qcrh20150331_10q.htm  

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ X ]

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

For the quarterly period ended March 31, 2015

 

[    ]

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

For the transition period from           to________

 

Commission file number 0-22208

 

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

42-1397595

(State or other jurisdiction of incorporation or organization) 

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

 

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

 

(309) 743-7724

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           Yes      [ X ]          No [    ]

 

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

Large accelerated filer [    ]           Accelerated filer [ X ]           Non-accelerated filer [    ]           Smaller reporting company [    ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).           Yes [    ]          No [ X ]    

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of April 29, 2015, the Registrant had outstanding 7,995,810 shares of common stock, $1.00 par value per share.

 

 
 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

INDEX

 

       

Page Number(s)

Part I

FINANCIAL INFORMATION

   
         
 

Item 1

Consolidated Financial Statements (Unaudited)

   
         
   

Consolidated Balance Sheets As of March 31, 2015 and December 31, 2014

 

                   2

         
   

Consolidated Statements of Income For the Three Months Ended March 31, 2015 and 2014

 

                   3

         
   

Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2015 and 2014

 

                   4

         
   

Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2015 and 2014

 

                   5

         
   

Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2015 and 2014

 

6-7

         
   

Notes to the Consolidated Financial Statements

 

8-30

         
 

Item 2

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

 

31-57

         
 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

58-60

         
 

Item 4

Controls and Procedures

 

                 61

         

Part II

OTHER INFORMATION

   
         
 

Item 1

Legal Proceedings

 

                 62

         
 

Item 1A

Risk Factors

 

                 62

         
 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

                 62

         
 

Item 3

Defaults upon Senior Securities

 

                 62

         
 

Item 4

Mine Safety Disclosures

 

                 62

         
 

Item 5

Other Information

 

                 62

         
 

Item 6

Exhibits

 

                 63

         

Signatures

 

 

                 64

 

 
1

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2015 and December 31, 2014

 

   

March 31,

   

December 31,

 
   

2015

   

2014

 

ASSETS

               

Cash and due from banks

  $ 45,138,266     $ 38,235,019  

Federal funds sold

    14,035,000       46,780,000  

Interest-bearing deposits at financial institutions

    17,118,983       35,334,682  
                 

Securities held to maturity, at amortized cost

    215,146,171       199,879,574  

Securities available for sale, at fair value

    422,258,100       451,659,630  

Total securities

    637,404,271       651,539,204  
                 

Loans receivable held for sale

    789,000       553,000  

Loans/leases receivable held for investment

    1,653,662,236       1,629,450,070  

Gross loans/leases receivable

    1,654,451,236       1,630,003,070  

Less allowance for estimated losses on loans/leases

    (23,883,273 )     (23,074,365 )

Net loans/leases receivable

    1,630,567,963       1,606,928,705  
                 

Premises and equipment, net

    38,473,407       36,021,128  

Bank-owned life insurance

    54,202,287       53,723,548  

Restricted investment securities

    15,702,075       15,559,575  

Other real estate owned, net

    13,245,314       12,767,636  

Goodwill

    3,222,688       3,222,688  

Core deposit intangible

    1,621,043       1,670,921  

Other assets

    20,927,709       23,174,994  

Total assets

  $ 2,491,659,006     $ 2,524,958,100  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 582,510,208     $ 511,991,864  

Interest-bearing

    1,151,759,179       1,167,676,149  

Total deposits

    1,734,269,387       1,679,668,013  
                 

Short-term borrowings

    183,335,719       268,351,670  

Federal Home Loan Bank advances

    196,500,000       203,500,000  

Other borrowings

    149,109,915       150,282,492  

Junior subordinated debentures

    40,457,936       40,423,735  

Other liabilities

    36,990,084       38,653,681  

Total liabilities

    2,340,663,041       2,380,879,591  
                 

STOCKHOLDERS' EQUITY

               

Common stock, $1 par value; shares authorized 20,000,000 March 2015 - 8,113,040 shares issued and 7,991,794 outstanding December 2014 - 8,074,443 shares issued and 7,953,197 outstanding

    8,113,040       8,074,443  

Additional paid-in capital

    62,149,073       61,668,968  

Retained earnings

    82,054,713       77,876,824  

Accumulated other comprehensive income (loss):

               

Securities available for sale

    922,686       (1,535,849 )

Interest rate cap derivatives

    (637,037 )     (399,367 )

Less treasury stock, March 2015 and December 2014 - 121,246 common shares, at cost

    (1,606,510 )     (1,606,510 )

Total stockholders' equity

    150,995,965       144,078,509  

Total liabilities and stockholders' equity

  $ 2,491,659,006     $ 2,524,958,100  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
2

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31,

 

   

2015

   

2014

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 18,004,519     $ 16,775,590  

Securities:

               

Taxable

    1,942,765       2,582,794  

Nontaxable

    1,730,568       1,454,056  

Interest-bearing deposits at financial institutions

    77,054       90,527  

Restricted investment securities

    142,318       128,925  

Federal funds sold

    4,506       3,319  

Total interest and dividend income

    21,901,730       21,035,211  
                 

Interest expense:

               

Deposits

    1,072,445       1,101,593  

Short-term borrowings

    64,025       51,696  

Federal Home Loan Bank advances

    1,443,715       1,555,976  

Other borrowings

    1,231,886       1,171,531  

Junior subordinated debentures

    307,442       305,174  

Total interest expense

    4,119,513       4,185,970  

Net interest income

    17,782,217       16,849,241  

Provision for loan/lease losses

    1,710,456       1,094,162  

Net interest income after provision for loan/lease losses

    16,071,761       15,755,079  
                 

Noninterest income:

               

Trust department fees

    1,633,395       1,500,342  

Investment advisory and management fees

    710,043       648,992  

Deposit service fees

    1,116,983       1,045,885  

Gains on sales of residential real estate loans

    86,140       63,487  

Gains on sales government guaranteed portions of loans

    70,973       194,019  

Securities gains

    421,066       20,625  

Earnings on bank-owned life insurance

    478,739       454,164  

Swap fee income

    726,207       62,000  

Debit card fees

    238,000       230,605  

Correspondent banking fees

    319,621       232,143  

Participation service fees on commercial loan participations

    221,949       206,194  

Losses on other real estate owned, net

    (28,953 )     (18,048 )

Other

    255,778       106,433  

Total noninterest income

    6,249,941       4,746,841  
                 

Noninterest expense:

               

Salaries and employee benefits

    11,034,452       10,017,918  

Occupancy and equipment expense

    1,794,171       1,894,288  

Professional and data processing fees

    1,470,517       1,584,406  

FDIC and other insurance

    719,057       714,750  

Loan/lease expense

    466,613       345,636  

Advertising and marketing

    418,237       337,587  

Postage and telephone

    248,956       290,675  

Stationery and supplies

    142,555       151,751  

Bank service charges

    337,458       298,032  

Other

    600,308       505,377  

Total noninterest expense

    17,232,324       16,140,420  

Net income before income taxes

    5,089,378       4,361,500  

Federal and state income tax expense

    911,489       472,285  

Net income

  $ 4,177,889     $ 3,889,215  

Less: Preferred stock dividends

    -       708,008  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 4,177,889     $ 3,181,207  

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

               

Basic

  $ 0.52     $ 0.40  

Diluted

  $ 0.52     $ 0.40  

Weighted average common shares outstanding

    7,975,910       7,901,035  

Weighted average common and common equivalent shares outstanding

    8,097,444       8,030,043  

Cash dividends declared per common share

  $ -     $ -  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
3

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2015 and 2014

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Net income

  $ 4,177,889     $ 3,889,215  
                 

Other comprehensive income:

               
                 

Unrealized gains on securities available for sale:

               

Unrealized holding gains arising during the period before tax

    4,402,337       8,490,174  

Less reclassification adjustment for gains included in net income before tax

    421,066       20,625  
      3,981,271       8,469,549  

Unrealized losses on interest rate cap derivatives:

               

Unrealized holding losses arising during the period before tax

    (372,384 )     -  

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

    901       -  
      (373,285 )     -  
                 

Other comprehensive income, before tax

    3,607,986       8,469,549  

Tax expense

    1,387,121       3,238,765  

Other comprehensive income, net of tax

    2,220,865       5,230,784  
                 

Comprehensive income attributable to QCR Holdings, Inc.

  $ 6,398,754     $ 9,119,999  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
4

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2015 and 2014

 

                                   

Accumulated

                 
                   

Additional

           

Other

                 
   

Preferred

   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury

         
   

Stock

   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Stock

   

Total

 

Balance December 31, 2014

  $ -     $ 8,074,443     $ 61,668,968     $ 77,876,824     $ (1,935,216 )   $ (1,606,510 )   $ 144,078,509  

Net income

    -       -       -       4,177,889       -       -       4,177,889  

Other comprehensive income, net of tax - unrealized gains on securities available for sale of $2,458,535, unrealized losses on interest rate cap derivatives of $237,670

    -       -       -       -       2,220,865       -       2,220,865  

Proceeds from issuance of 5,679 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    -       5,679       82,641       -       -       -       88,320  

Proceeds from issuance of 9,688 shares of common stock as a result of stock options exercised

    -       9,688       94,728       -       -       -       104,416  

Stock compensation expense

    -       -       367,775                               367,775  

Tax benefit of nonqualified stock options exercised

    -       -       15,651       -       -       -       15,651  

Restricted stock awards

    -       26,502       (26,502 )     -       -       -       -  

Exchange of 3,272 shares of common stock in connection with restricted stock vested, net

    -       (3,272 )     (54,188 )     -       -       -       (57,460 )

Balance March 31, 2015

  $ -     $ 8,113,040     $ 62,149,073     $ 82,054,713     $ 285,649     $ (1,606,510 )   $ 150,995,965  

 

                                   

Accumulated

                 
                   

Additional

           

Other

                 
   

Preferred

   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury

         
   

Stock

   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Stock

   

Total

 

Balance December 31, 2013

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

Net income

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

Other comprehensive income, net of tax - unrealized gains on securities available for sale of $5,230,784, unrealized losses on interest rate cap derivatives of $0

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

Preferred cash dividends declared

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

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

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

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

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

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

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

Stock compensation expense

    -       -       347,752                               347,752  

Tax benefit of nonqualified stock options exercised

    -       -       18,647       -       -       -       18,647  

Restricted stock awards

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

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

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

Balance March 31, 2014

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

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
5

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2015 and 2014

 

   

2015

   

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 4,177,889     $ 3,889,215  

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

               

Depreciation

    745,268       692,562  

Provision for loan/lease losses

    1,710,456       1,094,162  

Stock-based compensation expense

    367,775       347,752  

Deferred compensation expense accrued

    437,600       347,850  

Losses on other real estate owned, net

    28,953       18,048  

Amortization of premiums on securities, net

    214,427       535,951  

Securities gains

    (421,066 )     (20,625 )

Loans originated for sale

    (6,647,937 )     (6,354,404 )

Proceeds on sales of loans

    6,569,050       7,678,600  

Gains on sales of residential real estate loans

    (86,140 )     (63,487 )

Gains on sales of government guaranteed portions of loans

    (70,973 )     (194,019 )

Amortization of core deposit intangible

    49,878       49,878  

Accretion of acquisition fair value adjustments, net

    (178,380 )     (161,042 )

Increase in cash value of bank-owned life insurance

    (478,739 )     (454,164 )

Decrease in other assets

    486,879       3,804,360  

Decrease in other liabilities

    (1,840,279 )     (8,049,459 )

Net cash provided by operating activities

  $ 5,064,661     $ 3,161,178  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease in federal funds sold

    32,745,000       27,865,000  

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

    18,215,699       (11,344,360 )

Proceeds from sales of other real estate owned

    331,151       97,120  

Activity in securities portfolio:

               

Purchases

    (124,568,138 )     (26,142,834 )

Calls, maturities and redemptions

    83,794,967       10,563,599  

Paydowns

    4,073,422       6,547,632  

Sales

    54,971,056       7,020,625  

Activity in restricted investment securities:

               

Purchases

    (146,300 )     (1,040,000 )

Redemptions

    3,800       814,900  

Net increase in loans/leases originated and held for investment

    (25,689,344 )     (33,066,658 )

Purchase of premises and equipment

    (3,197,547 )     (563,035 )

Net cash provided by (used in) investing activities

  $ 40,533,766     $ (19,248,011 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in deposit accounts

    54,603,339       24,915,536  

Net increase (decrease) in short-term borrowings

    (85,015,951 )     16,276,145  

Activity in Federal Home Loan Bank advances:

               

Term advances

    5,000,000       -  

Calls and maturities

    (5,000,000 )     (20,350,000 )

Net change in short-term and overnight advances

    (7,000,000 )     24,700,000  

Principal payments on term debt

    (1,175,000 )     (200,000 )

Payment of cash dividends on common and preferred stock

    (315,955 )     (941,177 )

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

    -       (15,000,000 )

Proceeds from issuance of common stock, net

    208,387       179,841  

Net cash provided by (used in) by financing activities

  $ (38,695,180 )   $ 29,580,345  

Net increase in cash and due from banks

    6,903,247       13,493,512  

Cash and due from banks, beginning

    38,235,019       41,950,790  

Cash and due from banks, ending

  $ 45,138,266     $ 55,444,302  

 

(Continued)

 

 
6

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three Months Ended March 31, 2015 and 2014

 

   

2015

   

2014

 

Supplemental disclosure of cash flow information, cash payments for:

               

Interest

  $ 4,103,459     $ 4,140,254  

Income/franchise taxes

  $ 1,618,064     $ 1,365,000  

Supplemental schedule of noncash investing activities:

               

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

  $ 2,220,865     $ 5,230,784  

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

  $ (57,460 )   $ (177,984 )

Transfers of loans to other real estate owned

  $ 837,782     $ 60,750  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
7

 

 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2015

 

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, 2014, included in QCR Holdings, Inc.’s (the “Company”) Form 10-K filed with the Securities and Exchange Commission on March 12, 2015. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

 

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim period ended March 31, 2015, are not necessarily indicative of the results expected for the year ending December 31, 2015.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries which include three commercial banks: Quad City Bank & Trust Company (“QCBT”), Cedar Rapids Bank & Trust Company (“CRBT”), and Rockford Bank & Trust Company (“RB&T”). QCBT, CRBT, and RB&T are all state-chartered commercial banks. The Company also engages in direct financing lease contracts through m2 Lease Funds, LLC (“m2 Lease Funds”), a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

 

Recent accounting developments: In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of ASU 2014-04 is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption did not have an impact on the Company’s consolidated financial statements.

