qcrh_Current_Folio_10Q

Table of Contents

 

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 June 30, 2018

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

For the transition period from ______to________

Commission file number 0‑22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

42-1397595

(State or other jurisdiction of incorporation or organization)

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

 

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736‑3580

(Registrant's telephone number, including area code)

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

Yes [ X ]      No [    ]

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

Yes [ X ]      No [    ]

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

Large accelerated filer [   ]

Accelerated filer [ X ]

Non-accelerated filer  [   ]

Smaller reporting company [   ]

Emerging growth company [   ]

 

 

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

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

Yes [    ]      No [ X ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of August 1, 2018, the Registrant had outstanding 15,664,417 shares of common stock, $1.00 par value per share.

 

 


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

Page
Number(s)

Part I    FINANCIAL INFORMATION

 

 

 

Item 1      Consolidated Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets
As of June 30, 2018 and December 31, 2017
 

4

 

 

Consolidated Statements of Income
For the Three Months Ended June 30, 2018 and 2017
 

5

 

 

Consolidated Statements of Income
For the Six Months Ended June 30, 2018 and 2017
 

6

 

 

Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2018 and 2017
 

7

 

 

Consolidated Statements of Changes in Stockholders' Equity
For the Three and Six Months Ended June 30, 2018 and 2017
 

8

 

 

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017
 

9

 

 

Notes to Consolidated Financial Statements 

11

 

 

Note 1. Summary of Significant Accounting Policies 

11

Note 2. Investment Securities 

13

Note 3. Loans/Leases Receivable 

17

Note 4. Derivatives 

26

Note 5. Earnings Per Share 

27

Note 6. Fair Value 

28

Note 7. Business Segment Information 

30

Note 8. Regulatory Capital Requirements 

32

Note 9. Revenue Recognition 

33

Note 10. Mergers and Acquisitions 

34

 

 

Item 2      Management's Discussion and Analysis of Financial Condition and Results of Operations 

35

 

 

Introduction 

35

General 

35

Executive Overview 

36

Long-Term Financial Goals 

37

Strategic Developments 

38

GAAP to Non-GAAP Reconciliations 

39

Net Interest Income (Tax Equivalent Basis) 

41

Critical Accounting Policies 

47

Results of Operations 

48

Interest Income 

48

 

2


 

Table of Contents

 

Interest Expense 

48

Provision for Loan/Lease Losses 

49

Noninterest Income 

49

Noninterest Expense 

52

Income Taxes 

54

Financial Condition 

54

Investment Securities 

55

Loans/Leases 

56

Allowance for Estimated Losses on Loans/Leases 

57

Nonperforming Assets 

59

Deposits 

59

Borrowings 

60

Stockholders' Equity 

61

Liquidity and Capital Resources 

62

Special Note Concerning Forward-Looking Statements 

63

 

 

Item 3      Quantitative and Qualitative Disclosures About Market Risk 

65

 

 

Item 4      Controls and Procedures 

67

 

 

Part II   OTHER INFORMATION 

68

 

 

Item 1      Legal Proceedings 

68

 

 

Item 1A      Risk Factors 

68

 

 

Item 2      Unregistered Sales of Equity Securities and Use of Proceeds 

68

 

 

Item 3      Defaults upon Senior Securities 

68

 

 

Item 4      Mine Safety Disclosures 

68

 

 

Item 5      Other Information 

68

 

 

Item 6      Exhibits 

69

 

 

Signatures 

70

 

Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1.

3


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of June 30, 2018 and December 31, 2017

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2018

 

2017

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

69,069,403

 

$

75,721,663

Federal funds sold

 

 

10,866,000

 

 

30,197,000

Interest-bearing deposits at financial institutions

 

 

40,801,388

 

 

55,765,012

 

 

 

  

 

 

  

Securities held to maturity, at amortized cost

 

 

400,052,344

 

 

379,474,205

Securities available for sale, at fair value

 

 

257,944,671

 

 

272,907,907

Total securities

 

 

657,997,015

 

 

652,382,112

 

 

 

  

 

 

  

Loans receivable held for sale

 

 

1,033,700

 

 

645,001

Loans/leases receivable held for investment

 

 

3,113,758,723

 

 

2,963,840,399

Gross loans/leases receivable

 

 

3,114,792,423

 

 

2,964,485,400

Less allowance for estimated losses on loans/leases

 

 

(37,545,076)

 

 

(34,355,728)

Net loans/leases receivable

 

 

3,077,247,347

 

 

2,930,129,672

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

59,876,754

 

 

59,059,494

Premises and equipment, net

 

 

64,472,319

 

 

62,838,255

Restricted investment securities

 

 

23,888,600

 

 

19,782,525

Other real estate owned, net

 

 

12,750,023

 

 

13,558,308

Goodwill

 

 

28,090,897

 

 

28,334,092

Core deposit intangible

 

 

8,469,851

 

 

9,078,953

Other assets

 

 

53,353,108

 

 

45,817,687

Total assets

 

$

4,106,882,705

 

$

3,982,664,773

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

746,821,779

 

$

789,547,696

Interest-bearing

 

 

2,551,454,248

 

 

2,477,107,360

Total deposits

 

 

3,298,276,027

 

 

3,266,655,056

 

 

 

  

 

 

  

Short-term borrowings

 

 

17,585,605

 

 

13,993,122

Federal Home Loan Bank advances

 

 

254,100,000

 

 

192,000,000

Other borrowings

 

 

71,125,000

 

 

66,000,000

Junior subordinated debentures

 

 

37,580,881

 

 

37,486,487

Other liabilities

 

 

58,627,027

 

 

53,242,979

Total liabilities

 

 

3,737,294,540

 

 

3,629,377,644

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

Preferred stock, $1 par value; shares authorized 250,000 June 2018 and December 2017- No shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 June 2018 - 13,973,940 shares issued and  outstanding December 2017 - 13,918,168 shares issued and outstanding

 

 

13,973,940

 

 

13,918,168

Additional paid-in capital

 

 

190,533,240

 

 

189,077,550

Retained earnings

 

 

171,955,296

 

 

151,962,661

Accumulated other comprehensive loss:

 

 

  

 

 

  

Securities available for sale

 

 

(6,058,893)

 

 

(866,223)

Derivatives

 

 

(815,418)

 

 

(805,027)

Total stockholders' equity

 

 

369,588,165

 

 

353,287,129

Total liabilities and stockholders' equity

 

$

4,106,882,705

 

$

3,982,664,773

 

See Notes to Consolidated Financial Statements (Unaudited)

4


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

35,407,851

 

$

28,114,729

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,593,660

 

 

1,260,575

 

Nontaxable

 

 

3,295,046

 

 

2,688,243

 

Interest-bearing deposits at financial institutions

 

 

228,314

 

 

219,714

 

Restricted investment securities

 

 

211,902

 

 

131,890

 

Federal funds sold

 

 

61,441

 

 

38,117

 

Total interest and dividend income

 

 

40,798,214

 

 

32,453,268

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

6,528,340

 

 

2,990,603

 

Short-term borrowings

 

 

62,503

 

 

19,157

 

Federal Home Loan Bank advances

 

 

882,118

 

 

354,213

 

Other borrowings

 

 

732,881

 

 

695,669

 

Junior subordinated debentures

 

 

507,876

 

 

346,929

 

Total interest expense

 

 

8,713,718

 

 

4,406,571

 

Net interest income

 

 

32,084,496

 

 

28,046,697

 

Provision for loan/lease losses

 

 

2,300,735

 

 

2,022,993

 

Net interest income after provision for loan/lease losses

 

 

29,783,761

 

 

26,023,704

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

2,057,987

 

 

1,692,001

 

Investment advisory and management fees

 

 

1,057,666

 

 

868,835

 

Deposit service fees

 

 

1,610,403

 

 

1,458,359

 

Gains on sales of residential real estate loans, net

 

 

101,772

 

 

112,628

 

Gains on sales of government guaranteed portions of loans, net

 

 

 —

 

 

87,053

 

Swap fee income

 

 

1,648,885

 

 

327,577

 

Securities gains, net

 

 

 —

 

 

38,464

 

Earnings on bank-owned life insurance

 

 

399,273

 

 

459,359

 

Debit card fees

 

 

844,286

 

 

743,521

 

Correspondent banking fees

 

 

212,530

 

 

200,057

 

Other

 

 

979,464

 

 

794,664

 

Total noninterest income

 

 

8,912,266

 

 

6,782,518

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

15,804,016

 

 

12,930,944

 

Occupancy and equipment expense

 

 

3,132,658

 

 

2,698,336

 

Professional and data processing fees

 

 

2,771,223

 

 

2,340,699

 

Acquisition costs

 

 

413,602

 

 

 —

 

Post-acquisition compensation, transition and integration costs

 

 

165,314

 

 

 —

 

FDIC insurance, other insurance and regulatory fees

 

 

840,458

 

 

645,277

 

Loan/lease expense

 

 

260,089

 

 

260,284

 

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

 

 

(70,190)

 

 

27,957

 

Advertising and marketing

 

 

753,084

 

 

567,588

 

Bank service charges

 

 

466,091

 

 

447,445

 

Correspondent banking expense

 

 

204,337

 

 

201,693

 

CDI amortization

 

 

304,551

 

 

230,867

 

Other

 

 

1,324,590

 

 

1,053,539

 

Total noninterest expense

 

 

26,369,823

 

 

21,404,629

 

Net income before income taxes

 

 

12,326,204

 

 

11,401,593

 

Federal and state income tax expense

 

 

1,880,819

 

 

2,635,576

 

Net income

 

$

10,445,385

 

$

8,766,017

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.75

 

$

0.67

 

Diluted earnings per common share

 

$

0.73

 

$

0.65

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

13,919,565

 

 

13,170,283

 

Weighted average common and common equivalent shares outstanding

 

 

14,232,423

 

 

13,516,592

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

0.05

 

See Notes to Consolidated Financial Statements (Unaudited)

5


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

69,621,583

 

$

55,326,146

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

3,149,544

 

 

2,402,810

 

Nontaxable

 

 

6,584,048

 

 

5,335,965

 

Interest-bearing deposits at financial institutions

 

 

425,317

 

 

418,366

 

Restricted investment securities

 

 

446,246

 

 

262,320

 

Federal funds sold

 

 

117,772

 

 

52,760

 

Total interest and dividend income

 

 

80,344,510

 

 

63,798,367

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

11,409,489

 

 

5,223,359

 

Short-term borrowings

 

 

95,416

 

 

43,117

 

Federal Home Loan Bank advances

 

 

1,946,231

 

 

757,682

 

Other borrowings

 

 

1,451,057

 

 

1,378,877

 

Junior subordinated debentures

 

 

954,903

 

 

679,752

 

Total interest expense

 

 

15,857,096

 

 

8,082,787

 

Net interest income

 

 

64,487,414

 

 

55,715,580

 

Provision for loan/lease losses

 

 

4,840,574

 

 

4,128,102

 

Net interest income after provision for loan/lease losses

 

 

59,646,840

 

 

51,587,478

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

4,295,068

 

 

3,432,208

 

Investment advisory and management fees

 

 

2,010,010

 

 

1,830,434

 

Deposit service fees

 

 

3,141,856

 

 

2,774,749

 

Gains on sales of residential real estate loans, net

 

 

202,587

 

 

208,951

 

Gains on sales of government guaranteed portions of loans, net

 

 

358,434

 

 

1,037,694

 

Swap fee income

 

 

2,607,579

 

 

441,097

 

Securities gains, net

 

 

 —

 

 

38,464

 

Earnings on bank-owned life insurance

 

 

817,260

 

 

929,046

 

Debit card fees

 

 

1,610,394

 

 

1,446,322

 

Correspondent banking fees

 

 

477,357

 

 

445,246

 

Other

 

 

1,933,170

 

 

1,482,061

 

Total noninterest income

 

 

17,453,715

 

 

14,066,272

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

31,781,991

 

 

26,238,275

 

Occupancy and equipment expense

 

 

6,198,469

 

 

5,200,555

 

Professional and data processing fees

 

 

5,478,939

 

 

4,424,091

 

Acquisition costs

 

 

506,141

 

 

 —

 

Post-acquisition compensation, transition and integration costs

 

 

165,314

 

 

 —

 

FDIC insurance, other insurance and regulatory fees

 

 

1,596,669

 

 

1,266,519

 

Loan/lease expense

 

 

550,836

 

 

553,822

 

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

 

 

61,552

 

 

42,187

 

Advertising and marketing

 

 

1,446,323

 

 

1,177,019

 

Bank service charges

 

 

906,662

 

 

871,346

 

Correspondent banking expense

 

 

409,091

 

 

400,044

 

CDI amortization

 

 

609,102

 

 

461,733

 

Other

 

 

2,522,231

 

 

2,042,155

 

Total noninterest expenses

 

 

52,233,320

 

 

42,677,746

 

Income before income taxes

 

 

24,867,235

 

 

22,976,004

 

Federal and state income tax expense

 

 

3,871,889

 

 

5,025,022

 

Net income

 

$

20,995,346

 

$

17,950,982

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

1.51

 

$

1.36

 

Diluted earnings per common share

 

$

1.48

 

$

1.33

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

13,904,113

 

 

13,151,833

 

Weighted average common and common equivalent shares outstanding

 

 

14,219,003

 

 

13,502,505

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.12

 

$

0.10

 

See Notes to Consolidated Financial Statements (Unaudited)

6


 

Table of Contents

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Six Months Ended June 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

    

 

    

2018

    

2017

 

Net income

 

$

10,445,385

 

$

8,766,017

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

(1,512,488)

 

 

1,170,310

 

Less reclassification adjustment for gains included in net income before tax

 

 

 —

 

 

38,464

 

 

 

 

(1,512,488)

 

 

1,131,846

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

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

 

 

(322,937)

 

 

(132,352)

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

177,688

 

 

(136,639)

 

 

 

 

(500,625)

 

 

4,287

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

(2,013,113)

 

 

1,136,133

 

Tax expense (benefit)

 

 

(678,492)

 

 

434,394

 

Other comprehensive income (loss), net of tax

 

 

(1,334,621)

 

 

701,739

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

9,110,764

 

$

9,467,756

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2018

    

2017

 

Net income

 

$

20,995,346

 

$

17,950,982

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

(6,878,601)

 

 

1,768,500

 

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

 

 

 —

 

 

38,464

 

Less reclassification adjustment for adoption of ASU 2016-01

 

 

855,039

 

 

 —

 

 

 

 

(6,023,562)

 

 

1,730,036

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

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

 

 

(172,459)

 

 

(177,554)

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

97,173

 

 

(259,452)

 

 

 

 

(269,632)

 

 

81,898

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

(6,293,194)

 

 

1,811,934

 

Tax expense (benefit)

 

 

(1,757,033)

 

 

699,456

 

Other comprehensive income (loss), net of tax

 

 

(4,536,161)

 

 

1,112,478

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

16,459,185

 

$

19,063,460

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

7


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Six Months Ended June 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

Balance December 31, 2017

 

$

13,918,168

 

$

189,077,550

 

$

151,962,661

 

$

(1,671,250)

 

$

353,287,129

Net income

 

 

 —

 

 

 —

 

 

10,549,961

 

 

 —

 

 

10,549,961

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(3,201,540)

 

 

(3,201,540)

Impact of adoption of ASU 2016-01

 

 

 —

 

 

 

 

 

666,900

 

 

(666,900)

 

 

 —

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(833,730)

 

 

 —

 

 

(833,730)

Issuance of 2,669 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

 

 

2,669

 

 

100,262

 

 

 —

 

 

 —

 

 

102,931

Issuance of 13,074 shares of common stock as a result of stock options exercised

 

 

13,074

 

 

192,522

 

 

 —

 

 

 —

 

 

205,596

Stock-based compensation expense

 

 

 —

 

 

495,493

 

 

 —

 

 

 —

 

 

495,493

Restricted stock awards - 6,860 shares of common stock

 

 

6,860

 

 

(6,860)

 

 

 —

 

 

 —

 

 

 —

Exchange of 3,814 shares of common stock in connection with stock options exercised and restricted stock vested

 

 

(3,814)

 

 

(174,109)

 

 

 —

 

 

 —

 

 

(177,923)

Balance, March 31, 2018

 

$

13,936,957

 

$

189,684,858

 

$

162,345,792

 

$

(5,539,690)

 

$

360,427,917

Net income

 

 

 —

 

 

 —

 

 

10,445,385

 

 

 —

 

 

10,445,385

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(1,334,621)

 

 

(1,334,621)

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(835,881)

 

 

 —

 

 

(835,881)

Issuance of 5,728 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

 

 

5,728

 

 

215,173

 

 

 —

 

 

 —

 

 

220,901

Issuance of 26,641 shares of common stock as a result of stock options exercised

 

 

26,641

 

 

362,292

 

 

 —

 

 

 —

 

 

388,933

Stock-based compensation expense

 

 

 —

 

 

291,912

 

 

 —

 

 

 —

 

 

291,912

Restricted stock awards - 3,972 shares of common stock

 

 

3,972

 

 

(3,972)

 

 

 —

 

 

 —

 

 

 —

Exchange of 642 shares of common stock in connection with stock options exercised and restricted stock vested

 

 

642

 

 

(17,023)

 

 

 —

 

 

 —

 

 

(16,381)

Balance, June 30, 2018

 

$

13,973,940

 

$

190,533,240

 

$

171,955,296

 

$

(6,874,311)

 

$

369,588,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

Balance December 31, 2016

 

$

13,106,845

 

$

156,776,642

 

$

118,616,901

 

$

(2,459,589)

 

$

286,040,799

Net income

 

 

 —

 

 

 —

 

 

9,184,965

 

 

 —

 

 

9,184,965

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

410,739

 

 

410,739

Common cash dividends declared, $0.05 per share

 

 

 —

 

 

 —

 

 

(656,574)

 

 

 —

 

 

(656,574)

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

 

 

3,573

 

 

83,091

 

 

 —

 

 

 —

 

 

86,664

Issuance of 44,284 shares of common stock as a result of stock options exercised

 

 

44,284

 

 

630,290

 

 

 —

 

 

 —

 

 

674,574

Stock-based compensation expense

 

 

 —

 

 

388,753

 

 

 —

 

 

 —

 

 

388,753

Restricted stock awards - 13,289 shares of common stock

 

 

13,289

 

 

(13,289)

 

 

 —

 

 

 —

 

 

 —

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

 

 

(6,772)

 

 

(283,518)

 

 

 —

 

 

 —

 

 

(290,290)

Balance, March 31, 2017

 

$

13,161,219

 

$

157,581,969

 

$

127,145,292

 

$

(2,048,850)

 

$

295,839,630

Net income

 

 

 —

 

 

 —

 

 

8,766,017

 

 

 —

 

 

8,766,017

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

701,739

 

 

701,739

Common cash dividends declared, $0.05 per share

 

 

 —

 

 

 —

 

 

(657,003)

 

 

 —

 

 

(657,003)

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

 

 

4,582

 

 

170,061

 

 

 —

 

 

 —

 

 

174,643

Issuance of 8,027 shares of common stock as a result of stock options exercised

 

 

8,027

 

 

109,392

 

 

 —

 

 

 —

 

 

117,419

Stock-based compensation expense

 

 

 —

 

 

168,314

 

 

 —

 

 

 —

 

 

168,314

Restricted stock awards - 2,000 shares of common stock

 

 

2,000

 

 

(2,000)

 

 

 —

 

 

 —

 

 

 —

Exchange of 594 shares of common stock in connection with stock options exercised and restricted stock vested

 

 

(594)

 

 

(26,730)

 

 

 —

 

 

 —

 

 

(27,324)

Balance, June 30, 2017

 

$

13,175,234

 

$

158,001,006

 

$

135,254,306

 

$

(1,347,111)

 

$

305,083,435

 

See Notes to Consolidated Financial Statements (Unaudited)

 

8


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net income

 

$

20,995,346

 

$

17,950,982

 

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

 

 

  

 

 

  

 

Depreciation

 

 

2,074,618

 

 

1,847,963

 

Provision for loan/lease losses

 

 

4,840,574

 

 

4,128,102

 

Stock-based compensation expense

 

 

787,405

 

 

557,067

 

Deferred compensation expense accrued

 

 

1,004,010

 

 

724,422

 

Losses on other real estate owned, net

 

 

118,159

 

 

3,596

 

