 %

CRE

                                       

Owner-Occupied CRE

    -       332,148       -       332,148       1.56 %

Commercial Construction, Land Development, and Other Land

    -       4,353,819       -       4,353,819       20.51 %

Other Non Owner-Occupied CRE

    -       1,436,149       -       1,436,149       6.77 %

Direct Financing Leases

    215,225       2,446,181       1,008,244       3,669,650       17.28 %

Residential Real Estate

    294,854       1,075,639       585,541       1,956,034       9.21 %

Installment and Other Consumer

    110,501       87,344       18,746       216,591       1.02 %
    $ 966,814     $ 13,919,066     $ 6,346,528     $ 21,232,408       100.00 %

 

**Nonaccrual loans/leases included $2,300,479 of TDRs, including $48,501 in C&I loans, $1,380,047 in CRE loans, $816,149 in direct financing leases, $43,579 in residential real estate loans, and $12,203 in installment loans.

 

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Changes in the allowance by portfolio segment for the three and nine months ended September 30, 2017 and 2016, respectively, are presented as follows:

 

 

   

Three Months Ended September 30, 2017

 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 14,207,733     $ 12,999,233     $ 2,638,301     $ 2,430,454     $ 1,080,911     $ 33,356,632  

Provisions (credits) charged to expense

    469,977       1,349,393       179,190       (11,654 )     99,530       2,086,436  

Loans/leases charged off

    (338,361 )     -       (268,669 )     (25,822 )     (16,872 )     (649,724 )

Recoveries on loans/leases previously charged off

    63,366       10,748       103,936       6,000       4,947       188,997  

Balance, ending

  $ 14,402,715     $ 14,359,374     $ 2,652,758     $ 2,398,978     $ 1,168,516     $ 34,982,341  

 

   

Three Months Ended September 30, 2016

 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 10,724,506     $ 10,987,062     $ 3,226,194     $ 2,014,987     $ 1,144,741     $ 28,097,490  

Provisions charged to expense

    859,031       8,962       641,435       79,221       19,337       1,607,986  

Loans/leases charged off

    (96,330 )     -       (847,668 )     (38,554 )     (4,530 )     (987,082 )

Recoveries on loans/leases previously charged off

    70,759       6,500       22,001       -       9,181       108,441  

Balance, ending

  $ 11,557,966     $ 11,002,524     $ 3,041,962     $ 2,055,654     $ 1,168,729     $ 28,826,835  

 

 

   

Nine Months Ended September 30, 2017

 
                                                 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 12,545,110     $ 11,670,609     $ 3,111,898     $ 2,342,344     $ 1,087,487     $ 30,757,448  

Provisions charged to expense

    2,345,121       2,655,521       981,877       148,017       84,002       6,214,538  

Loans/leases charged off

    (630,704 )     (10,375 )     (1,611,432 )     (101,006 )     (40,436 )     (2,393,953 )

Recoveries on loans/leases previously charged off

    143,188       43,619       170,415       9,623       37,463       404,308  

Balance, ending

  $ 14,402,715     $ 14,359,374     $ 2,652,758     $ 2,398,978     $ 1,168,516     $ 34,982,341  

 

   

Nine Months Ended September 30, 2016

 
                                                 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 10,484,080     $ 9,375,117     $ 3,395,088     $ 1,790,150     $ 1,096,471     $ 26,140,906  

Provisions (credits) charged to expense

    1,357,262       1,644,008       1,580,677       336,865       (39,991 )     4,878,821  

Loans/leases charged off

    (388,879 )     (23,101 )     (1,983,322 )     (72,261 )     (22,018 )     (2,489,581 )

Recoveries on loans/leases previously charged off

    105,503       6,500       49,519       900       134,267       296,689  

Balance, ending

  $ 11,557,966     $ 11,002,524     $ 3,041,962     $ 2,055,654     $ 1,168,729     $ 28,826,835  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The allowance by impairment evaluation and by portfolio segment as of September 30, 2017 and December 31, 2016 is presented as follows:

 

 

   

As of September 30, 2017

 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Allowance for impaired loans/leases

  $ 1,062,424     $ 2,374,308     $ 652,775     $ 261,097     $ 24,487     $ 4,375,091  

Allowance for nonimpaired loans/leases

    13,340,291       11,985,066       1,999,983       2,137,881       1,144,029       30,607,250  
    $ 14,402,715     $ 14,359,374     $ 2,652,758     $ 2,398,978     $ 1,168,516     $ 34,982,341  
                                                 
                                                 

Impaired loans/leases

  $ 6,567,909     $ 15,588,929     $ 3,952,190     $ 1,328,160     $ 191,941     $ 27,629,129  

Nonimpaired loans/leases

    1,027,962,877       1,142,266,734       143,110,703       238,629,756       89,413,914       2,641,383,984  
    $ 1,034,530,786     $ 1,157,855,663     $ 147,062,893     $ 239,957,916     $ 89,605,855     $ 2,669,013,113  
                                                 
                                                 

Allowance as a percentage of impaired loans/leases

    16.18 %     15.23 %     16.52 %     19.66 %     12.76 %     15.84 %

Allowance as a percentage of nonimpaired loans/leases

    1.30 %     1.05 %     1.40 %     0.90 %     1.28 %     1.16 %

Total allowance as a percentage of total loans/leases

    1.39 %     1.24 %     1.80 %     1.00 %     1.30 %     1.31 %

 

 

   

As of December 31, 2016

 
   

C&I

   

CRE

   

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

 
                                                 

Allowance for impaired loans/leases

  $ 1,771,537     $ 693,919     $ 848,919     $ 289,112     $ 39,481     $ 3,642,968  

Allowance for nonimpaired loans/leases

    10,773,573       10,976,690       2,262,979       2,053,232       1,048,006       27,114,480  
    $ 12,545,110     $ 11,670,609     $ 3,111,898     $ 2,342,344     $ 1,087,487     $ 30,757,448  
                                                 

Impaired loans/leases

  $ 8,936,451     $ 6,112,114     $ 3,256,264     $ 1,661,180     $ 106,090     $ 20,072,099  

Nonimpaired loans/leases

    818,700,812       1,087,346,746       162,163,096       227,571,924       81,559,605       2,377,342,183  
    $ 827,637,263     $ 1,093,458,860     $ 165,419,360     $ 229,233,104     $ 81,665,695     $ 2,397,414,282  
                                                 

Allowance as a percentage of impaired loans/leases

    19.82 %     11.35 %     26.07 %     17.40 %     37.21 %     18.15 %

Allowance as a percentage of nonimpaired loans/leases

    1.32 %     1.01 %     1.40 %     0.90 %     1.28 %     1.14 %

Total allowance as a percentage of total loans/leases

    1.52 %     1.07 %     1.88 %     1.02 %     1.33 %     1.28 %

 

 

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 nine months ended September 30, 2017 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:

                                               

C&I

  $ 1,414,985     $ 1,425,422     $ -     $ 1,129,388     $ 42,567     $ 42,567  

CRE

                                               

Owner-Occupied CRE

    107,322       107,322       -       26,831       6,783       6,783  

Commercial Construction, Land Development, and Other Land

    -       -       -       -       -       -  

Other Non Owner-Occupied CRE

    1,198,439       1,198,439       -       1,178,032       -       -  

Direct Financing Leases

    2,971,485       2,971,485       -       2,708,433       97,603       97,603  

Residential Real Estate

    711,098       785,877       -       619,466       1,161       1,161  

Installment and Other Consumer

    137,704       137,704       -       124,530       -       -  
    $ 6,541,033     $ 6,626,249     $ -     $ 5,786,680     $ 148,114     $ 148,114  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

C&I

  $ 5,152,924     $ 5,156,763     $ 1,062,424     $ 4,994,557     $ 150,848     $ 150,848  

CRE

                                               

Owner-Occupied CRE

    155,020       155,020       51,520       238,584       -       -  

Commercial Construction, Land Development, and Other Land

    4,344,742       4,344,742       818,536       4,348,711       -       -  

Other Non Owner-Occupied CRE

    9,783,406       9,783,406       1,504,252       2,464,981       -       -  

Direct Financing Leases

    980,705       980,705       652,775       736,537       -       -  

Residential Real Estate

    617,062       617,062       261,097       496,243       12,830       12,830  

Installment and Other Consumer

    54,237       54,237       24,487       33,162       317       317  
    $ 21,088,096     $ 21,091,935     $ 4,375,091     $ 13,312,775     $ 163,995     $ 163,995  
                                                 

Total Impaired Loans/Leases:

                                               

C&I

  $ 6,567,909     $ 6,582,185     $ 1,062,424     $ 6,123,945     $ 193,415     $ 193,415  

CRE

                                               

Owner-Occupied CRE

    262,342       262,342       51,520       265,415       6,783       6,783  

Commercial Construction, Land Development, and Other Land

    4,344,742       4,344,742       818,536       4,348,711       -       -  

Other Non Owner-Occupied CRE

    10,981,845       10,981,845       1,504,252       3,643,013       -       -  

Direct Financing Leases

    3,952,190       3,952,190       652,775       3,444,970       97,603       97,603  

Residential Real Estate

    1,328,160       1,402,939       261,097       1,115,709       13,991       13,991  

Installment and Other Consumer

    191,941       191,941       24,487       157,692       317       317  
    $ 27,629,129     $ 27,718,184     $ 4,375,091     $ 19,099,455     $ 312,109     $ 312,109  

 

 

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

 

 

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 September 30, 2017 and 2016, respectively, are presented as follows:

 

   

Three Months Ended September 30, 2017

   

Three Months Ended September 30, 2016

 

Classes of Loans/Leases

 

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Interest Income

Recognized for

Cash Payments

Received

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Interest Income

Recognized for

Cash Payments

Received

 
                                                 

Impaired Loans/Leases with No Specific Allowance Recorded:

                                               

C&I

  $ 1,301,977     $ 25,816     $ 25,816     $ 1,677,527     $ 3,301     $ 3,301  

CRE

                                               

Owner-Occupied CRE

    53,661       6,783       6,783       767,032       -       -  

Commercial Construction, Land Development, and Other Land

    -       -       -       -       -       -  

Other Non Owner-Occupied CRE

    1,173,629       -       -       1,969,034       -       -  

Direct Financing Leases

    2,820,518       39,759       39,759       2,008,095       21,095       21,095  

Residential Real Estate

    690,791       -       -       1,481,340       941       941  

Installment and Other Consumer

    139,533       -       -       322,738       -       -  
    $ 6,180,109     $ 72,358     $ 72,358     $ 8,225,766     $ 25,337     $ 25,337  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

C&I

  $ 5,157,671     $ 53,127     $ 53,127     $ 4,188,621     $ -     $ -  

CRE

                                               

Owner-Occupied CRE

    155,020       -       -       363,911       -       -  

Commercial Construction, Land Development, and Other Land

    4,345,880       -       -       187,831       -       -  

Other Non Owner-Occupied CRE

    4,929,960       -       -       135,141       -       -  

Direct Financing Leases

    893,042       -       -       793,769       -       -  

Residential Real Estate

    550,476       5,601       5,601       807,827       1,503       1,503  

Installment and Other Consumer

    48,164       99       99       160,301       1,458       1,458  
    $ 16,080,213     $ 58,827     $ 58,827     $ 6,637,401     $ 2,961     $ 2,961  
                                                 

Total Impaired Loans/Leases:

                                               

C&I

  $ 6,459,648     $ 78,943     $ 78,943     $ 5,866,148     $ 3,301     $ 3,301  

CRE

                                               

Owner-Occupied CRE

    208,681       6,783       6,783       1,130,943       -       -  

Commercial Construction, Land Development, and Other Land

    4,345,880       -       -       187,831       -       -  

Other Non Owner-Occupied CRE

    6,103,589       -       -       2,104,175       -       -  

Direct Financing Leases

    3,713,560       39,759       39,759       2,801,864       21,095       21,095  

Residential Real Estate

    1,241,267       5,601       5,601       2,289,167       2,444       2,444  

Installment and Other Consumer

    187,697       99       99       483,039       1,458       1,458  
    $ 22,260,322     $ 131,185     $ 131,185     $ 14,863,167     $ 28,298     $ 28,298  

 

 

 

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

 

 

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, 2016 are presented as follows:

 

Classes of Loans/Leases

 

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                       

C&I

  $ 841,895     $ 951,600     $ -  

CRE

                       

Owner-Occupied CRE

    -       93,774       -  

Commercial Construction, Land Development, and Other Land

    -       -       -  

Other Non Owner-Occupied CRE

    1,196,549       1,196,549       -  

Direct Financing Leases

    1,690,121       1,690,121       -  

Residential Real Estate

    853,294       892,495       -  

Installment and Other Consumer

    55,734       55,734       -  
    $ 4,637,593     $ 4,880,273     $ -  
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                       

C&I

  $ 8,094,556     $ 8,098,395     $ 1,771,537  

CRE

                       

Owner-Occupied CRE

    322,148       322,148       57,398  

Commercial Construction, Land Development, and Other Land

    4,353,817       4,353,817       577,611  

Other Non Owner-Occupied CRE

    239,600       239,600       58,910  

Direct Financing Leases

    1,566,143       1,566,143       848,919  

Residential Real Estate

    807,886       882,018       289,112  

Installment and Other Consumer

    50,356       50,356       39,481  
    $ 15,434,506     $ 15,512,477     $ 3,642,968  
                         

Total Impaired Loans/Leases:

                       

C&I

  $ 8,936,451     $ 9,049,995     $ 1,771,537  

CRE

                       