 

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 is effective on January 1, 2017 and it is not expected to have a significant impact on the Company’s financial statements.

 

 
8

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

In June 2014, FASB issued ASU 2014-11, Transfers and Servicing. ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings, consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entail the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. The standard requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral and remaining tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 was effective on January 1, 2015 and adoption did not have an impact on the Company’s consolidated financial statements.

 

In August 2014, FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. ASU 2014-14 requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them as other real estate owned. The most common types of government guaranteed loans include those guaranteed by the Federal Housing Authority (FHA), U.S. Department of Housing and Urban Development (HUD), U.S. Department of Veterans Affairs (VA) and the U.S. Small Business Administration (SBA). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. ASU 2014-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption did not have an impact on the Company’s consolidated financial statements.

 

In February 2015, FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis. ASU 2015-02 is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The ASU also reduces the number of consolidation models from four to two. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and adoption is not expected to have a significant impact on the Company’s consolidated financial statements.

 

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

 

 
9

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 2 – INVESTMENT SECURITIES

 

The amortized cost and fair value of investment securities as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

(Losses)

   

Value

 

March 31, 2015

                               

Securities held to maturity:

                               

Municipal securities

  $ 214,096,171     $ 2,303,569     $ (1,812,743 )   $ 214,586,997  

Other securities

    1,050,000       -       -       1,050,000  
    $ 215,146,171     $ 2,303,569     $ (1,812,743 )   $ 215,636,997  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 300,131,663     $ 444,159     $ (1,395,567 )   $ 299,180,255  

Residential mortgage-backed and related securities

    90,632,701       1,192,895       (462,296 )     91,363,300  

Municipal securities

    28,649,282       1,107,755       (43,723 )     29,713,314  

Other securities

    1,370,532       630,797       (98 )     2,001,231  
    $ 420,784,178     $ 3,375,606     $ (1,901,684 )   $ 422,258,100  
                                 

December 31, 2014:

                               

Securities held to maturity:

                               

Municipal securities

  $ 198,829,574     $ 2,420,298     $ (1,186,076 )   $ 200,063,796  

Other securities

    1,050,000       -       -       1,050,000  
    $ 199,879,574     $ 2,420,298     $ (1,186,076 )   $ 201,113,796  
                                 

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 312,959,760     $ 173,685     $ (5,263,873 )   $ 307,869,572  

Residential mortgage-backed and related securities

    110,455,925       1,508,331       (541,032 )     111,423,224  

Municipal securities

    29,408,740       1,053,713       (62,472 )     30,399,981  

Other securities

    1,342,554       625,145       (846 )     1,966,853  
    $ 454,166,979     $ 3,360,874     $ (5,868,223 )   $ 451,659,630  

 

 

The Company’s held to maturity municipal securities consist largely of private issues of municipal debt. 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 commercial mortgage-backed securities or pooled trust preferred securities.

 

 
10

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2015 and December 31, 2014, 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

 

March 31, 2015:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 48,692,267     $ (991,314 )   $ 30,617,292     $ (821,429 )   $ 79,309,559     $ (1,812,743 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 102,286,952     $ (435,457 )   $ 93,948,175     $ (960,110 )   $ 196,235,127     $ (1,395,567 )

Residential mortgage-backed and related securities

    27,194,344       (126,489 )     22,421,887       (335,807 )     49,616,231       (462,296 )

Municipal securities

    598,285       (2,790 )     1,339,977       (40,933 )     1,938,262       (43,723 )

Other securities

    476       (98 )     -       -       476       (98 )
    $ 130,080,057     $ (564,834 )   $ 117,710,039     $ (1,336,850 )   $ 247,790,096     $ (1,901,684 )
                                                 

December 31, 2014:

                                               

Securities held to maturity:

                                               

Municipal securities

  $ 20,419,052     $ (587,992 )   $ 38,779,545     $ (598,084 )   $ 59,198,597     $ (1,186,076 )
                                                 

Securities available for sale:

                                               

U.S. govt. sponsored agency securities

  $ 23,970,085     $ (102,695 )   $ 255,743,056     $ (5,161,178 )   $ 279,713,141     $ (5,263,873 )

Residential mortgage-backed and related securities

    10,710,671       (10,139 )     37,570,774       (530,893 )     48,281,445       (541,032 )

Municipal securities

    920,935       (1,773 )     4,425,337       (60,699 )     5,346,272       (62,472 )

Other securities

    243,004       (846 )     -       -       243,004       (846 )
    $ 35,844,695     $ (115,453 )   $ 297,739,167     $ (5,752,770 )   $ 333,583,862     $ (5,868,223 )

 

 

At March 31, 2015, the investment portfolio included 474 securities. Of this number, 161 securities were in an unrealized loss position. The aggregate losses of these securities totaled less than 1% of the total amortized cost of the portfolio. Of these 161 securities, 59 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At March 31, 2015 and December 31, 2014, equity securities represented less than 1% of the total portfolio.

 

The Company did not recognize other-than-temporary impairment on any debt or equity securities for the three months ended March 31, 2015 and 2014.   

 

 
11

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

All sales of securities for the three months ended March 31, 2015 and 2014, respectively, were from securities identified as available for sale. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

 

   

Three Months Ended

 
   

March 31, 2015

   

March 31, 2014

 
                 

Proceeds from sales of securities

  $ 54,971,056     $ 7,020,625  

Pre-tax gross gains from sales of securities

    573,684       20,625  

Pre-tax gross losses from sales of securities

    (152,618 )     -  

 

The amortized cost and fair value of securities as of March 31, 2015 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table. “Other securities” available for sale are excluded from the maturity categories as there is no fixed maturity date for those securities.

 

   

Amortized Cost

   

Fair Value

 

Securities held to maturity:

               

Due in one year or less

  $ 3,866,598     $ 3,871,276  

Due after one year through five years

    18,512,988       18,595,028  

Due after five years

    192,766,585       193,170,693  
    $ 215,146,171     $ 215,636,997  
                 

Securities available for sale:

               

Due in one year or less

  $ 34,982,411     $ 34,994,562  

Due after one year through five years

    104,102,115       104,066,092  

Due after five years

    189,696,419       189,832,915  
    $ 328,780,945     $ 328,893,569  

Residential mortgage-backed and related securities

    90,632,701       91,363,300  

Other securities

    1,370,532       2,001,231  
    $ 420,784,178     $ 422,258,100  

 

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

 

   

Amortized Cost

   

Fair Value

 

Securities held to maturity:

               

Municipal securities

  $ 127,760,995     $ 128,323,293  
                 

Securities available for sale:

               

U.S. govt. sponsored agency securities

    185,507,330       184,490,370  

Municipal securities

    17,800,256       18,353,901  
    $ 203,307,586     $ 202,844,271  

 

 
12

 

  

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of March 31, 2015, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 70 issuers with fair values totaling $56.2 million and revenue bonds issued by 84 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $188.1 million. The Company held investments in general obligation bonds in 17 states, including three states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in eleven states, including four states in which the aggregate fair value exceeded $5.0 million.

 

As of December 31, 2014, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 77 issuers with fair values totaling $68.8 million and revenue bonds issued by 64 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $161.7 million. The Company held investments in general obligation bonds in 19 states, including three states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in eight states, including four 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:

 

March 31, 2015:

 

U.S. State:

 

Number of Issuers

   

Amortized Cost

   

Fair Value

   

Average Exposure Per Issuer (Fair Value)

 
                                 

Iowa

    15     $ 21,431,325     $ 21,602,520     $ 1,440,168  

Missouri

    11       7,091,686       7,085,546       644,141  

Illinois

    9       11,925,483       12,255,809       1,361,757  

Other

    35       14,918,372       15,295,418       437,012  

Total general obligation bonds

    70     $ 55,366,866     $ 56,239,293     $ 803,418  

 

 

December 31, 2014:

 

U.S. State:

 

Number of Issuers

   

Amortized Cost

   

Fair Value

   

Average Exposure Per Issuer (Fair Value)

 
                                 

Iowa

    14     $ 20,156,969     $ 20,446,655     $ 1,460,475  

Missouri

    11       8,424,928       8,426,047       766,004  

Illinois

    10       22,447,799       22,784,638       2,278,464  

Other

    42       16,838,719       17,110,831       407,401  

Total general obligation bonds

    77     $ 67,868,415     $ 68,768,171     $ 893,093  

 

 
13

 

 

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:

 

March 31, 2015:

 

U.S. State:

 

Number of Issuers

   

Amortized Cost

   

Fair Value

   

Average Exposure Per Issuer (Fair Value)

 
                                 

Missouri

    35     $ 66,627,817     $ 66,749,366     $ 1,907,125  

Iowa

    25       73,326,036       73,890,396       2,955,616  

Indiana

    11       25,563,200       25,397,220       2,308,838  

Kansas

    3       12,120,688       12,100,898       4,033,633  

Other

    10       9,740,846       9,923,138       992,314  

Total revenue bonds

    84     $ 187,378,587     $ 188,061,018     $ 2,238,822  

 

 

December 31, 2014:

 

U.S. State:

 

Number of Issuers

   

Amortized Cost

   

Fair Value

   

Average Exposure Per Issuer (Fair Value)

 
                                 

Missouri

    30     $ 62,358,276     $ 62,584,516     $ 2,086,151  

Iowa

    20       59,417,246       60,402,941       3,020,147  

Indiana

    8       17,991,200       17,925,721       2,240,715  

Kansas

    2       12,307,866       12,332,528       6,166,264  

Other

    4       8,295,311       8,449,900       2,112,475  

Total revenue bonds

    64     $ 160,369,899     $ 161,695,606     $ 2,526,494  

 

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2015 and December 31, 2014, the Company did not hold general obligation or revenue bonds of any single issuer, the aggregate book or market value of which exceeded 10% 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 risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).

 

The Company’s municipal securities are owned by each of the three charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually and as of March 31, 2015, all were well-within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of total risk-based capital.

 

As of March 31, 2015, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.

 

 
14

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 3 – LOANS/LEASES RECEIVABLE

 

The composition of the loan/lease portfolio as of March 31, 2015 and December 31, 2014 is presented as follows:

 

   

As of March 31,

   

As of December 31,

 
   

2015

   

2014

 
                 

Commercial and industrial loans

  $ 534,885,417     $ 523,927,140  

Commercial real estate loans

               

Owner-occupied commercial real estate

    263,646,328       260,069,080  

Commercial construction, land development, and other land

    60,040,330       68,118,989  

Other non owner-occupied commercial real estate

    385,995,048       373,952,353  
      709,681,706       702,140,422  
                 

Direct financing leases *

    167,244,011       166,032,416  

Residential real estate loans **

    163,739,861       158,632,492  

Installment and other consumer loans

    71,902,576       72,606,480  
      1,647,453,571       1,623,338,950  

Plus deferred loan/lease origination costs, net of fees

    6,997,665       6,664,120  
      1,654,451,236       1,630,003,070  

Less allowance for estimated losses on loans/leases

    (23,883,273 )     (23,074,365 )
    $ 1,630,567,963     $ 1,606,928,705  
                 
                 

* Direct financing leases:

               

Net minimum lease payments to be received

  $ 189,170,774     $ 188,181,432  

Estimated unguaranteed residual values of leased assets

    1,481,232       1,488,342  

Unearned lease/residual income

    (23,407,995 )     (23,637,358 )
      167,244,011       166,032,416  

Plus deferred lease origination costs, net of fees

    6,654,946       6,639,244  
      173,898,957       172,671,660  

Less allowance for estimated losses on leases

    (3,310,973 )     (3,442,915 )
    $ 170,587,984     $ 169,228,745  

 

*Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors and management’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three months ended March 31, 2015 and 2014.