Amortization of premiums on securities, net

 

 

828,972

 

 

1,005,121

 

Securities gains, net

 

 

 —

 

 

(38,464)

 

Loans originated for sale

 

 

(21,899,515)

 

 

(32,130,683)

 

Proceeds on sales of loans

 

 

22,071,837

 

 

33,807,027

 

Gains on sales of residential real estate loans

 

 

(202,587)

 

 

(208,951)

 

Gains on sales of government guaranteed portions of loans

 

 

(358,434)

 

 

(1,037,694)

 

Amortization of core deposit intangible

 

 

609,102

 

 

461,733

 

Accretion of acquisition fair value adjustments, net

 

 

(496,561)

 

 

(3,578,379)

 

Increase in cash value of bank-owned life insurance

 

 

(817,260)

 

 

(929,046)

 

Increase (decrease) in other assets

 

 

(5,878,796)

 

 

3,412,207

 

Decrease (increase) in other liabilities

 

 

5,688,375

 

 

(7,059,305)

 

Net cash provided by operating activities

 

$

29,365,245

 

$

18,915,698

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Net decrease in federal funds sold

 

 

19,331,000

 

 

3,074,000

 

Net decrease in interest-bearing deposits at financial institutions

 

 

14,963,624

 

 

10,777,600

 

Proceeds from sales of other real estate owned

 

 

736,370

 

 

487,815

 

Activity in securities portfolio:

 

 

  

 

 

  

 

Purchases

 

 

(54,950,828)

 

 

(85,169,891)

 

Calls, maturities and redemptions

 

 

12,618,640

 

 

33,079,683

 

Paydowns

 

 

27,187,398

 

 

21,606,220

 

Sales

 

 

 —

 

 

13,554,075

 

Activity in restricted investment securities:

 

 

  

 

 

  

 

Purchases

 

 

(4,215,275)

 

 

(2,407,600)

 

Redemptions

 

 

109,200

 

 

1,300,700

 

Net increase in loans/leases originated and held for investment

 

 

(150,992,827)

 

 

(146,365,255)

 

Purchase of premises and equipment

 

 

(2,666,098)

 

 

(2,422,880)

 

Net cash used in investing activities

 

$

(137,878,796)

 

$

(152,485,533)

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

 

Net increase in deposit accounts

 

 

31,652,051

 

 

201,041,035

 

Net increase (decrease) in short-term borrowings

 

 

3,592,483

 

 

(21,753,994)

 

Activity in Federal Home Loan Bank advances:

 

 

  

 

 

  

 

Calls and maturities

 

 

(10,000,000)

 

 

(6,000,000)

 

Net change in short-term and overnight advances

 

 

72,100,000

 

 

(25,000,000)

 

Activity in other borrowings:

 

 

  

 

 

  

 

Proceeds from other borrowings

 

 

9,000,000

 

 

 —

 

Calls, maturities and scheduled principal payments

 

 

(3,875,000)

 

 

(8,000,000)

 

Payment of cash dividends on common stock

 

 

(1,526,604)

 

 

(1,179,146)

 

Proceeds from issuance of common stock, net

 

 

918,361

 

 

1,053,300

 

Net cash provided by financing activities

 

$

101,861,291

 

$

140,161,195

 

Net decrease in cash and due from banks

 

 

(6,652,260)

 

 

6,591,360

 

Cash and due from banks, beginning

 

 

75,721,663

 

 

70,569,993

 

Cash and due from banks, ending

 

$

69,069,403

 

$

77,161,353

 

 

(Continued)

9


 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Six Months Ended June 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

2018

    

2017

 

Supplemental disclosure of cash flow information, cash payments for:

 

 

  

 

 

  

 

Interest

 

$

12,303,768

 

$

7,876,668

 

Income/franchise taxes

 

$

1,010,097

 

$

7,450,738

 

 

 

 

  

 

 

  

 

Supplemental schedule of noncash investing activities:

 

 

  

 

 

  

 

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

 

$

(4,536,161)

 

$

1,112,478

 

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

 

$

(194,304)

 

$

(317,614)

 

Transfers of loans to other real estate owned

 

$

46,244

 

$

141,828

 

Due to broker for purchases of securities

 

$

 —

 

$

(4,662,631)

 

Dividends payable

 

$

835,881

 

$

657,003

 

Decrease (increase) in the fair value of interest rate swap assets and liabilities

 

$

1,774,502

 

$

(209,185)

 

Transfer of equity securities from securities available for sale to other assets at fair value

 

$

2,614,261

 

$

 —

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

10


 

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2018

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, 2017, included in the Company's Annual Report on Form 10‑K filed with the SEC on March 12, 2018. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with  GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10‑Q and Rule 10‑01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended June 30, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018, or for any other period.

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

 

 

Allowance: Allowance for estimated losses on loans/leases

Guaranty: Guaranty Bankshares, Ltd.

AOCI: Accumulated other comprehensive income (loss)

Guaranty Bank: Guaranty Bank and Trust Company

AFS: Available for sale

HTM: Held to maturity

ASC: Accounting Standards Codification

m2: m2 Lease Funds, LLC

ASU: Accounting Standards Update

NIM: Net interest margin

Bates Companies: Bates Financial Advisors, Inc., Bates

NPA: Nonperforming asset

Financial Services, Inc., Bates Securities, Inc. and

NPL: Nonperforming loan

Bates Financial Group, Inc.

OREO: Other real estate owned

BOLI: Bank-owned life insurance

OTTI: Other-than-temporary impairment

Caps: Interest rate cap derivatives

PCI: Purchased credit impaired

CDI: Core deposit intangible

Provision: Provision for loan/lease losses

Community National: Community National Bancorporation

QCBT: Quad City Bank & Trust Company

CRBT: Cedar Rapids Bank & Trust Company

RB&T: Rockford Bank & Trust Company

CRE: Commercial real estate

ROAA: Return on Average Assets

CSB: Community State Bank

SBA: U.S. Small Business Administration

C&I: Commercial and industrial

SEC: Securities and Exchange Commission

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

SFC Bank: Springfield First Community Bank

Consumer Protection Act

Springfield Bancshares: Springfield Bancshares, Inc.

EPS: Earnings per share

TA: Tangible assets

Exchange Act:Securities Exchange Act of 1934, as amended

Tax Act: Tax Cuts and Jobs Act of 2017

FASB: Financial Accounting Standards Board

TCE: Tangible common equity

FDIC: Federal Deposit Insurance Corporation

TDRs: Troubled debt restructurings

FHLB: Federal Home Loan Bank

TEY: Tax equivalent yield

FRB: Federal Reserve Bank of Chicago

The Company: QCR Holdings, Inc.

GAAP: Generally Accepted Accounting Principles

USDA: U.S. Department of Agriculture

 

11


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, with the exception of SFC Bank which was acquired by merger on July 1, 2018, and include the accounts of four commercial banks:  QCBT, CRBT, CSB and RB&T. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

The acquisition of Guaranty Bank, headquartered in Cedar Rapids, Iowa occurred on October 2, 2017 and Guaranty Bank was merged into CRBT on December 2, 2017. The financial results for the periods since acquisition are included in this report. See Note 2 of the Company's Annual Report on Form 10‑K for the year ended December 31, 2017 for additional information about the acquisition.

On July 1, 2018, the Company completed its previously announced merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. The financial results of Springfield Bancshares and SFC Bank are not included in this report because the closing was effective July 1, 2018.  See Note 10 to the Consolidated Financial Statements for additional information about the merger. 

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

In January 2016, FASB issued ASU 2016‑01, Financial Instruments–Overall. ASU 2016‑01 makes targeted adjustments to GAAP by eliminating the AFS classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to AFS securities in combination with the entity's other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Upon adoption of ASU 2016‑01 by the Company on January 1, 2018, the fair value of the Company's loan portfolio is now presented using an exit price method. Also, the Company is no longer required to disclose the methodologies used for estimating fair value of financial assets and liabilities that are not measured at fair value on a recurring or nonrecurring basis. The remaining requirements of this update had no significant impact on the consolidated financial statements.

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

12


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

permitted for all entities. The Company has analyzed the impact of adoption and has concluded that it will not have a significant impact on the consolidated financial statements.

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

In February 2018, the FASB issued ASU 2018‑02, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the standard, entities are allowed to make a one-time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate as defined by the Tax Act. ASU 2018‑02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Companies may choose to early adopt for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018. The Company chose to early adopt ASU 2018‑02 and apply the guidance to the consolidated financial statements for the year ended December 31, 2017.

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

NOTE 2 – INVESTMENT SECURITIES   

The amortized cost and fair value of investment securities as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

June 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

399,002,344

 

$

4,916,288

 

$

(7,700,914)

 

$

396,217,718

Other securities

 

 

1,050,000

 

 

 —

 

 

(15,350)

 

 

1,034,650

 

 

$

400,052,344

 

$

4,916,288

 

$

(7,716,264)

 

$

397,252,368

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

36,767,888

 

$

7,872

 

$

(1,109,224)

 

$

35,666,536

Residential mortgage-backed and related securities

 

 

164,791,715

 

 

49,915

 

 

(6,307,182)

 

 

158,534,448

Municipal securities

 

 

60,160,248

 

 

221,112

 

 

(874,093)

 

 

59,507,267

Other securities

 

 

4,254,509

 

 

 —

 

 

(18,089)

 

 

4,236,420

 

 

$

265,974,360

 

$

278,899

 

$

(8,308,588)

 

$

257,944,671

 

13


 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

December 31, 2017:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

378,424,205

 

$

2,763,718

 

$

(2,488,119)

 

$

378,699,804

Other securities

 

 

1,050,000

 

 

 —

 

 

 —

 

 

1,050,000

 

 

$

379,474,205

 

$

2,763,718

 

$

(2,488,119)

 

$

379,749,804

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

38,409,157

 

$

37,344

 

$

(349,967)

 

$

38,096,534

Residential mortgage-backed and related securities

 

 

165,459,470

 

 

155,363

 

 

(2,313,529)

 

 

163,301,304

Municipal securities

 

 

66,176,364

 

 

660,232

 

 

(211,100)

 

 

66,625,496

Other securities

 

 

4,014,004

 

 

896,384

 

 

(25,815)

 

 

4,884,573

 

 

$

274,058,995

 

$

1,749,323

 

$

(2,900,411)

 

$

272,907,907

 

The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

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

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2018 and December 31, 2017, 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

June 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

140,257,617

 

$

(3,873,043)

 

$

61,121,755

 

$

(3,827,871)

 

$

201,379,372

 

$

(7,700,914)

Other securities

 

 

1,034,649

 

 

(15,350)

 

 

 —

 

 

 —

 

 

1,034,649

 

 

(15,350)

 

 

$

141,292,266

 

$

(3,888,393)

 

$

61,121,755

 

$

(3,827,871)

 

$

202,414,021

 

$

(7,716,264)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

31,724,483

 

$

(928,027)

 

$

3,532,286

 

$

(181,197)

 

$

35,256,769

 

$

(1,109,224)

Residential mortgage-backed and related securities

 

 

93,074,220

 

 

(3,402,034)

 

 

59,724,819

 

 

(2,905,148)

 

 

152,799,039

 

 

(6,307,182)

Municipal securities

 

 

36,033,296

 

 

(648,203)

 

 

7,706,943

 

 

(225,890)

 

 

43,740,239

 

 

(874,093)

Other securities

 

 

4,236,420

 

 

(18,089)

 

 

 —

 

 

 —

 

 

4,236,420

 

 

(18,089)

 

 

$

165,068,419

 

$

(4,996,353)

 

$

70,964,048

 

$

(3,312,235)

 

$

236,032,467

 

$

(8,308,588)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

December 31, 2017:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

23,750,826

 

$

(354,460)

 

$

72,611,780

 

$

(2,133,659)

 

$

96,362,606

 

$

(2,488,119)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

28,576,258

 

$

(200,022)

 

$

3,640,477

 

$

(149,945)

 

$

32,216,735

 

$

(349,967)

Residential mortgage-backed and related securities

 

 

88,927,779

 

 

(871,855)

 

 

57,931,731

 

 

(1,441,674)

 

 

146,859,510

 

 

(2,313,529)

Municipal securities

 

 

10,229,337

 

 

(41,151)

 

 

9,997,433

 

 

(169,949)

 

 

20,226,770

 

 

(211,100)

Other securities

 

 

923,535

 

 

(25,815)

 

 

 —

 

 

 —

 

 

923,535

 

 

(25,815)

 

 

$

128,656,909

 

$

(1,138,843)

 

$

71,569,641

 

$

(1,761,568)

 

$

200,226,550

 

$

(2,900,411)

 

At June 30, 2018, the investment portfolio included 602 securities. Of this number, 303 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 2.4% of the total amortized cost of the portfolio. Of these 303 securities, 42 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,

14


 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or six months ended June 30, 2018 and 2017.

There were no sales of securities for the three and six months ended June 30, 2018.  All sales of securities for the three and six months ended June 30, 2017 were from securities identified as AFS.  Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

 

 

 

 

 

 

 

 

Three and Six Months Ended

 

 

 

    

 

June 30, 2017

 

 

 

 

Proceeds from sales of securities

$

13,554,075

 

 

 

 

Gross gains from sales of securities

 

59,568

 

 

 

 

Gross losses from sales of securities

 

(21,104)

 

 

 

 

 

The amortized cost and fair value of securities as of June 30, 2018 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

Securities HTM:

 

 

  

 

 

  

Due in one year or less

 

$

1,732,495

 

$

1,737,807

Due after one year through five years

 

 

25,021,326

 

 

25,051,928

Due after five years

 

 

373,298,523

 

 

370,462,633

 

 

$

400,052,344

 

$

397,252,368

Securities AFS:

 

 

  

 

 

  

Due in one year or less

 

$

2,882,932

 

$

2,891,934

Due after one year through five years

 

 

25,265,433

 

 

24,969,540

Due after five years

 

 

73,034,280

 

 

71,548,749

 

 

 

101,182,645

 

 

99,410,223

Residential mortgage-backed and related securities

 

 

164,791,715

 

 

158,534,448

 

 

$

265,974,360

 

$

257,944,671

 

15


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

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

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

Securities HTM:

 

 

  

 

 

  

Municipal securities

 

$

232,556,893

 

$

230,900,385

 

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

 

4,998,914

 

 

4,873,050

Municipal securities

 

 

52,730,591

 

 

51,992,220

 

 

$

57,729,505

 

$

56,865,270

 

As of June 30, 2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 122 issuers with fair values totaling $94.8 million and revenue bonds issued by 150 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $360.9 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 16 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2017, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 131 issuers with fair values totaling $108.0 million and revenue bonds issued by 145 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $337.3 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 16 states, including seven states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of June 30, 2018 and December 31, 2017, the Company did not hold general obligation or revenue bonds of any single issuer, the aggregate book or market value of which exceeded 5% of the Company's stockholders' equity. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of June 30, 2018, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of June 30, 2018, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

 

16


 

Table of Contents

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 June 30, 2018 and December 31, 2017 is presented as follows:

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

 

 

 

 

 

 

 

C&I loans*

 

$

1,273,000,094

 

$

1,134,516,315

CRE loans

 

 

  

 

 

  

Owner-occupied CRE

 

 

349,007,830

 

 

332,742,477

Commercial construction, land development, and other land

 

 

162,644,566

 

 

186,402,404

Other non owner-occupied CRE

 

 

837,666,518

 

 

784,347,000

 

 

 

1,349,318,914

 

 

1,303,491,882

Direct financing leases **

 

 

133,196,613

 

 

141,448,232

Residential real estate loans ***

 

 

257,433,713

 

 

258,646,265

Installment and other consumer loans

 

 

92,952,124

 

 

118,610,799

 

 

 

3,105,901,458

 

 

2,956,713,493

Plus deferred loan/lease origination costs, net of fees

 

 

8,890,965

 

 

7,771,907

 

 

 

3,114,792,423

 

 

2,964,485,400

Less allowance

 

 

(37,545,076)

 

 

(34,355,728)

 

 

$

3,077,247,347

 

$

2,930,129,672

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 

$

147,388,211

 

$

156,583,887

Estimated unguaranteed residual values of leased assets

 

 

929,932

 

 

929,932

Unearned lease/residual income

 

 

(15,121,530)

 

 

(16,065,587)

 

 

 

133,196,613

 

 

141,448,232

Plus deferred lease origination costs, net of fees

 

 

4,159,711

 

 

4,624,027

 

 

 

137,356,324

 

 

146,072,259

Less allowance

 

 

(2,724,355)

 

 

(2,382,098)

 

 

$

134,631,969

 

$

143,690,161


*     Includes equipment financing agreements outstanding at m2, totaling $92,815,742 and $66,758,397 as of June 30, 2018 and December 31, 2017, respectively.

**   Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and six months ended June 30, 2018 and 2017.

*** Includes residential real estate loans held for sale totaling $1,033,700 and $645,001 as of June 30, 2018, and December 31, 2017, respectively.

17


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

Changes in accretable yield for acquired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

Six months ended June 30, 2018

 

 

    

PCI

    

Performing

    

 

 

 

PCI

    

Performing

    

 

 

 

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

Balance at the beginning of the period

 

$

(156,896)

 

$

(5,659,543)

 

$

(5,816,439)

 

$

(191,132)

 

$

(6,280,075)

 

$

(6,471,207)

 

Accretion recognized

 

 

14,848

 

 

608,119

 

 

622,967

 

 

49,084

 

 

1,228,651

 

 

1,277,735

 

Balance at the end of the period

 

$

(142,048)

 

$

(5,051,424)

 

$

(5,193,472)

 

$

(142,048)

 

$

(5,051,424)

 

$

(5,193,472)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2017

 

Six months ended June 30, 2017

 

 

    

PCI

    

Performing

    

 

 

PCI

    

Performing

    

 

 

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

Balance at the beginning of the period

 

$

(127,616)

 

$

(6,944,074)

 

$

(7,071,690)

 

$

(194,306)

 

$

(9,115,614)

 

$

(9,309,920)

 

Accretion recognized

 

 

43,756

 

 

1,618,603

 

 

1,662,359

 

 

110,446

 

 

3,790,143

 

 

3,900,589

 

Balance at the end of the period

 

$

(83,860)

 

$

(5,325,471)

 

$

(5,409,331)

 

$

(83,860)

 

$

(5,325,471)

 

$

(5,409,331)

 

 

The aging of the loan/lease portfolio by classes of loans/leases as of June 30, 2018 and December 31, 2017 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

1,270,508,073

 

$

602,885

 

$

403,841

 

$

 —

 

$

1,485,295

 

$

1,273,000,094

 

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

348,357,289

 

 

228,703

 

 

 —

 

 

 —

 

 

421,838

 

 

349,007,830

 

Commercial Construction, Land Development, and Other Land

 

 

158,999,305

 

 

1,758,740

 

 

 —

 

 

 —

 

 

1,886,521

 

 

162,644,566

 

Other Non Owner-Occupied CRE

 

 

832,861,572

 

 

91,345

 

 

 —

 

 

 —

 

 

4,713,601

 

 

837,666,518

 

Direct Financing Leases

 

 

129,115,766

 

 

1,019,243

 

 

532,600

 

 

 —

 

 

2,529,004

 

 

133,196,613

 

Residential Real Estate

 

 

254,927,412

 

 

374,480

 

 

816,670

 

 

 —

 

 

1,315,151

 

 

257,433,713

 

Installment and Other Consumer

 

 

92,086,640

 

 

588,332

 

 

55,189

 

 

19,573

 

 

202,390

 

 

92,952,124

 

 

 

$

3,086,856,057

 

$

4,663,728

 

$

1,808,300

 

$

19,573

 

$

12,553,800

 

$

3,105,901,458

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

 

 

99.39

%  

 

0.15

%  

 

0.06

%  

 

0.00

%  

 

0.40

%  

 

100.00

%

 

18


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

1,124,734,486

 

$

8,306,829

 

$

243,647

 

$

 —

 

$

1,231,353

 

$

1,134,516,315

 

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

331,868,142

 

 

540,435

 

 

 —

 

 

 —

 

 

333,900

 

 

332,742,477

 

Commercial Construction, Land Development, and Other Land

 

 

181,558,092

 

 

 —

 

 

 —

 

 

 —

 

 

4,844,312

 

 

186,402,404

 

Other Non Owner-Occupied CRE

 

 