Owner-Occupied CRE

    322,148       415,922       57,398  

Commercial Construction, Land Development, and Other Land

    4,353,817       4,353,817       577,611  

Other Non Owner-Occupied CRE

    1,436,149       1,436,149       58,910  

Direct Financing Leases

    3,256,264       3,256,264       848,919  

Residential Real Estate

    1,661,180       1,774,513       289,112  

Installment and Other Consumer

    106,090       106,090       39,481  
    $ 20,072,099     $ 20,392,750     $ 3,642,968  

 

 

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

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

For C&I and CRE loans, the Company’s credit quality indicator consists of 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 September 30, 2017 and December 31, 2016:

 

   

As of September 30, 2017

 
           

CRE

                 
                   

Non Owner-Occupied

                 

Internally Assigned Risk Rating

 

C&I

   

Owner-Occupied

CRE

   

Commercial

Construction,

Land

Development,

and Other Land

   

Other CRE

   

Total

   

As a % of

Total

 
                                                 

Pass (Ratings 1 through 5)

  $ 1,000,751,792     $ 313,179,076     $ 161,772,865     $ 639,045,018     $ 2,114,748,751       96.45 %

Special Mention (Rating 6)

    9,694,041       9,155,153       2,167,999       6,297,895       27,315,088       1.25 %

Substandard (Rating 7)

    24,084,953       4,810,537       5,051,840       16,375,280       50,322,610       2.30 %

Doubtful (Rating 8)

    -       -       -       -       -       -  
    $ 1,034,530,786     $ 327,144,766     $ 168,992,704     $ 661,718,193     $ 2,192,386,449       100.00 %

 

   

As of September 30, 2017

 

Delinquency Status *

 

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

   

As a % of Total

 
                                         

Performing

  $ 142,924,814     $ 238,382,845     $ 89,250,837     $ 470,558,496       98.73 %

Nonperforming

    4,138,079       1,575,071       355,018       6,068,168       1.27 %
    $ 147,062,893     $ 239,957,916     $ 89,605,855     $ 476,626,664       100.00 %

 

   

As of December 31, 2016

 
           

CRE

                 
                   

Non Owner-Occupied

                 

Internally Assigned Risk Rating

 

C&I

   

Owner-Occupied

CRE

   

Commercial

Construction,

Land

Development,

and Other Land

   

Other CRE

   

Total

   

As a % of Total

 
                                                 

Pass (Ratings 1 through 5)

  $ 796,568,451     $ 314,447,662     $ 158,108,465     $ 582,854,048     $ 1,851,978,626       96.40 %

Special Mention (Rating 6)

    6,305,772       7,559,380       1,780,000       4,437,122       20,082,274       1.05 %

Substandard (Rating 7)

    24,763,040       10,380,369       5,261,026       8,630,578       49,035,013       2.55 %

Doubtful (Rating 8)

    -       210       -       -       210       0.00 %
    $ 827,637,263     $ 332,387,621     $ 165,149,491     $ 595,921,748     $ 1,921,096,123       100.00 %

 

   

As of December 31, 2016

 

Delinquency Status *

 

Direct Financing

Leases

   

Residential Real

Estate

   

Installment and

Other Consumer

   

Total

   

As a % of Total

 
                                         

Performing

  $ 161,749,710     $ 227,277,070     $ 81,449,104     $ 470,475,884       98.77 %

Nonperforming

    3,669,650       1,956,034       216,591       5,842,275       1.23 %
    $ 165,419,360     $ 229,233,104     $ 81,665,695     $ 476,318,159       100.00 %

 

*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 TDRs.

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of September 30, 2017 and December 31, 2016, TDRs totaled $9,854,487 and $8,647,007, respectively.

 

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and nine months ended September 30, 2017 and 2016. 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 September 30, 2017

   

For the three months ended September 30, 2016

 

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

                                                               

C&I

    4     $ 620,452     $ 620,452     $ -       -     $ -     $ -     $ -  

Direct Financing Leases

    4       416,597       416,597       -       2       461,643       461,643       -  
      8     $ 1,037,049     $ 1,037,049     $ -       2     $ 461,643     $ 461,643     $ -  
                                                                 

TOTAL

    8     $ 1,037,049     $ 1,037,049     $ -       2     $ 461,643     $ 461,643     $ -  

 

 

   

For the nine months ended September 30, 2017

   

For the nine months ended September 30, 2016

 

Classes of Loans/Leases

 

Number of

Loans /

Leases

   

Pre-

Modification Recorded

Investment

   

Post-

Modification Recorded

Investment

   

Specific

Allowance

   

Number of

Loans /

Leases

   

Pre-

Modification Recorded

Investment

   

Post-

Modification Recorded

Investment

   

Specific

Allowance

 
                                                                 

CONCESSION - Extension of Maturity

                                                               

C&I

    -     $ -     $ -     $ -       1     $ 52,286     $ 52,286     $ -  

Direct Financing Leases

    2       104,382       104,382       -       4       410,653       410,653       -  
      2     $ 104,382     $ 104,382     $ -       5     $ 462,939     $ 462,939     $ -  
                                                                 

CONCESSION - Significant Payment Delay

                                                               

C&I

    7     $ 801,650     $ 801,650     $ -       1     $ 62,140     $ 62,140     $ -  

Direct Financing Leases

    27       1,889,000       1,889,000       -       6       771,672       771,672       -  
      34     $ 2,690,650     $ 2,690,650     $ -       7     $ 833,812     $ 833,812     $ -  
                                                                 

CONCESSION - Interest Rate Adjusted Below Market

                                                               

CRE - Other

    -     $ -     $ -     $ -       1     $ 1,233,740     $ 1,233,740     $ -  
      -     $ -     $ -     $ -       1     $ 1,233,740     $ 1,233,740     $ -  
                                                                 

TOTAL

    36     $ 2,795,032     $ 2,795,032     $ -       13     $ 2,530,491     $ 2,530,491     $ -  

 

 

Of the TDRs reported above, three with a post-modification recorded balance of $139,241 were on nonaccrual as of September 30, 2017. Two with a post-modification recorded balance of $1,384,680 were on nonaccrual as of September 30, 2016. Not included in the table above, the Company had one TDR that was restructured and charged off in 2016, totaling $236,545.

 

For the three and nine months ended September 30, 2017, four of the Company’s TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Two of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling $112 thousand and the other two TDRs related to another customer whose loans were restructured in the fourth quarter of 2016 with pre-modification balances totaling $195 thousand.

 

For the three and nine months ended September 30, 2016, none of the Company’s TDRs had redefaulted within 12 months subsequent to restructure.

 

 

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 EPS on a basic and diluted basis:

                                   

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 
   

2017

   

2016

   

2017

   

2016

 
                                 

Net income

  $ 7,853,935     $ 6,107,501     $ 25,804,917     $ 19,157,457  
                                 

Basic EPS

  $ 0.60     $ 0.47     $ 1.96     $ 1.55  

Diluted EPS

  $ 0.58     $ 0.46     $ 1.91     $ 1.52  
                                 

Weighted average common shares outstanding*

    13,151,350       13,066,777       13,151,672       12,398,491  

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

    356,605       202,926       357,894       181,551  

Weighted average common and common equivalent shares outstanding

    13,507,955       13,269,703       13,509,566       12,580,042  

 

 

 

The increase in weighted average common shares outstanding when comparing the nine months ended September 30, 2017 to September 30, 2016 was primarily due to the common stock issuance discussed in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

NOTE 5 – 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.

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Assets and liabilities measured at fair value on a recurring basis comprise the following at September 30, 2017 and December 31, 2016:

 

           

Fair Value Measurements at Reporting Date Using

 
           

Quoted Prices

   

Significant

         
           

in Active

   

Other

   

Significant

 
           

Markets for

   

Observable

   

Unobservable

 
           

Identical Assets

   

Inputs

   

Inputs

 
   

Fair Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

September 30, 2017:

                               

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 39,340,168     $ -     $ 39,340,168     $ -  

Residential mortgage-backed and related securities

    158,968,509       -       158,968,509       -  

Municipal securities

    56,763,060       -       56,763,060       -  

Other securities

    4,882,685       1,017       4,881,668       -  

Interest rate caps

    390,527       -       390,527       -  

Interest rate swaps - assets

    2,603,002       -       2,603,002       -  

Total assets measured at fair value

  $ 262,947,951     $ 1,017     $ 262,946,934     $ -  
                                 

Interest rate swaps - liabilities

  $ 2,603,002     $ -     $ 2,603,002     $ -  

Total liabilities measured at fair value

  $ 2,603,002     $ -     $ 2,603,002     $ -  
                                 
                                 

December 31, 2016:

                               

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 46,083,607     $ -     $ 46,083,607     $ -  

Residential mortgage-backed and related securities

    147,702,127       -       147,702,127       -  

Municipal securities

    52,604,426       -       52,604,426       -  

Other securities

    4,722,979       1,361       4,721,618       -  

Interest rate caps

    576,527       -       576,527       -  

Interest rate swaps - assets

    2,338,281       -       2,338,281       -  

Total assets measured at fair value

  $ 254,027,947     $ 1,361     $ 254,026,586     $ -  
                                 

Interest rate swaps - liabilities

  $ 2,338,281     $ -     $ 2,338,281     $ -  

Total liabilities measured at fair value

  $ 2,338,281     $ -     $ 2,338,281     $ -  

 

 

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and nine months ended September 30, 2017 or 2016.

 

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).

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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).

 

Interest rate caps are used for the purpose of hedging interest rate risk. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

 

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

 

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

 

Assets measured at fair value on a non-recurring basis comprise the following at September 30, 2017 and December 31, 2016:

 

           

Fair Value Measurements at Reporting Date Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

September 30, 2017:

                               

Impaired loans/leases

  $ 18,177,320     $ -     $ -     $ 18,177,320  

OREO

    5,545,633       -       -       5,545,633  
    $ 23,722,953     $ -     $ -     $ 23,722,953  
                                 

December 31, 2016:

                               

Impaired loans/leases

  $ 12,823,121     $ -     $ -     $ 12,823,121  

OREO

    5,964,952       -       -       5,964,952  
    $ 18,788,073     $ -     $ -     $ 18,788,073  

 

 

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 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 client and client’s business.  

 

OREO 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 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.

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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:

 

 

   

Quantitative Information about Level Fair Value Measurements

 
   

Fair Value
September 30, 2017

   

Fair Value
December 31, 2016

 

Valuation Technique

 

Unobservable Input

 

Range

 
                                   

Impaired loans/leases

  $ 18,177,320     $ 12,823,121  

Appraisal of collateral

 

Appraisal adjustments

    -10.00%  to  -50.00 %

OREO

    5,545,633       5,964,952  

Appraisal of collateral

 

Appraisal adjustments

    0.00% to  -35.00 %

 

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

 

There have been no changes in valuation techniques used for any assets measured at fair value during the three and nine months ended September 30, 2017 and 2016.

 

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 September 30, 2017

   

As of December 31, 2016

 
 

Hierarchy

 

Carrying

   

Estimated

   

Carrying

   

Estimated

 
 

Level

 

Value

   

Fair Value

   

Value

   

Fair Value

 
                                   

Cash and due from banks

 Level 1 

  $ 56,274,561     $ 56,274,561     $ 70,569,993     $ 70,569,993  

Federal funds sold

 Level 2 

    20,568,000       20,568,000       22,257,000     $ 22,257,000  

Interest-bearing deposits at financial institutions

 Level 2 

    41,221,383       41,221,383       63,948,925     $ 63,948,925  

Investment securities:

                                 

HTM

 Level 2 

    323,981,227       323,436,578       322,909,056     $ 320,414,899  

AFS

 See Previous Table 

    259,954,422       259,954,422       251,113,139     $ 251,113,139  

Loans/leases receivable, net

 Level 3 

    16,830,852       18,177,320       11,873,260     $ 12,823,121  

Loans/leases receivable, net

 Level 2 

    2,624,941,618       2,607,041,000       2,362,856,277     $ 2,344,462,740  

Interest rate caps

 Level 2 

    390,527       390,527       576,527     $ 576,527  

Interest rate swaps - assets

 Level 2 

    2,603,002       2,603,002       2,338,281     $ 2,338,281  

Deposits:

                                 

Nonmaturity deposits

 Level 2 

    2,365,493,644       2,365,493,644       2,188,683,349     $ 2,188,683,349  

Time deposits

 Level 2 

    528,774,838       526,265,000       480,577,924     $ 479,605,000  

Short-term borrowings

 Level 2 

    16,010,805       16,010,805       39,971,387     $ 39,971,387  

FHLB advances

 Level 2 

    169,055,000       169,434,000       137,500,000     $ 138,338,000  

Other borrowings

 Level 2 

    77,500,000       78,428,000       80,000,000     $ 81,282,000  

Junior subordinated debentures

 Level 2 

    33,578,744       25,349,715       33,480,202     $ 24,881,494  

Interest rate swaps - liabilities

 Level 2 

    2,603,002       2,603,002       2,338,281       2,338,281  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 6 – 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 comprised of the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB and RB&T. Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

 

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

 

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 as of and for the three and nine months ended September 30, 2017 and 2016.