 

**Includes residential real estate loans held for sale totaling $789,000 and $553,000 as of March 31, 2015, and December 31, 2014, respectively.

 

 
15

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2015 and December 31, 2014 is presented as follows:

 

   

As of March 31, 2015

 

Classes of Loans/Leases

 

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases

   

Total

 
                                                 

Commercial and Industrial

  $ 528,547,287     $ 319,076     $ 27,433     $ 149,600     $ 5,842,021     $ 534,885,417  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    262,328,777       713,875       -       -       603,676       263,646,328  

Commercial Construction, Land Development, and Other Land

    59,785,010       -       -       -       255,320       60,040,330  

Other Non Owner-Occupied Commercial Real Estate

    380,729,492       24,079       -       491,558       4,749,919       385,995,048  

Direct Financing Leases

    164,964,821       1,172,622       206,922       -       899,646       167,244,011  

Residential Real Estate

    160,310,125       2,069,137       -       -       1,360,599       163,739,861  

Installment and Other Consumer

    70,778,133       241,933       38,267       26,759       817,484       71,902,576  
    $ 1,627,443,645     $ 4,540,722     $ 272,622     $ 667,917     $ 14,528,665     $ 1,647,453,571  
                                                 

As a percentage of total loan/lease portfolio

    98.78 %     0.28 %     0.02 %     0.04 %     0.88 %     100.00 %

 

   

As of December 31, 2014

 

Classes of Loans/Leases

 

Current

   

30-59 Days Past Due

   

60-89 Days Past Due

   

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases

   

Total

 
                                                 

Commercial and Industrial

  $ 515,616,752     $ 323,145     $ -     $ 822     $ 7,986,421     $ 523,927,140  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    259,166,743       239,771       -       -       662,566       260,069,080  

Commercial Construction, Land Development, and Other Land

    67,021,157       729,983       111,837       -       256,012       68,118,989  

Other Non Owner-Occupied Commercial Real Estate

    360,970,551       3,448,902       2,840,862       60,000       6,632,038       373,952,353  

Direct Financing Leases

    164,059,914       573,575       293,212       -       1,105,715       166,032,416  

Residential Real Estate

    154,303,644       2,528,287       475,343       25,673       1,299,545       158,632,492  

Installment and Other Consumer

    71,534,329       172,872       246,882       6,916       645,481       72,606,480  
    $ 1,592,673,090     $ 8,016,535     $ 3,968,136     $ 93,411     $ 18,587,778     $ 1,623,338,950  
                                                 

As a percentage of total loan/lease portfolio

    98.11 %     0.49 %     0.24 %     0.01 %     1.15 %     100.00 %

 

 
16

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Nonperforming loans/leases by classes of loans/leases as of March 31, 2015 and December 31, 2014 are presented as follows:

 

   

As of March 31, 2015

 

Classes of Loans/Leases

 

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases *

   

Troubled Debt Restructurings - Accruing

   

Total Nonperforming Loans/Leases

   

Percentage of Total Nonperforming Loans/Leases

 
                                         

Commercial and Industrial

  $ 149,600     $ 5,842,021     $ 175,966     $ 6,167,587       37.28 %

Commercial Real Estate

                                       

Owner-Occupied Commercial Real Estate

    -       603,676       -       603,676       3.65 %

Commercial Construction, Land Development, and Other Land

    -       255,320       -       255,320       1.54 %

Other Non Owner-Occupied Commercial Real Estate

    491,558       4,749,919       -       5,241,477       31.68 %

Direct Financing Leases

    -       899,646       223,552       1,123,198       6.79 %

Residential Real Estate

    -       1,360,599       485,968       1,846,567       11.16 %

Installment and Other Consumer

    26,759       817,484       462,146       1,306,389       7.90 %
    $ 667,917     $ 14,528,665     $ 1,347,632     $ 16,544,214       100.00 %

 

*Nonaccrual loans/leases includes $4,128,435 of troubled debt restructurings, including $1,352,908 in commercial and industrial loans, $2,213,166 in commercial real estate loans, $56,644 in direct financing leases, $502,108 in residential real estate loans, and $3,609 in installment loans.

 

   

As of December 31, 2014

 

Classes of Loans/Leases

 

Accruing Past Due 90 Days or More

   

Nonaccrual Loans/Leases **

   

Troubled Debt Restructurings - Accruing

   

Total Nonperforming Loans/Leases

   

Percentage of Total Nonperforming Loans/Leases

 
                                         

Commercial and Industrial

  $ 822     $ 7,986,421     $ 235,926     $ 8,223,169       40.91 %

Commercial Real Estate

                          $ -          

Owner-Occupied Commercial Real Estate

    -       662,566       -     $ 662,566       3.30 %

Commercial Construction, Land Development, and Other Land

    -       256,012       -     $ 256,012       1.27 %

Other Non Owner-Occupied Commercial Real Estate

    60,000       6,632,038       -     $ 6,692,038       33.29 %

Direct Financing Leases

    -       1,105,715       233,557     $ 1,339,272       6.66 %

Residential Real Estate

    25,673       1,299,545       489,183     $ 1,814,401       9.02 %

Installment and Other Consumer

    6,916       645,481       462,552     $ 1,114,949       5.55 %
    $ 93,411     $ 18,587,778     $ 1,421,218     $ 20,102,407       100.00 %

 

 

**Nonaccrual loans/leases includes $5,013,041 of troubled debt restructurings, including $1,227,537 in commercial and industrial loans, $3,214,468 in commercial real estate loans, $61,144 in direct financing leases, $506,283 in residential real estate loans, and $3,609 in installment loans.

 

 
17

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Changes in the allowance for estimated losses on loans/leases by portfolio segment for the three months ended March 31, 2015 and 2014, respectively, are presented as follows:

 

   

Three Months Ended March 31, 2015

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

  $ 8,750,317     $ 8,353,386     $ 3,442,915     $ 1,525,952     $ 1,001,795     $ 23,074,365  

Provisions (credits) charged to expense

    388,641       835,894       403,452       71,802       10,667       1,710,456  

Loans/leases charged off

    (200,301 )     (351,076 )     (547,492 )     -       (8,794 )     (1,107,663 )

Recoveries on loans/leases previously charged off

    154,992       -       12,098       -       39,025       206,115  

Balance, ending

  $ 9,093,649     $ 8,838,204     $ 3,310,973     $ 1,597,754     $ 1,042,693     $ 23,883,273  

 

   

Three Months Ended March 31, 2014

 
                                                 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Balance, beginning

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

Provisions (credits) charged to expense

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

Loans/leases charged off

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

Recoveries on loans/leases previously charged off

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

Balance, ending

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

 

 
18

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

The allowance for estimated losses on loans/leases by impairment evaluation and by portfolio segment as of March 31, 2015 and December 31, 2014 is presented as follows:

 

   

As of March 31, 2015

 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Allowance for impaired loans/leases

  $ 2,513,023     $ 828,837     $ 283,485     $ 180,160     $ 267,430     $ 4,072,935  

Allowance for nonimpaired loans/leases

    6,580,626       8,009,367       3,027,488       1,417,594       775,263       19,810,338  
    $ 9,093,649     $ 8,838,204     $ 3,310,973     $ 1,597,754     $ 1,042,693     $ 23,883,273  
                                                 
                                                 

Impaired loans/leases

  $ 5,301,166     $ 5,495,701     $ 1,123,198     $ 1,846,567     $ 1,337,145     $ 15,103,777  

Nonimpaired loans/leases

    529,584,251       704,186,005       166,120,813       161,893,294       70,565,431       1,632,349,794  
    $ 534,885,417     $ 709,681,706     $ 167,244,011     $ 163,739,861     $ 71,902,576     $ 1,647,453,571  
                                                 
                                                 

Allowance as a percentage of impaired loans/leases

    47.41 %     15.08 %     25.24 %     9.76 %     20.00 %     26.97 %

Allowance as a percentage of nonimpaired loans/leases

    1.24 %     1.14 %     1.82 %     0.88 %     1.10 %     1.21 %
      1.70 %     1.25 %     1.98 %     0.98 %     1.45 %     1.45 %

 

   

As of December 31, 2014

 
   

Commercial and Industrial

   

Commercial Real Estate

   

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                                 

Allowance for impaired loans/leases

  $ 3,300,199     $ 1,170,020     $ 356,996     $ 151,663     $ 265,795     $ 5,244,673  

Allowance for nonimpaired loans/leases

    5,450,118       7,183,366       3,085,919       1,374,289       736,000       17,829,692  
    $ 8,750,317     $ 8,353,386     $ 3,442,915     $ 1,525,952     $ 1,001,795     $ 23,074,365  
                                                 

Impaired loans/leases

  $ 7,279,709     $ 7,433,383     $ 1,339,272     $ 1,788,729     $ 1,165,548     $ 19,006,641  

Nonimpaired loans/leases

    516,647,431       694,707,039       164,693,144       156,843,763       71,440,932       1,604,332,309  
    $ 523,927,140     $ 702,140,422     $ 166,032,416     $ 158,632,492     $ 72,606,480     $ 1,623,338,950  
                                                 

Allowance as a percentage of impaired loans/leases

    45.33 %     15.74 %     26.66 %     8.48 %     22.80 %     27.59 %

Allowance as a percentage of nonimpaired loans/leases

    1.05 %     1.03 %     1.87 %     0.88 %     1.03 %     1.11 %
      1.67 %     1.19 %     2.07 %     0.96 %     1.38 %     1.42 %

 

 
19

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2015 are presented as follows:

 

Classes of Loans/Leases

 

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

   

Average Recorded Investment

   

Interest Income Recognized

   

Interest Income Recognized for Cash Payments Received

 
                                                 

Impaired Loans/Leases with No Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 331,612     $ 425,636     $ -     $ 1,352,320     $ 1,849     $ 1,849  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    173,131       269,354       -       189,621       -       -  

Commercial Construction, Land Development, and Other Land

    171,186       511,204       -       171,186       -       -  

Other Non Owner-Occupied Commercial Real Estate

    290,577       1,528,456       -       1,102,174       -       -  

Direct Financing Leases

    665,735       665,735       -       1,009,487       4,109       4,109  

Residential Real Estate

    981,608       1,017,186       -       1,089,298       483       483  

Installment and Other Consumer

    726,050       726,050       -       698,685       -       -  
    $ 3,339,899     $ 5,143,621     $ -     $ 5,612,771     $ 6,441     $ 6,441  
                                                 

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

Commercial and Industrial

  $ 4,969,554     $ 4,973,392     $ 2,513,023     $ 4,938,115     $ -     $ -  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    454,980       454,980       15,154       468,590       -       -  

Commercial Construction, Land Development, and Other Land

    197,225       209,225       46,570       197,526       -       -  

Other Non Owner-Occupied Commercial Real Estate

    4,208,602       4,655,235       767,113       4,335,446       -       -  

Direct Financing Leases

    457,463       457,463       283,485       380,548       -       -  

Residential Real Estate

    864,957       864,957       180,160       728,349       2,830       2,830  

Installment and Other Consumer

    611,096       611,096       267,430       552,663       2,260       2,260  
    $ 11,763,877     $ 12,226,348     $ 4,072,935     $ 11,601,237     $ 5,090     $ 5,090  
                                                 

Total Impaired Loans/Leases:

                                               

Commercial and Industrial

  $ 5,301,166     $ 5,399,028     $ 2,513,023     $ 6,290,435     $ 1,849     $ 1,849  

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

    628,111       724,334       15,154       658,211       -       -  

Commercial Construction, Land Development, and Other Land

    368,411       720,429       46,570       368,712       -       -  

Other Non Owner-Occupied Commercial Real Estate

    4,499,179       6,183,691       767,113       5,437,620       -       -  

Direct Financing Leases

    1,123,198       1,123,198       283,485       1,390,035       4,109       4,109  

Residential Real Estate

    1,846,565       1,882,143       180,160       1,817,647       3,313       3,313  

Installment and Other Consumer

    1,337,146       1,337,146       267,430       1,251,348       2,260       2,260  
    $ 15,103,776     $ 17,369,969     $ 4,072,935     $ 17,214,008     $ 11,531     $ 11,531  