782,526,249

 

 

572,877

 

 

4,146

 

 

 —

 

 

1,243,728

 

 

784,347,000

 

Direct Financing Leases

 

 

137,708,397

 

 

1,305,191

 

 

259,600

 

 

 —

 

 

2,175,044

 

 

141,448,232

 

Residential Real Estate

 

 

253,261,821

 

 

3,552,709

 

 

393,410

 

 

74,519

 

 

1,363,806

 

 

258,646,265

 

Installment and Other Consumer

 

 

117,773,259

 

 

517,537

 

 

56,760

 

 

14,152

 

 

249,091

 

 

118,610,799

 

 

 

$

2,929,430,446

 

$

14,795,578

 

$

957,563

 

$

88,671

 

$

11,441,234

 

$

2,956,713,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of total loan/lease portfolio

 

 

99.08

%  

 

0.50

%  

 

0.03

%  

 

0.00

%  

 

0.39

%  

 

100.00

%

 

NPLs by classes of loans/leases as of June 30, 2018 and December 31, 2017 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

    

More

    

Loans/Leases*

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

C&I

 

$

 —

 

$

1,485,295

 

$

800,176

 

$

2,285,471

 

16.44

%

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

421,838

 

 

106,874

 

 

528,712

 

3.80

%

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

1,886,521

 

 

 —

 

 

1,886,521

 

13.57

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

4,713,601

 

 

 —

 

 

4,713,601

 

33.92

%

Direct Financing Leases

 

 

 —

 

 

2,529,004

 

 

137,432

 

 

2,666,436

 

19.18

%

Residential Real Estate

 

 

 —

 

 

1,315,151

 

 

270,903

 

 

1,586,054

 

11.41

%

Installment and Other Consumer

 

 

19,573

 

 

202,390

 

 

11,623

 

 

233,586

 

1.68

%

 

 

$

19,573

 

$

12,553,800

 

$

1,327,008

 

$

13,900,381

 

100.00

%


*     Nonaccrual loans/leases included $1,841,006 of TDRs, including $66,021 in C&I loans, $1,066,701 in CRE loans, $619,727 in direct financing leases, $83,287 in residential real estate loans, and $5,270 in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

    

More

    

Loans/Leases **

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

C&I

 

$

 —

 

$

1,231,353

 

$

5,224,182

 

$

6,455,535

 

34.63

%

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

333,900

 

 

107,322

 

 

441,222

 

2.37

%

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

4,844,312

 

 

 —

 

 

4,844,312

 

25.99

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

1,243,728

 

 

 —

 

 

1,243,728

 

6.67

%

Direct Financing Leases

 

 

 —

 

 

2,175,044

 

 

1,494,448

 

 

3,669,492

 

19.68

%

Residential Real Estate

 

 

74,519

 

 

1,363,806

 

 

272,493

 

 

1,710,818

 

9.18

%

Installment and Other Consumer

 

 

14,152

 

 

249,091

 

 

14,027

 

 

277,270

 

1.49

%

 

 

$

88,671

 

$

11,441,234

 

$

7,112,472

 

$

18,642,377

 

100.00

%


**   Nonaccrual loans/leases included $2,282,495 of TDRs, including $122,598 in C&I loans, $1,336,871 in CRE loans, $700,255 in direct financing leases, $115,190 in residential real estate loans, and $7,581 in installment loans.

19


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

Changes in the allowance by portfolio segment for the three and six months ended June 30, 2018 and 2017, respectively, are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Balance, beginning

 

$

15,065,245

 

$

14,938,020

 

$

2,730,301

 

$

2,375,219

 

$

1,423,817

 

$

36,532,602

Provisions (credits) charged to expense

 

 

777,013

 

 

871,475

 

 

687,908

 

 

57,283

 

 

(92,944)

 

 

2,300,735

Loans/leases charged off

 

 

(728,890)

 

 

 —

 

 

(794,299)

 

 

 —

 

 

(1,086)

 

 

(1,524,275)

Recoveries on loans/leases previously charged off

 

 

120,503

 

 

9,545

 

 

100,445

 

 

600

 

 

4,921

 

 

236,014

Balance, ending

 

$

15,233,871

 

$

15,819,040

 

$

2,724,355

 

$

2,433,102

 

$

1,334,708

 

$

37,545,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

12,954,090

 

$

12,643,266

 

$

2,978,260

 

$

2,375,864

 

$

1,107,670

 

$

32,059,150

Provisions (credits) charged to expense

 

 

1,281,786

 

 

339,857

 

 

297,672

 

 

116,151

 

 

(12,473)

 

 

2,022,993

Loans/leases charged off

 

 

(74,071)

 

 

(10,375)

 

 

(684,079)

 

 

(61,561)

 

 

(21,518)

 

 

(851,604)

Recoveries on loans/leases previously charged off

 

 

45,928

 

 

26,485

 

 

46,448

 

 

 —

 

 

7,232

 

 

126,093

Balance, ending

 

$

14,207,733

 

$

12,999,233

 

$

2,638,301

 

$

2,430,454

 

$

1,080,911

 

$

33,356,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Balance, beginning

 

$

14,323,036

 

$

13,962,688

 

$

2,382,098

 

$

2,466,431

 

$

1,221,475

 

$

34,355,728

 

Provisions charged to expense

 

 

1,585,174

 

 

1,836,858

 

 

1,292,691

 

 

17,946

 

 

107,905

 

 

4,840,574

 

Loans/leases charged off

 

 

(824,389)

 

 

 —

 

 

(1,078,186)

 

 

(52,325)

 

 

(5,833)

 

 

(1,960,733)

 

Recoveries on loans/leases previously charged off

 

 

150,050

 

 

19,494

 

 

127,752

 

 

1,050

 

 

11,161

 

 

309,507

 

Balance, ending

 

$

15,233,871

 

$

15,819,040

 

$

2,724,355

 

$

2,433,102

 

$

1,334,708

 

$

37,545,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

12,545,110

 

$

11,670,609

 

$

3,111,898

 

$

2,342,344

 

$

1,087,487

 

$

30,757,448

 

Provisions (credits) charged to expense

 

 

1,875,144

 

 

1,306,128

 

 

802,687

 

 

159,671

 

 

(15,528)

 

 

4,128,102

 

Loans/leases charged off

 

 

(292,344)

 

 

(10,375)

 

 

(1,342,763)

 

 

(75,184)

 

 

(23,564)

 

 

(1,744,230)

 

Recoveries on loans/leases previously charged off

 

 

79,823

 

 

32,871

 

 

66,479

 

 

3,623

 

 

32,516

 

 

215,312

 

Balance, ending

 

$

14,207,733

 

$

12,999,233

 

$

2,638,301

 

$

2,430,454

 

$

1,080,911

 

$

33,356,632

 

 

The allowance by impairment evaluation and by portfolio segment as of June 30, 2018 and December 31, 2017 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 

$

308,091

 

$

2,109,374

 

$

375,803

 

$

239,419

 

$

106,878

 

$

3,139,565

 

Allowance for nonimpaired loans/leases

 

 

14,925,780

 

 

13,709,666

 

 

2,348,552

 

 

2,193,683

 

 

1,227,830

 

 

34,405,511

 

 

 

$

15,233,871

 

$

15,819,040

 

$

2,724,355

 

$

2,433,102

 

$

1,334,708

 

$

37,545,076

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

1,551,445

 

$

6,967,425

 

$

2,529,004

 

$

1,449,866

 

$

214,655

 

$

12,712,395

 

Nonimpaired loans/leases

 

 

1,271,448,649

 

 

1,342,351,489

 

 

130,667,609

 

 

255,983,847

 

 

92,737,469

 

 

3,093,189,063

 

 

 

$

1,273,000,094

 

$

1,349,318,914

 

$

133,196,613

 

$

257,433,713

 

$

92,952,124

 

$

3,105,901,458

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

19.86

%  

 

30.27

%  

 

14.86

%  

 

16.51

%  

 

49.79

%  

 

24.70

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.17

%  

 

1.02

%  

 

1.80

%  

 

0.86

%  

 

1.32

%  

 

1.11

%

Total allowance as a percentage of total loans/leases

 

 

1.20

%  

 

1.17

%  

 

2.05

%  

 

0.95

%  

 

1.44

%  

 

1.21

%

 

20


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance for impaired loans/leases

 

$

715,627

 

$

1,429,460

 

$

504,469

 

$

355,167

 

$

38,596

 

$

3,043,319

 

Allowance for nonimpaired loans/leases

 

 

13,607,409

 

 

12,533,228

 

 

1,877,629

 

 

2,111,264

 

 

1,182,879

 

 

31,312,409

 

 

 

$

14,323,036

 

$

13,962,688

 

$

2,382,098

 

$

2,466,431

 

$

1,221,475

 

$

34,355,728

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

6,248,209

 

$

6,529,262

 

$

3,669,492

 

$

1,704,846

 

$

202,354

 

$

18,354,163

 

Nonimpaired loans/leases

 

 

1,128,268,106

 

 

1,296,962,620

 

 

137,778,740

 

 

256,941,419

 

 

118,408,445

 

 

2,938,359,330

 

 

 

$

1,134,516,315

 

$

1,303,491,882

 

$

141,448,232

 

$

258,646,265

 

$

118,610,799

 

$

2,956,713,493

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

11.45

%  

 

21.89

%  

 

13.75

%  

 

20.83

%  

 

19.07

%  

 

16.58

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.21

%  

 

0.97

%  

 

1.36

%  

 

0.82

%  

 

1.00

%  

 

1.07

%

Total allowance as a percentage of total loans/leases

 

 

1.26

%  

 

1.07

%  

 

1.68

%  

 

0.95

%  

 

1.03

%  

 

1.16

%

 

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.

21


 

Table of Contents

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 six months ended June 30, 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

Average

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,159,577

 

$

1,173,853

 

$

 —

 

$

1,465,402

 

$

138,543

 

$

138,543

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

288,813

 

 

288,813

 

 

 —

 

 

289,112

 

 

11,690

 

 

11,690

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

982,428

 

 

982,428

 

 

 —

 

 

1,151,245

 

 

 —

 

 

 —

Direct Financing Leases

 

 

1,903,173

 

 

1,903,173

 

 

 —

 

 

2,551,149

 

 

9,292

 

 

9,292

Residential Real Estate

 

 

941,520

 

 

1,016,299

 

 

 —

 

 

904,898

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

99,814

 

 

99,814

 

 

 —

 

 

95,448

 

 

 —

 

 

 —

 

 

$

5,375,325

 

$

5,464,380

 

$

 —

 

$

6,457,254

 

$

159,525

 

$

159,525

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

391,868

 

$

391,868

 

$

308,091

 

$

327,859

 

$

 —

 

$

 —

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

142,788

 

 

142,788

 

 

39,288

 

 

147,375

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

5,553,396

 

 

5,553,396

 

 

2,070,086

 

 

5,275,992

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Direct Financing Leases

 

 

625,831

 

 

625,831

 

 

375,803

 

 

521,142

 

 

 —

 

 

 —

Residential Real Estate

 

 

508,346

 

 

531,422

 

 

239,419

 

 

522,134

 

 

5,893

 

 

5,893

Installment and Other Consumer

 

 

114,841

 

 

114,841

 

 

106,878

 

 

109,254

 

 

159

 

 

159

 

 

$

7,337,070

 

$

7,360,146

 

$

3,139,565

 

$

6,903,756

 

$

6,052

 

$

6,052

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,551,445

 

$

1,565,721

 

$

308,091

 

$

1,793,261

 

$

138,543

 

$

138,543

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

431,601

 

 

431,601

 

 

39,288

 

 

436,487

 

 

11,690

 

 

11,690

Commercial Construction, Land Development, and Other Land

 

 

5,553,396

 

 

5,553,396

 

 

2,070,086

 

 

5,275,992

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

982,428

 

 

982,428

 

 

 —

 

 

1,151,245

 

 

 —

 

 

 —

Direct Financing Leases

 

 

2,529,004

 

 

2,529,004

 

 

375,803

 

 

3,072,291

 

 

9,292

 

 

9,292

Residential Real Estate

 

 

1,449,866

 

 

1,547,721

 

 

239,419

 

 

1,427,032

 

 

5,893

 

 

5,893

Installment and Other Consumer

 

 

214,655

 

 

214,655

 

 

106,878

 

 

204,702

 

 

159

 

 

159

 

 

$

12,712,395

 

$

12,824,526

 

$

3,139,565

 

$

13,361,010

 

$

165,577

 

$

165,577

 

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

22


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended June 30, 2018 and 2017, respectively, are presented as follows:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

Three Months Ended June 30, 2017

 

 

    

 

 

    

 

 

    

Interest Income

 

 

 

 

    

 

 

    

Interest Income

 

 

 

Average

 

 

 

 

Recognized for

 

 

Average

 

 

 

 

Recognized for

 

 

 

Recorded

 

Interest Income

 

Cash Payments

 

 

Recorded

 

Interest Income

 

Cash Payments

 

Classes of Loans/Leases

 

Investment

 

Recognized

 

Received

 

 

Investment

 

Recognized

 

Received

 

 

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 

$

1,400,498

 

$

59,176

 

$

59,176

 

 

$

805,309

 

$

9,399

 

$

9,399

 

CRE

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

289,036

 

 

5,868

 

 

5,868

 

 

 

 —

 

 

 —

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

1,105,004

 

 

 —

 

 

 —

 

 

 

1,160,161

 

 

 —

 

 

 —

 

Direct Financing Leases

 

 

2,198,852

 

 

2,544

 

 

2,544

 

 

 

2,560,019

 

 

38,949

 

 

38,949

 

Residential Real Estate

 

 

928,809

 

 

 —

 

 

 —

 

 

 

712,793

 

 

 —

 

 

 —

 

Installment and Other Consumer

 

 

101,582

 

 

 —

 

 

 —

 

 

 

173,585

 

 

218

 

 

218

 

 

 

$

6,023,781

 

$

67,588

 

$

67,588

 

 

$

5,411,867

 

$

48,566

 

$

48,566

 

 

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 

$

353,153

 

$

1,978

 

$

1,978

 

 

$

8,066,702

 

$

35,055

 

$

35,055

 

CRE

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

145,082

 

 

 —

 

 

 —

 

 

 

238,584

 

 

 —

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

5,491,832

 

 

 —

 

 

 —

 

 

 

4,348,142

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

 

 

38,260

 

 

 —

 

 

 —

 

Direct Financing Leases

 

 

566,063

 

 

 —

 

 

 —

 

 

 

757,602

 

 

 —

 

 

 —

 

Residential Real Estate

 

 

512,222

 

 

2,959

 

 

2,959

 

 

 

624,641

 

 

2,989

 

 

2,989

 

Installment and Other Consumer

 

 

116,887

 

 

76

 

 

76

 

 

 

34,333

 

 

 —

 

 

 —

 

 

 

$

7,185,239

 

$

5,014

 

$

5,014

 

 

$

14,108,264

 

$

38,044

 

$

38,044

 

 

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 

$

1,753,651

 

$

61,154

 

$

61,154

 

 

$

8,872,011

 

$

44,454

 

$

44,454

 

CRE

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

434,118

 

 

5,868

 

 

5,868

 

 

 

238,584

 

 

 —

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

5,491,832

 

 

 —

 

 

 —

 

 

 

4,348,142

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

1,105,004

 

 

 —

 

 

 —

 

 

 

1,198,421

 

 

 —

 

 

 —

 

Direct Financing Leases

 

 

2,764,915

 

 

2,544

 

 

2,544

 

 

 

3,317,621

 

 

38,949

 

 

38,949

 

Residential Real Estate

 

 

1,441,031

 

 

2,959

 

 

2,959

 

 

 

1,337,434

 

 

2,989

 

 

2,989

 

Installment and Other Consumer

 

 

218,469

 

 

76

 

 

76

 

 

 

207,918

 

 

218

 

 

218

 

 

 

$

13,209,020

 

$

72,602

 

$

72,602

 

 

$

19,520,131

 

$

86,610

 

$

86,610

 

 

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

23


 

Table of Contents

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, 2017 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid 

 

 

 

 

 

 

Recorded

 

Principal

 

Related

 

 

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

 

 

 

 

 

  

 

 

  

 

 

  

 

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

C&I

 

$

1,634,269

 

$

1,644,706

 

$

 —

 

 

CRE

 

 

  

 

 

  

 

 

  

 

 

Owner-Occupied CRE

 

 

289,261

 

 

289,261

 

 

 —

 

 

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

Other Non Owner-Occupied CRE

 

 

1,171,565

 

 

1,171,565

 

 

 —

 

 

Direct Financing Leases

 

 

2,944,540

 

 

2,944,540

 

 

 —

 

 

Residential Real Estate

 

 

943,388

 

 

1,018,167

 

 

 —

 

 

Installment and Other Consumer

 

 

134,245

 

 

134,245

 

 

 —

 

 

 

 

$

7,117,268

 

$

7,202,484

 

$

 —

 

 

 

 

 

  

 

 

  

 

 

  

 

 

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

C&I

 

$

4,613,940

 

$

4,617,879

 

$

715,627

 

 

CRE

 

 

  

 

 

  

 

 

  

 

 

Owner-Occupied CRE

 

 

151,962

 

 

151,962

 

 

48,462

 

 

Commercial Construction, Land Development, and Other Land

 

 

4,844,312

 

 

4,844,312

 

 

1,379,235

 

 

Other Non Owner-Occupied CRE

 

 

72,163

 

 

72,163

 

 

1,763

 

 

Direct Financing Leases

 

 

724,953

 

 

724,953

 

 

504,469

 

 

Residential Real Estate

 

 

761,458

 

 

761,458

 

 

355,167

 

 

Installment and Other Consumer

 

 

68,109

 

 

68,109

 

 

38,596

 

 

 

 

$

11,236,897

 

$

11,240,836

 

$

3,043,319

 

 

 

 

 

  

 

 

  

 

 

  

 

 

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

C&I

 

$

6,248,209

 

$

6,262,585

 

$

715,627

 

 

CRE

 

 

  

 

 

  

 

 

  

 

 

Owner-Occupied CRE

 

 

441,222

 

 

441,222

 

 

48,462

 

 

Commercial Construction, Land Development, and Other Land

 

 

4,844,312

 

 

4,844,312

 

 

1,379,235

 

 

Other Non Owner-Occupied CRE

 

 

1,243,728

 

 

1,243,728

 

 

1,763

 

 

Direct Financing Leases

 

 

3,669,492

 

 

3,669,492

 

 

504,469

 

 

Residential Real Estate

 

 

1,704,846

 

 

1,779,625

 

 

355,167

 

 

Installment and Other Consumer

 

 

202,354

 

 

202,354

 

 

38,596

 

 

 

 

$

18,354,163

 

$

18,443,318

 

$

3,043,319

 

 

 

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

For C&I and CRE loans, the Company's credit quality indicator consists of internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (equipment financing agreements), 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.