 

                                                                 
   

Commercial Banking

   

Wealth

           

Intercompany

   

Consolidated

 
   

QCBT

   

CRBT

   

CSB

   

RB&T

   

Management

   

All Other

   

Eliminations

   

Total

 

Three Months Ended September 30, 2017

                                                               

Total revenue

  $ 11,771,842     $ 10,892,025     $ 7,678,006     $ 4,534,768     $ 2,689,853     $ 10,028,660     $ (7,052,986 )   $ 40,542,168  

Net interest income

  $ 11,664,970     $ 7,903,483     $ 6,379,111     $ 3,245,346     $ -     $ (636,562 )   $ -     $ 28,556,348  

Provision

  $ 1,140,436     $ 200,000     $ 574,000     $ 172,000     $ -     $ -     $ -     $ 2,086,436  

Net income

  $ 3,929,158     $ 3,130,319     $ 1,669,209     $ 726,926     $ 539,091     $ 7,853,935     $ (9,994,703 )   $ 7,853,935  

Goodwill 

  $ 3,222,688     $ -     $ 9,888,225     $ -     $ -     $ -     $ -     $ 13,110,913  

Core deposit intangible

  $ -     $ 1,122,263     $ 5,566,350     $ -     $ -     $ -     $ -     $ 6,688,613  

Total assets

  $ 1,456,251,244     $ 1,007,062,151     $ 631,963,143     $ 445,098,530     $ -     $ 395,697,820     $ (385,609,794 )   $ 3,550,463,094  
                                                                 

Three Months Ended September 30, 2016

                                                               

Total revenue

  $ 18,026,215     $ 10,065,032     $ 2,675,741     $ 4,232,205     $ 2,284,577     $ 8,463,636     $ (8,507,270 )   $ 37,240,136  

Net interest income

  $ 11,225,414     $ 7,594,557     $ 2,191,862     $ 3,056,989     $ -     $ (438,045 )   $ -     $ 23,630,777  

Provision

  $ 1,137,986     $ -     $ 270,000     $ 200,000     $ -     $ -     $ -     $ 1,607,986  

Net income

  $ 3,596,469     $ 3,286,724     $ 188,608     $ 944,781     $ 398,859     $ 6,107,492     $ (8,415,432 )   $ 6,107,501  

Goodwill 

  $ 3,222,688     $ -     $ 10,408,938     $ -     $ -     $ -     $ -     $ 13,631,626  

Core deposit intangible

  $ -     $ 1,321,775     $ 6,291,818     $ -     $ -     $ -     $ -     $ 7,613,593  

Total assets

  $ 1,407,733,009     $ 887,592,695     $ 580,210,270     $ 393,191,774     $ -     $ 368,990,749     $ (356,732,388 )   $ 3,280,986,109  
                                                                 

Nine Months Ended September 30, 2017

                                                               

Total revenue

  $ 39,517,823     $ 31,428,339     $ 23,981,019     $ 12,723,998     $ 7,952,495     $ 30,086,617     $ (27,283,484 )   $ 118,406,807  

Net interest income

  $ 34,381,270     $ 22,107,955     $ 20,326,439     $ 9,308,932     $ -     $ (1,852,668 )   $ -     $ 84,271,928  

Provision

  $ 2,624,538     $ 750,000     $ 2,209,000     $ 631,000     $ -     $ -     $ -     $ 6,214,538  

Net income

  $ 11,657,941     $ 8,893,461     $ 5,484,383     $ 2,406,337     $ 1,554,618     $ 25,804,917     $ (29,996,740 )   $ 25,804,917  

Goodwill 

  $ 3,222,688     $ -     $ 9,888,225     $ -     $ -     $ -     $ -     $ 13,110,913  

Core deposit intangible

  $ -     $ 1,122,263     $ 5,566,350     $ -     $ -     $ -     $ -     $ 6,688,613  

Total assets

  $ 1,456,251,244     $ 1,007,062,151     $ 631,963,143     $ 445,098,530     $ -     $ 395,697,820     $ (385,609,794 )   $ 3,550,463,094  
                                                                 

Nine Months Ended September 30, 2016

                                                               

Total revenue

  $ 45,706,061     $ 31,342,345     $ 2,675,741     $ 11,945,081     $ 6,723,690     $ 23,567,906     $ (23,720,471 )   $ 98,240,353  

Net interest income

  $ 33,394,620     $ 21,755,270     $ 2,191,862     $ 8,914,380     $ -     $ (1,019,020 )   $ -     $ 65,237,112  

Provision

  $ 3,108,821     $ 700,000     $ 270,000     $ 800,000     $ -     $ -     $ -     $ 4,878,821  

Net income

  $ 10,326,508     $ 9,366,441     $ 188,608     $ 2,334,735     $ 1,232,831     $ 19,157,447     $ (23,449,113 )   $ 19,157,457  

Goodwill 

  $ 3,222,688     $ -     $ 10,408,938     $ -     $ -     $ -     $ -     $ 13,631,626  

Core deposit intangible

  $ -     $ 1,321,775     $ 6,291,818     $ -     $ -     $ -     $ -     $ 7,613,593  

Total assets

  $ 1,407,733,009     $ 887,592,695     $ 580,210,270     $ 393,191,774     $ -     $ 368,990,749     $ (356,732,388 )   $ 3,280,986,109  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 7 – REGULATORY CAPITAL REQUIREMENTS

 

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements.

 

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 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 September 30, 2017 and December 31, 2016, that the Company and the subsidiary banks met all capital adequacy requirements to which they are 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, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of September 30, 2017 and December 31, 2016 are also presented in the following table (dollars in thousands). As of September 30, 2017 and December 31, 2016, each of the subsidiary banks met the requirements to be “well capitalized”.

 

                                     

For Capital

   

To Be Well

 
                                     

Adequacy Purposes

   

Capitalized Under

 
                   

For Capital 

   

With Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Conservation Buffer*

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

 

Ratio

   

Amount

 

Ratio

   

Amount

 

Ratio

 

As of September 30, 2017:

                                                                     

Company:

                                                                     

Total risk-based capital

  $ 356,559       11.49 %   $ 248,360  

 

    8.00 %   $ 287,166  

 

    9.250 %   $ 310,450  

 

    10.00 %

Tier 1 risk-based capital

    321,213       10.35 %     186,270  

 

    6.00       225,076  

 

    7.250       248,360  

 

    8.00  

Tier 1 leverage

    321,213       9.23 %     139,146  

 

    4.00       139,146  

 

    4.000       173,932  

 

    5.00  

Common equity Tier 1

    289,612       9.33 %     139,703  

 

    4.50       178,509  

 

    5.750       201,793  

 

    6.50  

Quad City Bank & Trust:

                                                                     

Total risk-based capital

  $ 152,635       12.25 %   $ 99,693  

 

    8.00 %   $ 115,270  

 

    9.250 %   $ 124,616  

 

    10.00 %

Tier 1 risk-based capital

    138,453       11.11 %     74,770  

 

    6.00       90,347  

 

    7.250       99,693  

 

    8.00  

Tier 1 leverage

    138,453       9.40 %     58,913  

 

    4.00       58,913  

 

    4.000       73,642  

 

    5.00  

Common equity Tier 1

    138,453       11.11 %     56,077  

 

    4.50       71,654  

 

    5.750       81,001  

 

    6.50  

Cedar Rapids Bank & Trust:

                                                                     

Total risk-based capital

  $ 114,234       12.16 %   $ 75,150  

 

    8.00 %   $ 86,893  

 

    9.250 %   $ 93,938  

 

    10.00 %

Tier 1 risk-based capital

    102,545       10.92 %     56,363  

 

    6.00       68,105  

 

    7.250       75,150  

 

    8.00  

Tier 1 leverage

    102,545       10.27 %     39,950  

 

    4.00       39,950  

 

    4.000       49,938  

 

    5.00  

Common equity Tier 1

    102,545       10.92 %     42,272  

 

    4.50       54,014  

 

    5.750       61,060  

 

    6.50  

Community State Bank:

                                                                     

Total risk-based capital

  $ 67,071       12.83 %   $ 41,837  

 

    8.00 %   $ 48,374  

 

    9.250 %   $ 52,296  

 

    10.00 %

Tier 1 risk-based capital

    63,356       12.11 %     31,378  

 

    6.00       37,915  

 

    7.250       41,837  

 

    8.00  

Tier 1 leverage

    63,356       10.14 %     24,991  

 

    4.00       24,991  

 

    4.000       31,239  

 

    5.00  

Common equity Tier 1

    63,356       12.11 %     23,533  

 

    4.50       30,070  

 

    5.750       33,992  

 

    6.50  

Rockford Bank & Trust:

                                                                     

Total risk-based capital

  $ 45,031       11.48 %   $ 31,394  

 

    8.00 %   $ 36,299  

 

    9.250 %   $ 39,243  

 

    10.00 %

Tier 1 risk-based capital

    40,120       10.22 %     23,546  

 

    6.00       28,451  

 

    7.250       31,394  

 

    8.00  

Tier 1 leverage

    40,120       9.26 %     17,328  

 

    4.00       17,328  

 

    4.000       21,660  

 

    5.00  

Common equity Tier 1

    40,120       10.22 %     17,659  

 

    4.50       22,564  

 

    5.750       25,508  

 

    6.50  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

                                     

For Capital

   

To Be Well

 
                                     

Adequacy Purposes

   

Capitalized Under

 
                   

For Capital

   

With Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Conservation Buffer*

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

 

Ratio

   

Amount

 

Ratio

   

Amount

 

Ratio

 

As of December 31, 2016:

                                                                     

Company:

                                                                     

Total risk-based capital

  $ 327,440       11.56 %   $ 226,587  

 

    8.00 %   $ 244,289  

 

    8.625 %   $ 283,233  

 

    10.00 %

Tier 1 risk-based capital

    296,366       10.46 %     169,940  

 

    6.00       187,642  

 

    6.625       226,587  

 

    8.00  

Tier 1 leverage

    296,366       9.10 %     130,229  

 

    4.00       130,229  

 

    4.000       162,787  

 

    5.00  

Common equity Tier 1

    266,419       9.41 %     127,455  

 

    4.50       145,157  

 

    5.125       184,102  

 

    6.50  

Quad City Bank & Trust:

                                                                     

Total risk-based capital

  $ 142,990       12.27 %   $ 93,212  

 

    8.00 %   $ 100,494  

 

    8.625 %   $ 116,515  

 

    10.00 %

Tier 1 risk-based capital

    129,524       11.12 %     69,909  

 

    6.00       77,191  

 

    6.625       93,212  

 

    8.00  

Tier 1 leverage

    129,524       9.18 %     56,445  

 

    4.00       56,445  

 

    4.000       70,556  

 

    5.00  

Common equity Tier 1

    129,524       11.12 %     52,432  

 

    4.50       59,714  

 

    5.125       75,735  

 

    6.50  

Cedar Rapids Bank & Trust:

                                                                     

Total risk-based capital

  $ 106,791       12.82 %   $ 66,623  

 

    8.00 %   $ 71,828  

 

    8.625 %   $ 83,279  

 

    10.00 %

Tier 1 risk-based capital

    96,369       11.57 %     49,968  

 

    6.00       55,173  

 

    6.625       66,623  

 

    8.00  

Tier 1 leverage

    96,369       10.69 %     36,061  

 

    4.00       36,061  

 

    4.000       45,076  

 

    5.00  

Common equity Tier 1

    96,369       11.57 %     37,476  

 

    4.50       42,681  

 

    5.125       54,132  

 

    6.50  

Community State Bank:

                                                                     

Total risk-based capital

  $ 68,216       13.81 %   $ 39,521  

 

    8.00 %   $ 42,609  

 

    8.625 %   $ 49,402  

 

    10.00 %

Tier 1 risk-based capital

    66,746       13.51 %     29,641  

 

    6.00       32,729  

 

    6.625       39,522  

 

    8.00  

Tier 1 leverage

    66,746       11.75 %     22,726  

 

    4.00       22,726  

 

    4.000       28,408  

 

    5.00  

Common equity Tier 1

    66,746       13.51 %     22,231  

 

    4.50       25,319  

 

    5.125       32,111  

 

    6.50  

Rockford Bank & Trust:

                                                                     

Total risk-based capital

  $ 42,007       12.26 %   $ 27,410  

 

    8.00 %   $ 29,551  

 

    8.625 %   $ 34,262  

 

    10.00 %

Tier 1 risk-based capital

    37,716       11.01 %     20,558  

 

    6.00       22,699  

 

    6.625       27,410  

 

    8.00  

Tier 1 leverage

    37,716       9.57 %     15,772  

 

    4.00       15,772  

 

    4.000       19,716  

 

    5.00  

Common equity Tier 1

    37,716       11.01 %     15,418  

 

    4.50       17,759  

 

    5.125       22,270  

 

    6.50  

 

*The minimums under Basel III increase by .625% (the capital conservation buffer) annually until 2019.  The fully phased-in minimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), and 7.0% (Common equity Tier 1).  

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 8 – SUBSEQUENT EVENT - ACQUISITION OF GUARANTY BANK AND TRUST COMPANY

 

On October 2, 2017 the Company announced the completion of its previously announced acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty, on October 1, 2017. Guaranty Bank is an Iowa-chartered bank that operates five banking locations throughout the Cedar Rapids metropolitan area.

 

In the acquisition, the Company acquired 100% of Guaranty Bank’s outstanding common stock and purchased certain assets and assumed certain liabilities of Guaranty for aggregate consideration consisting of 79% QCR Holdings common stock (678,670 shares) and 21% cash ($7.8 million). On September 29, 2017, the last trading date before the closing, the Company’s common stock closed at $45.50, resulting in stock consideration valued at $30.9 million and total consideration paid by the Company of $38.7 million.

 

To help fund the cash portion of the purchase price, on September 27, 2017, the Company executed a $7.0 million four-year term note with principal and interest due quarterly. Interest is calculated at the effective LIBOR rate plus 3.00% per annum (4.34% at September 30, 2017). The first principal payment of $437,500 is due in the first quarter of 2018. The collateral on the borrowing is the original stock certificates and stock powers of all subsidiaries.  This note is included within other borrowings on the September 30, 2017 Consolidated Balance Sheet. The remaining cash consideration paid to Guaranty came from operating cash.

 

As of the acquisition date, Guaranty Bank had assets with a book value of $257.2 million, loans with a book value of $196.1 million, and deposits with a book value of $212.3 million. The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed. The Company expects core deposit intangible to be in the range of approximately $2.5-4.5 million. The remaininig fair value adjustments, including goodwill, are still in-process.

