Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

10‑Q

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

For the quarterly period ended March 31,September 30, 2018

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

For the transition period from to________

______to________

Commission file number 0-222080‑22208

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) 736-3580736‑3580

(Registrant’sRegistrant'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 (§  232.405 of this chapter) 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-212b‑2 of the Exchange Act.      (Check one):     

Large accelerated filer [   ]

Accelerated filer [ X ]

Non-accelerated filer  [   ]

Smaller reporting company [   ]

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-212b‑2 of the Exchange Act).

Yes [    ]      No [ X ]

Indicate the number of shares outstanding of each of the issuer’sissuer's classes of common stock as of the latest practicable date: As of MayNovember 1, 2018, the Registrant had outstanding 13,952,80015,673,883 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

FINANCIAL INFORMATION

Item 1

Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets

                   3


As of March 31,September 30, 2018 and December 31, 2017

4

Consolidated Statements of Income


For the Three Months Ended March 31,September 30, 2018 and 2017

5

 4

Consolidated Statements of Income
For the Nine Months Ended September 30, 2018 and 2017

6

Consolidated Statements of Comprehensive Income


For the Three and Nine Months Ended March 31,September 30, 2018 and 2017

7

 5

Consolidated Statements of Changes in Stockholders' Equity


For the Three and Nine Months Ended March 31,September 30, 2018 and 2017

8

 6

Consolidated Statements of Cash Flows


For the ThreeNine Months Ended March 31,September 30, 2018 and 2017

10

 7

Notes to Consolidated Financial Statements

12

Note 1. Summary of Significant Accounting Policies

                   9

12

Note 2. Investment SecuritiesMergers and Acquisitions

                 11

14

Note 3. Loans/Leases ReceivableInvestment Securities

                 16

17

Note 4. Earnings Per ShareLoans/Leases Receivable

                 25

21

Note 5. Fair ValueDerivatives

                 25

31

Note 6. Business Segment InformationEarnings Per Share

                 29

32

Note 7. Regulatory Capital RequirementsFair Value

                 30

32

Note 8. Revenue RecognitionBusiness Segment Information

                 32

35

Note 9. AcquisitionsRegulatory Capital Requirements

36

Note10. Revenue Recognition

37

Note 11. Subsequent Events - Acquisition

38

 33

Item 2

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

39

Introduction

                 34

39

General

                 34

39

Executive Overview

                 35

40

Long-Term Financial Goals

                 36

41

Strategic Developments

                 37

42

GAAP to Non-GAAP Reconciliations

                 39

43

Net Interest Income (Tax Equivalent Basis)

                 41

45

Critical Accounting Policies

                 45

51

Results of Operations

45
52

Interest Income

52

2


 45

Interest Expense

                 46

52

Provision for Loan/Lease Losses

                 46

53

Noninterest Income

                 47

53

Noninterest Expense

                 49

56

Income Taxes

                 51

58

Financial Condition

                 51

58

Investment Securities

                 52

59

Loans/Leases

                 53

60

Allowance for Estimated Losses on Loans/Leases

                 55

61

Nonperforming Assets

                 57

63

Deposits

                 58

63

Borrowings

                 59

64

Stockholders' Equity

                 60

65

Liquidity and Capital Resources

                 61

66

Special Note Concerning Forward-Looking Statements

67

 63

Item 3

Quantitative and Qualitative Disclosures About Market Risk

69

 64

Item 4

Controls and Procedures

71

 66

Part II   OTHER INFORMATION

72

Part II

OTHER INFORMATION

Item 1

Legal Proceedings

                 67

Item 1      Legal Proceedings

72

Item 1A

Risk Factors

                 67

Item 1A   Risk Factors

72

Item 2

Item 2      Unregistered Sales of Equity Securities and Use of Proceeds

72

 67

Item 3

Defaults upon Senior Securities

                 67

Item 4

Mine Safety Disclosures

                 67

Item 5

Other Information

                 67

Item 6

Exhibits

                 68

72

Signatures

 