24


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

Non Owner-Occupied

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 

$

1,135,035,263

 

$

342,518,625

 

$

160,224,065

 

$

805,031,050

 

$

2,442,809,003

 

96.57

%

Special Mention (Rating 6)

 

 

29,414,324

 

 

3,984,113

 

 

 —

 

 

10,804,187

 

 

44,202,624

 

1.75

%

Substandard (Rating 7)

 

 

15,734,765

 

 

2,505,092

 

 

2,420,501

 

 

21,831,281

 

 

42,491,639

 

1.68

%

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 

 

$

1,180,184,352

 

$

349,007,830

 

$

162,644,566

 

$

837,666,518

 

$

2,529,503,266

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Performing

 

$

92,361,366

 

$

130,530,177

 

$

255,847,659

 

$

92,718,538

 

$

571,457,740

 

99.14

%

Nonperforming

 

 

454,376

 

 

2,666,436

 

 

1,586,054

 

 

233,586

 

 

4,940,452

 

0.86

%

 

 

$

92,815,742

 

$

133,196,613

 

$

257,433,713

 

$

92,952,124

 

$

576,398,192

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

Non Owner-Occupied

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Pass (Ratings 1 through 5)

 

$

1,031,963,703

 

$

318,293,608

 

$

179,142,839

 

$

767,119,909

 

$

2,296,520,059

 

96.85

%

Special Mention (Rating 6)

 

 

10,944,924

 

 

8,230,060

 

 

1,780,000

 

 

10,068,870

 

 

31,023,854

 

1.31

%

Substandard (Rating 7)

 

 

24,578,731

 

 

6,218,809

 

 

5,479,565

 

 

7,158,221

 

 

43,435,326

 

1.83

%

Doubtful (Rating 8)

 

 

270,559

 

 

 —

 

 

 —

 

 

 —

 

 

270,559

 

0.01

%

 

 

$

1,067,757,917

 

$

332,742,477

 

$

186,402,404

 

$

784,347,000

 

$

2,371,249,799

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

65,847,177

 

$

137,778,740

 

$

256,935,447

 

$

118,333,529

 

$

578,894,893

 

98.88

%

Nonperforming

 

 

911,220

 

 

3,669,492

 

 

1,710,818

 

 

277,270

 

 

6,568,800

 

1.12

%

 

 

$

66,758,397

 

$

141,448,232

 

$

258,646,265

 

$

118,610,799

 

$

585,463,693

 

100.00

%


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

As of June 30, 2018 and December 31, 2017, TDRs totaled $3,168,014 and $9,394,967, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and six months ended June 30, 2018 and 2017. The difference between

25


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.  No loans were restructured during the three months ended June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 2018

 

For the three months ended June 30, 2017

 

 

   

 

   

Pre-

    

Post-

    

 

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 1

 

$

47,509

 

$

47,509

 

$

 —

 

Direct Financing Leases

 

 —

 

 

 —

 

 

 —

 

 

 —

 

15

 

 

802,542

 

 

802,542

 

 

 —

 

 

 

 —

 

$

 —

 

$

 —

 

$

 —

 

16

 

$

850,051

 

$

850,051

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

Direct Financing Leases

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 1

 

$

98,119

 

$

98,119

 

$

 —

 

 

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 1

 

$

98,119

 

$

98,119

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 —

 

$

 —

 

$

 —

 

$

 —

 

17

 

$

948,170

 

$

948,170

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 2018

 

For the six months ended June 30, 2017

 

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

Direct Financing Leases

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 2

 

 

104,382

 

 

104,382

 

 

 —

 

 

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 2

 

$

104,382

 

$

104,382

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 3

 

$

181,198

 

$

181,198

 

$

 —

 

Real Estate

 

 1

 

 

46,320

 

 

46,320

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 

Direct Financing Leases

 

 2

 

 

47,524

 

 

47,524

 

 

 —

 

23

 

 

1,472,403

 

 

1,472,403

 

 

 —

 

 

 

 3

 

$

93,844

 

$

93,844

 

$

 —

 

26

 

$

1,653,601

 

$

1,653,601

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

TOTAL

 

 3

 

$

93,844

 

$

93,844

 

$

 —

 

28

 

$

1,757,983

 

$

1,757,983

 

$

 —

 

 

Of the TDRs reported above, one with a post-modification recorded balance of $46,320 was on nonaccrual as of June 30, 2018. Of the TDRs reported above, none were on nonaccrual as of June 30, 2017.

For the three and six months ended June 30, 2018, seven of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Three of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling $78 thousand and the other TDRs related to other customers whose loans were restructured in the second and third quarters of 2017 with pre-modification balances totaling $378 thousand.

For the three and six months ended June 30, 2017, two of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These two TDRs were related to the same customer and were restructured in the fourth quarter of 2016 with pre-modification balances totaling $195 thousand.  

Not included in the table above, the Company had 8 TDRs that were restructured and charged off in 2018, totaling $577,377.  The Company had 2 TDRs that were restructured and charged off in 2017, totaling $65,623.

NOTE 4 – DERIVATIVES

The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.  The Company entered into interest rate caps on June 5, 2014 to hedge against the risk of rising interest rates on short-term liabilities.  The short-term liabilities consist of $30.0 million of 1-month FHLB advances, and the benchmark rate hedged is 1-month LIBOR.  The interest rate caps are designated as a cash flow

26


 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

hedge in accordance with ASC 815.  An initial premium of $2.1 million was paid upfront for the two caps.  The details of the interest rate caps are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

1-Month LIBOR

 

 

Fair Value as of

 

Hedged Instrument

 

Effective Date

 

Maturity Date

 

Location

 

 

Notional Amount

 

Strike Rate

 

 

June 30, 2018

 

 

December 31, 2017

 

1-month FHLB Advance

 

6/3/2014

 

6/5/2019

 

Other Assets

 

$

15,000,000

 

1.00

%  

 

$

199,821

 

 

$

190,085

 

1-month FHLB Advance

 

6/5/2014

 

6/5/2021

 

Other Assets

 

 

15,000,000

 

1.50

%  

 

 

506,470

 

 

 

316,615

 

 

 

 

 

 

 

 

 

$

30,000,000

 

 

 

 

$

706,291

 

 

$

506,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective.  The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815.  The details of the interest rate swaps are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of

 

Hedged Instrument

 

Effective Date

 

Maturity Date

 

Location

 

 

Notional Amount

 

Receive Rate

 

 

Pay Rate

 

June 30, 2018

 

 

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

$

10,000,000

 

5.19

%  

 

 

5.85

%  

 

$

(94,210)

 

 

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

 

8,000,000

 

5.19

%  

 

 

5.85

%  

 

 

(75,368)

 

 

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Other Liabilities

 

 

10,000,000

 

3.90

%  

 

 

4.54

%  

 

 

(97,961)

 

 

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Other Liabilities

 

 

3,000,000

 

4.49

%  

 

 

5.17

%  

 

 

(28,329)

 

 

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Other Liabilities

 

 

3,500,000

 

4.09

%  

 

 

4.75

%  

 

 

(33,330)

 

 

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Other Liabilities

 

 

4,500,000

 

4.09

%  

 

 

4.75

%  

 

 

(42,852)

 

 

 

 

  

 

 

 

 

 

$

39,000,000

 

4.58

%  

 

 

5.24

%  

 

$

(372,050)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair values of derivatives designated as cash flow hedges are recorded in OCI to the extent the hedge is effective, and reclassified to earnings as the hedged transaction (interest payments on debt) impact earnings.

The caps and swaps are valued by the transaction counterparty on a monthly basis and corroborated by a third party annually.

NOTE 5 - EARNINGS PER SHARE

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

2018

    

 

2017

    

 

2018

    

 

2017

 

Net income

 

$

10,445,385

 

$

8,766,017

 

$

20,995,346

 

$

17,950,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic EPS

 

$

0.75

 

$

0.67

 

$

1.51

 

$

1.36

 

Diluted EPS

 

$

0.73

 

$

0.65

 

$

1.48

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

13,919,565

 

 

13,170,283

 

 

13,904,113

 

 

13,151,833

 

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

 

 

312,858

 

 

346,309

 

 

314,890

 

 

350,672

 

Weighted average common and common equivalent shares outstanding

 

 

14,232,423

 

 

13,516,592

 

 

14,219,003

 

 

13,502,505

 

 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

The increase in weighted average common shares outstanding when comparing the three and six months ended June 30, 2018 to June 30, 2017 was primarily due to the common stock issuance discussed in Note 2 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017.

 

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 and liabilities measured at fair value on a recurring basis comprise the following at June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

June 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

35,666,536

 

$

 —

 

$

35,666,536

 

$

 —

Residential mortgage-backed and related securities

 

 

158,534,448

 

 

 —

 

 

158,534,448

 

 

 —

Municipal securities

 

 

59,507,267

 

 

 —

 

 

59,507,267

 

 

 —

Other securities

 

 

4,236,420

 

 

 —

 

 

4,236,420

 

 

 —

Interest rate caps

 

 

706,291

 

 

 —

 

 

706,291

 

 

 —

Interest rate swaps - assets

 

 

6,171,740

 

 

 —

 

 

6,171,740

 

 

  

Total assets measured at fair value

 

$

264,822,702

 

$

 —

 

$

264,822,702

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

6,543,790

 

$

 —

 

$

6,543,790

 

$

 —

Total liabilities measured at fair value

 

$

6,543,790

 

$

 —

 

$

6,543,790

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2017:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

38,096,534

 

$

 —

 

$

38,096,534

 

$

 —

Residential mortgage-backed and related securities

 

 

163,301,304

 

 

 —

 

 

163,301,304

 

 

 —

Municipal securities

 

 

66,625,496

 

 

 —

 

 

66,625,496

 

 

 —

Other securities

 

 

4,884,573

 

 

1,028

 

 

4,883,545

 

 

 —

Interest rate caps

 

 

506,700

 

 

 —

 

 

506,700

 

 

 —

Interest rate swaps - assets

 

 

4,397,238

 

 

 —

 

 

4,397,238

 

 

  

Total assets measured at fair value

 

$

277,811,845

 

$

1,028

 

$

277,810,817

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

4,397,238

 

$

 —

 

$

4,397,238

 

$

 —

Total liabilities measured at fair value

 

$

4,397,238

 

$

 —

 

$

4,397,238

 

$

 —

 

28


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and six months ended June 30, 2018 or 2017.

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

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

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 1 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Interest rate swaps are also used for the purpose of hedging interest rate risk on junior subordinated debt.  The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

June 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

4,674,218

 

$

 —

 

$

 —

 

$

4,674,218

OREO

 

 

13,770,025

 

 

 —

 

 

 —

 

 

13,770,025

 

 

$

18,444,243

 

$

 —

 

$

 —

 

$

18,444,243

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

8,972,337

 

$

 —

 

$

 —

 

$

8,972,337

OREO

 

 

14,642,973

 

 

 —

 

 

 —

 

 

14,642,973

 

 

$

23,615,310

 

$

 —

 

$

 —

 

$

23,615,310

 

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

OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. 

29


 

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

Valuation Technique

    

Unobservable Input

    

Range

 

Impaired loans/leases

 

$

4,674,218

 

$

8,972,337

 

Appraisal of collateral

 

Appraisal adjustments

 

(10.00)

%  

to

 

(30.00)

%

OREO

 

 

13,770,025

 

 

14,642,973

 

Appraisal of collateral

 

Appraisal adjustments

 

0.00

%  

to

 

(35.00)

%

 

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

There have been no changes in valuation techniques used for any assets measured at fair value during the three and six months ended June 30, 2018 and 2017.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

As of June 30, 2018

 

As of December 31, 2017

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

Cash and due from banks

 

Level 1

 

$

69,069,403

 

$

69,069,403

 

$

75,721,663

 

$

75,721,663

Federal funds sold

 

Level 2

 

 

10,866,000

 

 

10,866,000

 

 

30,197,000

 

 

30,197,000

Interest-bearing deposits at financial institutions

 

Level 2

 

 

40,801,388

 

 

40,801,388

 

 

55,765,012

 

 

55,765,012

Investment securities:

 

  

 

 

 

 

 

 

 

 

  

 

 

  

HTM

 

Level 2

 

 

400,052,344

 

 

397,252,368

 

 

379,474,205

 

 

379,749,804

AFS

 

See Previous Table

 

 

257,944,671

 

 

257,944,671

 

 

272,907,907

 

 

272,907,907

Loans/leases receivable, net

 

Level 3

 

 

4,327,980

 

 

4,674,218

 

 

8,307,719

 

 

8,972,337

Loans/leases receivable, net

 

Level 2

 

 

3,072,919,367

 

 

3,020,805,000

 

 

2,921,821,953

 

 

2,892,963,000

Interest rate caps

 

Level 2

 

 

706,291

 

 

706,291

 

 

506,700

 

 

506,700

Interest rate swaps - assets

 

Level 2

 

 

6,171,740

 

 

6,171,740

 

 

4,397,238

 

 

4,397,238

Deposits:

 

  

 

 

 

 

 

 

 

 

  

 

 

  

Nonmaturity deposits

 

Level 2

 

 

2,622,243,626

 

 

2,622,243,626

 

 

2,670,583,178

 

 

2,670,583,178

Time deposits

 

Level 2

 

 

676,032,401

 

 

677,799,000

 

 

596,071,878

 

 

591,772,000

Short-term borrowings

 

Level 2

 

 

17,585,605

 

 

17,585,605

 

 

13,993,122

 

 

13,993,122

FHLB advances

 

Level 2

 

 

254,100,000

 

 

254,008,000

 

 

192,000,000

 

 

192,115,000

Other borrowings

 

Level 2

 

 

71,125,000

 

 

71,645,000

 

 

66,000,000

 

 

66,520,000

Junior subordinated debentures

 

Level 2

 

 

37,580,881

 

 

29,851,237

 

 

37,486,487

 

 

29,253,624

Interest rate swaps - liabilities

 

Level 2

 

 

6,543,790

 

 

6,543,790

 

 

4,397,238

 

 

4,397,238

 

 

NOTE 7 – BUSINESS SEGMENT INFORMATION

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

30


 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

The Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the five subsidiary banks wholly owned by the Company:  QCBT, CRBT, CSB, RB&T and SFC Bank. 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 five subsidiary banks in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

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

Selected financial information on the Company's business segments is presented as follows as of and for the three and six months ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Banking

 

Wealth

 

 

 

 

Intercompany

 

Consolidated

 

    

QCBT

    

CRBT

    

CSB

    

RB&T

    

Management

    

All other

    

Eliminations

    

Total

Three Months Ended June 30, 2018

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

16,682,874

 

$

16,503,977

 

$

8,406,295

 

$

5,119,916

 

$

3,115,653

 

$

13,024,443

 

$

(13,142,678)

 

$

49,710,480

Net interest income

 

 

12,290,034

 

 

10,481,055

 

 

6,734,510

 

 

3,401,849

 

 

 —

 

 

(822,952)

 

 

 —

 

 

32,084,496

Provision

 

 

1,254,493

 

 

627,742

 

 

221,000

 

 

197,500

 

 

 —

 

 

 —

 

 

 —

 

 

2,300,735

Net income

 

 

4,510,902

 

 

4,705,042

 

 

2,158,347

 

 

813,623

 

 

796,911

 

 

10,405,693

 

 

(12,945,133)

 

 

10,445,385

Goodwill

 

 

3,222,688

 

 

14,979,984

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,090,897

Core deposit intangible

 

 

 —

 

 

3,439,864

 

 

5,029,987

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,469,851

Total assets

 

 

1,563,643,434

 

 

1,345,431,093

 

 

712,138,515

 

 

484,123,277

 

 

 —

 

 

463,206,792

 

 

(461,660,406)

 

 

4,106,882,705

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended June 30, 2017

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

14,210,040

 

$

10,149,769

 

$

8,171,307

 

$

4,241,431

 

$

2,560,836

 

$

10,181,814

 

$

(10,279,411)

 

$

39,235,786

Net interest income

 

 

11,414,818

 

 

7,230,425

 

 

6,920,820

 

 

3,095,512

 

 

 —

 

 

(614,878)

 

 

 —

 

 

28,046,697

Provision

 

 

552,993

 

 

300,000

 

 

861,000

 

 

309,000

 

 

 —

 

 

 —

 

 

 —

 

 

2,022,993

Net income

 

 

4,073,777

 

 

2,870,582

 

 

1,920,040

 

 

834,842

 

 

454,465

 

 

8,766,014

 

 

(10,153,703)

 

 

8,766,017

Goodwill

 

 

3,222,688

 

 

 —

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,110,913

Core deposit intangible

 

 

 —

 

 

1,172,141

 

 

5,747,339

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,919,480

Total assets

 

 

1,400,307,827

 

 

993,768,912

 

 

642,761,140

 

 

426,159,677

 

 

 —

 

 

382,407,292

 

 

(388,218,153)

 

 

3,457,186,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

32,490,444

 

$

32,501,309

 

$

16,569,618

 

$

10,117,861

 

$

6,305,078

 

$

25,556,486

 

$

(25,742,571)

 

$

97,798,225

Net interest income

 

 

24,410,336

 

 

21,316,903

 

 

13,478,457

 

 

6,867,003

 

 

 —

 

 

(1,585,285)

 

 

 —

 

 

64,487,414

Provision for loan/lease losses

 

 

2,374,902

 

 

1,229,570

 

 

796,602

 

 

439,500

 

 

 —

 

 

 —

 

 

 —

 

 

4,840,574

Net income

 

 

8,968,770

 

 

9,321,570

 

 

4,026,935

 

 

1,554,918

 

 

1,567,776

 

 

20,920,203

 

 

(25,364,826)

 

 

20,995,346

Goodwill

 

 

3,222,688

 

 

14,979,984

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,090,897

Core deposit intangible

 

 

 —

 

 

3,439,864

 

 

5,029,987

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,469,851

Total assets

 

 

1,563,643,434

 

 

1,345,431,093

 

 

712,138,515

 

 

484,123,277

 

 

 —

 

 

463,206,792

 

 

(461,660,406)

 

 

4,106,882,705

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Six Months Ended June 30, 2017

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

27,745,981

 

$

20,536,314

 

$

16,303,013

 

$

8,189,230

 

$

5,262,642

 

$

20,057,957

 

$

(20,230,498)

 

$

77,864,639

Net interest income

 

 

22,716,300

 

 

14,204,472

 

 

13,947,328

 

 

6,063,586

 

 

 —

 

 

(1,216,106)

 

 

 —

 

 

55,715,580

Provision for loan/lease losses

 

 

1,484,102

 

 

550,000

 

 

1,635,000

 

 

459,000

 

 

 —

 

 

 —

 

 

 —

 

 

4,128,102

Net income

 

 

7,728,783

 

 

5,763,142

 

 

3,815,174

 

 

1,679,411

 

 

1,015,527

 

 

17,950,982

 

 

(20,002,037)

 

 

17,950,982

Goodwill

 

 

3,222,688

 

 

 —

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,110,913

Core deposit intangible

 

 

 —

 

 

1,172,141

 

 

5,747,339

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,919,480

Total assets

 

 

1,400,307,827

 

 

993,768,912

 

 

642,761,140

 

 

426,159,677

 

 

 —

 

 

382,407,292

 

 

(388,218,153)

 

 

3,457,186,695

 

 

31


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

NOTE 8 – REGULATORY CAPITAL REQUIREMENTS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation.  Management believes, as of June 30, 2018 and December 31, 2017, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks' actual capital amounts and ratios as of June 30, 2018 and December 31, 2017 are presented in the following table (dollars in thousands). As of June 30, 2018 and December 31, 2017, each of the subsidiary banks met the requirements to be “well capitalized”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

    

 

    

Ratio

    

Amount

    

 

    

Ratio

    

Amount

    

 

    

Ratio

 

As of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

407,222

 

11.23

%  

$

290,121

 

> 

 

8.00

%  

$

358,118

 

> 

 

9.875

%  

$

362,652

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

369,677

 

10.19

%  

 

217,591

 

> 

 

6.00

 

 

285,588

 

> 

 

7.875

 

 

290,121

 

> 

 

8.00

 

Tier 1 leverage

 

 

369,677

 

9.22

%  

 

160,373

 

> 

 

4.00

 

 

160,373

 

> 

 

4.000

 

 

200,466

 

> 

 

5.00

 

Common equity Tier 1

 

 

332,096

 

9.16

%  

 

163,193

 

> 

 

4.50

 

 

231,190

 

> 

 

6.375

 

 

235,723

 

> 

 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

158,480

 

11.67

%  

$

108,599

 

> 

 

8.00

%  

$

134,052

 

> 

 

9.875

%  

$

135,748

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

145,157

 

10.69

%  

 

81,449

 

> 

 

6.00

 

 

106,902

 

> 

 

7.875

 

 

108,599

 

> 

 

8.00

 

Tier 1 leverage

 

 

145,157

 

9.19

%  

 

63,193

 

> 

 

4.00

 

 

63,193

 

> 

 

4.000

 

 

78,992

 

> 

 

5.00

 

Common equity Tier 1

 

 

145,157

 

10.69

%  

 

61,087

 

> 

 

4.50

 

 

86,540

 

> 

 

6.375

 

 

88,236

 

> 

 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

143,414

 

11.76

%  

$

97,602

 

> 

 

8.00

%  

$

120,477

 

> 

 

9.875

%  

$

122,003

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

130,203

 

10.67

%  

 

73,202

 

> 

 

6.00

 

 

96,077

 

> 

 

7.875

 

 

97,602

 

> 

 

8.00

 

Tier 1 leverage

 

 

130,203

 

9.83

%  

 

52,961

 

> 

 

4.00

 

 

52,961

 

> 

 

4.000

 

 

66,201

 

> 

 

5.00

 

Common equity Tier 1

 