 

In the fourth quarter of 2017, the Company intends to merge Guaranty Bank with and into CRBT, with CRBT as the surviving bank. As part of the merger, the Guaranty Bank branches located at 302 3rd Avenue SE, Cedar Rapids, Iowa and 1819 42nd Street NE, Cedar Rapids, Iowa , will permanently close.  The three remaining Guaranty Bank branches will become banking offices of CRBT. Until the banks are merged, the Company will own and operate Guaranty Bank as a separate bank subsidiary.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION

 

This section reviews the financial condition and results of operations of the Company and its subsidiaries for the three and nine months ending September 30, 2017. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to are presented in the table of contents.

 

Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.

 

GENERAL

 

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


QCBT, CRBT and CSB 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 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, 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. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (two in Waterloo and one in Cedar Falls).

 

 

CSB was acquired in 2016, as further described in Note 2 of the Annual Report on Form 10-K for the year ended December 31, 2016. CSB provides full-service commercial and consumer banking to the Des Moines, Iowa area and adjacent communities through its 10 branch locations, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

 

 

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.

 

 

The financial results of Guaranty Bank are not included in this report because the acquisition occurred on October 1, 2017.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

EXECUTIVE OVERVIEW

 

The Company reported net income of $7.9 million and diluted EPS of $0.58 for the quarter ended September 30, 2017. By comparison, for the quarter ended June 30, 2017, the Company reported net income of $8.8 million and diluted EPS of $0.65. For the quarter ended September 30, 2016, the Company reported net income of $6.1 million and diluted EPS of $0.46.

 

For the nine months ended September 30, 2017, the Company reported net income of $25.8 million, and diluted EPS of $1.91. By comparison, for the nine months ended September 30, 2016, the Company reported net income of $19.2 million, and diluted EPS of $1.52.

 

The third quarter of 2017 was highlighted by several significant items:

 

 

Net interest margin (excluding acquisition accounting net accretion) improved three basis points when comparing the third quarter of 2017 to the second quarter of 2017;

 

Annualized loan and lease growth of 19% for the second consecutive quarter;

 

Noninterest expense growth, primarily due to increased salaries and employee benefits, as well as inflated legal expense; and

 

NPAs increased in third quarter primarily due to the addition of one large non owner-occupied CRE relationship.

 

 

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

 

 

   

For the three months ended

   

For the nine months ended

 
   

September 30, 2017

   

June 30, 2017

   

September 30, 2016

   

September 30, 2017

   

September 30, 2016

 
                                         

Net income

  $ 7,853,935     $ 8,766,017     $ 6,107,501     $ 25,804,917     $ 19,157,457  
                                         

Diluted earnings per common share

  $ 0.58     $ 0.65     $ 0.46     $ 1.91     $ 1.52  
                                         
                                         

Weighted average common and common equivalent shares outstanding*

    13,507,955       13,532,324       13,269,703       13,509,566       12,580,042  

 

 

The increase in weighted average common shares outstanding when comparing the first nine months ended September 30, 2017 to September 30, 2016 was primarily due to the common stock issuance discussed in Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

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

 

 

   

For the three months ended

   

For the nine months ended

 
   

September 30, 2017

   

June 30, 2017

   

September 30, 2016

   

September 30, 2017

   

September 30, 2016

 
                                         

Net interest income

  $ 28,556,348     $ 28,046,697     $ 23,630,777     $ 84,271,928     $ 65,237,112  

Provision expense

    2,086,436       2,022,993       1,607,986       6,214,538       4,878,821  

Noninterest income

    6,701,303       6,782,518       10,423,401       20,767,575       24,008,275  

Noninterest expense

    23,395,747       21,404,629       24,480,483       66,073,493       59,178,734  

Federal and state income tax expense

    1,921,533       2,635,576       1,858,208       6,946,555       6,030,375  

Net income

  $ 7,853,935     $ 8,766,017     $ 6,107,501     $ 25,804,917     $ 19,157,457  

 

 

Following are some noteworthy changes in the Company’s financial results:

 

 

Net interest income in the third quarter of 2017 was up 2% compared to the second quarter of 2017 and up 21% compared to the third quarter of 2016. Net interest income increased 29% when comparing the first nine months of 2017 to the same period in the prior year, primarily due to the addition of CSB.

 

 

Provision expense in the third quarter of 2017 increased 3% compared to the second quarter of 2017 and 30% from the same period of 2016. The increase from the third quarter of 2016 to the third quarter of 2017 was primarily attributable to CSB. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.

 

 

Noninterest income in the third quarter of 2017 decreased 1% compared to the second quarter of 2017, primarily due to smaller gains on the sale of government guaranteed portions of loans. Noninterest income in the third quarter of 2017 decreased 36% from the third quarter of 2016 which was primarily attributable to $4 million in gains on the sale of securities associated with a balance sheet restructuring strategy executed in the third quarter of 2016.

 

 

Noninterest expense increased 9% from the second quarter of 2017 which was primarily due to costs related to the acquisition of Guaranty Bank, post-acquisition transition and integration costs, increased salaries and employee benefits expense and inflated professional and data processing expense (primarily legal expense). Noninterest expense decreased 4% from the third quarter of 2016 primarily due to $4 million losses on debt extinguishment due to the balance sheet restructuring strategy executed in the third quarter of 2016.

 

 

Federal and state income tax expense in the third quarter of 2017 decreased 27% compared to the second quarter of 2017. Federal and state income tax in the third quarter of 2017 increased 3% compared to the third quarter of 2016. See the Income Taxes section of this report for additional details.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

LONG-TERM FINANCIAL GOALS

 

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company’s ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company’s long-term financial goals are as follows:

 

 

Improve balance sheet efficiency by maintaining a gross loans and leases to total assets ratio in the range of 73 – 78%;

 

 

Improve profitability (measured by NIM and ROAA);

 

 

Improve asset quality by reducing NPAs to total assets to below 0.75% and maintain charge-offs as a percentage of average loans/leases of under 0.25% annually;

 

 

Maintain reliance on wholesale funding at less than 15% of total assets;

 

 

Grow noninterest bearing deposits to more than 30% of total assets;

 

 

Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income to more than $4 million annually; and

 

 

Grow wealth management segment net income by 10% annually.

 

The following table shows the evaluation of the Company’s long-term financial goals.

 

Goal

   

Key Metric

 

Target**

For the Quarter Ending

September 30,
2017

June 30,
2017

September 30,

2016

Balance sheet efficiency

   

Gross loans and leases to total assets

 

73 - 78%

75%

74%

72%

Profitability

   

NIM(TEY)(non-GAAP)*

 

> 3.85%

3.71%

3.81%

3.71%

   

ROAA

 

> 1.10%

0.90%

1.04%

0.85%

   

Core ROAA (non-GAAP)*

 

0.97%

1.03%

1.05%

Asset quality

   

NPAs to total assets

 

< 0.75%

0.95%

0.75%

0.69%

   

Net charge-offs to average loans and leases***

 

< 0.25% annually

0.11%

0.13%

0.15%

Reliance on wholesale funding

   

Wholesale funding to total assets****

 

< 15%

12%

10%

13%

Funding mix

   

Noninterest bearing deposits as a percentage of total assets

 

> 30%

20%

22%

23%

Consistent, high quality noninterest income revenue streams

   

Gains on sales of government guaranteed portions of loans and swap fee income***

 

> $4 million annually

$2.4 million

$3.0 million

$5.4 million

   

Grow wealth management segment net income***

 

> 10% annually

24%

22%

(3%)

 

*

See GAAP to Non-GAAP reconciliations.

**

Targets will be re-evaluated and adjusted as appropriate.

***

Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period, that are then annualized for comparison.

****

Wholesale funding to total assets is calculated by dividing total borrowings and brokered deposits by total assets.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

STRATEGIC DEVELOPMENTS

 

 

The Company took the following actions to support its corporate strategy and the long-term financial goals shown above.

 

 

The Company grew loans and leases in the first nine months of 2017 by 15% on an annualized basis. This growth exceeded the targeted organic growth of 10-12% for the full year. Strong loan and lease growth for the remainder of the year will help keep the Company’s loan and leases to asset ratio within the targeted range of 73-78%.

 

 

The Company intends to continue to participate in a prudent manner as an acquirer in the consolidation taking place in our markets to further boost ROAA and improve the Company’s efficiency ratio. In the third quarter of 2016, the Company acquired CSB, headquartered in Ankeny, Iowa. See Note 2 of the Company’s 2016 Annual Report on Form 10-K for the year ended December 31, 2016 for additional details. On October 1, 2017, the Company completed the acquisition of Guaranty Bank. See Note 8 to the Consolidated Financial Statements for additional details.

 

 

The Company continues to focus on the NPAs to total assets ratio. This ratio increased by 20 basis points to 0.95%, as compared to the second quarter 2017, due to the addition of one large non owner-occupied CRE relationship. The Company remains committed to improving asset quality ratios in 2017.

 

 

Management continues to focus on reducing the Company’s reliance on wholesale funding. Wholesale funding increased in the third quarter 2017 due to the strong loan and lease growth in the second and third quarters of 2017 which has outpaced the Company’s deposit growth. Management continues to evaluate opportunities for reduction in wholesale funding.

 

 

Correspondent banking continues to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the three states currently served – Iowa, Illinois and Wisconsin. The Company acts as the correspondent bank for 183 downstream banks with average total noninterest bearing deposits of $287.4 million during the third quarter of 2017. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

 

 

SBA and USDA lending is a specialty lending area on which the Company has focused. Once these loans are originated, the government-guaranteed portion of the loan can be sold to the secondary market for premiums. The Company aims to continue to make this a more consistent source of noninterest income.

 

 

As a result of the low interest rate environment, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company 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.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of September 30, 2017 the Company had $2.41 billion of total financial assets in trust (and related) accounts and $955.7 million of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help to drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy.

 

 

GAAP TO NON-GAAP RECONCILIATIONS

 

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “core net income”, “core net income attributable to QCR Holdings, Inc. common stockholders”, “core EPS”, “core ROAA”, “NIM (TEY)”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

 

 

TCE/TA ratio (non-GAAP) is reconciled to stockholders’ equity and total assets;

 

Core net income, core net income attributable to QCR Holdings, Inc. common stockholders, core EPS and core ROAA (all non-GAAP measures) are reconciled to net income;

 

NIM (TEY) (non-GAAP) is reconciled to NIM; and

 

Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income.

 

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company’s capital position without regard to the effects of intangible assets.

 

The table following also includes several “core” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future run-rates.

 

NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures.

 

The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is a standard ratio in the banking industry and widely utilized by investors.

 

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

   

As of

 
   

September 30,

   

June 30,

   

December 31,

 

GAAP TO NON-GAAP RECONCILIATIONS

 

2017

   

2017

   

2016

 
   

(dollars in thousands, except per share data)

 

TCE / TA RATIO

                       
                         

Stockholders' equity (GAAP)

  $ 313,039     $ 305,083     $ 286,041  

Less: Intangible assets

    19,800       20,030       22,522  

TCE (non-GAAP)

  $ 293,239     $ 285,053     $ 263,519  
                         

Total assets (GAAP)

  $ 3,550,463     $ 3,457,187     $ 3,301,944  

Less: Intangible assets

    19,800       20,030       22,522  

TA (non-GAAP)

  $ 3,530,663     $ 3,437,157     $ 3,279,422  
                         

TCE / TA ratio (non-GAAP)

    8.31 %     8.29 %     8.04 %

 

 

   

For the Quarter Ended

   

For the Nine Months Ended

 
   

September 30,

   

June 30,

   

December 31,

   

September 30,

   

September 30,

 

CORE NET INCOME

 

2017

   

2017

   

2016

   

2017

   

2016

 
                                         

Net income (GAAP)

  $ 7,854     $ 8,766     $ 8,529     $ 25,805     $ 19,157  
                                         

Less nonrecurring items (post-tax) (*):

                                       

Income:

                                       

Securities gains, net

  $ (41 )   $ 25     $ (23 )   $ (16 )   $ 3,009  

Total nonrecurring income (non-GAAP)

  $ (41 )   $ 25     $ (23 )   $ (16 )   $ 3,009  
                                         

Expense:

                                       

Losses on debt extinguishment

  $ -     $ -     $ 232     $ -     $ 2,743  

Acquisition costs

    265       -       -       265       887  

Post-acquisition transition and integration costs

    340       -       26       340       850  

Total nonrecurring expense (non-GAAP)

  $ 605     $ -     $ 258     $ 605     $ 4,480  
                                         

Core net income (non-GAAP)

  $ 8,500     $ 8,741     $ 8,810     $ 26,426     $ 20,628  
                                         
                                         

CORE EPS

                                       
                                         

Core net income (non-GAAP) (from above)

  $ 8,500     $ 8,741     $ 8,810     $ 26,426     $ 20,628  
                                         

Weighted average common shares outstanding

    13,151,591       13,170,283       13,087,592       13,151,752       12,398,491  

Weighted average common and common equivalent shares outstanding

    13,508,277       13,532,324       13,323,883       13,509,673       12,580,042  
                                         

Core EPS (non-GAAP):

                                       

Basic

  $ 0.65     $ 0.66     $ 0.67     $ 2.01     $ 1.66  

Diluted

  $ 0.63     $ 0.65     $ 0.66     $ 1.96     $ 1.64  
                                         
                                         

CORE ROAA

                                       
                                         

Core net income (non-GAAP) (from above)

  $ 8,500     $ 8,741     $ 8,810     $ 26,426     $ 20,628  
                                         

Average Assets

  $ 3,503,148     $ 3,378,195     $ 3,277,814     $ 3,385,352     $ 2,702,992  
                                         

Core ROAA (annualized) (non-GAAP)