 

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

 

 
20

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2014 are presented as follows:

 

Classes of Loans/Leases

 

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

   

Average Recorded Investment

   

Interest Income Recognized

   

Interest Income Recognized for Cash Payments Received

 
                                                 

Impaired Loans/Leases with No Specific Allowance Recorded:

                                               

Commercial and Industrial

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

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

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

Commercial Construction, Land Development, and Other Land

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

Other Non Owner-Occupied Commercial Real Estate

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

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

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

Impaired Loans/Leases with Specific Allowance Recorded:

                                               

Commercial and Industrial

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

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

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

Commercial Construction, Land Development, and Other Land

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

Other Non Owner-Occupied Commercial Real Estate

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

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

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

Total Impaired Loans/Leases:

                                               

Commercial and Industrial

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

Commercial Real Estate

                                               

Owner-Occupied Commercial Real Estate

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

Commercial Construction, Land Development, and Other Land

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

Other Non Owner-Occupied Commercial Real Estate

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

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

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

 

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

 

 
21

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2014 are presented as follows:

 

Classes of Loans/Leases

 

Recorded Investment

   

Unpaid Principal Balance

   

Related Allowance

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                       

Commercial and Industrial

  $ 246,308     $ 342,391     $ -  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    67,415       163,638       -  

Commercial Construction, Land Development, and Other Land

    31,936       143,136       -  

Other Non Owner-Occupied Commercial Real Estate

    491,717       491,717       -  

Direct Financing Leases

    561,414       561,414       -  

Residential Real Estate

    1,060,770       1,060,770       -  

Installment and Other Consumer

    671,319       671,319       -  
    $ 3,130,879     $ 3,434,385     $ -  
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                       

Commercial and Industrial

  $ 7,033,401     $ 8,190,495     $ 3,300,199  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    620,896       620,896       4,462  

Commercial Construction, Land Development, and Other Land

    337,076       577,894       12,087  

Other Non Owner-Occupied Commercial Real Estate

    5,884,343       6,583,934       1,153,471  

Direct Financing Leases

    777,858       777,858       356,996  

Residential Real Estate

    727,959       763,537       151,663  

Installment and Other Consumer

    494,229       494,229       265,795  
    $ 15,875,762     $ 18,008,843     $ 5,244,673  
                         

Total Impaired Loans/Leases:

                       

Commercial and Industrial

  $ 7,279,709     $ 8,532,886     $ 3,300,199  

Commercial Real Estate

                       

Owner-Occupied Commercial Real Estate

    688,311       784,534       4,462  

Commercial Construction, Land Development, and Other Land

    369,012       721,030       12,087  

Other Non Owner-Occupied Commercial Real Estate

    6,376,060       7,075,651       1,153,471  

Direct Financing Leases

    1,339,272       1,339,272       356,996  

Residential Real Estate

    1,788,729       1,824,307       151,663  

Installment and Other Consumer

    1,165,548       1,165,548       265,795  
    $ 19,006,641     $ 21,443,228     $ 5,244,673  

 

 

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

 

 
22

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

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

 

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of March 31, 2015 and December 31, 2014:

 

   

As of March 31, 2015

 
           

Commercial Real Estate

         
                   

Non Owner-Occupied

         

Internally Assigned Risk Rating

 

Commercial and Industrial

   

Owner-Occupied Commercial Real Estate

   

Commercial Construction, Land Development, and Other Land

   

Other Commercial Real Estate

   

Total

 
                                         

Pass (Ratings 1 through 5)

  $ 498,723,676     $ 249,094,668     $ 57,664,537     $ 368,990,982     $ 1,174,473,863  

Special Mention (Rating 6)

    21,123,731       12,312,076       70,511       6,064,699       39,571,017  

Substandard (Rating 7)

    15,038,010       2,239,584       2,305,282       10,939,367       30,522,243  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 534,885,417     $ 263,646,328     $ 60,040,330     $ 385,995,048     $ 1,244,567,123  

 

   

As of March 31, 2015

 

Delinquency Status *

 

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                 

Performing

  $ 166,120,813     $ 161,893,294     $ 70,596,187     $ 398,610,294  

Nonperforming

    1,123,198       1,846,567       1,306,389       4,276,154  
    $ 167,244,011     $ 163,739,861     $ 71,902,576     $ 402,886,448  

 

   

As of December 31, 2014

 
           

Commercial Real Estate

         
                   

Non Owner-Occupied

         

Internally Assigned Risk Rating

 

Commercial and Industrial

   

Owner-Occupied Commercial Real Estate

   

Commercial Construction, Land Development, and Other Land

   

Other Commercial Real Estate

   

Total

 
                                         

Pass (Ratings 1 through 5)

  $ 491,883,568     $ 245,237,462     $ 65,691,737     $ 354,581,419     $ 1,157,394,186  

Special Mention (Rating 6)

    17,034,909       12,637,930       -       3,285,191       32,958,030  

Substandard (Rating 7)

    15,008,663       2,193,688       2,427,252       16,085,743       35,715,346  

Doubtful (Rating 8)

    -       -       -       -       -  
    $ 523,927,140     $ 260,069,080     $ 68,118,989     $ 373,952,353     $ 1,226,067,562  

 

   

As of December 31, 2014

 

Delinquency Status *

 

Direct Financing Leases

   

Residential Real Estate

   

Installment and Other Consumer

   

Total

 
                                 

Performing

  $ 164,693,144     $ 156,818,091     $ 71,491,531     $ 393,002,766  

Nonperforming

    1,339,272       1,814,401       1,114,949       4,268,622  
    $ 166,032,416     $ 158,632,492     $ 72,606,480     $ 397,271,388  

 

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

 

 
23

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

As of March 31, 2015 and December 31, 2014, troubled debt restructurings (“TDRs”) totaled $5,476,067 and $6,434,259, 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 months ended March 31, 2015 and 2014. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

 

   

For the three months ended March 31, 2015

   

For the three months ended March 31, 2014

 

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

                                                               

Direct Financing Leases

    -     $ -     $ -     $ -       1     $ 89,443     $ 89,443     $ -  
      -     $ -     $ -     $ -       1     $ 89,443     $ 89,443     $ -  
                                                                 

CONCESSION - Extension of Maturity

                                                               

Direct Financing Leases

    -     $ -     $ -     $ -       1     $ 70,144     $ 70,144     $ 24,246  
      -     $ -     $ -     $ -       1     $ 70,144     $ 70,144     $ 24,246  
                                                                 

TOTAL

    -     $ -     $ -       -       2     $ 159,587     $ 159,587       24,246  

 

 

Of the TDRs reported above, one with post-modification recorded investments totaling $70,144 was on nonaccrual as of March 31, 2014.

 

For the three months ended March 31, 2015 and 2014, none of the Company’s TDRs had redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

 

 
24

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 4 - EARNINGS PER SHARE

 

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

 

   

Three months ended

 
   

March 31,

 
   

2015

   

2014

 
                 

Net income

  $ 4,177,889     $ 3,889,215  
                 

Less: Preferred stock dividends

    -       708,008  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 4,177,889     $ 3,181,207  
                 

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

               

Basic

  $ 0.52     $ 0.40  

Diluted

  $ 0.52     $ 0.40  
                 

Weighted average common shares outstanding

    7,975,910       7,901,035  

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

    121,534       129,008  

Weighted average common and common equivalent shares outstanding

    8,097,444       8,030,043  

 

NOTE 5 – BUSINESS SEGMENT INFORMATION

 

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

 

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

 

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

 

 
25

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

Selected financial information on the Company’s business segments is presented as follows as of and for the three months ended March 31, 2015 and 2014.

 

   

Commercial Banking

                                 
   

Quad City

Bank & Trust

   

Cedar Rapids

Bank & Trust

   

Rockford

Bank & Trust

   

Wealth

Management

   

All Other

   

Intercompany Eliminations

   

Consolidated Total

 

Three Months Ended March 31, 2015

                                                       

Total revenue

  $ 12,793,179     $ 9,428,494     $ 3,667,864     $ 2,343,438     $ 5,644,606     $ (5,725,910 )   $ 28,151,671  

Net interest income

  $ 9,275,038     $ 6,358,297     $ 2,634,082     $ -     $ (485,200 )   $ -     $ 17,782,217  

Net income

  $ 2,562,613     $ 2,068,306     $ 518,657     $ 459,330     $ 4,177,889     $ (5,608,906 )   $ 4,177,889  

Total assets

  $ 1,268,168,825     $ 855,417,474     $ 354,993,941     $ -     $ 221,549,665     $ (208,470,899 )   $ 2,491,659,006  

Provision for loan/lease losses

  $ 882,456     $ 600,000     $ 228,000     $ -     $ -     $ -     $ 1,710,456  

Goodwill

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

Core deposit intangible

  $ -     $ 1,621,043     $ -     $ -     $ -     $ -     $ 1,621,043  
                                                         

Three Months Ended March 31, 2014

                                                       

Total revenue

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

Net interest income

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

Net income

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

Total assets

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

Provision for loan/lease losses

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

Goodwill

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

Core deposit intangible

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

 

 
26

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

NOTE 6 – FAIR VALUE

 

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

 

 

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

 

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

 

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

 

Assets measured at fair value on a recurring basis comprise the following at March 31, 2015 and December 31, 2014:

 

           

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)

 
                                 

March 31, 2015:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 299,180,255     $ -     $ 299,180,255     $ -  

Residential mortgage-backed and related securities

    91,363,300       -       91,363,300       -  

Municipal securities

    29,713,314       -       29,713,314       -  

Other securities

    2,001,231       356,110       1,645,121       -  

Derivative instruments

    1,114,101       -       1,114,101       -  
    $ 423,372,201     $ 356,110     $ 423,016,091     $ -  
                                 

December 31, 2014:

                               

Securities available for sale:

                               

U.S. govt. sponsored agency securities

  $ 307,869,572     $ -     $ 307,869,572     $ -  

Residential mortgage-backed and related securities

    111,423,224       -       111,423,224       -  

Municipal securities

    30,399,981       -       30,399,981       -  

Other securities

    1,966,853       345,952       1,620,901       -  

Derivative instruments

    1,487,386       -       1,487,386          
    $ 453,147,016     $ 345,952     $ 452,801,064     $ -  

 

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three months ended March 31, 2015 or 2014.

 

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

 

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

 

 
27

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

Derivative instruments consist of interest rate caps that are used for the purpose of hedging interest rate risk. See Note 7 to the Consolidated Financial Statements for the details of these instruments. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

 

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

 

Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2015 and December 31, 2014:

 

           

Fair Value Measurements at Reporting Date Using

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

March 31, 2015:

                               

Impaired loans/leases

  $ 9,403,469     $ -     $ -     $ 9,403,469  

Other real estate owned

    14,304,939       -       -       14,304,939  
    $ 23,708,408     $ -     $ -     $ 23,708,408  
                                 

December 31, 2014:

                               

Impaired loans/leases

  $ 12,467,362     $ -     $ -     $ 12,467,362  

Other real estate owned

    13,789,047       -       -       13,789,047  
    $ 26,256,409     $ -     $ -     $ 26,256,409  

 

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.  

 

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

 

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

 

   

Quantitave Information about Level Fair Value Measurments

 
   

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

 

March 31, 2015:

                   

Impaired loans/leases

  $ 9,403,469  

Appraisal of collateral

Appraisal adjustments

    -10.00% to -50.00 %

Other real estate owned

    14,304,939  

Appraisal of collateral

Appraisal adjustments

    0.00% to -35.00 %

 

   

Quantitave Information about Level Fair Value Measurments

 
   

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

 

December 31, 2014:

                   

Impaired loans/leases

  $ 12,467,362  

Appraisal of collateral

Appraisal adjustments

    -10.00% to -50.00 %

Other real estate owned

    13,789,047  

Appraisal of collateral

Appraisal adjustments

    0.00% to -35.00 %

 

 
28

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

There have been no changes in valuation techniques used for any assets measured at fair value during the three months ended March 31, 2015 and 2014.