 

130,203

 

10.67

%  

 

54,901

 

> 

 

4.50

 

 

77,777

 

> 

 

6.375

 

 

79,302

 

> 

 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

70,656

 

11.70

%  

$

48,330

 

> 

 

8.00

%  

$

59,658

 

> 

 

9.875

%  

$

60,413

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

65,443

 

10.83

%  

 

36,248

 

> 

 

6.00

 

 

47,575

 

> 

 

7.875

 

 

48,330

 

> 

 

8.00

 

Tier 1 leverage

 

 

65,443

 

9.56

%  

 

27,384

 

> 

 

4.00

 

 

27,384

 

> 

 

4.000

 

 

34,229

 

> 

 

5.00

 

Common equity Tier 1

 

 

65,443

 

10.83

%  

 

27,186

 

> 

 

4.50

 

 

38,513

 

> 

 

6.375

 

 

39,268

 

> 

 

6.50

 

Rockford Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

47,697

 

10.81

%  

$

35,283

 

> 

 

8.00

%  

$

43,553

 

> 

 

9.875

%  

$

44,104

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

42,181

 

9.56

%  

 

26,463

 

> 

 

6.00

 

 

34,732

 

> 

 

7.875

 

 

35,283

 

> 

 

8.00

 

Tier 1 leverage

 

 

42,181

 

8.90

%  

 

18,947

 

> 

 

4.00

 

 

18,947

 

> 

 

4.000

 

 

23,684

 

> 

 

5.00

 

Common equity Tier 1

 

 

42,181

 

9.56

%  

 

19,847

 

> 

 

4.50

 

 

28,116

 

> 

 

6.375

 

 

28,668

 

> 

 

6.50

 

 

32


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

    

 

    

Ratio

    

Amount

    

 

    

Ratio

    

Amount

    

 

    

Ratio

 

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

383,282

 

11.15

%  

$

275,090

 

> 

 

8.00

%  

$

318,073

 

> 

 

9.25

%  

$

343,862

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

348,530

 

10.14

%  

 

206,317

 

> 

 

6.00

 

 

249,300

 

> 

 

7.25

 

 

275,090

 

> 

 

8.00

 

Tier 1 leverage

 

 

348,530

 

8.98

%  

 

155,256

 

> 

 

4.00

 

 

155,256

 

> 

 

4.00

 

 

194,070

 

> 

 

5.00

 

Common equity Tier 1

 

 

313,012

 

9.10

%  

 

154,738

 

> 

 

4.50

 

 

197,721

 

> 

 

5.75

 

 

223,510

 

> 

 

6.50

 

Quad City Bank & Trust:

 

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

Total risk-based capital

 

$

160,112

 

12.35

%  

$

103,711

 

> 

 

8.00

%  

$

119,916

 

> 

 

9.25

%  

$

129,639

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

147,472

 

11.38

%  

 

77,783

 

> 

 

6.00

 

 

93,988

 

> 

 

7.25

 

 

103,711

 

> 

 

8.00

 

Tier 1 leverage

 

 

147,472

 

9.52

%  

 

61,985

 

> 

 

4.00

 

 

61,985

 

> 

 

4.00

 

 

77,481

 

> 

 

5.00

 

Common equity Tier 1

 

 

147,472

 

11.38

%  

 

58,337

 

> 

 

4.50

 

 

74,542

 

> 

 

5.75

 

 

84,265

 

> 

 

6.50

 

Cedar Rapids Bank & Trust:

 

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

Total risk-based capital

 

$

138,492

 

11.88

%  

$

93,272

 

> 

 

8.00

%  

$

107,846

 

> 

 

9.25

%  

$

116,590

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

126,601

 

10.86

%  

 

69,954

 

> 

 

6.00

 

 

84,528

 

> 

 

7.25

 

 

93,272

 

> 

 

8.00

 

Tier 1 leverage

 

 

126,601

 

11.68

%  

 

43,348

 

> 

 

4.00

 

 

43,348

 

> 

 

4.00

 

 

54,185

 

> 

 

5.00

 

Common equity Tier 1

 

 

126,601

 

10.86

%  

 

52,465

 

> 

 

4.50

 

 

67,039

 

> 

 

5.75

 

 

75,783

 

> 

 

6.50

 

Community State Bank:

 

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

Total risk-based capital

 

$

66,271

 

11.71

%  

$

45,293

 

> 

 

8.00

%  

$

52,370

 

> 

 

9.25

%  

$

56,616

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

61,941

 

10.94

%  

 

33,970

 

> 

 

6.00

 

 

41,047

 

> 

 

7.25

 

 

45,293

 

> 

 

8.00

 

Tier 1 leverage

 

 

61,941

 

9.77

%  

 

25,354

 

> 

 

4.00

 

 

25,354

 

> 

 

4.00

 

 

31,693

 

> 

 

5.00

 

Common equity Tier 1

 

 

61,941

 

10.94

%  

 

25,477

 

> 

 

4.50

 

 

32,554

 

> 

 

5.75

 

 

36,801

 

> 

 

6.50

 

Rockford Bank & Trust:

 

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

 

  

 

  

 

  

 

Total risk-based capital

 

$

45,684

 

11.28

%  

$

32,413

 

> 

 

8.00

%  

$

37,477

 

> 

 

9.25

%  

$

40,516

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

40,615

 

10.02

%  

 

24,310

 

> 

 

6.00

 

 

29,374

 

> 

 

7.25

 

 

32,413

 

> 

 

8.00

 

Tier 1 leverage

 

 

40,615

 

8.94

%  

 

18,177

 

> 

 

4.00

 

 

18,177

 

> 

 

4.00

 

 

22,721

 

> 

 

5.00

 

Common equity Tier 1

 

 

40,615

 

10.02

%  

 

18,232

 

> 

 

4.50

 

 

23,297

 

> 

 

5.75

 

 

26,335

 

> 

 

6.50

 


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

NOTE 9 – REVENUE RECOGNITION

As of January 1, 2018, the Company adopted ASU 2014‑09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue as approximately 89% of the Company's revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

Descriptions of our revenue-generating contracts with customers that are within the scope of ASU 2014‑09, which are presented in our income statements as components of non-interest income are as follows:

Trust department and Investment advisory and management fees: This is a contract between the Company and its customers for fiduciary and/or investment administration services on trust and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

Deposit service fees: The deposit contract obligates the Company to serve as a custodian of the customer's deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Deposit account related fees, including analysis charges, overdraft/nonsufficient fund charges, service charges, debit card usage fees, overdraft fees and wire transfer fees are within the scope of the guidance; however, revenue recognition practices did not change under the guidance, as deposit agreements are considered day-to-day contracts. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued

Correspondent banking fees: A contract between the Company and its correspondent banks for corresponding banking services. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. Correspondent banking fee income is tied to transaction activity and revenue is recognized monthly as earned for services provided.

NOTE 10 –MERGERS AND ACQUISITIONS

BATES COMPANIES

On March 20, 2018 the Company announced the signing of definitive agreements to acquire the Bates Companies, headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will enhance the wealth management services of RB&T by adding approximately $700.0 million of assets under management.

In the acquisition, the Company will acquire 100% of the Bates Companies' outstanding common stock for an aggregate consideration of $3.0 million cash and up to $3.0 million of the Company's common stock. In a private placement exempt from registration with the SEC, the Company expects to issue upon closing of the transaction approximately 21,528 common shares or $1.0 million of Company stock. Assuming all future performance based contingent consideration is realized total stock consideration can reach $3.0 million, which would result in the Company expecting to issue approximately 64,583 common shares based on closing stock price at the date of announcement.

This transaction is subject to regulatory approval and certain closing conditions. The transaction is expected to close early in fourth quarter of 2018.

SPRINGFIELD BANCSHARES, INC.

On July 1, 2018, the Company completed its previously announced merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. SFC Bank is a Missouri-chartered bank that operates one location in the Springfield, Missouri market.  As a result of the transaction, SFC Bank became the Company’s fifth independent charter.

Stockholders of Springfield Bancshares received 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held.  On June 29, 2018, the last trading date before the closing, the Company’s common stock closed at $47.45, resulting in stock consideration valued at $79.2 million and total consideration paid by the Company of $87.4 million. To help fund the cash portion of the purchase price, on June 29, 2018, the Company borrowed $4.1 million on its existing $10.0 million revolving line of credit.   The Company also borrowed $4.9 million on this same revolving line of credit to fund the repayment of certain debt assumed in the merger, shortly after closing.    This note is included within other borrowings on the June 30, 2018 Consolidated Balance Sheet.  The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.

As of the merger date, SFC Bank had assets with a historical book value of $573 million, loans with a book value of $487 million, and deposits with a book value of $439 million.  The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed, including goodwill and core deposit intangible.

 

34


 

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Part I

Item 2

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

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending June 30, 2018. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to are presented in the table of contents.

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

GENERAL

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

QCBT, CRBT and CSB are Iowa-chartered commercial banks, RB&T is an Illinois-chartered commercial bank and SFC Bank is a Missouri-chartered commercial bank. All are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by law by the FDIC.

·

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

·

CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its five offices located in Cedar Rapids and Marion, Iowa. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (two in Waterloo and one in Cedar Falls).

·

CSB was acquired by QCR in 2016, as further described in Note 2 to the Consolidated Financial Statements included in the Annual Report on Form 10‑K for the year ended December 31, 2017. CSB provides full-service commercial and consumer banking to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

·

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

·

The financial results of SFC Bank are not included in this report because the Company’s acquisition of SFC Bank through merger of Springfield Bancshares, previously the holding company of SFC Bank, into the Company occurred on July 1, 2018.

 

35


 

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Part I

Item 2

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

EXECUTIVE OVERVIEW

The Company reported net income of $10.4 million and diluted EPS of $0.73 for the quarter ended June 30, 2018. By comparison, for the quarter ended March 31, 2018, the Company reported net income of $10.6 million and diluted EPS of $0.74. For the quarter ended June 30, 2017, the Company reported net income of $8.8 million and diluted EPS of $0.65.  For the six months ended June 30, 2018, the Company reported net income of $21.0 million, and diluted EPS of $1.48.  By comparison, for the six months ended June 30, 2017, the Company reported net income of $18.0 million, and diluted EPS of $1.33.

The second quarter of 2018 was highlighted by several significant items:

·

Net income of $10.4 million, or $0.73 per diluted share;

·

Core net income (non-GAAP) of $10.9 million, or $0.77 per diluted share;

·

Annualized loan and lease growth of 7.8% for the quarter ended and 10.1% year-to-date; and

·

Annualized noninterest income growth of 17.4%.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

 

June 30, 2018

 

December 31, 2017

 

June 30, 2017

 

June 30, 2018

 

June 30, 2017

 

Net income

 

$

10,445,385

 

$

9,901,590

 

$

8,766,017

 

$

20,995,346

 

$

17,950,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.73

 

$

0.70

 

$

0.65

 

$

1.48

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

 

14,232,423

 

 

14,193,191

 

 

13,516,592

 

 

14,219,003

 

 

13,502,505

 

 

The increase in weighted average common shares outstanding from June 30, 2017 to June 30, 2018 was primarily due to the common stock issued to Guaranty as consideration for the acquisition of Guaranty Bank.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

    

June 30, 2018

    

March 31, 2018

    

June 30, 2017

    

June 30, 2018

    

June 30, 2017

 

Net interest income

 

$

32,084,496

 

$

32,402,918

 

$

28,046,697

 

$

64,487,414

 

$

55,715,580

 

Provision expense

 

 

2,300,735

 

 

2,539,839

 

 

2,022,993

 

 

4,840,574

 

 

4,128,102

 

Noninterest income

 

 

8,912,266

 

 

8,541,449

 

 

6,782,518

 

 

17,453,715

 

 

14,066,272

 

Noninterest expense

 

 

26,369,823

 

 

25,863,497

 

 

21,404,629

 

 

52,233,320

 

 

42,677,746

 

Federal and state income tax expense

 

 

1,880,819

 

 

1,991,070

 

 

2,635,576

 

 

3,871,889

 

 

5,025,022

 

Net income

 

$

10,445,385

 

$

10,549,961

 

$

8,766,017

 

$

20,995,346

 

$

17,950,982

 

 

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

·

Net interest income in the second quarter of 2018 was down 1% compared to the first quarter of 2018.  Net interest income increased 14% compared to the second quarter of 2017 and 16% when comparing the first six months of 2018 to the same period in the prior year.  This increase was primarily due to strong loan and lease growth and the acquisition of Guaranty Bank.

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Part I

Item 2

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

·

Provision expense in the second quarter of 2018 decreased 9% compared to the first quarter of 2018 and increased 14% from the same period of 2017.  Provision expense increased 17% in the first six months of 2018  from the same period of 2017 and was attributable to both strong loan growth and accounting for acquired loans.  As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.

·

Noninterest income in the second quarter of 2018 increased 4% compared to the first quarter of 2018, primarily due to higher swap fee income. Noninterest income in the second quarter of 2018 increased 31% from the second quarter of 2017 and 24% when comparing the first six months of 2018 to the same period in the prior year.  This increase was primarily attributable to higher swap fee income, as well as solid growth in wealth management fee income and the acquisition of Guaranty Bank.

·

Noninterest expense increased 2% from the first quarter of 2018. Noninterest expense increased 23% from the second quarter of 2017 and 22% when comparing the first six months of 2018 to the same period in the prior year which was primarily due to the acquisition of Guaranty Bank.

·

Federal and state income tax expense in the second quarter of 2018 decreased 6% compared to the first quarter of 2018. Federal and state income tax expense in the second quarter of 2018 decreased 29% compared to the second quarter of 2017 and decreased 23% when comparing the first six months of 2018 to the same period in the prior year primarily due to a lower federal tax rate. See the “Income Taxes” section of this Report for additional details.

LONG-TERM FINANCIAL GOALS

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company's ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2017. The Company's long-term financial goals are as follows:

·

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

·

Improve profitability (measured by NIM and ROAA);

·

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

·

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

·

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

·

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

·

Grow wealth management segment net income by 10% annually.

37


 

Table of Contents

Part I

Item 2

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ending

 

Goal

Key Metric

Target**

June 30, 2018

 

March 31, 2018

 

June 30, 2017

 

Balance sheet efficiency

Gross loans and leases to total assets

73% - 78%

 

76

%  

 

 

76

%

 

 

74

%

 

 

NIM TEY (non-GAAP)*

> 3.65%

 

3.52

%  

 

 

3.64

%

 

 

3.81

%

 

Profitability

ROAA

> 1.10%

 

1.03

%  

 

 

1.06

%

 

 

1.04

%

 

 

Core ROAA (non-GAAP)*

> 1.10%

 

1.08

%  

 

 

1.06

%

 

 

1.04

%

 

Asset quality

NPAs to total assets

< 0.75%

 

0.65

%  

 

 

0.77

%

 

 

0.75

%

 

 

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

< 0.25% annually

 

0.11

%  

 

 

0.05

%

 

 

0.13

%

 

Reliance on wholesale funding

Wholesale funding to total assets****

< 15%

 

13

%  

 

 

14

%

 

 

10

%

 

Funding mix

Noninterest bearing deposits as a percentage of total assets

>  30%

 

18

%  

 

 

19

%

 

 

22

%

 

Consistent, high quality noninterest income revenue streams

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

> $4 million annually

$

5.9

million  

 

$

5.3

million  

 

$

3.0

million

 

 

Grow wealth management segment net income***

> 10% annually

 

54

%  

 

 

37

%

 

 

22

%

 


*       See “GAAP to Non-GAAP” reconciliations section.

**     Targets will be re-evaluated and adjusted as appropriate.

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

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

STRATEGIC DEVELOPMENTS

The Company took the following actions during the second quarter of 2018 to support its corporate strategy and the long-term financial goals shown above.

·

The Company grew loans and leases in the second quarter of 2018 by 7.8% on an annualized basis. Strong loan and lease growth for the remainder of the year will help keep the Company's loan and leases to asset ratio within the targeted range of 73‑78%.

·

The Company has participated, and intends to continue to participate, in a prudent manner as an acquirer in the consolidation taking place in our markets to continue to grow EPS, further boost ROAA and improve the Company's efficiency ratio. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The Company announced in July 2018 the completion of the merger of Springfield Bancshares. See Note 10 to the Consolidated Financial Statements for additional details about these strategic transactions.

·

The Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreased by 12 basis points to 0.65%, compared to the first quarter 2018. This decrease was primarily due to the upgrade of one large credit that was taken out of TDR status. The Company remains committed to improving asset quality ratios in 2018 and beyond.

·

Management has continued to focus on reducing the Company's reliance on wholesale funding. Core deposit growth in the second quarter of 2018 allowed wholesale funding to decrease 1%. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

38


 

Table of Contents

Part I

Item 2

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

·

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the three states currently served – Iowa, Illinois and Wisconsin - and to expand into the Missouri market. The Company acts as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $215.3 million that hadaverage total interest bearing deposits of $208.3 million during the first six months of 2018. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

·

SBA and USDA lending is a specialty lending area on which the Company has focused. Once these loans are originated, the government-guaranteed portion of the loan can be sold to the secondary market for premiums.

·

As a result of the relatively low interest rate environment including a flat yield curve, the Company has focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company.

·

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of June 30, 2018, the Company had $2.72 billion of total financial assets in trust (and related) accounts and $1.05 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as the acquisition of managed assets. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.

GAAP TO NON-GAAP RECONCILIATIONS

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

·

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

·

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

·

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

·

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

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

39


 

Table of Contents

Part I

Item 2

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

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

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

GAAP TO NON-GAAP

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

    

June 30, 

 

RECONCILIATIONS

 

2018

 

2018

 

2017

 

2017

 

2017

 

 

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

 

 

 

 

 

  

 

 

 

 

 

  

 

 

  

 

Stockholders' equity (GAAP)

 

$

369,588

 

$

360,428

 

$

353,287

 

$

313,039

 

$

305,083

 

Less: Intangible assets

 

 

36,561

 

 

37,108

 

 

37,413

 

 

19,800

 

 

20,030

 

TCE (non-GAAP)

 

$

333,027

 

$

323,320

 

$

315,874

 

$

293,239

 

$

285,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (GAAP)

 

$

4,106,883

 

$

4,026,314

 

$

3,982,665

 

$

3,550,463

 

$

3,457,187

 

Less: Intangible assets

 

 

36,561

 

 

37,108

 

 

37,413

 

 

19,800

 

 

20,030

 

TA (non-GAAP)

 

$

4,070,322

 

$

3,989,206

 

$

3,945,252

 

$

3,530,663

 

$

3,437,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

 

 

8.18

%  

 

8.10

%  

 

8.01

%  

 

8.31

%  

 

8.29

%

 

40


 

Table of Contents

Part I

Item 2

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

For the Six Months Ended

 

 

 

 

June 30, 

    

March 31, 

    

December 31, 

    

 

 

June 30, 

June 30, 

 

 

 

    

2018

    

2018

    

2017

 

 

 

2018

2017

 

 

 

 

(dollars in thousands,except per share data)

 

 

CORE NET INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

10,445

 

$

10,550

 

$

9,902

 

 

$

20,995

 

$

17,951

 

 

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

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Income:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Securities gains, net

 

$

 —

 

$

 —

 

$

(41)

 

 

$

 —

 

$

25

 

 

Total nonrecurring income (non-GAAP)

 

$

 —

 

$

 —

 

$

(41)

 

 

$

 —

 

$

25

 

 

Expense:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Acquisition costs

 

$

327

 

$

73

 

$

430

 

 

$

400

 

$

 —

 

 

Post-acquisition compensation, transition and integration costs

 

 

130

 

 

 —

 

 

2,462

 

 

 

130

 

 

 —

 

 

Total nonrecurring expense (non-GAAP)

 

$

457

 

$

73

 

$

2,892

 

 

$

530

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment of tax expense related to the Tax Act

 

$

 —

 

$

 —

 

$

2,919

 

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core net income (non-GAAP)

 

$

10,902

 

$

10,623

 

$

9,916

 

 

$

21,525

 

$

17,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORE EPS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

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

 

$

10,902

 

$

10,623

 

$

9,916

 

 

$

21,525

 

$

17,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

13,919,565

 

 

13,888,661

 

 

13,845,497

 

 

 

13,904,113

 

 

13,151,833

 

 

Weighted average common and common equivalent shares outstanding

 

 

14,232,423

 

 

14,205,584

 

 

14,193,191

 

 

 

14,219,003

 

 

13,502,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core EPS (non-GAAP):

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Basic

 

$

0.78

 

$

0.76

 

$

0.72

 

 

$

1.55

 

$

1.36

 

 

Diluted

 

$

0.77

 

$

0.75

 

$

0.70

 

 

$

1.51

 

$

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORE ROAA

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

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

 

$

10,902

 

$

10,623

 

$

9,916

 

 

$

21,525

 

$

17,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

4,053,684

 

$

3,994,691

 

$

3,923,337

 

 

$

4,024,188

 

$

3,326,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core ROAA (annualized) (non-GAAP)

 

 

1.08

%  

 

1.06

%  

 

1.01

%  

 

 

1.07

%  

 

1.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM (TEY)*

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

 

 

Net interest income (GAAP)

 

$

32,085

 

$

32,403

 

$

31,793

 

 

$

64,488

 

$

55,716

 

 

Plus: Taxequivalent adjustment

 

 

1,462

 

 

1,353

 

 

2,585

 

 

 

2,815

 

 

4,218

 

 

Net interest income - taxequivalent (non-GAAP)

 

$

33,547

 

$

33,756

 

$

34,378

 

 

$

67,303

 

$

59,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

3,820,333

 

$

3,759,475

 

$

3,699,193

 

 

$

3,789,905

 

$

3,128,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.37

%  

 

3.50

%  

 

3.41

%  

 

 

3.43

%  

 

3.59

%

 

NIM (TEY) (non-GAAP)

 

 

3.52

%  

 

3.64

%  

 

3.69

%  

 

 

3.58

%  

 

3.86

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Noninterest expense (GAAP)

 

$

26,370

 

$

25,863

 

$

31,351

 

 

$

52,234

 

$

42,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

32,085

 

$

32,403

 

$

31,793

 

 

$

64,488

 

$

55,716

 

 

Noninterest income (GAAP)

 

 

8,912

 

 

8,541

 

 

9,714

 

 

 

17,454

 

 

14,066

 

 

Total income

 

$

40,997

 

$

40,944

 

$

41,507

 

 

$

81,942

 

$

69,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

64.32

%  

 

63.17

%  

 

75.53

%  

 

 

63.75

%  

 

61.16

%

 


*     Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 35% for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)   

As part of the Tax Act, the Company's federal income tax rate was reduced from 35% down to 21% effective January 1, 2018. In order to compare periods before and after the effective date of the Tax Act, it's important to note the difference in the federal income tax rate and the impact on the Company's tax exempt earning assets (loans and securities) and the related tax equivalent yield reporting.