Item 4      Mine Safety Disclosures

72

 69

Item 5      Other Information

72

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

Item 6      Exhibits

73

Signatures

74

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

3


 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2018

 

2017

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

73,406,657

 

$

75,721,663

Federal funds sold

 

 

33,070,000

 

 

30,197,000

Interest-bearing deposits at financial institutions

 

 

96,590,367

 

 

55,765,012

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost

 

 

395,421,195

 

 

379,474,205

Securities available for sale, at fair value

 

 

255,323,442

 

 

272,907,907

Total securities

 

 

650,744,637

 

 

652,382,112

 

 

 

  

 

 

  

Loans receivable held for sale

 

 

2,557,907

 

 

645,001

Loans/leases receivable held for investment

 

 

3,650,828,460

 

 

2,963,840,399

Gross loans/leases receivable

 

 

3,653,386,367

 

 

2,964,485,400

Less allowance for estimated losses on loans/leases

 

 

(43,077,457)

 

 

(34,355,728)

Net loans/leases receivable

 

 

3,610,308,910

 

 

2,930,129,672

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

67,443,063

 

 

59,059,494

Premises and equipment, net

 

 

73,828,512

 

 

62,838,255

Restricted investment securities

 

 

28,679,400

 

 

19,782,525

Other real estate owned, net

 

 

12,203,780

 

 

13,558,308

Goodwill

 

 

73,618,426

 

 

28,334,092

Core deposit intangible

 

 

16,136,914

 

 

9,078,953

Other assets

 

 

56,701,829

 

 

45,817,687

Total assets

 

$

4,792,732,495

 

$

3,982,664,773

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

802,090,334

 

$

789,547,696

Interest-bearing

 

 

2,986,186,588

 

 

2,477,107,360

Total deposits

 

 

3,788,276,922

 

 

3,266,655,056

 

 

 

  

 

 

  

Short-term borrowings

 

 

12,929,499

 

 

13,993,122

Federal Home Loan Bank advances

 

 

359,128,925

 

 

192,000,000

Other borrowings

 

 

73,950,426

 

 

66,000,000

Junior subordinated debentures

 

 

37,626,070

 

 

37,486,487

Other liabilities

 

 

63,433,264

 

 

53,242,979

Total liabilities

 

 

4,335,345,106

 

 

3,629,377,644

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

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

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 September 2018 - 15,673,760 shares issued and outstanding December 2017 - 13,918,168 shares issued and outstanding

 

 

15,673,760

 

 

13,918,168

Additional paid-in capital

 

 

269,373,303

 

 

189,077,550

Retained earnings

 

 

179,826,524

 

 

151,962,661

Accumulated other comprehensive loss:

 

 

  

 

 

  

Securities available for sale

 

 

(7,347,979)

 

 

(866,223)

Derivatives

 

 

(138,219)

 

 

(805,027)

Total stockholders' equity

 

 

457,387,389

 

 

353,287,129

Total liabilities and stockholders' equity

 

$

4,792,732,495

 

$

3,982,664,773

 

See Notes to Consolidated Financial Statements (Unaudited)

4

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2018 and December 31, 2017


 

  

March 31,

  

December 31,

 
  

2018

  

2017

 

ASSETS

        

Cash and due from banks

 $61,845,988  $75,721,663 

Federal funds sold

  14,505,000   30,197,000 

Interest-bearing deposits at financial institutions

  45,051,555   55,765,012 
         

Securities held to maturity, at amortized cost

  378,584,337   379,474,205 

Securities available for sale, at fair value

  259,644,940   272,907,907 

Total securities

  638,229,277   652,382,112 
         

Loans receivable held for sale

  279,750   645,001 

Loans/leases receivable held for investment

  3,054,622,689   2,963,840,399 

Gross loans/leases receivable

  3,054,902,439   2,964,485,400 

Less allowance for estimated losses on loans/leases

  (36,532,602)  (34,355,728)