 

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

 

   

Fair Value

   

As of March 31, 2015

   

As of December 31, 2014

 
   

Hierarchy

   

Carrying

   

Estimated

   

Carrying

   

Estimated

 
   

Level

   

Value

   

Fair Value

   

Value

   

Fair Value

 
                                         

Cash and due from banks

 

Level 1

    $ 45,138,266     $ 45,138,266     $ 38,235,019     $ 38,235,019  

Federal funds sold

 

Level 2

      14,035,000       14,035,000       46,780,000       46,780,000  

Interest-bearing deposits at financial institutions

 

Level 2

      17,118,983       17,118,983       35,334,682       35,334,682  

Investment securities:

                                       

Held to maturity

 

Level 3

      215,146,171       215,636,997       199,879,574       201,113,796  

Available for sale

 

See Previous Table

      422,258,100       422,258,100       451,659,630       451,659,630  

Loans/leases receivable, net

 

Level 3

      8,706,916       9,403,469       11,543,854       12,467,362  

Loans/leases receivable, net

 

Level 2

      1,621,861,047       1,636,808,084       1,595,384,851       1,606,646,146  

Derivative instruments

 

Level 2

      1,114,101       1,114,101       1,487,386       1,487,386  

Deposits:

                                       

Nonmaturity deposits

 

Level 2

      1,386,860,881       1,386,860,881       1,304,044,099       1,304,044,099  

Time deposits

 

Level 2

      347,408,506       348,466,000       375,623,914       376,509,000  

Short-term borrowings

 

Level 2

      183,335,719       183,335,719       268,351,670       268,351,670  

Federal Home Loan Bank advances

 

Level 2

      196,500,000       206,366,000       203,500,000       208,172,000  

Other borrowings

 

Level 2

      149,109,915       159,278,000       150,282,492       159,741,000  

Junior subordinated debentures

 

Level 2

      40,457,936       28,691,964       40,423,735       28,585,294  

 

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

 

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

 

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

 

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

 

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

 

 
29

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

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

 

 

NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

 

During the second quarter of 2014, the Company executed and designated two interest rate cap derivatives as cash flow hedges of short-term Federal Home Loan Bank (“FHLB”) advances. The short-term FHLB advance rates will fluctuate with rate movements; therefore the Bank determined it was necessary to hedge against this increase in interest expense in a rising rate environment. The caps purchased will essentially set a ceiling on the rate paid on the FHLB advances, minimizing the risk associated with rate increases.

 

Below is a summary of the interest rate cap derivatives held by the Company as of March 31, 2015. An initial premium of $2.1 million was paid for the two caps. The fair value of these instruments will fluctuate with market value changes, as well as amortization of the initial premium to interest expense.

 

Effective Date

Maturity Date

Balance Sheet

Location

 

Notional Amount

 

Accounting Treatment

 

Fair Value

 

June 5, 2014

June 5, 2019

Other Assets

  $ 15,000,000  

Cash Flow Hedging

  $ 437,694  

June 5, 2014

June 5, 2021

Other Assets

    15,000,000  

Cash Flow Hedging

    676,407  
        $ 30,000,000       $ 1,114,101  

 

Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are effective hedges, are recorded as a component of accumulated other comprehensive income. The following is a summary of how accumulated other comprehensive income was impacted during the reporting periods:

 

   

Three Months Ended

March 31, 2015

 

Unrealized loss at beginning of period, net of tax

  $ (399,367 )

Amount reclassified from accumulated other comprehensive income to noninterest income related to hedge ineffectiveness

    341  

Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization

    560  

Amount of loss recognized in other comprehensive income, net of tax

    (238,571 )

Unrealized loss at end of period

  $ (637,037 )

 

Changes in the fair value related to the ineffective portion of cash flow hedges, are reported in noninterest income during the period of the change. As shown in the table above, $341 of the change in fair value year-to-date was due to ineffectiveness.

 

 
30

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

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


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

 

 

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

 

 

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its main office located on First Avenue in downtown Cedar Rapids, Iowa and its branch facility located on Council Street in northern Cedar Rapids. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (two in Waterloo and one in Cedar Falls).

 

 

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

 

OVERVIEW

 

The Company recognized net income of $4.2 million for the quarter ended March 31, 2015 and reported diluted earnings per common share of $0.52. By comparison, for the first quarter of 2014, the Company recognized net income of $3.9 million. After preferred stock dividends of $708 thousand, the Company reported net income attributable to common stockholders of $3.2 million, or diluted earnings per common share of $0.40 for the first quarter of 2014.

 

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

 

   

For the three months ended

 
   

March 31, 2015

   

March 31, 2014

 
                 

Net income

  $ 4,177,889     $ 3,889,215  

Less: Preferred stock dividends

    -       708,008  

Net income attributable to QCR Holdings, Inc. common stockholders

  $ 4,177,889     $ 3,181,207  
                 

Diluted earnings per common share

  $ 0.52     $ 0.40  
                 

Weighted average common and common equivalent outstanding

    8,097,444       8,030,043  

 

 
31

 

 

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

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
                         

Net interest income

  $ 17,782,217     $ 17,781,213     $ 16,849,241  

Provision for loan/lease losses

    (1,710,456 )     (3,647,636 )     (1,094,162 )

Noninterest income

    6,249,941       5,838,604       4,746,841  

Noninterest expense

    (17,232,324 )     (16,634,863 )     (16,140,420 )

Federal and state income tax

    (911,489 )     (344,497 )     (472,285 )

Net income

  $ 4,177,889     $ 2,992,821     $ 3,889,215  

 

In comparing quarter-over-quarter, following are some noteworthy changes in the Company’s financial results:

 

 

Net interest income was flat compared to the fourth quarter of 2014 and increased 6% from the first quarter of 2014.

 

Provision for loan/lease losses decreased 53% compared to the fourth quarter of 2014 and increased 56% from the first quarter of 2014.

 

Noninterest income increased 7% compared to the fourth quarter of 2014 and increased 32% from the first quarter of 2014.

 

Noninterest expense increased 4% compared to the fourth quarter of 2014 and increased 7% from the first quarter of 2014.

 

Federal and state income tax expense increased 93% compared to the first quarter of 2014, mostly due to a one-time tax benefit of $359 thousand recognized in the first quarter of 2014 as a result of the finalization of tax issues related to the Community National Bancorporation (“Community National”) acquisition following the filing of the acquired entity’s final tax return. Federal and state income tax expense increased from the fourth quarter of 2014 primarily due to improved pre-tax net income. In the fourth quarter of 2014, a larger percentage of net income was attributable to nontaxable sources (municipal loans and securities), which lowered the effective tax rate to 10.3%. The effective tax rate for the current quarter was 17.9%.

 

 
32

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

NET INTEREST INCOME

 

Net interest income, on a tax equivalent basis, increased $1.2 million, or 7%, to $18.9 million for the quarter ended March 31, 2015, from $17.7 million for the same period of 2014. Net interest income improved primarily due to the Company’s strategy to redeploy funds from the securities portfolio into higher yielding loans and leases. In addition, organic loan and lease growth has been strong over the past twelve months, as evidenced by the average gross loan/lease increase of $170.6 million, or 12%.

 

A comparison of yields, spread and margin from the first quarter of 2014 to the first quarter of 2015 is as follows (on a tax equivalent basis):

 

 

The average yield on interest-earning assets increased 10 basis points.

 

The average cost of interest-bearing liabilities decreased 6 basis points.

 

The net interest spread increased 16 basis points from 2.83% to 2.99%.

 

The net interest margin improved 14 basis points from 3.11% to 3.25%.

 

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

 

During 2014 and 2015, the Company placed an emphasis on shifting its balance sheet mix. With a stated goal of increasing loans/leases as a percentage of assets to at least 70%, the Company plans to fund this loan/lease growth with a mixture of core deposits and cash from the investment securities portfolio. Strategies are continuously being evaluated in which securities are sold and the cash is redeployed into the loan/lease portfolio, with little to no extension of duration and a significant increase in yield. Additionally, the Company is recognizing net gains on these sales due to the current low rate environment. As rates rise, the Company will also have less market volatility in the investment securities portfolio, as this continues to become a smaller portion of the balance sheet.

 

The Company continues to monitor and evaluate both prepayment and debt restructuring opportunities within the wholesale funding portion of the balance sheet, as such a strategy may increase net interest margin at a quicker pace than holding the debt until maturity.

 

 
33

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

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

 

   

For the three months ended March 31,

 
   

2015

   

2014

 
           

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

  $ 13,688     $ 4       0.12 %   $ 10,995     $ 3       0.11 %

Interest-bearing deposits at financial institutions

    69,974       77       0.45 %     88,376       91       0.42 %

Investment securities (1)

    625,834       4,492       2.91 %     722,220       4,655       2.61 %

Restricted investment securities

    15,942       142       3.61 %     17,249       129       3.03 %

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

    1,635,705       18,304       4.54 %     1,465,061       16,968       4.70 %

Total interest earning assets

  $ 2,361,143     $ 23,019       3.95 %   $ 2,303,901     $ 21,846       3.85 %
                                                 

Noninterest-earning assets:

                                               

Cash and due from banks

  $ 44,284                     $ 43,830                  

Premises and equipment

    38,079                       36,732                  

Less allowance for estimated losses on loans/leases…

    (23,417 )                     (21,894 )                

Other

    86,408                       71,589                  

Total assets

  $ 2,506,497                     $ 2,434,158                  
                                                 

LIABILITIES AND STOCKHOLDERS' EQUITY

                                               

Interest-bearing liabilities:

                                               

Interest-bearing deposits

  $ 787,350       442       0.23 %   $ 715,054       446       0.25 %

Time deposits

    374,365       630       0.68 %     382,721       656       0.70 %

Short-term borrowings

    180,914       64       0.14 %     149,989       52       0.14 %

Federal Home Loan Bank advances

    206,476       1,444       2.84 %     234,627       1,556       2.69 %

Junior subordinated debentures

    40,441       307       3.08 %     40,306       305       3.07 %

Other borrowings

    149,014       1,232       3.35 %     142,317       1,171       3.34 %

Total interest-bearing liabilities

  $ 1,738,560     $ 4,119       0.96 %   $ 1,665,014     $ 4,186       1.02 %

Noninterest-bearing demand deposits

  $ 585,490                     $ 585,441                  

Other noninterest-bearing liabilities

    34,308                       33,640                  

Total liabilities

  $ 2,358,358                     $ 2,284,095                  

Stockholders' equity

    148,139                       150,063                  

Total liabilities and stockholders' equity

  $ 2,506,497                     $ 2,434,158                  

Net interest income

          $ 18,900                     $ 17,660          

Net interest spread

                    2.99 %                     2.83 %

Net interest margin

                    3.25 %                     3.11 %

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

    135.81 %                     138.37 %                

 

(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.

 

 
34

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2015

 

   

Inc./(Dec.)

   

Components

 
   

from

   

of Change (1)

 
   

Prior Period

   

Rate

   

Volume

 
   

2015 vs. 2014

 
   

(dollars in thousands)

 

INTEREST INCOME

                       

Federal funds sold

  $ 1     $ -     $ 1  

Interest-bearing deposits at financial institutions

    (14 )     34       (48 )

Investment securities (2)

    (163 )     2,242       (2,405 )

Restricted investment securities

    13       66       (53 )

Gross loans/leases receivable (3) (4)

    1,336       (3,305 )     4,641  
                         

Total change in interest income

  $ 1,173     $ (963 )   $ 2,136  
                         

INTEREST EXPENSE

                       

Interest-bearing deposits

  $ (4 )   $ (184 )   $ 180  

Time deposits

    (26 )     (12 )     (14 )

Short-term borrowings

    12       1       11  

Federal Home Loan Bank advances

    (112 )     438       (550 )

Junior subordinated debentures

    2       1       1  

Other borrowings

    61       6       55  
                         

Total change in interest expense

  $ (67 )   $ 250     $ (317 )
                         

Total change in net interest income

  $ 1,240     $ (1,213 )   $ 2,453  

 

(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 andregulatory guidance.

(4)

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

 

 
35

 

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

CRITICAL ACCOUNTING POLICIES

 

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

 

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for estimated losses on loans/leases (“allowance”). The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in the Company’s markets, including economic conditions throughout the Midwest, and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. Management may report a materially different amount for the provision for loan/lease losses (“provision”) in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere herein, as well as the portion in the section entitled “Financial Condition” of this Management’s Discussion and Analysis that discusses the allowance. Although management believes the level of the allowance as of March 31, 2015 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

 

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

 

 
36

 

 

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 $867 thousand, or 4%, comparing the first quarter of 2015 to the same period of 2014. The majority of this growth was the result of the Company’s strategy to redeploy funds from the securities portfolio into higher yielding loans and leases. In addition, organic loan and lease growth has been strong over the past twelve months. Overall, the Company’s average earning assets increased a total of $57.2 million, comparing March 31, 2015 to March 31, 2014. During the same time period, average gross loans and leases increased $170.6 million, while average securities decreased $96.4 million. The securities portfolio yield continued to increase (from 2.61% for the first quarter of 2014 to 2.91% for the first quarter of 2015) as the Company continued to sell low-yielding investments. Additionally, the Company continued to take actions to diversify its securities portfolio, including increasing its portfolio of tax-exempt municipal securities, in an effort to increase interest income. A large majority of the tax-exempt municipal securities are from issuers located in the Midwest with strong underwriting conducted before investment.