    0.97 %     1.03 %     1.08 %     1.04 %     1.02 %

 

* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 35%.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

   

For the Quarter Ended

   

For the Nine Months Ended

 
   

September 30,

   

June 30,

   

December 31,

   

September 30,

   

September 30,

 

GAAP TO NON-GAAP RECONCILIATIONS (CONTINUED)

 

2017

   

2017

   

2016

   

2017

   

2016

 
   

(dollars in thousands)

                 

NIM (TEY)

                                       
                                         

Net interest income (GAAP)

  $ 28,556     $ 28,047     $ 29,280     $ 84,272     $ 65,237  
                                         

Plus: Tax equivalent adjustment

    2,311       2,201       1,727       6,632       4,294  
                                         

Net interest income - tax equivalent (Non-GAAP)

  $ 30,867     $ 30,248     $ 31,007     $ 90,904     $ 69,531  
                                         

Average earning assets

  $ 3,303,014     $ 3,180,779     $ 3,069,122     $ 3,186,716     $ 2,548,070  
                                         

NIM (GAAP)

    3.43 %     3.54 %     3.80 %     3.54 %     3.42 %

NIM (TEY) (Non-GAAP)

    3.71 %     3.81 %     4.02 %     3.81 %     3.65 %
                                         

EFFICIENCY RATIO

                                       
                                         

Noninterest expense (GAAP)

  $ 23,395     $ 21,405     $ 22,308     $ 66,073     $ 59,179  
                                         

Net interest income (GAAP)

  $ 28,556     $ 28,047     $ 29,280     $ 84,272     $ 65,237  

Noninterest income (GAAP)

    6,702       6,782       7,029       20,768       24,008  

Total income

  $ 35,258     $ 34,829     $ 36,309     $ 105,040     $ 89,245  
                                         

Efficiency ratio (noninterest expense/total income) (Non-GAAP)

    66.35 %     61.46 %     61.44 %     62.90 %     66.31 %

 

 

 

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

 

Net interest income, on a tax equivalent basis, increased 22% to $30.9 million for the quarter ended September 30, 2017, compared to the same quarter of the prior year. For the nine months ended September 30, 2017, net interest income, on a tax equivalent basis, increased 31% to $90.9 million, compared to the same period of 2016. Net interest income improved due to several factors:

 

 

The acquisition of CSB, whose strong net interest margin has significantly contributed to the Company’s results;

 

The Company’s continued strategy to redeploy funds from the taxable securities portfolio into higher yielding loans and leases; and

 

Organic loan and lease growth has been strong over the past twelve months, as evidenced by average gross loan/lease growth of 29% in that period.

 

A comparison of yields, spread and margin from the third quarter of 2017 to the third quarter of 2016 is as follows (on a tax equivalent basis):

 

 

The average yield on interest-earning assets increased 16 basis points.

 

The average cost of interest-bearing liabilities increased 18 basis points.

 

The net interest spread decreased 2 basis points from 3.49% to 3.47%.

 

NIM remained flat at 3.71% for both periods.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

A comparison of yields, spread and margin from the first nine months of 2017 to the first nine months of 2016 is as follows (on a tax equivalent basis):

 

 

The average yield on interest-earning assets increased 25 basis points.

 

The average cost of interest-bearing liabilities increased 9 basis points.

 

The net interest spread increased 16 basis points from 3.43% to 3.59%.

 

NIM improved 16 basis points from 3.65% to 3.81%.

 

The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their NIM. Management continually addresses this issue with pricing and other balance sheet management strategies.

 

The improvement in NIM was primarily the result of the acquisition of CSB. CSB’s margin will fluctuate based on the amortization and accretion of purchase accounting adjustments, most notably, the discount accretion on the loan portfolio. This benefit can fluctuate based on prepayments of both PCI and performing loans. As loans prepay, the associated discount is accelerated.

 

The Company continues to place an emphasis on shifting its balance sheet mix. With a stated goal of maintaining loans/leases as a percentage of assets in a range of 73-78%, the Company funded its loan/lease growth with a mixture of core deposits and cash from calls/maturities/redemptions in the investment securities portfolio. In 2015 and 2016, cash from called securities and the targeted sales of securities was redeployed into the loan portfolio, resulting in a significant increase in yield, while minimizing any extension of duration. Additionally, the Company recognized net gains on these sales due to the previous rate environment. As rates rise, the Company should also have less market volatility in the investment securities portfolio, as this is a smaller portion of the balance sheet.

 

There still exists some higher cost legacy borrowings and the Company continues to monitor and evaluate both prepayment and debt restructuring opportunities, as executing on such a strategy could potentially increase NIM at a much quicker pace than holding the debt until maturity.

 

 

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 September 30,

 
   

2017

   

2016

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Earned

   

Yield or

   

Average

   

Earned

   

Yield or

 
   

Balance

   

or Paid

   

Cost

   

Balance

   

or Paid

   

Cost

 
                                                 
   

(dollars in thousands)

 

ASSETS

                                               

Interest earning assets:

                                               

Federal funds sold

  $ 19,966     $ 52       1.03 %   $ 17,685     $ 13       0.29 %

Interest-bearing deposits at financial institutions

    42,178       141       1.33 %     67,807       103       0.60 %

Investment securities (1)

    593,451       5,808       3.88 %     525,417       4,826       3.65 %

Restricted investment securities

    17,793       173       3.86 %     14,877       132       3.53 %

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

    2,629,626       29,978       4.52 %     2,077,376       23,330       4.47 %
                                                 

Total interest earning assets

  $ 3,303,014     $ 36,152       4.34 %   $ 2,703,162     $ 28,404       4.18 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 64,272                     $ 52,678                  

Premises and equipment

    61,585                       42,986                  

Less allowance

    (34,086 )                     (30,927 )                

Other

    108,363                       98,048                  
                                                 

Total assets

  $ 3,503,148                     $ 2,865,947                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,613,162       2,230       0.55 %   $ 1,116,325       717       0.26 %

Time deposits

    530,120       1,326       0.99 %     422,603       755       0.71 %

Short-term borrowings

    16,138       33       0.81 %     30,208       12       0.16 %

FHLB advances

    146,556       608       1.65 %     118,564       421       1.41 %

Other borrowings

    72,617       726       3.97 %     116,856       975       3.32 %

Junior subordinated debentures

    33,563       362       4.28 %     33,430       306       3.64 %
                                                 

Total interest-bearing liabilities

  $ 2,412,156     $ 5,285       0.87 %   $ 1,837,986     $ 3,186       0.69 %
                                                 

Noninterest-bearing demand deposits

  $ 738,824                     $ 704,469                  

Other noninterest-bearing liabilities

    42,572                       45,123                  

Total liabilities

  $ 3,193,552                     $ 2,587,578                  
                                                 

Stockholders' equity

    309,596                       278,369                  
                                                 

Total liabilities and stockholders' equity

  $ 3,503,148                     $ 2,865,947                  
                                                 

Net interest income

          $ 30,867                     $ 25,218          
                                                 

Net interest spread

                    3.47 %                     3.49 %
                                                 

Net interest margin

                    3.71 %                     3.71 %
                                                 

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

    136.93 %                     147.07 %                

 

(1)  Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% 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. 

 

 

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 September 30, 2017

 

   

Inc./(Dec.)

   

Components

 
   

from

   

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2017 vs. 2016

 
   

(dollars in thousands)

 

INTEREST INCOME

                       

Federal funds sold

  $ 39     $ 37     $ 2  

Interest-bearing deposits at financial institutions

    38       264       (226 )

Investment securities (2)

    982       320       662  

Restricted investment securities

    41       13       28  

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

    6,648       295       6,353  
                         

Total change in interest income

  $ 7,748     $ 929     $ 6,819  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ 1,513     $ 1,090     $ 423  

Time deposits

    571       348       223  

Short-term borrowings

    21       58       (37 )

Federal Home Loan Bank advances

    187       77       110  

Other borrowings

    (249 )     913       (1,162 )

Junior subordinated debentures

    56       55       1  
                         

Total change in interest expense

  $ 2,099     $ 2,541     $ (442 )
                         

Total change in net interest income

  $ 5,649     $ (1,612 )   $ 7,261  

 

(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 35% 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.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

   

For the nine months ended September 30,

 
   

2017

   

2016

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Earned

   

Yield or

   

Average

   

Earned

   

Yield or

 
   

Balance

   

or Paid

   

Cost

   

Balance

   

or Paid

   

Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest earning assets:

                                               

Federal funds sold

  $ 16,600     $ 105       0.85 %   $ 16,364     $ 36       0.29 %

Interest-bearing deposits at financial institutions

    73,655       560       1.02 %     53,063       226       0.57 %

Investment securities (1)

    575,884       16,350       3.80 %     527,162       14,084       3.57 %

Restricted investment securities

    14,963       435       3.89 %     14,396       396       3.67 %

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

    2,505,614       86,821       4.63 %     1,937,085       63,784       4.40 %
                                                 

Total interest earning assets

  $ 3,186,716     $ 104,271       4.37 %   $ 2,548,070     $ 78,526       4.12 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 64,363                     $ 49,677                  

Premises and equipment

    61,296                       39,637                  

Less allowance

    (32,648 )                     (28,480 )                

Other

    105,625                       94,087                  
                                                 

Total assets

  $ 3,385,352                     $ 2,702,992                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 1,528,971       5,205       0.46 %   $ 994,476       1,931       0.26 %

Time deposits

    522,986       3,575       0.91 %     415,808       2,175       0.70 %

Short-term borrowings

    19,754       76       0.51 %     55,623       74       0.18 %

FHLB advances

    112,550       1,365       1.62 %     125,319       1,278       1.36 %

Other borrowings

    73,126       2,104       3.85 %     106,201       2,624       3.30 %

Junior subordinated debentures

    33,530       1,042       4.15 %     33,825       913       3.61 %
                                                 

Total interest-bearing liabilities

  $ 2,290,917     $ 13,367       0.78 %   $ 1,731,251     $ 8,995       0.69 %
                                                 

Noninterest-bearing demand deposits

  $ 751,318                     $ 675,240                  

Other noninterest-bearing liabilities

    42,660                       41,499                  

Total liabilities

  $ 3,084,895                     $ 2,447,990                  
                                                 

Stockholders' equity

    300,457                       255,002                  
                                                 

Total liabilities and stockholders' equity

  $ 3,385,352                     $ 2,702,992                  
                                                 

Net interest income

          $ 90,904                     $ 69,531          
                                                 

Net interest spread

                    3.59 %                     3.43 %
                                                 

Net interest margin

                    3.81 %                     3.65 %
                                                 

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

    139.10 %                     147.18 %                

 

(1)  Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% 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. 

 

 

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 nine months ended September 30, 2017

 

   

Inc./(Dec.)

   

Components

 
   

from

   

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2017 vs. 2016

 
   

(dollars in thousands)

 

INTEREST INCOME

                       

Federal funds sold

  $ 69     $ 68     $ 1  

Interest-bearing deposits at financial institutions

    334       224       110  

Investment securities (2)

    2,266       924       1,342  

Restricted investment securities

    39       23       16  

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

    23,037       3,540       19,497  
                         

Total change in interest income

  $ 25,745     $ 4,779     $ 20,966  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ 3,274     $ 1,913     $ 1,361  

Time deposits

    1,400       762       638  

Short-term borrowings

    2       97       (95 )

Federal Home Loan Bank advances

    87       283       (196 )

Other borrowings

    (520 )     577       (1,097 )

Junior subordinated debentures

    129       143       (14 )
                         

Total change in interest expense

  $ 4,372     $ 3,775     $ 597  
                         

Total change in net interest income

  $ 21,373     $ 1,004     $ 20,369  
                         

 

(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 35% 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.

 

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 GAAP. 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. Certain critical accounting policies are described below.

 

ALLOWANCE FOR LOAN AND LEASE LOSSES

 

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.

 

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 NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.

 

Qualitative factors include management’s view regarding 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 structures, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology.

 

Management may report a materially different amount for the provision in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the 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 September 30, 2017 was adequate to absorb losses 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.

 

OTHERTHAN-TEMPORARY IMPAIRMENT

 

The Company’s assessment of OTTI of its investment securities portfolio is another critical accounting policy due to the level of judgment required by management. Investment securities are evaluated to determine whether declines in fair value below their cost are other-than-temporary.

 

In estimating OTTI 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 Company’s lack of intent to 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 OTTI should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

RESULTS OF OPERATIONS

 

INTEREST INCOME

 

Interest income increased 26%, comparing the third quarter of 2017 to the same period of 2016 and increased 32%, comparing the first nine months of 2017 to the same period of 2016. This increase was primarily the result of the CSB acquisition during the third quarter of 2016, as well as strong organic loan growth.

 

Overall, the Company’s average earning assets increased 22%, comparing the third quarter of 2017 to the third quarter of 2016. During the same time period, average gross loans and leases increased 27%, while average investment securities increased 13%. Average earning assets increased 25%, comparing the first nine months of 2017 to the same period of 2016. Average gross loans and leases increased 29% and average investment securities increased 9%, comparing the first nine of 2017 to the same period of 2016. These increases were also the result of the acquisition of CSB, as well as strong loan growth.

 

Additionally, the Company continued to diversify its securities portfolio, including increasing its portfolio of tax exempt municipal securities. The large majority of these are privately placed debt issuances by municipalities located in the Midwest and require a thorough underwriting process before investment. Execution of this strategy has led to increased interest income on a tax equivalent basis over the past several years. Management understands that this strategy has 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 intends to continue to grow quality loans and leases as well as diversify its securities portfolio to maximize yield while minimizing credit and interest rate risk.