41


 

Table of Contents

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Item 2

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

Net interest income, on a tax equivalent basis, increased 11% to $33.5 million for the quarter ended June 30, 2018, compared to the same quarter of the prior year, and increased 12% to $67.3 million for the six months ended June 30, 2018 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased 14% for the quarter ended June 30, 2018 compared to the same quarter of the prior year, and increased 16%  for the six months ended June 30, 2018 compared to the same period of the prior year. Net interest income improved due to several factors:

·

Organic loan and lease growth has been strong over the past 12 months pushing loans/leases up to 76% of total assets;

·

The acquisition of Guaranty Bank in the fourth quarter of 2017, whose strong NIM has contributed to the Company's results; and

·

The Company's continued strategy to redeploy funds from the lower yielding taxable securities portfolio into higher yielding loans and municipal bonds, especially with the Company's most recent acquisitions of CSB and Guaranty Bank.

A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

 

GAAP

 

 

 

 

For the Quarter Ended

 

 

For the Quarter Ended

 

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

 

    

2018

    

 

2018

    

 

2017

 

    

2018

 

    

2018

    

 

2017

 

Average Yield on Interest-Earning Assets

 

 

4.44

%  

 

4.41

%  

 

4.37

%  

 

4.28

%  

 

4.27

%  

 

4.09

%

Average Cost of Interest-Bearing Liabilities

 

 

1.21

%  

 

1.03

%  

 

0.77

%  

 

1.21

%  

 

1.03

%  

 

0.77

%

Net Interest Spread

 

 

3.23

%  

 

3.38

%  

 

3.60

%  

 

3.07

%  

 

3.24

%  

 

3.32

%

NIM

 

 

3.52

%  

 

3.64

%  

 

3.81

%  

 

3.37

%  

 

3.50

%  

 

3.54

%

NIM Excluding Acquisition Accounting Net Accretion

 

 

3.46

%  

 

3.56

%  

 

3.61

%  

 

3.31

%  

 

3.42

%  

 

3.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

 

GAAP

 

 

 

 

 

For the Six Months Ended

 

 

For the Six Months Ended

 

 

 

 

    

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

 

 

2018

    

 

2017

    

 

2018

 

    

2017

 

 

Average Yield on Interest-Earning Assets

 

 

4.42

%  

 

4.38

%  

 

4.28

%  

 

4.11

%

 

Average Cost of Interest-Bearing Liabilities

 

 

1.13

%  

 

0.73

%  

 

1.13

%  

 

0.73

%

 

Net Interest Spread

 

 

3.29

%  

 

3.65

%  

 

3.15

%  

 

3.38

%

 

NIM

 

 

3.58

%  

 

3.86

%  

 

3.43

%  

 

3.59

%

 

NIM Excluding Acquisition Accounting Net Accretion

 

 

3.51

%  

 

3.63

%  

 

3.37

%  

 

3.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition accounting net accretion can fluctuate depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it's important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons.  A comparison of acquisition accounting net accretion included in NIM is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

For the Six Months Ended

 

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

 

2018

    

 

2018

    

 

2017

 

 

2018

 

    

2017

 

 

 

dollars in thousands

 

Acquisition Accounting Net Accretion in NIM

 

$

545

 

$

699

 

$

1,553

 

$

1,244

 

$

3,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM on a tax equivalent basis was down 12 basis points on a linked quarter basis.  .  Excluding acquisition accounting net accretion, NIM was down 10 basis points on a linked quarter basis.  This margin compression was primarily due to the following:

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Item 2

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

·

Increases in the cost of funds due to both mix and rate as the Company continues to grow larger commercial and public deposits which tend to have higher interest rate sensitivity;

·

In the first quarter of 2018, the Company recognized elevated loan origination fee income through NIM for select commercial loans which contributed to approximately five basis points of the core NIM decline;

·

With the flat yield curve and continued competition in our markets, loan pricing continues to be pressured.  The Company had success in widening spreads as core loan yields increased 13 basis points on linked quarter basis; however, the pace and magnitude of the widening has been offset by the increasing cost of funds;

·

The majority of the Company’s earning asset growth in the second quarter of 2018 occurred at the end of the quarter.

The Company's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with  the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies which included better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate increases and finding additional ways to manage cost of funds through derivatives.

43


 

Table of Contents

Part I

Item 2

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 

 

 

 

2018

 

 

2017

 

 

 

 

 

 

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

 

$

18,561

 

$

61

 

 

1.32

%  

 

$

18,742

 

$

38

 

 

0.81

%

Interest-bearing deposits at financial institutions

 

 

54,879

 

 

228

 

 

1.67

%  

 

 

86,236

 

 

220

 

 

1.02

%

Investment securities (1)

 

 

648,276

 

 

5,752

 

 

3.56

%  

 

 

573,747

 

 

5,384

 

 

3.76

%

Restricted investment securities

 

 

21,100

 

 

212

 

 

4.03

%  

 

 

13,226

 

 

132

 

 

4.00

%

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

 

 

3,077,517

 

 

36,008

 

 

4.69

%  

 

 

2,488,828

 

 

28,881

 

 

4.65

%

Total interest earning assets

 

$

3,820,333

 

$

42,261

 

 

4.44

%  

 

$

3,180,779

 

$

34,655

 

 

4.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

$

68,266

 

 

 

 

 

 

 

 

$

63,526

 

 

 

 

 

 

 

Premises and equipment

 

 

63,665

 

 

 

 

 

 

 

 

 

61,327

 

 

 

 

 

 

 

Less allowance

 

 

(36,960)

 

 

 

 

 

 

 

 

 

(32,361)

 

 

 

 

 

 

 

Other

 

 

138,380

 

 

 

 

 

 

 

 

 

104,924

 

 

 

 

 

 

 

Total assets

 

$

4,053,684

 

 

 

 

 

 

 

 

$

3,378,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

1,919,406

 

 

4,089

 

 

0.85

%  

 

$

1,566,106

 

 

1,835

 

 

0.47

%

Time deposits

 

 

665,643

 

 

2,439

 

 

1.47

%  

 

 

527,719

 

 

1,156

 

 

0.88

%

Short-term borrowings

 

 

19,024

 

 

63

 

 

1.33

%  

 

 

17,936

 

 

19

 

 

0.42

%

FHLB advances

 

 

174,826

 

 

882

 

 

2.02

%  

 

 

76,739

 

 

354

 

 

1.85

%

Other borrowings

 

 

67,044

 

 

733

 

 

4.39

%  

 

 

72,000

 

 

696

 

 

3.88

%

Junior subordinated debentures

 

 

37,558

 

 

508

 

 

5.43

%  

 

 

33,530

 

 

347

 

 

4.15

%

Total interest-bearing liabilities

 

$

2,883,501

 

$

8,714

 

 

1.21

%  

 

$

2,294,030

 

$

4,407

 

 

0.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

757,954

 

 

 

 

 

 

 

 

$

741,886

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

47,198

 

 

 

 

 

 

 

 

 

41,411

 

 

 

 

 

 

 

Total liabilities

 

$

3,688,653

 

 

 

 

 

 

 

 

$

3,077,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

365,031

 

 

 

 

 

 

 

 

 

300,868

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,053,684

 

 

 

 

 

 

 

 

$

3,378,195

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

33,547

 

 

 

 

 

 

 

 

$

30,248

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.23

%  

 

 

 

 

 

 

 

 

3.60

%

Net interest margin

 

 

 

 

 

 

 

 

3.52

%  

 

 

 

 

 

 

 

 

3.81

%

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

 

 

132.49

%  

 

 

 

 

 

 

 

 

138.65

%  

 

 

 

 

 

 


(1)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

(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.

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Table of Contents

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Item 2

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

Analysis of Changes of Interest Income/Interest Expense

For the three months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

 

from

 

of Change (1)

 

 

    

Prior Period

    

Rate

    

Volume

 

 

 

2018 vs. 2017

 

 

 

(dollars in thousands)

 

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

23

 

$

25

 

$

(2)

 

Interest-bearing deposits at financial institutions

 

 

 8

 

 

412

 

 

(404)

 

Investment securities (2)

 

 

368

 

 

(1,549)

 

 

1,917

 

Restricted investment securities

 

 

80

 

 

 1

 

 

79

 

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

 

 

7,127

 

 

241

 

 

6,886

 

Total change in interest income

 

$

7,606

 

$

(870)

 

$

8,476

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

2,254

 

$

1,767

 

$

487

 

Time deposits

 

 

1,283

 

 

924

 

 

359

 

Short-term borrowings

 

 

44

 

 

43

 

 

 1

 

Federal Home Loan Bank advances

 

 

528

 

 

36

 

 

492

 

Other borrowings

 

 

37

 

 

276

 

 

(239)

 

Junior subordinated debentures

 

 

161

 

 

116

 

 

45

 

Total change in interest expense

 

$

4,307

 

$

3,162

 

$

1,145

 

Total change in net interest income

 

$

3,299

 

$

(4,032)

 

$

7,331

 


(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 for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

(3)

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

(4)

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

 

45


 

Table of Contents

Part I

Item 2

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended June 30, 

 

 

 

2018

 

 

2017

 

 

 

 

 

 

Interest

 

Average

 

 

 

 

 

Interest

 

Average

 

 

 

Average

 

Earned

 

Yield or

 

 

Average

 

Earned

 

Yield or

 

 

    

Balance

    

or Paid

    

Cost

    

 

Balance

    

or Paid

    

Cost

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

19,132

 

$

118

 

 

1.24

%  

 

$

14,917

 

$

53

 

 

0.72

%  

Interest-bearing deposits at financial institutions

 

 

52,205

 

 

425

 

 

1.64

 

 

 

89,394

 

 

418

 

 

0.94

%  

Investment securities (1)

 

 

648,656

 

 

11,418

 

 

3.55

 

 

 

567,101

 

 

10,543

 

 

3.75

%  

Restricted investment securities

 

 

21,465

 

 

446

 

 

4.19

 

 

 

13,549

 

 

262

 

 

3.90

%  

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

 

 

3,048,447

 

 

70,753

 

 

4.68

 

 

 

2,443,608

 

 

56,741

 

 

4.68

%  

Total interest earning assets

 

$

3,789,905

 

 

83,160

 

 

4.42

 

 

$

3,128,569

 

 

68,017

 

 

4.38

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

$

67,745

 

 

 

 

 

 

 

 

$

64,409

 

 

 

 

 

 

 

Premises and equipment, net

 

 

63,530

 

 

 

 

 

 

 

 

 

61,152

 

 

 

 

 

 

 

Less allowance for estimated losses on loans/leases

 

 

(36,048)

 

 

 

 

 

 

 

 

 

(31,930)

 

 

 

 

 

 

 

Other

 

 

139,057

 

 

 

 

 

 

 

 

 

104,256

 

 

 

 

 

 

 

Total assets

 

$

4,024,189

 

 

 

 

 

 

 

 

$

3,326,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing demand deposits

 

$

1,873,817

 

 

7,109

 

 

0.77

%  

 

$

1,486,876

 

 

2,974

 

 

0.40

%  

Time deposits

 

 

641,152

 

 

4,301

 

 

1.35

 

 

 

519,419

 

 

2,249

 

 

0.87

%  

Short-term borrowings

 

 

18,148

 

 

95

 

 

1.06

 

 

 

21,562

 

 

43

 

 

0.40

%  

Federal Home Loan Bank advances

 

 

205,758

 

 

1,946

 

 

1.91

 

 

 

95,548

 

 

758

 

 

1.60

%  

Other borrowings

 

 

65,862

 

 

1,451

 

 

4.44

 

 

 

73,381

 

 

1,379

 

 

3.79

%  

Junior subordinated debentures

 

 

37,534

 

 

955

 

 

5.13

 

 

 

33,514

 

 

680

 

 

4.09

%  

Total interest-bearing liabilities

 

$

2,842,271

 

 

15,857

 

 

1.13

 

 

$

2,230,300

 

 

8,083

 

 

0.73

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

776,314

 

 

 

 

 

 

 

 

$

757,566

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

44,826

 

 

 

 

 

 

 

 

 

42,704

 

 

 

 

 

 

 

Total liabilities

 

$

3,663,411

 

 

 

 

 

 

 

 

$

3,030,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

360,778

 

 

 

 

 

 

 

 

 

295,887

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,024,189

 

 

 

 

 

 

 

 

$

3,326,456

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

67,303

 

 

 

 

 

 

 

 

$

59,934

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.29

%  

 

 

 

 

 

 

 

 

3.65

%  

Net interest margin

 

 

 

 

 

 

 

 

3.58

%  

 

 

 

 

 

 

 

 

3.86

%  

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

 

 

133.34

%  

 

 

 

 

 

 

 

 

140.28

%  

 

 

 

 

 

 


(1)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

(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.

 

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Analysis of Changes of Interest Income/Interest Expense

For the six months ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

from

 

of Change (1)

 

    

Prior Period

    

Rate

    

Volume

 

 

2018 vs. 2017

 

 

(dollars in thousands)

INTEREST INCOME

 

 

  

 

 

  

 

 

  

Federal funds sold

 

$

65

 

$

47

 

$

18

Interest-bearing deposits at other financial institutions

 

 

 7

 

 

454

 

 

(447)

Investment securities (2)

 

 

875

 

 

(1,414)

 

 

2,289

Restricted investment securities

 

 

184

 

 

21

 

 

163

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

 

 

14,012

 

 

(80)

 

 

14,092

Total change in interest income

 

$

15,143

 

$

(972)

 

$

16,115

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

Interest-bearing demand deposits

 

$

4,135

 

$

3,205

 

$

930

Time deposits

 

 

2,052

 

 

1,438

 

 

614

Short-term borrowings

 

 

52

 

 

73

 

 

(21)

Federal Home Loan Bank advances

 

 

1,188

 

 

170

 

 

1,018

Other borrowings

 

 

72

 

 

403

 

 

(331)

Junior subordinated debentures

 

 

275

 

 

(40)

 

 

315

Total change in interest expense

 

$

7,774

 

$

5,249

 

$

2,525

Total change in net interest income

 

$

7,369

 

$

(6,221)

 

$

13,590


(1)

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

(2)

Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

(3)

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

(4)

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

CRITICAL ACCOUNTING POLICIES

The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Certain critical accounting policies are described below.

ALLOWANCE FOR LOAN AND LEASE LOSSES

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan and lease losses.

The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers' sensitivity to interest rate movements.

 

Qualitative factors include management's view regarding the general economic environment in the Company's markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and

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complexity of individual credits in relation to loan/lease structures, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology.

Management may report a materially different amount for the provision in the statement of income to change the allowance if its assessment of the above factors were different. This discussion and analysis should be read in conjunction with the Company's financial statements and the accompanying notes presented elsewhere herein, as well as the section entitled “Financial Condition” of this Management's Discussion and Analysis that discusses the allowance.

Although management believes the level of the allowance as of June 30, 2018 was adequate to absorb losses in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased 26%, comparing the second quarter of 2018 to the same period of 2017 and comparing the first half of 2018 to the same period of 2017. This increase was primarily the result of strong organic loan growth, the acquisition of Guaranty Bank, and improved pricing with the rising rate environment.  Although the latter has been less than the Company would like due to competitive pressures and the flat yield cureve, the Company is focused on growing loans at higher rates with widening spreads to more than effect the rising cost of funds

Overall, the Company's average earning assets increased 20%, comparing the second quarter of 2018 to the second quarter of 2017. During the same time period, average gross loans and leases increased 24%, while average investment securities increased 13% with a portion being private placement tax-exempt municipal securities.  Average earning assets increased 21%, comparing the first half of 2018 to the same period of 2017.  Average gross loans and leases increased 25% and average investment securities increased 14%, comparing the first half of 2018 to the same period to 2017. These increases were also the result of strong loan growth and the acquisition of Guaranty Bank.

The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSE

Interest expense for the second quarter of 2018 increased 98% from the second quarter of 2017 and increased 96%, comparing the first half of 2018 to the same period of 2017. The acquisition of Guaranty Bank contributed to this increase as we added over $200MM in deposits.  Additionally, as the Company has grown organically at a significant pace over the past several years, the loan growth has been funded in larger part by bigger depositor relationships with higher rate sensitivity and many of those relationships which have pricing tied to a certain index.  As a result, the cost of these funds is higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest rates rise which has been the case over the past several quarters.  The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on these relationships with pricing tied to a certain index.  Additionally, the loan growth has outpaced deposit growth, short-term borrowings have increased to fill in the funding gap and the cost of these funds has increased with the rising rate environment. 

 

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

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PROVISION FOR LOAN/LEASE LOSSES

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

The Company's provision totaled $2.3 million for the second quarter of 2018, which was an increase of $278 thousand or 14% from the same quarter of the prior year.   Provision for the first six months of the year totaled $4.8 million, which was up $712 thousand or 17%, compared to the first six months of 2017.  The increase from the second quarter of 2017 to the second quarter of 2018 was primarily attributable to loan growth and the accounting for the loans acquired through the acquisitions of CSB and Guaranty Bank. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of $1.7 million for the first six months of 2018, increased the Company's allowance to $37.5 million at June 30, 2018. As of June 30, 2018, the Company's allowance to total loans/leases was 1.21%, which was relatively flat from 1.20% at March 31, 2018 and down from 1.31% at June 30, 2017.

In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($6.6 million and $6.3 million at June 30, 2018 and June 30, 2017, respectively). When factoring this remaining discount into the Company's allowance to total loans and leases calculation, the Company's allowance as a percentage of total loans and leases increases from 1.21% to 1.42% as of June 30, 2018 and increases from 1.31% to 1.55% as of June 30, 2017.