 

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 first quarter of 2015 decreased $66 thousand, or 2%, from the first quarter of 2014. Considering the growth of interest-bearing liabilities (average balances grew $73.5 million, or 4%, from March 31, 2014 to March 31, 2015) resulting from organic growth, the Company has been successful in maintaining pricing discipline on deposits and decreasing the cost of borrowings, which has more than offset the growth impact and contributed to the net decline in interest expense. Management has placed a strong focus on reducing the reliance on long-term wholesale funding as it tends to be higher cost than deposits. In recent years, the majority of maturing wholesale funds have been replaced by core deposits, or, to a lesser extent, have been replaced by new wholesale funds at significantly reduced cost. Continuing this trend will strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

 

Management continues to consider strategies to accelerate the reduction of the reliance on wholesale funding and continue the shift in mix to a funding base consisting of a higher percentage of core deposits, including noninterest-bearing deposits. An important consideration to these strategies, however, will be the impact on the Company’s interest rate risk position, as some of its wholesale funding was originally borrowed to help strengthen the Company’s net interest income in rising interest rate scenarios.

 

 
37

 

 

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 provision totaled $1.7 million for the first quarter of 2015, which was down $1.9 million from the prior quarter, and up $616 thousand from the first quarter of 2014. The Company had net charge-offs of $901 thousand for the first quarter of 2015 which, when coupled with the provision of $1.7 million, increased the Company’s allowance to $23.9 million at March 31, 2015. As of March 31, 2015, the Company’s allowance to total loans/leases was 1.44%, which was up from 1.42% at December 31, 2014, and down from 1.52% at March 31, 2014.

 

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

 

NONINTEREST INCOME

 

The following tables set forth the various categories of noninterest income for the three months ended March 31, 2015 and 2014.

 

   

Three Months Ended

                 
   

March 31, 2015

   

March 31, 2014

   

$ Change

   

% Change

 
                                 

Trust department fees

  $ 1,633,395     $ 1,500,342     $ 133,053       8.9

%

Investment advisory and management fees

    710,043       648,992       61,051       9.4  

Deposit service fees

    1,116,983       1,045,885       71,098       6.8  

Gains on sales of residential real estate loans

    86,140       63,487       22,653       35.7  

Gains on sales of government guaranteed portions of loans

    70,973       194,019       (123,046 )     (63.4 )

Securities gains, net

    421,066       20,625       400,441       1,941.5  

Earnings on bank-owned life insurance

    478,739       454,164       24,575       5.4  

Swap fee income

    726,207       62,000       664,207       1,071.3  

Debit card fees

    238,000       230,605       7,395       3.2  

Correspondent banking fees

    319,621       232,143       87,478       37.7  

Participation service fees on commercial loan participations

    221,949       206,194       15,755       7.6  

Losses on other real estate owned, net

    (28,953 )     (18,048 )     (10,905 )     60.4  

Other

    255,778       106,433       149,345       140.3  

Total noninterest income

  $ 6,249,941     $ 4,746,841     $ 1,503,100       31.7

%

 

Trust department fees continue to be a significant contributor to noninterest income, increasing 9% from the first quarter of 2014 to the first quarter of 2015. 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. As the markets have strengthened with the national economy’s recovery from recession, the Company’s fee income has experienced similar growth. Additionally, in recent years, the Company has been successful in expanding its customer base which has helped to drive the increases in fee income.

 

 
38

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

In recent years, 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 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 which has helped drive the recent increases in fee income. Investment advisory fees increased 9% from the first quarter of 2014 to the first quarter of 2015.

 

As management focuses on growing fee income, expanding market share in trust and investment advisory services will continue to be a primary strategic focus. 

 

Deposit service fees expanded 7% comparing the first quarter of 2015 to the same period in 2014. The Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

 

Gains on sales of residential real estate loans increased 36% comparing the first quarter of 2015 to the first quarter of 2014. With the sustained historically 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 become a much smaller contributor to overall noninterest income.

 

The Company’s gains on the sale of government guaranteed portions of loans for the first quarter of 2015 totaled $71 thousand, compared to $194 thousand for the first quarter of 2014. As one of its core strategies, the Company continues to leverage its small business lending expertise by taking advantage of programs offered by the Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”). The Company’s portfolio of government guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government guaranteed 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 small business loans that fit the criteria for the government guarantee. Further, some of the transactions can be large and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can be large. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing. The Company is adding additional talent and executing on strategies in an effort to make this a more consistent and larger source of revenue.

 

Securities gains, net of losses, for the first quarter of 2015 totaled $421 thousand. The Company has taken advantage of market opportunity by selling approximately $55.0 million of government agency investments that were low-yielding. Proceeds were then used to purchase higher-yielding, tax-exempt municipal bonds and to fund loan and lease growth. This strategy is being used to shift the balance sheet mix in an effort to improve profitability. The Company intends to redeploy funds from the investment portfolio into higher yielding loans and leases, with a goal of growing loans and leases to more than 70% of total assets.

 

Earnings on Bank-Owned Life Insurance (“BOLI”) increased 5% from the first quarter of 2014 to the first quarter of 2015. There were no purchases of BOLI that contributed to this increase. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. 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.

 

 
39

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

As a result of the sustained historically low interest rate environment, the Company was able to execute several interest rate swaps on select commercial loans, resulting in fee income of $726 thousand for the first quarter of 2015. 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.

 

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 3% comparing the first quarter of 2015 to the first quarter of 2014. As an opportunity to maximize fees, the Company offers a deposit product with a modest increased interest rate that incentivizes debit card activity.

 

Correspondent banking fees increased 38% comparing the first quarter of 2015 to the first quarter of 2014. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund additional loan growth as well as a steady source of fee income. In 2014, the Company expanded its territory to Wisconsin in order to continue to build this business unit. The Company now serves approximately 168 Banks in Iowa, Illinois and Wisconsin.

 

Participation service fees on commercial loan participations represent fees paid to the Company by the participant(s) to cover servicing expenses incurred by the Company. The fee is generally 25 basis points of the participated loan amount. Additionally, the Company receives a mandated 1% servicing fee on the sold portion of government guaranteed loans. Participation service fees grew 8% comparing the first quarter of 2015 to the first quarter of 2014.

 

During the first quarter of 2015, the Company had several small gains and losses from the sale of other real estate owned (“OREO”) properties, for a net loss totaling $29 thousand. Management continues to proactively manage its OREO portfolio in an effort to sell the properties timely at minimal loss, as evidenced by the minimal losses recognized thus far in 2015, as well as the prior year.

 

 
40

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

NONINTEREST EXPENSE

 

The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2015 and 2014.

 

    Three Months Ended              
   

March 31, 2015

   

March 31, 2014

   

$ Change

   

% Change

 
                                 

Salaries and employee benefits

  $ 11,034,452     $ 10,017,918     $ 1,016,534       10.1

%

Occupancy and equipment expense

    1,794,171       1,894,288       (100,117 )     (5.3 )

Professional and data processing fees

    1,470,517       1,584,406       (113,889 )     (7.2 )

FDIC and other insurance

    719,057       714,750       4,307       0.6  

Loan/lease expense

    466,613       345,636       120,977       35.0  

Advertising and marketing

    418,237       337,587       80,650       23.9  

Postage and telephone

    248,956       290,675       (41,719 )     (14.4 )

Stationery and supplies

    142,555       151,751       (9,196 )     (6.1 )

Bank service charges

    337,458       298,032       39,426       13.2  

Other

    600,308       505,377       94,931       18.8  

Total noninterest expense

  $ 17,232,324     $ 16,140,420     $ 1,091,904       6.8

%

 

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

 

Salaries and employee benefits, which was the largest component of noninterest expense, increased from the first quarter of 2014 to the first quarter of 2015 by 10%. This increase was largely the result of:

 

 

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

 

Higher accrued incentive compensation. Accrued incentives were reduced in the fourth quarter of 2014 due to financial performance in that quarter.

 

Targeted talent additions. Throughout 2014, the Company added twelve business development/sales officers (four in the Wealth Management Division, four in the Commercial Banking area, three in the Correspondent Banking Division, and one at m2) in an effort to continue to grow market share. Two additional business development/sales officers (one in the Commercial Banking area and one at m2) were added in the first quarter of 2015.

 

Occupancy and equipment expense decreased 5%, comparing the first quarter of 2015 to the same period of the prior year. A portion of this decrease is due to the relocation of the RB&T branch. In 2014, RB&T’s downtown Rockford branch was relocated to a more cost-effective space with improved visibility.

 

Professional and data processing fees decreased 7% from the prior year, mostly due to reduced legal expenses. 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 has stayed relatively flat. The slight increase in expense was due to an increased asset base, as this is how the FDIC and other regulatory agencies calculate their fees.

 

 
41

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Loan/lease expense increased 35% comparing the first quarter of 2015 to the same quarter of 2014. The Company incurred elevated levels of expense at the banks for certain existing nonperforming loans as workouts progressed. Generally, loan/lease expense has a direct relationship with the level of nonperforming loans/leases; however, it may deviate depending upon the individual nonperforming loans/leases. Management expects these historically elevated levels of expense to decline in line with the declining trend in nonperforming loans/leases. Additionally, a portion of these expenses are offset by the increase in income earned on other real estate owned, as the income and expense related to repossessed properties must be recognized on a gross basis.

 

Advertising and marketing expense increased 24% compared to the prior year, in an effort to gain market share across all four markets the Company serves.

 

Bank service charges, which include costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 13% from the first quarter of 2014 to the first quarter of 2015. The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio.

 

INCOME TAXES

 

The provision for income taxes totaled $911 thousand, or an effective tax rate of 18%, for the first quarter of 2015 compared to $472 thousand, or an effective tax rate of 11%, for the same quarter of 2014. The Company recognized a one-time tax benefit in the first quarter of 2014 of $359 thousand as a result of the finalization of tax issues related to the Community National acquisition following the filing of the acquired entity’s final tax returns. Excluding this one-time tax benefit, the Company’s effective tax rate would have been 19% for the first quarter of 2014.

 

 
42

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

FINANCIAL CONDITION

 

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

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

(dollars in thousands)

 
       
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Cash, federal funds sold, and interest-bearing deposits

  $ 76,292       3 %   $ 120,350       5 %   $ 111,403       5 %

Securities

    637,404       26 %     651,539       26 %     707,107       29 %

Net loans/leases

    1,630,568       65 %     1,606,929       64 %     1,469,926       61 %

Other assets

    147,395       6 %     146,140       5 %     137,883       5 %

Total assets

  $ 2,491,659       100 %   $ 2,524,958       100 %   $ 2,426,319       100 %
                                                 

Total deposits

  $ 1,734,269       70 %   $ 1,679,668       67 %   $ 1,671,893       69 %

Total borrowings

    569,404       23 %     662,558       26 %     583,843       24 %

Other liabilities

    36,990       1 %     38,653       1 %     29,226       1 %

Total stockholders' equity

    150,996       6 %     144,079       6 %     141,357       6 %

Total liabilities and stockholders' equity

  $ 2,491,659       100 %   $ 2,524,958       100 %   $ 2,426,319       100 %

 

During the first quarter of 2015, the Company’s total assets decreased $33.3 million, or 1%, to a total of $2.49 billion. Despite the decrease in assets, loans/leases grew $23.6 million, or 2%, while securities decreased $14.1 million, or 2%. Loan growth was funded through the sale of securities, as well as deposit growth. Deposits grew $54.6 million, or 3%, while borrowings decreased $93.2 million, or 14%. Most of the decrease in borrowings was in federal funds purchased.

 

 
43

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

INVESTMENT SECURITIES. The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on asset-liability position and maximizing return. In recent years, management has elevated its focus on maximizing return while minimizing credit and interest rate risk. The Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and residential mortgage-back securities, while increasing municipal securities. Of the latter, the large majority are privately placed 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. Additionally, management will continue to diversify the portfolio with further growth strictly dictated by the pace of growth in deposits and loans. Management expects to fund future loan growth partially with cashflow from the securities portfolio (calls and maturities of government sponsored agencies, paydowns on residential mortgage-backed securities, and/or targeted sales of securities that meet certain criteria as defined by management).

 

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

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 
       

U.S. govt. sponsored agency securities

  $ 299,180       47 %   $ 307,869       47 %   $ 350,338       50 %

Municipal securities

    243,810       38 %     229,230       35 %     195,655       28 %

Residential mortgage-backed and related securities

    91,363       14 %     111,423       17 %     158,119       22 %

Other securities

    3,051       1 %     3,017       1 %     2,995       0 %
    $ 637,404       100 %   $ 651,539       100 %   $ 707,107       100 %
                                                 

As a % of Total Assets

    25.58 %             25.80 %             29.14 %        

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

    0.31 %             (0.19 %)             (2.45 %)        

Duration (in years)

    4.3               4.4               4.6          

 

As a result of fluctuations in longer-term interest rates, the Company’s fair value of its securities portfolio moved from a net unrealized loss position (approximately 2.5% of amortized cost at March 31, 2014) to a net unrealized gain position (approximately 0.3% of amortized cost at March 31, 2015). Management performs an evaluation of the portfolio quarterly to understand the current market value as well as projections of market value in a variety of rising and falling interest rate scenarios. In addition, management has evaluated those securities with an unrealized loss position to determine whether the loss is derived from credit deterioration or the movement in interest rates. The evaluation determined that there were no securities in the portfolio with other-than-temporary impairment. See the “Critical Accounting Policies” section for further discussion on this evaluation.