 

INTEREST EXPENSE

 

Interest expense for the third quarter of 2017 increased 66% from the third quarter of 2016. For the first nine months of 2017, interest expense increased 49% compared to the first nine months of 2016. The acquisition of CSB contributed to this increase. Additionally, the Company has rate sensitive deposits with select major customers that have repriced with the increase in certain market interest rates.

 

Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher in cost than deposits. Several balance sheet restructuring strategies were executed in 2016. Refer to Notes 10 and 11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional details.

 

The Company’s management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

 

 

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.

 

The Company’s provision totaled $2.1 million for the third quarter of 2017, which was an increase of $478 thousand or 30% from the same quarter of the prior year. Provision for the first nine months of the year totaled $6.2 million, which was up $1.3 million or 27%, compared to the first nine months of 2016. The increase from the third quarter of 2016 to the third quarter of 2017 was primarily attributable to CSB. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance. This provision, when coupled with net charge-offs of $2.0 million for the first nine months of 2017, increased the Company’s allowance to $35.0 million at September 30, 2017. As of September 30, 2017, the Company’s allowance to total loans/leases was 1.31%, which is flat from June 30, 2017 and up from 1.22% at September 30, 2016.

 

In accordance with GAAP for business combination accounting, the loans acquired through the acquisition of CSB were recorded at fair value; therefore, there was no allowance associated with CSB’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired CSB loans factoring in the net remaining discount ($5.6 million at September 30, 2017). When factoring this remaining discount into the Company’s allowance to total loans and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from 1.31% to 1.52%.

 

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

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONINTEREST INCOME

 

The following tables set forth the various categories of noninterest income for the three and nine months ended September 30, 2017 and 2016.

 

   

Three Months Ended

                 
   

September 30,

2017

   

September 30,

2016

   

$ Change

   

% Change

 
                                 

Trust department fees

  $ 1,721,401     $ 1,518,600     $ 202,801       13.4

%

Investment advisory and management fees

    968,452       765,977       202,475       26.4  

Deposit service fees

    1,522,461       1,150,869       371,592       32.3  

Gains on sales of residential real estate loans, net

    98,409       144,105       (45,696 )     (31.7 )

Gains on sales of government guaranteed portions of loans, net

    91,974       218,785       (126,811 )     (58.0 )

Swap fee income

    194,256       333,772       (139,516 )     (41.8 )

Securities gains (losses), net

    (63,588 )     4,251,773       (4,315,361 )     (101.5 )

Earnings on bank-owned life insurance

    428,002       450,251       (22,249 )     (4.9 )

Debit card fees

    754,803       475,182       279,621       58.8  

Correspondent banking fees

    239,060       253,823       (14,763 )     (5.8 )

Other

    746,073       860,264       (114,191 )     (13.3 )

Total noninterest income

  $ 6,701,303     $ 10,423,401     $ (3,722,098 )     (35.7 )%
                                 
                                 
   

Nine Months Ended

                 
   

September 30, 2017

   

September 30, 2016

   

$ Change

   

% Change

 
                                 

Trust department fees

  $ 5,153,609     $ 4,606,590     $ 547,019       11.9

%

Investment advisory and management fees

    2,798,886       2,117,100       681,786       32.2  

Deposit service fees

    4,297,210       3,028,758       1,268,452       41.9  

Gains on sales of residential real estate loans

    307,360       288,904       18,456       6.4  

Gains on sales of government guaranteed portions of loans

    1,129,668       2,701,203       (1,571,535 )     (58.2 )

Swap fee income

    635,353       1,358,312       (722,959 )     (53.2 )

Securities gains (losses), net

    (25,124 )     4,628,283       (4,653,407 )     (100.5 )

Earnings on bank-owned life insurance

    1,357,049       1,324,380       32,669       2.5  

Debit card fees

    2,201,125       1,126,581       1,074,544       95.4  

Correspondent banking fees

    684,306       800,892       (116,586 )     (14.6 )

Other

    2,228,133       2,027,272       200,861       9.9  

Total noninterest income

  $ 20,767,575     $ 24,008,275     $ (3,240,700 )     (13.5 )%

 

In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in early 2017 coupled with strong growth in assets under management, trust department fees increased 13%, comparing the third quarter of 2017 to the same period of the prior year. Trust department fees increased 12% when comparing the first nine months of 2017 to the same period of the prior year. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. Additionally, the Company recently started offering trust operations services to correspondent banks. Management 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). Similar to trust department fees, these fees are largely determined based on the value of the investments managed. And, similar to the trust department, the Company has had some success in expanding its customer base. Due to this growth and favorable market conditions in 2017, investment advisory and management fees increased 26%, comparing the third quarter of 2017 to the same period of the prior year and they increased 32% when comparing the first nine months of 2017 to the first nine months of 2016. The acquisition of CSB also contributed to this increase, as it had an established investment advisory and management services department at acquisition.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Deposit service fees expanded 32% comparing the third quarter of 2017 to the same period of the prior year and expanded 42% when comparing the first nine months of 2017 to the same period of the prior year. This increase was primarily the result of the acquisition of CSB. 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 continuing 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 decreased 32% when comparing the third quarter of 2017 to the same period of the prior year and increased 6% when comparing the first nine months of 2017 to the same period of the prior year. Overall, with the continued low interest rate environment, refinancing activity has slowed, as many of the Company’s existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

 

The Company’s gains on the sale of government-guaranteed portions of loans for the third quarter of 2017 decreased 58% compared to the third quarter of 2016 and decreased 58% when comparing the first nine months of 2017 to the same period of the prior year. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. The Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. 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.

 

As a result of the continued low interest rate environment, the Company was able to execute numerous interest rate swaps on select commercial loans over the past two years. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position the Company 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. A good interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled $194 thousand for the third quarter of 2017, compared to $334 thousand for the third quarter of 2016. Swap fee income totaled $635 thousand for the first nine months of 2017 compared to $1.4 million in the first nine months of 2016. Future levels of swap fee income are dependent upon prevailing interest rates.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Securities losses were $64 thousand for the third quarter of 2017, compared to gains of $4.3 million for the third quarter of 2016. Securities losses totaled $25 thousand for the first nine months of 2017, compared to gains of $4.6 million for the first nine months of 2016. In September 2016, the Company sold an equity security and recognized a pre-tax gross gain on the sale of $4 million. The equity security was acquired by the Company at no cost as part of a membership in the invested company in 2002.

 

Earnings on BOLI decreased 5% comparing the third quarter of 2017 to the third quarter of 2016 and increased 3% comparing the first nine months of 2017 to the first nine months of 2016. There were no purchases of BOLI within the last twelve months. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Equity market performance accounted for the majority of the volatility. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

 

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 59% comparing the third quarter of 2017 to the third quarter of the prior year and increased 95% comparing the first nine months of 2017 to the first nine months of 2016. The primary reason for the increase was the addition of CSB. CSB has a large retail customer base and therefore generates significant interchange revenue. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity.

 

Correspondent banking fees decreased 6% comparing the third quarter of 2017 to the third quarter of the prior year and decreased 15% when comparing the first nine months of 2017 to the first nine months of 2016. As interest rates rise, the correspondent bank deposit accounts receive a higher earnings credit, which then reduces the direct fees that the Company receives. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. 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 loan growth as well as a steady source of fee income. The Company now serves approximately 183 banks in Iowa, Illinois and Wisconsin.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONINTEREST EXPENSE

 

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2017 and 2016.

 

   

Three Months Ended

                 
   

September 30, 2017

   

September 30, 2016

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits

  $ 13,423,943     $ 11,202,460     $ 2,221,483       19.8

%

Occupancy and equipment expense

    2,516,274       2,086,331       429,943       20.6  

Professional and data processing fees

    2,950,839       1,931,329       1,019,510       52.8  

Acquisition costs

    407,997       1,036,904       (628,907 )     (60.7 )

Post-acquisition transition and integration costs

    522,740       1,009,132       (486,392 )     (48.2 )

FDIC insurance, other insurance and regulatory fees

    690,894       582,835       108,059       18.5  

Loan/lease expense

    257,540       102,678       154,862       150.8  

Net cost of (income from) operations of other real estate

    (160,640 )     133,055       (293,695 )     (220.7 )

Advertising and marketing

    669,923       547,768       122,155       22.3  

Bank service charges

    460,153       415,401       44,752       10.8  

Losses on debt extinguishment, net

    -       4,137,310       (4,137,310 )     (100.0 )

Correspondent banking expense

    204,189       205,998       (1,809 )     (0.9 )

Other

    1,451,895       1,089,282       362,613       33.3  

Total noninterest expense

  $ 23,395,747     $ 24,480,483     $ (1,084,736 )     (4.4

)%

                                 
                                 
   

Nine Months Ended

                 
   

September 30, 2017

   

September 30, 2016

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits

  $ 39,662,218     $ 32,920,840     $ 6,741,378       20.5

%

Occupancy and equipment expense

    7,716,829       5,797,875       1,918,954       33.1  

Professional and data processing fees

    7,374,930       4,921,064       2,453,866       49.9  

Acquisition costs

    407,997       1,363,987       (955,990 )     (70.1 )

Post-acquisition transition and integration costs

    522,740       1,037,018       (514,278 )     (49.6 )

FDIC insurance, other insurance and regulatory fees

    1,957,413       1,866,804       90,609       4.9  

Loan/lease expense

    811,362       419,846       391,516       93.3  

Net cost of (income from) operations of other real estate

    (118,453 )     513,149       (631,602 )     (123.1 )

Advertising and marketing

    1,846,942       1,367,478       479,464       35.1  

Bank service charges

    1,331,499       1,246,682       84,817       6.8  

Losses on debt extinguishment, net

    -       4,220,507       (4,220,507 )     (100.0 )

Correspondent banking expense

    604,233       564,763       39,470       7.0  

Other

    3,955,783       2,938,721       1,017,062       34.6  

Total noninterest expense

  $ 66,073,493     $ 59,178,734     $ 6,894,759       11.7

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency.

 

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2016 to the third quarter of 2017 by 20%. This line item also increased 21% when comparing the first nine months of 2017 to the first nine months of 2016. This increase was primarily related to the acquisition of CSB late in the third quarter of 2016.

 

 

Part I
Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Occupancy and equipment expense increased 21%, comparing the third quarter of 2017 to the same period of the prior year and increased 33% comparing the first nine months of 2017 to the same period of the prior year. The increased expense was mostly due to the addition of CSB.

 

Professional and data processing fees increased 53%, comparing the third quarter of 2017 to the same period in 2016 and increased 50% comparing the first nine months of 2017 to the same period in 2016. This increased expense was partially due to the addition of CSB. Legal expense for the past quarter was elevated due to a legal matter in Rockford where two Bank officers have been charged with wrongdoing in connection with an SBA loan application.  The Company anticipates these legal expenses will continue until the court proceedings are completed, which the Company expects to be sometime in 2018.  Neither RB&T, nor the Company, have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

 

FDIC and other insurance expense increased 19%, comparing the third quarter of 2017 to the third quarter of 2016, and increased 5% comparing the first nine months of 2017 to the same period of 2016. The increase in expense was due to the acquisition of CSB, partially offset by a decrease in the assessment rate designated by the FDIC.

 

Loan/lease expense increased 151%, comparing the third quarter of 2017 to the same quarter of 2016, and increased 93% when comparing the first nine months of 2017 to the same period of 2016. The Company incurred elevated levels of expense in the first nine months of 2017 for certain existing NPLs in connection with the work-out of these loans. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

 

Net cost of or income from operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Income from operations of other real estate totaled $161 thousand for the third quarter of 2017, compared to net costs of operations of $133 thousand for the third quarter of 2016. Income from operations of other real estate totaled $118 thousand for the first nine months of 2017, compared to net costs of operations of $513 thousand for the first nine months of 2016. Occupancy rates for one of the OREO properties managed by the Company have improved over the past year, increasing cash flow from that property and reducing net operating costs.

 

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 11% from the third quarter of 2016 to the third quarter of 2017 and increased 7% from the first nine months of 2016 to the first nine months of 2017. The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio. As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

 

In the first nine months of 2016, the Company incurred $4.2 thousand of losses on debt extinguishment, net. These losses relate to the prepayment of certain FHLB advances and wholesale structured repurchase agreements. Additionally, the Company recognized gains on extinguishment related to the repurchase of junior subordinated debentures that were acquired at a discount through auction.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Correspondent banking expense was down 1% when comparing the third quarter of 2017 to the third quarter of 2016 and up 7% when comparing the first nine months of 2017 to the same period of 2016 due to both increases in volume and in the number of correspondent banking clients. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services.

 

Other noninterest expense was up 33% when comparing the third quarter of 2017 to the third quarter of 2016 and up 35% when comparing the first nine months of 2017 to the same period of 2016.  A large portion of that increase was due to core deposit intangible amortization.  Core deposit intangible amortization expense was up $120 thousand when comparing the third quarter of 2017 to the third quarter of 2016 and increased $482 thousand when comparing the first nine months of 2017 to the same period of 2016.  Increases were due to the acquisition of CSB.

 

INCOME TAXES

 

In the third quarter of 2017, the Company incurred income tax expense of $1.9 million. During the first nine months of the year, the Company incurred income tax expense of $6.9 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended September 30, 2017 and 2016.