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

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Trust department fees

 

$

2,057,987

 

$

1,692,001

 

$

365,986

 

21.6

%

 

Investment advisory and management fees

 

 

1,057,666

 

 

868,835

 

 

188,831

 

21.7

 

 

Deposit service fees

 

 

1,610,403

 

 

1,458,359

 

 

152,044

 

10.4

 

 

Gains on sales of residential real estate loans, net

 

 

101,772

 

 

112,628

 

 

(10,856)

 

(9.6)

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

 —

 

 

87,053

 

 

(87,053)

 

(100.0)

 

 

Swap fee income

 

 

1,648,885

 

 

327,577

 

 

1,321,308

 

403.4

 

 

Securities gains, net

 

 

 —

 

 

38,464

 

 

(38,464)

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

399,273

 

 

459,359

 

 

(60,086)

 

(13.1)

 

 

Debit card fees

 

 

844,286

 

 

743,521

 

 

100,765

 

13.6

 

 

Correspondent banking fees

 

 

212,530

 

 

200,057

 

 

12,473

 

6.2

 

 

Other

 

 

979,464

 

 

794,664

 

 

184,800

 

23.3

 

 

Total noninterest income

 

$

8,912,266

 

$

6,782,518

 

$

2,129,748

 

31.4

%

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

 

% Change

 

 

Trust department fees

 

$

4,295,068

 

$

3,432,208

 

$

862,860

 

25.1

%

 

Investment advisory and management fees

 

 

2,010,010

 

 

1,830,434

 

 

179,576

 

9.8

 

 

Deposit service fees

 

 

3,141,856

 

 

2,774,749

 

 

367,107

 

13.2

 

 

Gains on sales of residential real estate loans, net

 

 

202,587

 

 

208,951

 

 

(6,364)

 

(3.0)

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

358,434

 

 

1,037,694

 

 

(679,260)

 

(65.5)

 

 

Swap fee income

 

 

2,607,579

 

 

441,097

 

 

2,166,482

 

491.2

 

 

Securities gains, net

 

 

 —

 

 

38,464

 

 

(38,464)

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

817,260

 

 

929,046

 

 

(111,786)

 

(12.0)

 

 

Debit card fees

 

 

1,610,394

 

 

1,446,322

 

 

164,072

 

11.3

 

 

Correspondent banking fees

 

 

477,357

 

 

445,246

 

 

32,111

 

7.2

 

 

Other

 

 

1,933,170

 

 

1,482,061

 

 

451,109

 

30.4

 

 

Total noninterest income

 

$

17,453,715

 

$

14,066,272

 

$

3,387,443

 

24.1

%

 

 

In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in early 2018 coupled with strong growth in assets under management, trust department fees increased 22%, comparing the second quarter of 2018 to the same period of the prior year. Trust department fees increased 25% when comparing the first half of 2018 to the same period of the prior year.  Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Additionally, the Company started offering trust operations services to correspondent banks.

Investment advisory and management fees increased 22%, comparing the second quarter of 2018 to the same period of the prior year, and they increased 10% when comparing the first half of 2018 to the first half of 2017. Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company's Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, these fees are largely determined based on the value of the investments managed. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.  This acquisition is expected to close early in the fourth quarter of 2018.

Deposit service fees expanded 10% comparing the second quarter of 2018 to the same period of the prior year and expanded 13% when comparing the first half of 2018 to the same period of the prior year. This increase was primarily the result of the growth in deposits due to the acquisition of Guaranty Bank. Additionally, the Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans decreased 10% when comparing the second quarter of 2018 to the same period of the prior year and decreased 3% when comparing the first half of 2018 to the same period of the prior year. Overall, with the continued low interest rate environment, refinancing activity has slowed, as many of the Company's existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.

The Company's gains on the sale of government-guaranteed portions of loans for the second quarter of 2018 decreased 100% compared to the second quarter of 2017 and decreased 66% when comparing the first half of 2018 to the same period

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of the prior year. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In the past several years, the Company's portfolio of government-guaranteed loans has grown as a direct result of the Company's strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing.  Recently, competitors have been offering SBA loan candidates traditional financing without the guarantee and the Company is not willing to relax structure for those lending opportunities.

As a result of the continued relatively low interest rate environment including a flat yield curve, the Company was able to execute numerous interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent 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. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled $1.6 million for the second quarter of 2018, compared to $328 thousand for the second quarter of 2017. Swap fee income totaled $2.6 million for the first half of 2018 compared to $441 thousand in the first half of 2017.  Future levels of swap fee income are also dependent upon prevailing interest rates.

Earnings on BOLI decreased 13% comparing the second quarter of 2018 to the first quarter of 2018 and decreased 12% comparing the first half of 2018 to the first half of 2017.  There were no purchases of BOLI within the last 12 months. Notably, a small portion of the Company's BOLI is variable rate whereby the returns are determined by the performance of the equity market. Equity market performance accounted for the majority of the decrease in earnings on BOLI. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 14% comparing the second quarter of 2018 to the second quarter of the prior year and increased 11% comparing the first half of 2018 to the first half of 2017. This increase was primarily related to the acquisition of Guaranty Bank in the fourth quarter of 2017. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity, which has been taken advantage of by the Company's customers.

Correspondent banking fees increased 6% comparing the second quarter of 2018 to the second quarter of the prior year and increased 7% comparing the first half of 2018 to the first half of 2017. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income.   The Company now serves approximately 192 banks in Iowa, Illinois and Wisconsin.

Other noninterest income increased 23% comparing the second quarter of 2018 to the second quarter of the prior year and increased 30% comparing the first half of 2018 to the first half of 2017.  These increases were primarily driven by fluctuations in net gains recognized on the disposal of leased assets.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and six months ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Salaries and employee benefits

 

$

15,804,016

 

$

12,930,944

 

$

2,873,072

 

22.2

%

 

Occupancy and equipment expense

 

 

3,132,658

 

 

2,698,336

 

 

434,322

 

16.1

 

 

Professional and data processing fees

 

 

2,771,223

 

 

2,340,699

 

 

430,524

 

18.4

 

 

Acquisition costs

 

 

413,602

 

 

 —

 

 

413,602

 

100.0

 

 

Post-acquisition compensation, transition and integration costs

 

 

165,314

 

 

 —

 

 

165,314

 

100.0

 

 

FDIC insurance, other insurance and regulatory fees

 

 

840,458

 

 

645,277

 

 

195,181

 

30.2

 

 

Loan/lease expense

 

 

260,089

 

 

260,284

 

 

(195)

 

(0.1)

 

 

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

 

 

(70,190)

 

 

27,957

 

 

(98,147)

 

(351.1)

 

 

Advertising and marketing

 

 

753,084

 

 

567,588

 

 

185,496

 

32.7

 

 

Bank service charges

 

 

466,091

 

 

447,445

 

 

18,646

 

4.2

 

 

Correspondent banking expense

 

 

204,337

 

 

201,693

 

 

2,644

 

1.3

 

 

CDI amortization expense

 

 

304,551

 

 

230,867

 

 

73,684

 

31.9

 

 

Other

 

 

1,324,590

 

 

1,053,539

 

 

271,051

 

25.7

 

 

Total noninterest expense

 

$

26,369,823

 

$

21,404,629

 

$

4,965,194

 

23.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Salaries and employee benefits

 

$

31,781,991

 

$

26,238,275

 

$

5,543,716

 

21.1

%

 

Occupancy and equipment expense

 

 

6,198,469

 

 

5,200,555

 

 

997,914

 

19.2

 

 

Professional and data processing fees

 

 

5,478,939

 

 

4,424,091

 

 

1,054,848

 

23.8

 

 

Acquisition costs

 

 

506,141

 

 

 —

 

 

506,141

 

100.0

 

 

Post-acquisition compensation, transition and integration costs

 

 

165,314

 

 

 —

 

 

165,314

 

100.0

 

 

FDIC insurance, other insurance and regulatory fees

 

 

1,596,669

 

 

1,266,519

 

 

330,150

 

26.1

 

 

Loan/lease expense

 

 

550,836

 

 

553,822

 

 

(2,986)

 

(0.5)

 

 

Net cost of operations of other real estate

 

 

61,552

 

 

42,187

 

 

19,365

 

45.9

 

 

Advertising and marketing

 

 

1,446,323

 

 

1,177,019

 

 

269,304

 

22.9

 

 

Bank service charges

 

 

906,662

 

 

871,346

 

 

35,316

 

4.1

 

 

Correspondent banking expense

 

 

409,091

 

 

400,044

 

 

9,047

 

2.3

 

 

CDI amortization

 

 

609,102

 

 

461,733

 

 

147,369

 

31.9

 

 

Other

 

 

2,522,231

 

 

2,042,155

 

 

480,076

 

23.5

 

 

Total noninterest expense

 

$

52,233,320

 

$

42,677,746

 

$

9,555,574

 

22.4

%

 

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions are expected to impact expense throughout 2018.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the second quarter of 2017 to the second quarter of 2018 by 22%.   This line item also increased 21% when comparing the first half of 2018 to the first half of 2017. This increase was primarily related to new hires, merit increases and the addition of the Guaranty Bank employees. To help support recent and expected growth, the Company is adding to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters.  Some of these hires are opportunistic, as the Company takes advantage of strong talent in the marketplace as a result of ongoing industry consolidation. 

Occupancy and equipment expense increased 16%, comparing the second quarter of 2018 to the same period of the prior year and increased 19% comparing the first half of 2018 to the same period of the prior year. The increased expense was primarily due to the addition of Guaranty Bank.

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Professional and data processing fees increased 18%, comparing the second quarter of 2018 to the same period in 2017 and increased 24% comparing the first half of 2018 to the same period of the prior year. This increased expense was partially due to the addition of Guaranty Bank. Additionally, legal expense was also elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue to increase until the court proceedings are completed, which the Company expects to be in late 2018. Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.

Acquisition costs totaled $413 thousand for the second quarter of 2018 and $506 thousand for the first half of 2018. There were no acquisition costs in the first half of 2017.  These costs were comprised primarily of legal, accounting and investment banking costs related to the acquisitions described in Note 10 to the Consolidated Financial Statements.

Post-acquisition costs totaled $165 thousand for the second quarter of 2018 and for the first half of 2018.  These costs were comprised primarily of personnel costs, IT integration, and data conversion costs related to acquisitions.

FDIC insurance, other insurance and regulatory fee expense increased 30%, comparing the second quarter of 2018 to the second quarter of 2017 and increased 26% comparing the first half of 2018 to the same period of the prior year. The increase in expense was due to the acquisition of Guaranty Bank.

Loan/lease expense remained flat when comparing the second quarter of 2018 to the same quarter of 2017 as well as when comparing the first half of 2018 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of/income from operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from operations of other real estate totaled $70 thousand for the second quarter of 2018, compared to net costs of operations of $28 thousand for the second quarter of 2017.  Net cost of operations of other real estate totaled $62 thousand for the first half of 2018 compared to $42 thousand for the same period of the prior year.

Advertising and marketing expense increased 33%, comparing the second quarter of 2018 to the second quarter of 2017 and increased 23% comparing the first half of 2018 to the same period of the prior year. The increase in expense was primarily due to the addition of Guaranty Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 4% from the second quarter of 2017 to the second quarter of 2018 and increased 4%, comparing the first half of 2018 to the same period of the prior year.  The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio. As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Correspondent banking expense increased 1% when comparing the second quarter of 2018 to the second quarter of 2017 and increased 2% when comparing the first half of 2018 to the same period of the prior year.  The increase was due to both increases in volume and in the number of correspondent banking clients. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

CDI amortization expense increased 32% when comparing the second quarter of 2018 to the second quarter of 2017 and  when comparing the first half of 2018 to the same period of the prior year. The increase was due to the acquisition of Guaranty Bank.

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Other noninterest expense was up 26% when comparing the second quarter of 2018 to the second quarter of 2017 and increased 24% when comparing the first half of 2018 to the same period of the prior year. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to the addition of Guaranty Bank.

INCOME TAXES

In the second quarter of 2018, the Company incurred income tax expense of $1.9 million. During the first half of the year, the Company incurred income tax expense of $3.9 million.  Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and six months ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 

 

For the Six Months Ended June 30, 

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

 

 

Computed "expected" tax expense

 

$

2,588,503

 

21.0

%  

$

3,990,557

 

35.0

%  

$

5,222,119

 

21.0

%  

$

8,041,601

 

35.0

%

 

Tax exempt income, net

 

 

(956,089)

 

(7.8)

 

 

(1,433,903)

 

(12.6)

 

 

(1,899,190)

 

(7.6)

 

 

(2,739,330)

 

(11.9)

 

 

Bank-owned life insurance

 

 

(83,848)

 

(0.7)

 

 

(160,775)

 

(1.4)

 

 

(171,625)

 

(0.7)

 

 

(325,166)

 

(1.4)

 

 

State income taxes, net of federal benefit, current year

 

 

557,656

 

4.5

 

 

394,410

 

3.5

 

 

1,109,124

 

4.5

 

 

802,735

 

3.5

 

 

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

 

 

(200,644)

 

(1.6)

 

 

(89,545)

 

(0.8)

 

 

(333,005)

 

(1.3)

 

 

(622,867)

 

(2.7)

 

 

Other

 

 

(24,759)

 

(0.1)

 

 

(65,168)

 

(0.6)

 

 

(55,534)

 

(0.3)

 

 

(131,951)

 

(0.6)

 

 

Federal and state income tax expense

 

$

1,880,819

 

15.3

%  

$

2,635,576

 

23.1

%  

$

3,871,889

 

15.6

%  

$

5,025,022

 

21.9

%

 

 

The effective tax rate for the quarter ended June 30, 2018 was 15.3% which was a 7.8% decrease from the effective tax rate of 23.1% for the quarter ended June 30, 2017. The effective tax rate for the six months ended June 30, 2018 was 15.6%, which was a decrease over the effective tax rate of 21.9% for the six months ended June 30, 2017.  The Tax Act was enacted on December 22, 2017 and was effective January 1, 2018 reducing the federal corporate tax rate from 35% to 21%.

FINANCIAL CONDITION

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

June 30, 2018

 

 

March 31, 2018

 

 

December 31, 2017

 

 

June 30, 2017

 

 

 

 

(dollars in thousands)

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Cash and due from banks

 

$

69,069

 

 2

%  

 

$

61,846

 

 2

%  

 

$

75,722

 

 2

%  

 

$

77,161

 

 2

%

 

Federal funds sold and interest-bearing deposits

 

 

51,667

 

 1

%  

 

 

59,557

 

 1

%  

 

 

85,962

 

 2

%  

 

 

72,354

 

 2

%  

 

Securities

 

 

657,997

 

16

%  

 

 

638,229

 

16

%  

 

 

652,382

 

16

%  

 

 

593,485

 

17

%

 

Net loans/leases

 

 

3,077,247

 

75

%  

 

 

3,018,370

 

75

%  

 

 

2,930,130

 

74

%  

 

 

2,520,209

 

73

%

 

Other assets

 

 

250,903

 

 6

%  

 

 

248,312

 

 6

%  

 

 

238,469

 

 6

%  

 

 

193,978

 

 6

%

 

Total assets

 

$

4,106,883

 

100

%  

 

$

4,026,314

 

100

%  

 

$

3,982,665

 

100

%  

 

$

3,457,187

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,298,276

 

81

%  

 

$

3,280,001

 

82

%  

 

$

3,266,655

 

82

%  

 

$

2,870,234

 

83

%

 

Total borrowings

 

 

380,392

 

 9

%  

 

 

334,802

 

 8

%  

 

 

309,480

 

 8

%  

 

 

230,264

 

 7

%

 

Other liabilities

 

 

58,627

 

 1

%  

 

 

51,083

 

 1

%  

 

 

53,243

 

 1

%  

 

 

51,606

 

 1

%

 

Total stockholders' equity

 

 

369,588

 

 9

%  

 

 

360,428

 

 9

%  

 

 

353,287

 

 9

%  

 

 

305,083

 

 9

%

 

Total liabilities and stockholders' equity

 

$

4,106,883

 

100

%  

 

$

4,026,314

 

100

%  

 

$

3,982,665

 

100

%  

 

$

3,457,187

 

100

%

 

 

During the second quarter of 2018, the Company's total assets increased $80.6 million, or 2%, to a total of $4.1 billion. Net loans/leases grew $58.9 million. This loan and lease growth was funded by deposits, which increased $18.3 million in the second quarter of 2018, and borrowings, which increased $45.6 million in the second quarter of 2018. Stockholders' equity increased $9.2 million, or 3%, in the current quarter due to net retained income.

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INVESTMENT SECURITIES

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

June 30, 2018

 

March 31, 2018

 

December 31, 2017

 

 

June 30, 2017

 

 

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

U.S. govt. sponsored agency securities

 

$

35,667

 

 5

%  

$

36,868

 

 6

%  

$

38,097

 

 6

%  

 

$

41,944

 

 7

%

Municipal securities

 

 

458,510

 

70

%  

 

438,736

 

69

%  

 

445,049

 

68

%  

 

 

381,254

 

64

%

Residential mortgage-backed and related securities

 

 

158,534

 

24

%  

 

157,289

 

24

%  

 

163,301

 

25

%  

 

 

164,415

 

28

%

Other securities

 

 

5,286

 

 1

%  

 

5,336

 

 1

%  

 

5,935

 

 1

%  

 

 

5,872

 

 1

%

 

 

$

657,997

 

100

%  

$

638,229

 

100

%  

$

652,382

 

100

%  

 

$

593,485

 

100

%

 

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

 

  

 

  

 

Securities as a % of Total Assets

 

 

16.02

%  

  

 

 

15.85

%  

  

 

 

16.38

%  

  

 

 

 

17.17

%  

  

 

Net Unrealized Losses as a % of Amortized Cost

 

 

(1.58)

%  

  

 

 

(1.01)

%  

  

 

 

(0.13)

%  

  

 

 

 

(0.33)

%  

  

 

Duration (in years)

 

 

7.0

 

  

 

 

6.9

 

  

 

 

7.0

 

  

 

 

 

6.3

 

  

 

Quarterly Yield on Investment Securities (TEY)

 

 

3.56

%  

  

 

 

3.65

%  

  

 

 

3.82

%  

  

 

 

 

3.76

%  

  

 

Quarterly Yield on Investment Securities (GAAP)

 

 

3.02

%  

  

 

 

3.03

%  

  

 

 

2.77

%  

  

 

 

 

2.75

%  

  

 

 

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

The duration of the securities portfolio shortened modestly with the TEY on the portfolio decreasing 26 bps in the first half of 2018; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 25 basis points.

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

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

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Item 2

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

LOANS/LEASES

Total loans/leases grew 7.8% on an annualized basis during the second quarter of 2018. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

June 30, 2018

 

March 31, 2018

 

December 31, 2017

 

June 30, 2017

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

 

 

 

(dollars in thousands)

 

 

C&I loans

 

$

1,273,000

 

42

%  

$

1,201,087

 

39

%  

$

1,134,516

 

38

%  

$

942,538

 

37

%

 

CRE loans

 

 

1,349,319

 

43

%  

 

1,357,703

 

45

%  

 

1,303,492

 

44

%  

 

1,131,906

 

45

%

 

Direct financing leases

 

 

133,196

 

 4

%  

 

137,614

 

 5

%  

 

141,448

 

 5

%  

 

153,337

 

 6

%

 

Residential real estate loans

 

 

257,434

 

 8

%  

 

254,484

 

 8

%  

 

258,646

 

 9

%  

 

233,871

 

 9

%

 

Installment and other consumer loans

 

 

92,952

 

 3

%  

 

95,912

 

 3

%  

 

118,611

 

 4

%  

 

84,047

 

 3

%

 

Total loans/leases

 

$

3,105,901

 

100

%  

$

3,046,800

 

100

%  

$

2,956,713

 

100

%  

$

2,545,699

 

100

%

 

Plus deferred loan/lease origination costs, net of fees

 

 

8,891

 

 

 

 

8,103

 

 

 

 

7,773

 

  

 

 

7,867

 

  

 

 

Less allowance

 

 

(37,545)

 

 

 

 

(36,533)

 

 

 

 

(34,356)

 

  

 

 

(33,357)

 

  

 

 

Net loans/leases

 

$

3,077,247

 

 

 

$

3,018,370

 

 

 

$

2,930,130

 

  

 

$

2,520,209

 

  

 

 

 

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of June 30, 2018 and December 31, 2017, approximately 26% of the CRE loan portfolio was owner-occupied.