 

 
44

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

The duration of the securities portfolio has decreased slightly over the past twelve months for two reasons:

 

 

A portion of the government-sponsored agency securities contain call options at the discretion of the issuer whereby the issuer can call the security at par at certain times which vary by individual security. With a steady decline in longer-term market interest rates in 2014 and thus far in 2015, the duration of these callable agency securities shortened as the likelihood of a call increased.

 

The Company’s sales strategy targeted the liquidation of longer duration government-sponsored agency securities and government-sponsored mortgage-backed securities.

 

The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities. Additionally, the Company has not invested in the types of securities subject to the Volcker Rule (a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “Dodd-Frank Act”).

 

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

 

LOANS/LEASES. Total loans/leases grew 1.5% during the first quarter of 2015. Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more commercial and industrial loans and direct financing leases, and fewer commercial real estate and construction loans. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 
                                                 

Commercial and industrial loans

  $ 534,885       32 %   $ 523,927       32 %   $ 442,350       30 %

Commercial real estate loans

    709,682       43 %     702,140       43 %     679,228       46 %

Direct financing leases

    167,244       10 %     166,032       10 %     139,994       9 %

Residential real estate loans

    163,740       10 %     158,633       10 %     148,950       10 %

Installment and other consumer loans

    71,902       5 %     72,607       5 %     76,810       5 %

Total loans/leases

  $ 1,647,453       100 %   $ 1,623,339       100 %   $ 1,487,332       100 %

Plus deferred loan/lease origination costs, net of fees

    6,998               6,664               5,247          

Less allowance for estimated losses on loans/leases

    (23,883 )             (23,074 )             (22,653 )        

Net loans/leases

  $ 1,630,568             $ 1,606,929             $ 1,469,926          

 

Because commercial real estate loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s commercial real estate loan portfolio. For example, management tracks the level of owner-occupied commercial real estate loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of both March 31, 2015 and December 31, 2014, approximately 37% of the commercial real estate loan portfolio was owner-occupied.

 

 
45

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

Following is a listing of significant industries within the Company’s commercial real estate loan portfolio:

 

   

As of March 31,

   

As of December 31,

   

As of March 31,

 
   

2015

   

2014

   

2014

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 
       

Lessors of Nonresidential Buildings

  $ 247,114       35 %   $ 256,436       37 %   $ 231,341       34 %

Lessors of Residential Buildings

    73,611       10 %     74,668       11 %     60,982       9 %

Commercial and Institutional Building Construction

    18,956       3 %     12,530       2 %     2,875       0 %

Nursing Care Facilities

    18,053       3 %     17,078       2 %     21,938       3 %

Lessors of Other Real Estate Property

    17,532       2 %     17,553       2 %     16,861       3 %

Land Subdivision

    15,814       2 %     19,504       3 %     30,802       5 %

Hotels

    15,342       2 %     16,252       2 %     20,644       3 %

New Car Dealers

    15,693       2 %     16,090       2 %     16,183       2 %

Continuing Care Retirement Communities

    14,316       2 %     14,161       2 %     13,300       2 %

Other *

    273,251       39 %     257,868       37 %     264,302       39 %

Total Commercial Real Estate Loans

  $ 709,682       100 %   $ 702,140       100 %   $ 679,228       100 %

 

* “Other” consists of all other industries. None of these had concentrations greater than $15.0 million, or approximately 2% of total commercial real estate loans.

 

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

 

 

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

 

A limited amount of 15-year fixed rate residential real estate loans that 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.

 

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

 

 
46

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES 

 

Changes in the allowance for the three months ended March 31, 2015 and 2014 are presented as follows:

 

   

Three Months Ended

 
   

March 31, 2015

   

March 31, 2014

 
   

(dollars in thousands)

 
       

Balance, beginning

  $ 23,074     $ 21,448  

Provisions charged to expense

    1,710       1,094  

Loans/leases charged off

    (1,107 )     (79 )

Recoveries on loans/leases previously charged off

    206       190  

Balance, ending

  $ 23,883     $ 22,653  

 

The allowance was $23.9 million at March 31, 2015 compared to $23.1 million at December 31, 2014 and $22.7 million at March 31, 2014. Net charge-offs of loans/leases for the first three months of 2015 were six basis points of average loans/leases, which compares to the modest net recovery for the first three months of 2014. 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” and carrying aggregate exposure in excess of $100 thousand. The adequacy of the allowance is monitored by the loan review staff and reported to management and the board of directors.

 

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

 

   

As of

 

Internally Assigned Risk Rating *

 

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

(dollars in thousands)

 
       

Special Mention (Rating 6)

  $ 39,571     $ 32,958     $ 24,586  

Substandard (Rating 7)

    30,522       35,715       48,317  

Doubtful (Rating 8)

    -       -       -  
    $ 70,093     $ 68,673     $ 72,903  
                         

Criticized Loans **

  $ 70,093     $ 68,673     $ 72,903  

Classified Loans ***

  $ 30,522     $ 35,715     $ 48,317  

 

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

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

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

 

 
47

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

The Company experienced a modest increase in criticized loans during the first three months of 2015, as compared to December 31, 2014, while classified loans decreased during this same period. Nonperforming loans/leases also decreased $3.6 million during the same period. The Company continues its strong focus on improving credit quality, including close management of criticized and classified loans as well as performing delinquent loans/leases, in an effort to limit nonperforming loans/leases.

 

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

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
                         

Allowance / Gross Loans/Leases

    1.44 %     1.42 %     1.52 %

Allowance / Nonperforming Loans/Leases *

    144.35 %     114.78 %     121.58 %

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

 

In accordance with generally accepted accounting principles for acquisition accounting, the acquired CNB loans were recorded at market value; therefore, there was no allowance associated with CNB’s loans at acquisition.

 

Although management believes that the allowance at March 31, 2015 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

 

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

 

 
48

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

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

 

   

As of March 31,

   

As of December 31,

   

As of March 31,

   

As of December 31,

 
   

2015

   

2014

   

2014

   

2013

 
   

(dollars in thousands)

 
       

Nonaccrual loans/leases (1) (2)

  $ 14,529     $ 18,588     $ 17,653     $ 17,878  

Accruing loans/leases past due 90 days or more

    668       93       5       84  

Troubled debt restructurings - accruing

    1,348       1,421       974       2,523  

Total nonperforming loans/leases

    16,545       20,102       18,632       20,485  

Other real estate owned

    13,245       12,768       9,675       9,729  

Other repossessed assets

    326       155       252       346  

Total nonperforming assets

  $ 30,116     $ 33,025     $ 28,559     $ 30,560  
                                 

Nonperforming loans/leases to total loans/leases

    1.00 %     1.23 %     1.25 %     1.40 %

Nonperforming assets to total loans/leases plus reposessed property

    1.81 %     2.01 %     1.90 %     2.08 %

Nonperforming assets to total assets

    1.21 %     1.31 %     1.18 %     1.28 %

Texas ratio (3)

    17.52 %     20.26 %     17.81 %     18.43 %

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

 

(2)

Includes troubled debt restructurings of $4.1 million at March 31, 2015, $5.0 million at December 31, 2014, $10.7 million at March 31, 2014, and $10.9 million at December 31, 2013.

 

(3)

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

 

The large majority of the nonperforming assets consist of nonaccrual loans/leases, accruing TDRs, and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate. Additionally, a portion of several of the nonaccrual loans are guaranteed by the government. At March 31, 2015, government guaranteed amounts of nonaccrual loans totaled approximately $893 thousand, or 6% of the $14.5 million of total nonaccrual loans/leases. OREO is carried at the lower of carrying amount or fair value less costs to sell.

 

Nonperforming assets at March 31, 2015 were $30.1 million, which were down $2.9 million from December 31, 2014, and up $1.6 million from March 31, 2014. In addition, the ratio of nonperforming assets to total assets was 1.21% at March 31, 2015, which was down from 1.31% at December 31, 2014, and up from 1.18% at March 31, 2014. During the first three months of 2015, the Company saw improvement in nonperforming assets due to the payoff or improved performance of nonaccrual loans.

 

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

 

 
49

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

DEPOSITS. Deposits grew $54.6 million during the first quarter of 2015, mostly in noninterest bearing demand deposits. The table below presents the composition of the Company’s deposit portfolio.

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

(dollars in thousands)

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 

Noninterest bearing demand deposits

  $ 582,510       34 %   $ 511,992       31 %   $ 579,110       35 %

Interest bearing demand deposits

    804,351       46 %     792,052       47 %     715,705       43 %

Time deposits

    279,660       16 %     306,364       18 %     297,696       18 %

Brokered time deposits

    67,748       4 %     69,260       4 %     79,382       4 %
    $ 1,734,269       100 %   $ 1,679,668       100 %   $ 1,671,893       100 %

 

The Company has been successful in growing its noninterest bearing deposit portfolio over the past several years. Quarter-end balances can fluctuate a great deal 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 some of their significant customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the Federal Reserve Bank or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

(dollars in thousands)

 

Overnight repurchase agreements with customers

  $ 150,796     $ 137,252     $ 136,649  

Federal funds purchased

    32,540       131,100       28,920  
    $ 183,336     $ 268,352     $ 165,569  

 

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. FHLB advances decreased by $7.0 million, or 3%, during the first quarter of 2015.

 

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

 

 
50

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

(dollars in thousands)

 

Structured repos

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

Term note

    16,450       17,625       9,600  

Series A subordinated notes

    2,660       2,657       2,651  
    $ 149,110     $ 150,282     $ 142,251  

 

In June of 2014, the Company restructured its existing term debt and borrowed an additional $10.0 million of term debt to assist with the final redemption of its Series F Non-Cumulative Perpetual Preferred Stock. The term debt is secured by common stock of the Company’s subsidiary banks and has a 4-year term with principal and interest due quarterly. Interest is calculated at the effective LIBOR rate plus 3.00% per annum (3.27% at March 31, 2015). Additionally, the Company continued to maintain its $10.0 million revolving line of credit note. At March 31, 2015, the Company had not borrowed on this revolving credit note and had the full $10.0 million line available.

 

It is management’s intention to continue to reduce its reliance on wholesale funding, including FHLB advances, structured repos, and brokered time deposits. Replacement of this funding with core deposits helps to reduce interest expense as the wholesale funding tends to be higher funding cost. However, the Company may choose to utilize advances 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 cost for the Company’s combined wholesale funding portfolio.

 

   

March 31, 2015

   

December 31, 2014

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Interest Rate

           

Interest Rate

 

Maturity:

 

Amount Due

   

at Quarter-End

   

Amount Due

   

at Year-End

 

Year ending December 31:

 

(dollar amounts in thousands)

 

2015

  $ 80,806       0.99     $ 103,818       0.92  

2016

    56,642       3.18       50,642       3.51  

2017

    55,965       2.88       53,965       2.96  

2018

    61,542       3.35       60,042       3.41  

2019

    88,152       3.48       83,152       3.59  

Thereafter

    51,141       2.64       51,141       2.64  

Total Wholesale Funding

  $ 394,248       2.71     $ 402,760       2.66  

 

During the first three months of 2015, wholesale funding maturing in 2015 decreased by $23.0 million. This was the result of an $8.5 million reduction in wholesale funding and $14.5 million of current year maturities replaced with FHLB advances and brokered time deposits having maturities in 2016 through 2019.

 

 
51

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

 

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

 

   

As of

 
   

March 31, 2015

   

December 31, 2014

   

March 31, 2014

 
   

Amount

   

%

   

Amount

   

%

   

Amount

   

%

 
   

(dollars in thousands)

 

Common stock

  $ 8,113             $ 8,074             $ 8,039          

Additional paid in capital - common

    62,149               61,669               60,696          

Retained earnings

    82,055               77,877               67,817          

Accumulated other comprehensive income (loss)

    285               (1,935 )             (8,413 )        

Less: Treasury stock

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

Total common stockholders' equity

    150,996       100 %     144,079       100 %     126,533       90 %
                                                 

Preferred stock

    -               -               15          

Additional paid in capital - preferred

    -               -               14,809          

Total preferred stockholders' equity

    -       0 %     -       0 %     14,824       10 %
                                                 

Total stockholders' equity

  $ 150,996       100 %   $ 144,079       100 %   $ 141,357       100 %
                                                 

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

    5.88 %             5.52 %             5.02 %        

TCE/TA excluding accumulated other comprehensive income (loss)

    5.87 %             5.60 %             5.36 %        

  

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

 

The following table presents the rollforward of stockholders’ equity for the three months ended March 31, 2015 and 2014, respectively.