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 
           

% of

           

% of

           

% of

           

% of

 
           

Pretax

           

Pretax

           

Pretax

           

Pretax

 
   

Amount

   

Income

   

Amount

   

Income

   

Amount

   

Income

   

Amount

   

Income

 
                                                                 

Computed "expected" tax expense

  $ 3,421,414       35.0 %   $ 2,787,998       35.0 %   $ 11,463,015       35.0 %   $ 8,815,741       35.0 %

Tax exempt income, net

    (1,479,786 )     (15.1 )     (1,180,470 )     (14.8 )     (4,219,116 )     (12.9 )     (3,135,276 )     (12.5 )

Bank-owned life insurance

    (149,802 )     (1.5 )     (157,587 )     (2.0 )     (474,968 )     (1.4 )     (463,532 )     (1.8 )

State income taxes, net of federal benefit, current year

    389,200       4.0       289,287       3.6       1,191,935       3.6       853,325       3.4  

Excess tax benefit on stock options exercised and restricted stock awards vested*

    (190,554 )     (1.9 )     -       -       (813,421 )     (2.5 )     -       -  

Other

    (68,939 )     (0.8 )     118,980       1.5       (200,890 )     (0.6 )     (39,883 )     (0.2 )

Federal and state income tax expense

  $ 1,921,533       19.7 %   $ 1,858,208       23.3 %   $ 6,946,555       21.2 %   $ 6,030,375       23.9 %

 

The effective tax rate for the quarter ended September 30, 2017 was 19.7% which was a decrease from the effective tax rate of 23.3% for the quarter ended September 30, 2016. The effective tax rate for the nine months ended September 30, 2017 was 21.2%, which was a decrease over the effective tax rate of 23.9% for the nine months ended September 30, 2016. This shift was primarily due to the implementation of ASU 2016-09, which resulted in a tax benefit of $191 thousand for the third quarter of 2017 and $813 thousand for the first nine months of 2017. The effective rate for the three months ended September 30, 2017 was also positively impacted by higher levels of tax exempt interest income.

 

FINANCIAL CONDITION

 

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

 

   

As of

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

(dollars in thousands)

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Cash and due from banks

  $ 56,275       2 %   $ 77,161       2 %   $ 70,570       2 %   $ 61,213       2 %

Federal funds sold and interest-bearing deposits

    61,789       2 %     72,354       2 %     86,206       3 %     96,047       3 %

Securities

    583,936       16 %     593,485       17 %     574,022       19 %     564,930       17 %

Net loans/leases

    2,641,772       74 %     2,520,209       73 %     2,374,730       70 %     2,331,774       71 %

Other assets

    206,691       6 %     193,978       6 %     196,416       6 %     227,022       7 %

Total assets

  $ 3,550,463       100 %   $ 3,457,187       100 %   $ 3,301,944       100 %   $ 3,280,986       100 %
                                                                 

Total deposits

  $ 2,894,268       82 %   $ 2,870,234       83 %   $ 2,669,261       81 %   $ 2,594,913       79 %

Total borrowings

    296,145       8 %     230,264       7 %     290,952       9 %     312,104       10 %

Other liabilities

    47,011       1 %     51,606       1 %     55,690       2 %     93,112       3 %

Total stockholders' equity

    313,039       9 %     305,083       9 %     286,041       8 %     280,857       8 %

Total liabilities and stockholders' equity

  $ 3,550,463       100 %   $ 3,457,187       100 %   $ 3,301,944       100 %   $ 3,280,986       100 %

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

During the third quarter of 2017, the Company’s total assets increased $93.3 million, or 3%, to a total of $3.6 billion. Total gross loans and leases grew $123.2 million. This loan and lease growth was funded by deposits, which increased $24.0 million in the third quarter of 2017, and borrowings, which increased $65.9 million in the third quarter of 2017. Stockholders’ equity increased $8.0 million, or 3%, in the current quarter due to net retained income.

 

INVESTMENT SECURITIES 

 

The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk and maximizing return, while minimizing credit risk. The Company has further diversified the portfolio by decreasing U.S government sponsored agency securities, while increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company’s existing markets) and require a thorough underwriting process before investment.

 

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

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 

U.S. govt. sponsored agency securities

  $ 39,340       7 %   $ 41,944       7 %   $ 46,084       8 %   $ 67,885       12 %

Municipal securities

    379,694       65 %     381,254       64 %     374,463       65 %     360,330       64 %

Residential mortgage-backed and related securities

    158,969       27 %     164,415       28 %     147,702       26 %     133,173       23 %

Other securities

    5,933       1 %     5,872       1 %     5,773       1 %     3,542       1 %
    $ 583,936       100 %   $ 593,485       100 %   $ 574,022       100 %   $ 564,930       100 %
                                                                 

Securities as a % of Total Assets

    16.45 %             17.17 %             17.38 %             17.22 %        

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

    (0.16 )%             (0.33 )%             (0.87 )%             1.53 %        

Duration (in years)

    6.4               6.3               6.0               5.7          

Quarterly Yield on investment securities (tax equivalent)

    3.88 %             3.76 %             3.56 %             3.65 %        

 

Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in any of the periods presented.

 

The duration of the securities portfolio extended modestly with the TEY on the portfolio improving 32 bps over the first nine months of 2017.

 

The Company has not invested in private 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.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

LOANS/LEASES 

 

Total loans/leases grew 19.2% on an annualized basis during the third quarter of 2017. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

 

   

As of

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
                                                                 
   

(dollars in thousands)

 
                                                                 

C&I loans

  $ 1,034,531       39 %   $ 942,538       37 %   $ 827,637       34 %   $ 804,308       35 %

CRE loans

    1,157,856       43 %     1,131,906       45 %     1,093,459       46 %     1,070,305       45 %

Direct financing leases

    147,063       6 %     153,337       6 %     165,419       7 %     166,924       7 %

Residential real estate loans

    239,958       9 %     233,871       9 %     229,233       10 %     229,081       10 %

Installment and other consumer loans

    89,605       3 %     84,047       3 %     81,666       3 %     81,918       3 %
                                                                 

Total loans/leases

  $ 2,669,013       100 %   $ 2,545,699       100 %   $ 2,397,414       100 %   $ 2,352,536       100 %
                                                                 

Plus deferred loan/lease origination costs, net of fees

    7,741               7,867               8,073               8,065          

Less allowance

    (34,982 )             (33,357 )             (30,757 )             (28,827 )        
                                                                 

Net loans/leases

  $ 2,641,772             $ 2,520,209             $ 2,374,730             $ 2,331,774          

 

As CRE loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of September 30, 2017 and June 30, 2017, approximately 28% of the CRE loan portfolio was owner-occupied.

 

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $92.0 million in the current quarter, or an annualized rate of 39%.

 

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully funded, highly liquid term loans for which there is a liquid secondary market. As of September 30, 2017 and December 31, 2016, the amount of nationally syndicated loans totaled $55.0 million and $46.5 million, respectively.

 

The Company also has several loans that are syndicated to borrowers in our existing markets or purchased from peer banks that we have a relationship with. These loans were immaterial as of September 30, 2017 and December 31, 2016.

 

 

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 CRE loan portfolio:

 

   

As of September 30,

   

As of June 30,

   

As of December 31,

   

As of September 30,

 
   

2017

   

2017

   

2016

   

2016

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 

Lessors of Nonresidential Buildings

  $ 345,387       30 %   $ 344,747       30 %   $ 322,337       30 %   $ 308,334       28 %

Lessors of Residential Buildings

    159,542       14 %     159,370       14 %     141,321       13 %     136,055       13 %

New Housing For-Sale Builders

    56,390       5 %     52,277       5 %     56,711       5 %     42,858       4 %

Nonresidential Property Managers

    53,231       5 %     52,947       5 %     70,914       7 %     65,640       6 %

Hotels

    42,121       4 %     39,881       4 %     35,006       3 %     24,509       2 %

Land Subdivision

    41,795       3 %     46,117       4 %     45,132       4 %     29,569       3 %

Nursing Care Facilities

    41,264       3 %     33,607       3 %     34,768       3 %     21,823       2 %

Other *

    418,126       36 %     402,960       35 %     387,270       35 %     458,519       42 %
                                                                 

Total CRE Loans

  $ 1,157,856       100 %   $ 1,131,906       100 %   $ 1,093,459       100 %   $ 1,087,307       100 %

 

 

* “Other” consists of all other industries. None of these had concentrations greater than $23.2 million, or approximately 2% of total CRE loans in the most recent period presented.

 

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 meet 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.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Following is a listing of significant equipment types within the m2 loan and lease portfolio:

 

   

As of September 30,

   

As of June 30,

   

As of December 31,

   

As of September 30,

 
   

2017

   

2017

   

2016

   

2016

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
                                                                 
   

(dollars in thousands)

 
                                                                 

Construction - General

  $ 18,807       9 %   $ 15,207       7 %   $ 16,815       8 %   $ 16,840       8 %

Trucks & Vans

    18,146       8 %     16,679       8 %     13,806       7 %     12,786       6 %

Manufacturing - General

    16,997       8 %     19,092       9 %     17,434       8 %     16,332       8 %

Food Processing Equipment

    13,317       6 %     13,754       7 %     14,316       7 %     14,115       7 %

Computer Hardware

    11,483       5 %     9,821       5 %     10,443       5 %     11,105       5 %

Marine - Travelifts

    10,417       5 %     12,497       6 %     8,180       4 %     7,506       4 %

Trailers

    9,272       4 %     9,611       5 %     10,003       5 %     10,112       5 %

Restaurant

    7,718       4 %     7,238       3 %     7,950       4 %     8,138       4 %

Manufacturing - CNC

    6,722       3 %     10,083       5 %     7,164       3 %     7,320       4 %

Other *

    102,080       48 %     100,271       45 %     104,934       49 %     102,546       49 %
                                                                 

Total m2 loans and leases

  $ 214,959       100 %   $ 214,253       100 %   $ 211,045       100 %   $ 206,800       100 %

 

* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.

 

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s loan and lease portfolio.

 

 

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 and nine months ended September 30, 2017 and 2016 are presented as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2017

   

September 30, 2016

   

September 30, 2017

   

September 30, 2016

 
   

(dollars in thousands)

   

(dollars in thousands)

 

Balance, beginning

  $ 33,357     $ 28,097     $ 30,757     $ 26,141  

Provisions charged to expense

    2,086       1,608       6,215       4,879  

Loans/leases charged off

    (650 )     (987 )     (2,394 )     (2,489 )

Recoveries on loans/leases previously charged off

    189       109       404       296  

Balance, ending

  $ 34,982     $ 28,827     $ 34,982     $ 28,827  

 

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 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”, as described in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and carrying aggregate exposure in excess of $250 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 *

 

September 30,

2017

   

June 30,

2017

   

December 31,

2016

   

September 30,

2016

 
   

(dollars in thousands)

 

Special Mention (Rating 6)

  $ 27,315     $ 27,737     $ 20,082     $ 19,572  

Substandard (Rating 7)

    50,323       45,290       49,035       51,029  

Doubtful (Rating 8)

    -       -       -       -  
    $ 77,638     $ 73,027     $ 69,117     $ 70,601  
                                 
                                 

Criticized Loans **

  $ 77,638     $ 73,027     $ 69,117     $ 70,601  

Classified Loans ***

  $ 50,323     $ 45,290     $ 49,035     $ 51,029  
                                 

Criticized Loans as a % of Total Loans/Leases

    2.90 %     2.86 %     2.87 %     2.99 %

Classified Loans as a % of Total Loans/Leases

    1.88 %     1.77 %     2.04 %     2.16 %

 

* Amounts above include the government guaranteed portion, if any. For the calculation of allowance, 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.

 

The Company experienced a modest increase in classified loans during the first nine months of 2017. Criticized loans increased 12% during the same period due to one large non owner-occupied CRE relationship that was downgraded in the third quarter of 2017. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

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

 

 

   

As of

 
   

September 30,

2017

   

June 30,

2017

   

December 31,

2016

   

September 30,

2016

 
                                 
                                 

Allowance / Gross Loans/Leases

    1.31 %     1.31 %     1.28 %     1.22 %

Allowance / NPLs *

    123.05 %     162.27 %     144.85 %     173.78 %

 

*NPLs consist of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing TDRs.

 

Although management believes that the allowance at September 30, 2017 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.

 

In accordance with GAAP for business combination accounting, the loans acquired through the acquisition of CSB were recorded at market value; therefore, there was no allowance associated with CSB’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired CSB loans factoring in the net remaining discount ($5.6 million at September 30, 2017). When factoring this remaining discount into the Company’s allowance to total loans and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from 1.31% to 1.52%. This elimination of CSB’s allowance also resulted in a decrease of the allowance to NPLs ratio, as CSB’s NPLs no longer have an allowance allocated to them and instead, have a loan discount that is separate from the allowance.

 

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

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

NONPERFORMING ASSETS

 

The table below presents the amount of NPAs and related ratios.

   

As of September 30,

   

As of June 30,

   

As of December 31,

   

As of September 30,

 
   

2017

   

2017

   

2016

   

2016

 
   

(dollars in thousands)

 

Nonaccrual loans/leases (1) (2)

  $ 20,443     $ 13,217     $ 13,919     $ 14,371  

Accruing loans/leases past due 90 days or more

    423       424       967       392  

TDRs - accruing

    7,563       6,915       6,347       1,825  

Total NPLs

    28,429       20,556       21,233       16,588  

OREO

    5,135       5,174       5,523       5,808  

Other repossessed assets

    120       123       202       353  

Total NPAs

  $ 33,684     $ 25,853     $ 26,958     $ 22,749  
                                 

NPLs to total loans/leases

    1.06 %     0.80 %     0.88 %     0.70 %

NPAs to total loans/leases plus repossessed property

    1.26 %     1.01 %     1.12 %     0.96 %

NPAs to total assets

    0.95 %     0.75 %     0.82 %     0.69 %

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

 

(2)

Includes TDRs of $2.3 million at September 30, 2017, $2.2 million at June 30, 2017, $2.3 million at December 31, 2016, and $4.9 million at September 30, 2016.

. 

 

NPAs at September 30, 2017 were $33.7 million, which was up $7.8 million from June 30, 2017 and up $10.9 million from September 30, 2016. These increases were due to the addition of one large non owner-occupied CRE relationship in the third quarter of 2017.