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $71.9 million in the current quarter.

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully funded, highly liquid term loans for which there is a liquid secondary market. As of June 30, 2018 and December 31, 2017, the amount of nationally syndicated loans totaled $38.6 million and $51.2 million, respectively.

Following is a listing of significant industries within the Company's CRE loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 

 

As of March 31, 

 

 

As of December 31, 

 

 

As of June 30, 

 

 

 

 

2018

 

2018

 

 

2017

 

 

2017

 

 

 

    

Amount

    

%

    

Amount

    

%

 

    

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

Lessors of Nonresidential Buildings

 

$

439,067

 

33

%  

$

435,919

 

32

%

 

$

388,648

 

30

%  

 

$

344,747

 

30

%

 

Lessors of Residential Buildings

 

 

230,187

 

17

%  

 

221,978

 

16

%

 

 

199,047

 

15

%  

 

 

159,370

 

14

%

 

Hotels

 

 

73,335

 

5

%  

 

70,887

 

5

%

 

 

70,447

 

5

%  

 

 

39,881

 

 4

%

 

Nonresidential Property Managers

 

 

55,979

 

4

%  

 

56,572

 

4

%

 

 

51,621

 

4

%  

 

 

52,947

 

 5

%

 

Land Subdivision

 

 

39,883

 

3

%  

 

45,356

 

3

%

 

 

44,192

 

3

%  

 

 

46,117

 

 4

%

 

New Housing For-Sale Builders

 

 

38,392

 

3

%  

 

52,951

 

4

%

 

 

61,480

 

5

%  

 

 

52,277

 

 5

%

 

Nursing Care Facilities

 

 

37,417

 

3

%  

 

38,830

 

3

%

 

 

47,008

 

4

%  

 

 

33,607

 

 3

%

 

Lessors of Other Real Estate Property

 

 

28,149

 

2

%  

 

31,121

 

2

%

 

 

29,078

 

2

%  

 

 

20,932

 

 2

%

 

Other *

 

 

406,910

 

30

%  

 

404,089

 

30

%

 

 

411,971

 

32

%  

 

 

382,028

 

33

%

 

Total CRE Loans

 

$

1,349,319

 

100

%  

$

1,357,703

 

100

%

 

$

1,303,492

 

100

%  

 

$

1,131,906

 

100

%

 


*     “Other” consists of all other industries. None of these had concentrations greater than $27.0 million, or approximately 2% of total CRE loans in the most recent period presented.

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The Company's residential real estate loan portfolio includes 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 and 20‑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. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 

 

 

As of March 31, 

 

 

As of December 31, 

 

As of June 30, 

 

 

 

2018

 

 

2018

 

 

2017

 

2017

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trucks, Vans and Vocational Vehicles

 

$

35,814

 

15

%  

 

$

28,219

 

13

%

 

$

19,927

 

 9

%  

$

16,679

 

 8

%

Construction - General

 

 

18,494

 

 8

%  

 

 

18,067

 

 8

%

 

 

18,705

 

 9

%  

 

15,207

 

 7

%

Manufacturing - General

 

 

16,794

 

 7

%  

 

 

16,624

 

 7

%

 

 

16,571

 

 8

%  

 

19,092

 

 9

%

Food Processing Equipment

 

 

14,377

 

 6

%  

 

 

13,270

 

 6

%

 

 

12,965

 

 6

%  

 

13,754

 

 7

%

Marine - Travelifts

 

 

12,875

 

 6

%  

 

 

12,843

 

 6

%

 

 

10,802

 

 5

%  

 

12,497

 

 6

%

Computer Hardware

 

 

10,141

 

 4

%  

 

 

10,694

 

 5

%

 

 

11,340

 

 5

%  

 

9,821

 

 5

%

Trailers

 

 

10,137

 

 4

%  

 

 

9,161

 

 4

%

 

 

8,983

 

 4

%  

 

9,611

 

 5

%

Miscellaneous Equipment

 

 

7,032

 

 3

%  

 

 

6,459

 

 3

%

 

 

6,644

 

 3

%  

 

5,126

 

 2

%

Restaurant

 

 

6,509

 

 3

%  

 

 

6,844

 

 3

%

 

 

7,107

 

 3

%  

 

7,238

 

 3

%

Other *

 

 

101,124

 

44

%  

 

 

101,473

 

45

%

 

 

102,192

 

48

%  

 

105,228

 

48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total m2 loans and leases

 

$

233,297

 

100

%  

 

$

223,654

 

100

%

 

$

215,236

 

100

%  

$

214,253

 

100

%


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

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

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and six months ended June 30, 2018 and 2017 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2018

    

June 30, 2017

    

June 30, 2018

    

June 30, 2017

 

(dollars in thousands)

 

(dollars in thousands)

Balance, beginning

$

36,533

 

$

32,059

 

$

34,356

 

$

30,757

Provisions charged to expense

 

2,301

 

 

2,023

 

 

4,841

 

 

4,128

Loans/leases charged off

 

(1,524)

 

 

(851)

 

 

(1,961)

 

 

(1,743)

Recoveries on loans/leases previously charged off

 

235

 

 

126

 

 

309

 

 

215

Balance, ending

$

37,545

 

$

33,357

 

$

37,545

 

$

33,357

 

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,

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including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed monthly with specific detailed reviews completed on all loans risk-rated worse than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report  on Form 10‑K for the year ended December 31, 2017, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the loan review staff and reported to management and the board of directors.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

Internally Assigned Risk Rating *

    

June 30, 2018

    

March 31, 2018

    

December 31, 2017

    

June 30, 2017

 

 

 

 

(dollars in thousands)

 

 

Special Mention (Rating 6)

 

$

44,202

 

$

42,926

 

$

31,024

 

$

27,737

 

 

Substandard (Rating 7)

 

 

42,492

 

 

39,815

 

 

43,435

 

 

45,290

 

 

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

271

 

 

 —

 

 

 

 

$

86,694

 

$

82,741

 

$

74,730

 

$

73,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans **

 

$

86,694

 

$

82,741

 

$

74,730

 

$

73,027

 

 

Classified Loans ***

 

$

42,492

 

$

39,815

 

$

43,706

 

$

45,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

 

2.79

%

 

2.79

%

 

2.52

%

 

2.86

%

 

Classified Loans as a % of Total Loans/Leases

 

 

1.37

%

 

1.34

%

 

1.47

%

 

1.77

%

 


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

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

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

The Company experienced a 7% increase in classified loans during the second quarter of 2018. Criticized loans increased 5% during the same period.  The Company experienced a decrease of 3% in classified loans during the first six months of 2018. Criticized loans increased 16% during the same period. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

June 30, 2018

    

March 31, 2018

    

December 31, 2017

    

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance / Gross Loans/Leases

 

1.21

%  

1.20

%  

1.16

%  

 

1.31

%

 

Allowance / NPLs

 

270.09

%  

202.11

%  

184.28

%  

 

162.27

%

 

Although management believes that the allowance at June 30, 2018 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.

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NONPERFORMING ASSETS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 

 

As of March 31, 

 

As of December 31, 

 

As of June 30, 

 

 

 

    

2018

    

2018

    

2017

    

2017

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

12,554

 

$

12,759

 

$

11,441

 

$

13,217

 

 

Accruing loans/leases past due 90 days or more

 

 

20

 

 

41

 

 

89

 

 

424

 

 

TDRs - accruing

 

 

1,327

 

 

5,276

 

 

7,113

 

 

6,915

 

 

Total NPLs

 

 

13,901

 

 

18,076

 

 

18,643

 

 

20,556

 

 

OREO

 

 

12,750

 

 

12,750

 

 

13,558

 

 

5,174

 

 

Other repossessed assets

 

 

150

 

 

200

 

 

80

 

 

123

 

 

Total NPAs

 

$

26,801

 

$

31,026

 

$

32,281

 

$

25,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

    

 

0.45

%  

 

0.59

%  

 

0.63

%  

 

0.80

%

 

NPAs to total loans/leases plus repossessed property

 

 

0.86

%  

 

1.01

%  

 

1.08

%  

 

1.01

%

 

NPAs to total assets

 

 

0.65

%  

 

0.77

%  

 

0.81

%  

 

0.75

%

 


(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $1.8 million at June 30, 2018, $2.6 million at March 31, 2018, $2.3 million at December 31, 2017, and $2.2 million at June 30, 2017.

NPAs at June 30, 2018 were $26.8 million, down $4.2 million from March 31, 2018 and up $948 thousand from June 30, 2017. The decrease in the second quarter of 2018 was due to one large loan that was upgraded and taken out of TDR status.

The ratio of NPAs to total assets was 0.65% at June 30, 2018, down from 0.77% at March 31, 2018 and down from 0.75% at June 30, 2017.

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

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

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

DEPOSITS

Deposits increased $18.3 million during the second quarter of 2018. The table below presents the composition of the Company's deposit portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

June 30, 2018

    

March 31, 2018

    

December 31, 2017

 

June 30, 2017

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

Noninterest bearing demand deposits

 

$

746,822

 

23

%  

$

784,815

 

24

%  

$

789,548

 

24

%  

$

760,625

 

27

%

 

Interest bearing demand deposits

 

 

1,865,382

 

57

%  

 

1,789,019

 

55

%  

 

1,855,893

 

57

%  

 

1,526,103

 

52

%

 

Time deposits

 

 

519,999

 

16

%  

 

496,644

 

15

%  

 

516,058

 

16

%  

 

478,580

 

17

%

 

Brokered deposits

 

 

166,073

 

 5

%  

 

209,523

 

 6

%  

 

105,156

 

 3

%  

 

104,926

 

 4

%

 

 

 

$

3,298,276

 

100

%  

$

3,280,001

 

100

%  

$

3,266,655

 

100

%  

$

2,870,234

 

100

%

 

 

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity.

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

Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits.

BORROWINGS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

June 30, 2018

    

March 31, 2018

    

December 31, 2017

    

June 30, 2017

 

 

 

(dollars in thousands)

 

Overnight repurchase agreements with customers

 

$

2,186

 

$

3,820

 

$

7,003

 

$

4,897

 

Federal funds purchased

 

 

15,400

 

 

13,040

 

 

6,990

 

 

13,320

 

 

 

$

17,586

 

$

16,860

 

$

13,993

 

$

18,217

 

 

The Company's federal funds purchased fluctuates based on the short-term funding needs of the Company's subsidiary banks.

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. Generally, FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

June 30, 2018

 

March 31, 2018

    

December 31, 2017

    

June 30, 2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Term FHLB advances

 

$

46,600

 

$

56,600

 

$

56,600

 

$

57,000

Overnight FHLB advances

 

 

207,500

 

 

159,745

 

 

135,400

 

 

49,500

 

 

$

254,100

 

$

216,345

 

$

192,000

 

$

106,500

 

Term FHLB advances decreased $10.0 million in the current quarter, as compared to the prior quarter. Overnight FHLB advances increased by $47.8 million in the second quarter of 2018 due to the strong loan and lease growth, which outpaced the Company's deposit growth.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

June 30, 2018

    

March 31, 2018

    

December 31, 2017

    

June 30, 2017

 

 

 

(dollars in thousands)

 

Wholesale structured repurchase agreements

 

$

35,000

 

$

35,000

 

$

35,000

 

$

45,000

 

Term notes

 

 

27,125

 

 

29,063

 

 

31,000

 

 

27,000

 

Revolving line of credit

 

 

9,000

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

71,125

 

$

64,063

 

$

66,000

 

$

72,000

 

 

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

As described in Note 11 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017, the Company has outstanding term notes and an available revolving line of credit. As of June 30, 2018, the term debt had been paid down to $27.1 million, as scheduled. The term notes and revolving line of credit were used to help fund acquisitions as described in Note 10 to the Consolidated Financial Statements. As of June 30, 2018, $1.0 million of the $10.0 million line of credit was available. Interest is calculated at the effective LIBOR rate plus 2.50% per annum (4.84% at June 30, 2018).

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

Average

 

Maturity:

    

Amount Due

    

Interest Rate

    

Amount Due

    

Interest Rate

 

 

 

(dollar amounts in thousands)

 

Year ending December 31:

 

 

 

 

 

 

 

 

 

 

 

2018

 

$

373,653

 

2.04

%  

$

273,677

 

1.68

%

2019

 

 

50,921

 

2.20

 

 

31,950

 

2.32

 

2020

 

 

30,694

 

2.42

 

 

26,600

 

2.44

 

Total Wholesale Funding

 

$

455,268

 

2.09

%  

$

332,227

 

1.80

%

 

During the first six months of 2018, wholesale funding increased $123.0 million. Year-to-date, the Company has repaid $79.0 million of term borrowings at maturity. However, this was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.

STOCKHOLDERS' EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

June 30, 2018

    

March 31, 2018

    

December 31, 2017

    

 

June 30, 2017

 

 

 

 

(dollars in thousands)

 

 

Common stock

 

$

13,974

 

$

13,937

 

$

13,918

 

 

$

13,175

 

 

Additional paid in capital

 

 

190,533

 

 

189,685

 

 

189,078

 

 

 

158,001

 

 

Retained earnings

 

 

171,955

 

 

162,346

 

 

151,962

 

 

 

135,254

 

 

AOCI (loss)

 

 

(6,874)

 

 

(5,540)

 

 

(1,671)

 

 

 

(1,347)

 

 

Total stockholders' equity

 

$

369,588

 

$

360,428

 

$

353,287

 

 

$

305,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE* / TA

 

 

8.18

%  

 

8.10

%  

 

8.01

%  

 

 

8.29

%

 


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

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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 $141.7 million during the second quarter of 2018 and $164.0 million during the full year of 2017. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio (both residential mortgage-backed securities and municipal securities).

At June 30, 2018, the subsidiary banks had 33 lines of credit totaling $371.7 million, of which $2.7 million was secured and $369.0 million was unsecured. At June 30, 2018, the full $371.7 million was available.

At December 31, 2017, the subsidiary banks had 34 lines of credit totaling $375.0 million, of which $3.0 million was secured and $372.0 million was unsecured. At December 31, 2017, the full $375.0 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2019. At June 30, 2018, $1.0 million of the $10.0 million was available.

As of June 30, 2018, the Company had $415.0 million in average correspondent banking deposits spread over 192 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of $137.9 million during the first six months of 2018, compared to $152.5 million for the same period of 2017. The net decrease in federal funds sold was $19.3 million for the first six months of 2018, compared to a net decrease of $3.1 million for the same period of 2017. The net decrease in interest-bearing deposits at financial institutions was $15.0 million for the first six months of 2018, compared to a net increase of $10.8 million for the same period of 2017. Proceeds from calls, maturities, and paydowns of securities were $39.8 million for the first six months of 2018, compared to $68.2 million for the same period of 2017. Purchases of securities used cash of $55.0 million for the first six months of 2018, compared to $85.2 million for the same period of 2017. The net increase in loans/leases used cash of $151.0 million for the first six months of 2018 compared to $146.4 million for the same period of 2017.

Financing activities provided cash of $101.9 million for the first six months of 2018, compared to $140.2 million for same period of 2017. Net increases in deposits totaled $31.7 million for the first six months of 2018, compared to $201.0 million for the same period of 2017. During the first six months of 2018, the Company's short-term borrowings increased $3.6 million, while they decreased $21.8 million for the same period of 2017. In the first six months of 2018, the Company increased short-tem and overnight FHLB advances by $72.1 million and increased other borrowings by $9.0 million.  Maturities and principal payments on borrowings totaled $13.9 millionin the first six months of 2018. In the first

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Item 2

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

six months of 2017, the Company reduced FHLB advances and borrowings by $39.0 million through a mixture of maturities, scheduled payments, and changes in short-term and overnight FHLB advances.

Total cash provided by operating activities was $29.4 million for the first six months of 2018, compared to $18.9 million for the same period of 2017.

Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities.

The following table presents the details of the trust preferred securities outstanding as of June 30, 2018 and December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Amount

    

Amount

    

 

    

 

  

 

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

Interest Rate as of

 

Interest Rate as of

 

Name

 

Date Issued

 

2018

 

2017

 

Interest Rate

 

June 30, 2018

 

December 31, 2017

 

QCR Holdings Statutory Trust II

 

February 2004

 

$

10,310,000

 

$

10,310,000

 

2.85% over 3-month LIBOR

 

5.19

%  

4.54

%

QCR Holdings Statutory Trust III

 

February 2004

 

 

8,248,000

 

 

8,248,000

 

2.85% over 3-month LIBOR

 

5.19

%  

4.54

%

QCR Holdings Statutory Trust V

 

February 2006

 

 

10,310,000

 

 

10,310,000

 

1.55% over 3-month LIBOR

 

3.90

%  

2.91

%

Community National Statutory Trust II

 

September 2004

 

 

3,093,000

 

 

3,093,000

 

2.17% over 3-month LIBOR

 

4.49

%  

3.80

%

Community National Statutory Trust III

 

March 2007

 

 

3,609,000

 

 

3,609,000

 

1.75% over 3-month LIBOR

 

4.09

%  

3.32

%

Guaranty Bankshares Statutory Trust I

 

May 2005

 

 

4,640,000

 

 

4,640,000

 

1.75% over 3-month LIBOR

 

4.09

%  

3.34

%

 

 

  

 

$

40,210,000

 

$

40,210,000

 

Weighted Average Rate

 

4.58

%  

3.82

%

 

As described in Note 4 to the Consolidated Financial Statements, on June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The floating rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective.  The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815.  See Note 4 for the notional amount swapped and the related effective fixed rates. The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. The Company assumed the trust preferred securities originally issued by Guaranty in connection with its acquisition in October 2017. 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. As of June 30, 2018, the remaining discount was $2.6 million.

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 8 of the Consolidated Financial Statements for additional information regarding regulatory capital.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

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.

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

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

·

The strength of the local and national economy.

·

Changes in the interest rate environment.

·

The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

·

The impact of cybersecurity risks.

·

The costs, effects and outcomes of existing or future litigation.

·

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB.

·

Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.

·

The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.

·

The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2017.

 

 

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Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.

Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

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

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 basis point downward shift. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve.

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

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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

 

 

    

 

    

As of June 30, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2018

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.9

%  

0.3

%  

(1.7)

%

200 basis point upward shift

 

(10.0)

%  

(4.4)

%  

(3.7)

%  

(1.2)

%

300 basis point upward shock

 

(25.0)

%  

(11.5)

%  

(8.4)

%  

(1.4)

%

 

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at June 30, 2018 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

In 2014, the Company executed two interest rate cap transactions, each with a notional value of $15.0 million, for a total of $30.0 million. The interest rate caps purchased essentially set a ceiling to the interest rate paid on the $30.0 million of short-term FHLB advances that are being hedged, minimizing the interest rate risk associated with rising interest rates.

On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities, for a total of $39.0 million.

The Company will continue to analyze and evaluate similar transactions as an alternative and cost effective way to mitigage 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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Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) promulgated under the Exchange Act of 1934) as of June 30, 2018. 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.

 

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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  Annual Report on Form 10‑K for the year ended December 31, 2017. Please refer to that section of the Company's Form 10‑K for disclosures regarding the risks and uncertainties related to the Company's business.

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3           Defaults Upon Senior Securities

None

Item 4           Mine Safety Disclosures

Not applicable

Item 5           Other Information

None

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QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6           Exhibits

 

 

3.1*

Agreement and Plan of Merger between QCR Holdings, Inc. and Springfield Bancshares, Inc., dated April 17, 2018 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on April 18, 2018).

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2018 and June 30, 2017; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and June 30, 2017; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2018 and June 30, 2017; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and June 30, 2017; and (vi) Notes to the Consolidated Financial Statements.

 

*

The Company has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K.  The Company will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

 

 

 

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SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

 

 

 

 

Date

August 8, 2018

 

/s/ Douglas M. Hultquist

 

 

Douglas M. Hultquist, President

 

 

Chief Executive Officer

 

 

 

 

 

 

Date

August 8, 2018

 

/s/ Todd A. Gipple

 

 

Todd A. Gipple, Executive Vice President

 

 

Chief Operating Officer

 

 

Chief Financial Officer

 

 

 

 

 

 

Date

August 8, 2018

 

/s/ Elizabeth A. Grabin

 

 

Elizabeth A. Grabin, First Vice President

 

 

Director of Financial Reporting

 

 

Principal Accounting Officer

 

70