 

   

For the quarter ended March 31,

 
   

2015

   

2014

 
   

(dollars in thousands)

 

Beginning balance

  $ 144,079     $ 147,577  

Net income

    4,178       3,889  

Other comprehensive income, net of tax

    2,221       5,231  

Preferred and common cash dividends declared

    -       (708 )

Redemption of 15,000 shares of Series F Preferred Stock

    -       (15,000 )

Other *

    518       368  

Ending balance

  $ 150,996     $ 141,357  

 

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

 

 
52

 

 

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 $127.9 million during the first quarter of 2015, $118.8 million during 2014 and $102.8 million during 2013. 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, structured repos, brokered time deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio (both residential mortgage-backed securities and municipal securities). At March 31, 2015, the subsidiary banks had 33 lines of credit totaling $349.5 million, of which $15.0 million was secured and $334.5 million was unsecured. At March 31, 2015, the full $349.5 million was available as no lines were utilized for short-term borrowing needs at the three banks. At December 31, 2014, the subsidiary banks had 35 lines of credit totaling $351.6 million, of which $17.1 million was secured and $334.5 million was unsecured. At December 31, 2014, $237.6 million was available as $114.0 million was utilized for short-term borrowing needs at QCBT and RB&T. 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 its $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 24, 2015. At March 31 2015, the Company had not borrowed on this revolving credit note and had the full amount available.

 

Investing activities provided cash of $40.5 million during the first three months of 2015 and used $19.2 million for the same period of 2014. Proceeds from calls, maturities, paydowns, and sales of securities were $142.8 million for the first three months of 2015 compared to $24.1 million for the same period of 2014. Purchases of securities used cash of $124.6 million for the first three months of 2015 compared to $26.1 million for the same period of 2014. The net increase in loans/leases used cash of $25.7 million for the first three months of 2015 compared to $33.1 million for the same period of 2014.

 

Financing activities used cash of $38.7 million for the first three months of 2015 and provided $29.6 million for same period of 2014. Net increases in deposits totaled $54.6 million for the first three months of 2015 compared to $24.9 million for the same period of 2014. During the first three months of 2015, the Company’s short-term borrowings decreased $85.0 million.

 

Total cash provided by operating activities was $5.1 million for the first three months of 2015 compared to $3.2 million for the same period of 2014.

 

 
53

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

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

 

The following table presents the details of the trust preferred securities issued and outstanding as of March 31, 2015.

 

Name

Date Issued

 

Amount Issued

 

Interest Rate

 

Interest Rate as of

3/31/15

   

Interest Rate as of 12/31/2014

 
                             

QCR Holdings Statutory Trust II

February 2004

  $ 12,372,000  

2.85% over 3-month LIBOR

    3.11 %     3.08 %

QCR Holdings Statutory Trust III

February 2004

    8,248,000  

2.85% over 3-month LIBOR

    3.11 %     3.08 %

QCR Holdings Statutory Trust IV

May 2005

    5,155,000  

1.80% over 3-month LIBOR

    2.05 %     2.03 %

QCR Holdings Statutory Trust V

February 2006

    10,310,000  

1.55% over 3-month LIBOR

    1.80 %     1.78 %

Community National Statutory Trust II

September 2004

    3,093,000  

2.17% over 3-month LIBOR

    2.44 %     2.42 %

Community National Statutory Trust III

March 2007

    3,609,000  

1.75% over 3-month LIBOR

    2.02 %     1.99 %
      $ 42,787,000  

Weighted Average Rate

    2.53 %     2.50 %

 

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 March 31, 2015, the remaining discount was $2.3 million.

 

On June 30, 2014, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”). This registration statement, declared effective by the SEC on July 14, 2014, will allow the Company to issue various types of securities, including common stock, preferred stock, debt securities or warrants, from time to time, up to an aggregate amount of $75.0 million. The specific terms and prices of the securities 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.

 

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

 

 
54

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act. The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $1 billion). The Basel III Rules not only increased most of the required minimum regulatory capital ratios, but they introduced a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Failure to maintain capital levels above Basel III minimums may lead to restrictions on dividends, share buybacks, discretionary payments on Tier 1 instruments and discretionary bonus payments. The Basel III Rules also expanded the definition of capital by establishing criteria that instruments must meet to be considered additional Tier 1 capital (Tier 1 capital in addition to common equity) and Tier 2 capital. A number of instruments that previously qualified as Tier 1 capital do not qualify, or their qualifications changed. The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income (“AOCI”), which excluded the affect from regulatory capital. The Company made this election in the first quarter of 2015. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the common equity Tier 1 capital ratio. In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. The Company became subject to the new Basel III Rules on January 1, 2015. Management believes that its current capital structure and the execution of its existing capital plan will be sufficient to continue to meet the revised regulatory capital ratios as required by the new Basel III Rules.

 

The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2015 and December 31, 2014 are presented in the following tables (dollars in thousands), along with the regulatory minimums. As of March 31, 2015 and December 31, 2014, the Company and subsidiary banks met the requirements to be “well capitalized”, and as of March 31, 2015, the Company and subsidiary banks met the new Basel III minimum ratio requirements.

 

 
55

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

                                   

To Be Well

                 
                                   

Capitalized Under

   

New

 
                   

For Capital

   

Prompt Corrective

   

Basel III

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

   

Minimums*

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of March 31, 2015:

                                                               

Company:

                                                               

Total risk-based capital

   204,139       10.30    158,485     > 8.0 %    198,106     > 10.0 %    158,485     > 8.0 %

Tier 1 risk-based capital

     178,376        9.00     118,863     > 6.0        158,485     > 8.0        118,863     > 6.0  

Tier 1 leverage

     178,376       7.14     99,968    

>

4.0       124,960     > 5.0       99,968     > 4.0  

Common equity Tier 1

     143,406        7.24     89,148     > 4.5       128,769     > 6.5       89,148     > 4.5  

Quad City Bank & Trust:

                                                               

Total risk-based capital

  $ 107,200       11.01 %   $ 77,874     > 8.0 %   $ 97,343     > 10.0 %   $ 77,874     > 8.0 %

Tier 1 risk-based capital

    95,760       9.84 %     58,406     > 6.0       77,874     > 8.0       58,406     > 6.0  

Tier 1 leverage

    95,760       7.24 %     52,909     > 4.0       66,136     > 5.0       52,909     > 4.0  

Common equity Tier 1

    95,760       9.84 %     43,804     > 4.5       63,273     > 6.5       43,804     > 4.5  

Cedar Rapids Bank & Trust:

                                                               

Total risk-based capital

  $ 79,553       11.21 %   $ 56,762     > 8.0 %   $ 70,953     > 10.0 %   $ 56,762     > 8.0 %

Tier 1 risk-based capital

    71,088       10.02 %     42,572     > 6.0       56,762     > 8.0       42,572     > 6.0  

Tier 1 leverage

    71,088       8.36 %     34,007     > 4.0       42,509     > 5.0       34,007     > 4.0  

Common equity Tier 1

    71,088       10.02 %     31,929     > 4.5       46,119     > 6.5       31,929     > 4.5  

Rockford Bank & Trust:

                                                               

Total risk-based capital

  $ 36,624       11.94 %   $ 24,549     > 8.0 %   $ 30,686     > 10.0 %   $ 24,549     > 8.0 %

Tier 1 risk-based capital

    32,790       10.69 %     18,412     > 6.0       24,549     > 8.0       18,412     > 6.0  

Tier 1 leverage

    32,790       9.38 %     13,989     > 4.0       17,486     > 5.0       13,989     > 4.0  

Common equity Tier 1

    32,790       10.69 %     13,809     > 4.5       19,946     > 6.5       13,809     > 4.5  

 

*The minimums under Basel III phase-in higher by .625% (the capital conservation buffer) annually until 2019. The fully phased-in mimimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), 6.5% (Tier 1 leverage) and 7.0% (Common equity Tier 1).

  

                                   

To Be Well

 
                                   

Capitalized Under

 
                   

For Capital

   

Prompt Corrective

 
   

Actual

   

Adequacy Purposes

   

Action Provisions

 
   

Amount

   

Ratio

   

Amount

    Ratio    

Amount

    Ratio  

As of December 31, 2014:

                                               

Company:

                                               

Total risk-based capital

  $ 204,376       10.91 %   $ 149,876     > 8.0 %  

N/A

   

N/A

 

Tier 1 risk-based capital

    178,364       9.52 %     74,938     > 4.0 %  

N/A

   

N/A

 

Tier 1 leverage

    178,364       7.62 %     93,658     > 4.0 %  

N/A

   

N/A

 

Quad City Bank & Trust:

                                               

Total risk-based capital

  $ 104,869       11.26 %   $ 74,495     > 8.0 %   $ 93,119     > 10.00 %

Tier 1 risk-based capital

    93,785       10.07 %     37,248     > 4.0       55,872     > 6.00 %

Tier 1 leverage

    93,785       7.10 %     52,817     > 4.0       66,021     > 5.00 %

Cedar Rapids Bank & Trust:

                                               

Total risk-based capital

  $ 76,662       11.54 %   $ 53,126     > 8.0 %   $ 66,407     > 10.00 %

Tier 1 risk-based capital

    68,772       10.36 %     26,563     > 4.0       39,844     > 6.00 %

Tier 1 leverage

    68,772       8.21 %     33,525     > 4.0       41,906     > 5.00 %

Rockford Bank & Trust:

                                               

Total risk-based capital

  $ 35,906       12.56 %   $ 22,875     > 8.0 %   $ 28,594     > 10.00 %

Tier 1 risk-based capital

    32,325       11.30 %     11,438     > 4.0       17,156     > 6.00 %

Tier 1 leverage

    32,325       9.16 %     14,112     > 4.0       17,640     > 5.00 %

 

 
56

 

 

Part I

Item 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued

  

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

 
57

 

 

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.

 

 
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Part I

Item 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve. Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift upward 100, 200, 300, and 400 basis points and a parallel and instantaneous shift downward 100 basis points. The Company will run additional interest rate scenarios on an as-needed basis. The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit has been increased to 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

 

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

 

           

NET INTEREST INCOME EXPOSURE in YEAR 1

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

   

As of December 31, 2014

   

As of March 31, 2014

   

As of December 31, 2013

 
                                 

100 basis point downward shift

    -10.0 %     -1.7 %     -1.0 %     -1.0 %

200 basis point upward shift

    -10.0 %     -5.0 %     -4.6 %     -4.8 %

300 basis point upward shock

    -25.0 %     -11.9 %     -11.4 %     -11.0 %

 

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 2014 (the most recent quarter available) 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).

 

 
59

 

 

Part I

Item 3

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

In the second quarter of 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 initial cost (prepaid premium) of the interest rate caps totaled $2.1 million. This amount was recorded in the Other Assets section of the balance sheet. This asset will be amortized to interest expense according to a predetermined schedule and will also be adjusted to fair value on a recurring basis. The change in fair value will flow through Accumulated Other Comprehensive Income and the derivative transaction will be tested for effectiveness according to cash flow hedge accounting standards. The interest rate caps purchased will 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.

 

 
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Part I

Item 4

 

CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2015. 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.

 

 
61

 

 

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION

 

Item 1

Legal Proceedings                                        

 

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

 

Item 1A

Risk Factors

 

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company’s 2014 Annual Report on Form 10-K. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds                         

 

None 

 

Item 3

Defaults Upon Senior Securities                         

 

None

 

Item 4

Mine Safety Disclosures

 

Not applicable

 

Item 5

Other Information                                        

 

None               

 

 
62

 

 

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

PART II - OTHER INFORMATION - continued

 

Item 6

Exhibits

 

31.1

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

 

31.2

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

 

32.1

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

 

32.2

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

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Income for the three months ended March 31, 2015 and March 31, 2014; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and March 31, 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and March 31, 2014; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014; and (vi) Notes to the Consolidated Financial Statements.

 

 
63

 

 

SIGNATURES

 

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

 

 

QCR HOLDINGS, INC.

(Registrant)

 

 

 

Date

May 4, 2015

 

/s/ Douglas M. Hultquist

 

 

 

 

Douglas M. Hultquist, President

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Todd A. Gipple

 

Date

May 4, 2015

 

Todd A. Gipple, Executive Vice President

 

 

 

 

Chief Operating Officer

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

May 4, 2015

 

/s/ Elizabeth A. Grabin

 

 

 

 

Elizabeth A. Grabin, Vice President

 

 

 

 

Controller 

 

 

 

 

Principal Accounting Officer

 

 

 

 64