 

The ratio of NPAs to total assets was 0.95% at September 30, 2017, which was up from 0.75% at June 30, 2017, and up from 0.69% at September 30, 2016.

 

The large majority of the NPAs consist of nonaccrual loans/leases, accruing TDRs, and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.

 

OREO is carried at the lower of carrying amount or fair value less costs to sell.

 

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

 

 

Item I
Part 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

DEPOSITS 

 

Deposits increased $24.0 million during the third quarter of 2017. The table below presents the composition of the Company’s deposit portfolio.

 

 

   

As of

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

(dollars in thousands)

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Noninterest bearing demand deposits

  $ 715,537       25 %   $ 760,625       27 %   $ 797,415       30 %   $ 764,615       30 %

Interest bearing demand deposits

    1,614,894       55 %     1,526,103       52 %     1,369,226       51 %     1,298,781       50 %

Time deposits

    430,270       15 %     478,580       17 %     439,169       17 %     420,470       16 %

Brokered deposits

    133,567       5 %     104,926       4 %     63,451       2 %     111,047       4 %
    $ 2,894,268       100 %   $ 2,870,234       100 %   $ 2,669,261       100 %   $ 2,594,913       100 %

 

 

In an effort to strengthen the relationship and maximize the liquidity potential of its correspondent banking clients, the Company introduced an interest-bearing money market deposit account to its correspondent banking clients and this generated strong deposit growth in the first nine months of 2017.

 

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. Management will continue to focus on growing its noninterest bearing deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits.

 

BORROWINGS 

 

The subsidiary banks offer short-term repurchase agreements to a few of their significant customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.

   

As of

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

(dollars in thousands)

 

Overnight repurchase agreements with customers

  $ 3,671     $ 4,897     $ 8,131     $ 8,265  

Federal funds purchased

    12,340       13,320       31,840       51,750  
    $ 16,011     $ 18,217     $ 39,971     $ 60,015  

 

 

The Company is nearing the completion of a process to transition its overnight repurchase agreements with customers into a comparable interest bearing demand deposit product that offers full FDIC insurance. This transition has freed up securities that were previously pledged as collateral to the overnight repurchase agreements with customers and has enhanced the Company’s ability to further rotate its earning assets from securities to loans.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

As a result of their memberships in either the 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.

 

The table below presents the Company’s term FHLB advances and overnight FHLB advances.

 

   

As of

 
   

September 30,

2017

   

June 30,

2017

   

December 31,

2016

   

September 30,

2016

 
                                 
   

(dollars in thousands)

 
                                 

Term FHLB advances

  $ 58,600     $ 57,000     $ 63,000     $ 83,343  

Overnight FHLB advances

    110,455       49,500       74,500       55,300  
    $ 169,055     $ 106,500     $ 137,500     $ 138,643  

 

 

Term FHLB advances increased in the current quarter by $1.6 million. Overnight FHLB advances have increased by $61.0 million due to the strong loan and lease growth in the second and third quarters of 2017 which has outpaced the Company’s deposit growth.

 

The table below presents the composition of the Company’s other borrowings.

 

   

As of

 
   

September 30,

2017

   

June 30,

2017

   

December 31,

2016

   

September 30,

2016

 
                                 
   

(dollars in thousands)

 
                                 

Wholesale structured repurchase agreements

  $ 45,000     $ 45,000     $ 45,000     $ 45,000  

Term note

  $ 32,500     $ 27,000     $ 30,000     $ 30,000  

Revolving line of credit

    -       -       5,000       5,000  
    $ 77,500     $ 72,000     $ 80,000     $ 80,000  

 

 

Other borrowings include structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. Structured repos are collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

 

As described in Note 11 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, the Company has an outstanding five-year term note and revolving line of credit. As of September 30, 2017, the term debt had been paid down to $25.5 million, as scheduled. Also, in the first quarter of 2017, the Company paid off the full outstanding amount of the revolving line of credit. The term note and revolving line of credit were used to help fund the acquisition of CSB. As of September 30, 2017, the full $10.0 million line of credit was available. If the line of credit is used, interest is calculated at the effective LIBOR rate plus 2.50% per annum (3.84% at September 30, 2017). In the third quarter of 2017, the Company entered into a $7.0 million term note with a four-year term and interest calculated at the effective LIBOR rate plus 3.00% per annum (4.34% at September 30, 2017) to fund a portion of the cash consideration for the acquisition of Guaranty. See further discussion in Note 8 to the Consolidated Financial Statements.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The Company executed several balance sheet restructuring strategies in 2016. Refer to Note 11 of the Annual Report on Form 10-K for the year ended December 31, 2016 for addition information regarding these prepayments.

 

It is management’s intention to reduce its reliance on wholesale funding, including FHLB advances, structured repos, and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.

 

The table below presents the maturity schedule including weighted average interest cost for the Company’s combined wholesale funding portfolio.

 

   

September 30, 2017

   

December 31, 2016

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 

Maturity:

 

Amount Due

   

Interest Rate

   

Amount Due

   

Interest Rate

 
                                 

Year ending December 31:

 

(dollar amounts in thousands)

 
                                 

2017

    255,486       1.33 %     165,543       0.91 %

2018

    48,585       2.31       38,459       2.56  

2019

    16,950       2.74       16,950       2.65  

2020

    26,600       2.44       25,000       2.48  

Total Wholesale Funding

  $ 347,621       1.62 %   $ 245,952       1.45 %

 

 

During the first nine months of 2017, wholesale funding increased $101.7 million. Year-to-date, the Company has repaid $6.0 million of term borrowings at maturity. However, this was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.

 

STOCKHOLDERS’ EQUITY

 

The table below presents the composition of the Company’s stockholders’ equity.

 

   

As of

 
   

September 30, 2017

   

June 30, 2017

   

December 31, 2016

   

September 30, 2016

 
   

Amount

   

Amount

   

Amount

   

Amount

 
                                 
   

(dollars in thousands)

 
                                 

Common stock

  $ 13,202     $ 13,175     $ 13,107     $ 13,075  

Additional paid in capital

    158,459       158,001       156,777       155,951  

Retained earnings

    142,450       135,254       118,617       110,610  

AOCI (loss)

    (1,072 )     (1,347 )     (2,460 )     1,221  

Total stockholders' equity

  $ 313,039     $ 305,083     $ 286,041     $ 280,857  
                                 

TCE* / TA

    8.31 %     8.29 %     8.04 %     7.92 %

 

*TCE is defined as total common stockholders’ equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.

 

 

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $126.4 million during the third quarter of 2017 and $139.5 million during the full year of 2016. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

 

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, 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 securities portfolio (both residential mortgage-backed securities and municipal securities).

 

At September 30, 2017, the subsidiary banks had 34 lines of credit totaling $375.0 million, of which $3.0 million was secured and $372.0 million was unsecured. At September 30, 2017, the full $375.0 million was available as none was utilized for short-term borrowing needs at QCBT.

 

At December 31, 2016, the subsidiary banks had 33 lines of credit totaling $381.4 million, of which $34.4 million was secured and $347.0 million was unsecured. At December 31, 2016, $361.4 million was available as $20.0 million was utilized for short-term borrowing needs.

 

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 maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2018. At September 30, 2017, the full $10.0 million was available.

 

As of September 30, 2017, the Company has $384.1 million in correspondent banking deposits spread over 183 relationships. While the Company believes that these funds are very stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

 

Investing activities used cash of $271.1 million during the first nine months of 2017, compared to $132.1 million for the same period of 2016. The net decrease in interest-bearing deposits at financial institutions was $22.7 million for the first nine months of 2017, compared to a net increase of $24.0 million for the same period of 2016. Proceeds from calls, maturities, paydowns, and sales of securities were $92.5 million for the first nine months of 2017, compared to $219.1 million for the same period of 2016. Purchases of securities used cash of $103.5 million for the first nine months of 2017, compared to $111.6 million for the same period of 2016. The net increase in loans/leases used cash of $269.3 million for the first nine months of 2017 compared to $144.6 million for the same period of 2016.  In 2017, cash prepaid for the acquisition of Guaranty Bank was $7.8 million.  In 2016, the net cash paid for the acquisition of CSB was $69.9 million.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

Financing activities provided cash of $229.6 million for the first nine months of 2017, compared to $125.7 million for same period of 2016. Net increases in deposits totaled $225.1 million for the first nine months of 2017, compared to $227.9 million for the same period of 2016. During the first nine months of 2017, the Company’s short-term borrowings decreased $24.0 million, while they decreased $84.6 million for the same period of 2016. In the first nine months of 2017, the Company increased FHLB advances and other borrowings by $44.6 million through a mixture of term advances, proceeds from other borrowings and net change in short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $15.5 million. In the first nine months of 2016, the Company reduced FHLB advances and borrowings by $83.8 million through a mixture of maturities, prepayments, and debt retirement. In the same period, the Company received $29.8 million of proceeds from the common stock offering of 1.2 million shares of common stock. In the first nine months of 2016, the Company received $35.0 million in cash from the proceeds of other borrowings.

 

Total cash provided by operating activities was $27.2 million for the first nine months of 2017, compared to $25.8 million for the same period of 2016.

 

Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities.

 

The following table presents the details of the trust preferred securities outstanding as of September 30, 2017 and December 31, 2016.

 

Name

Date Issued

 

Amount

Outstanding
September 30,

2017

   

Amount Outstanding
December 31,

2016

 

Interest Rate

 

Interest Rate as of
September 30, 2017

   

Interest Rate as of
December 31, 2016

 
                                     

QCR Holdings Statutory Trust II

February 2004

  $ 10,310,000     $ 10,310,000  

2.85% over 3-month LIBOR

    4.19 %     3.85 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000       8,248,000  

2.85% over 3-month LIBOR

    4.19 %     3.85 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000       10,310,000  

1.55% over 3-month LIBOR

    2.85 %     2.43 %

Community National Statutory Trust II

September 2004

    3,093,000       3,093,000  

2.17% over 3-month LIBOR

    3.50 %     3.17 %

Community National Statutory Trust III

March 2007

    3,609,000       3,609,000  

1.75% over 3-month LIBOR

    3.07 %     2.71 %
      $ 35,570,000     $ 35,570,000  

Weighted Average Rate

    3.63 %     3.26 %

 

 

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 being accreted as interest expense on a level yield basis over the expected term. The original discount totaled $2.6 million. As of September 30, 2017, the remaining discount was $2.0 million.

 

The Company filed a universal shelf registration statement on Form S-3 with the SEC on October 27, 2016, as amended on January 11, 2017. Declared effective by the SEC on January 31, 2017, the registration statement allows the Company to offer and sell various types of securities, including common stock, preferred stock, debt securities and/or warrants, from time to time up to an aggregate amount of $100 million. The Company utilized $30.1 million of its $100 million previous shelf registration filing through the offer and sale of its common stock in the second quarter of 2016 to help fund the acquisition of CSB. This Form S-3 filing replenished the amount available to the previous level of $100 million. The specific terms and prices of any securities offered pursuant to the registration statement will be determined at the time of any future offering and described in a separate prospectus supplement, which would be filed with the SEC at the time of the particular offering, if any. There were no securities issued under this shelf registration statement during the nine months ended September 30, 2017.

 

The Company filed a registration statement on Form S-4 with the SEC on July 27, 2017which was  amended on August 14, 2017. In connection with the acquisition of Guaranty Bank, the Company issued 678,670 shares of common stock on October 1, 2017 pursuant to the S-4.

 

 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements. Refer to Note 7 of the Consolidated Financial Statements for additional information regarding regulatory capital.

 

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” sections included under Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Item 1A of Part II of this report. 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. One should not consider the risk factors to be a complete discussion of risks, uncertainties and assumptions.

 

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

 

 

Part I

Item 3

             QUANTITATIVE AND QUALITATIVE 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 an effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

 

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

 

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

 

The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 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.

 

 

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued

 

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 September 30, 2017

   

As of December 31, 2016

   

As of December 31, 2015

 
                                 

100 basis point downward shift

    -10.0%       0.0%       -1.7%       -2.1%  

200 basis point upward shift

    -10.0%       -3.4%       -1.2%       -2.7%  

300 basis point upward shock

    -25.0%       -8.0%       -1.4%       -7.1%  

 

 

The simulation is well 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 September 30, 2017 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).

 

In 2014, the Company executed two interest rate cap transactions, each with a notional value of $15.0 million, for a total of $30.0 million. The interest rate caps purchased essentially set a ceiling to the interest rate paid on the $30.0 million of short-term FHLB advances that are being hedged, minimizing the interest rate risk associated with rising interest rates. The Company will continue to analyze and evaluate similar transactions as an alternative and cost effective way to mitigate interest rate risk.

 

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.

 

 

                                                                                    

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) and 15d-15(e) promulgated under the Exchange Act of 1934) as of September 30, 2017. 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.

 

 

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1

 

Legal Proceedings

     
   

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 Annual Report on Form 10-K for the year ended December 31, 2016. 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.

     

Item1A

 

Risk Factors

     

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

 

 

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 September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and September 30, 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and September 30, 2016; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2017 and September 30, 2016; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016; and (vi) Notes to the Consolidated Financial Statements.

 

 

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

November 8, 2017

  /s/ Douglas M. Hultquist  
      Douglas M. Hultquist, President   
      Chief Executive Officer  
         
         
         

Date

November 8, 2017 

  /s/ Todd A. Gipple  
      Todd A. Gipple, Executive Vice President  
      Chief Operating Officer  
      Chief Financial Officer  
         
         
         

Date

November 8, 2017 

  /s/ Elizabeth A. Grabin  
      Elizabeth A. Grabin, First Vice President  
      Director of Financial Reporting   
     

Principal Accounting Officer

 

 

 

76