Net loans/leases receivable

  3,018,369,837   2,930,129,672 
         

Bank-owned life insurance

  59,477,481   59,059,494 

Premises and equipment, net

  63,564,277   62,838,255 

Restricted investment securities

  22,413,075   19,782,525 

Other real estate owned, net

  12,750,023   13,558,308 

Goodwill

  28,334,092   28,334,092 

Core deposit intangible

  8,774,402   9,078,953 

Other assets

  52,999,407   45,817,687 

Total assets

 $4,026,314,414  $3,982,664,773 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

LIABILITIES

        

Deposits:

        

Noninterest-bearing

 $784,815,082  $789,547,696 

Interest-bearing

  2,495,186,410   2,477,107,360 

Total deposits

  3,280,001,492   3,266,655,056 
         

Short-term borrowings

  16,859,753   13,993,122 

Federal Home Loan Bank advances

  216,345,000   192,000,000 

Other borrowings

  64,062,500   66,000,000 

Junior subordinated debentures

  37,534,402   37,486,487 

Other liabilities

  51,083,350   53,242,979 

Total liabilities

  3,665,886,497   3,629,377,644 
         

STOCKHOLDERS' EQUITY

        

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

  -   - 

Common stock, $1 par value; shares authorized 20,000,000 March 2018 - 13,936,957 shares issued and outstanding December 2017 - 13,918,168 shares issued and outstanding

  13,936,957   13,918,168 

Additional paid-in capital

  189,684,858   189,077,550 

Retained earnings

  162,345,792   151,962,661 

Accumulated other comprehensive loss:

        

Securities available for sale

  (4,917,148)  (866,223)

Interest rate cap derivatives

  (622,542)  (805,027)

Total stockholders' equity

  360,427,917   353,287,129 

Total liabilities and stockholders' equity

 $4,026,314,414  $3,982,664,773 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

44,033,687

 

$

29,245,320

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,521,789

 

 

1,367,212

 

Nontaxable

 

 

3,516,550

 

 

2,862,208

 

Interest-bearing deposits at financial institutions

 

 

323,636

 

 

141,331

 

Restricted investment securities

 

 

329,767

 

 

172,776

 

Federal funds sold

 

 

105,042

 

 

52,018

 

Total interest and dividend income

 

 

49,830,471

 

 

33,840,865

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

8,722,555

 

 

3,556,189

 

Short-term borrowings

 

 

78,053

 

 

33,248

 

Federal Home Loan Bank advances

 

 

1,272,538

 

 

607,751

 

Other borrowings

 

 

924,780

 

 

724,854

 

Junior subordinated debentures

 

 

519,062

 

 

362,475

 

Total interest expense

 

 

11,516,988

 

 

5,284,517

 

Net interest income

 

 

38,313,483

 

 

28,556,348

 

Provision for loan/lease losses

 

 

6,205,828

 

 

2,086,436

 

Net interest income after provision for loan/lease losses

 

 

32,107,655

 

 

26,469,912

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

2,195,828

 

 

1,721,401

 

Investment advisory and management fees

 

 

1,059,413

 

 

968,452

 

Deposit service fees

 

 

1,655,529

 

 

1,522,461

 

Gains on sales of residential real estate loans, net

 

 

336,679

 

 

98,409

 

Gains on sales of government guaranteed portions of loans, net

 

 

46,417

 

 

91,974

 

Swap fee income

 

 

1,110,182

 

 

194,256

 

Securities losses, net

 

 

 —

 

 

(63,588)

 

Earnings on bank-owned life insurance

 

 

474,426

 

 

428,002

 

Debit card fees

 

 

845,740

 

 

754,803

 

Correspondent banking fees

 

 

195,450

 

 

239,060

 

Other

 

 

889,161

 

 

746,073

 

Total noninterest income

 

 

8,808,825

 

 

6,701,303

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,432,632

 

 

13,423,943

 

Occupancy and equipment expense

 

 

3,318,470

 

 

2,516,274

 

Professional and data processing fees

 

 

2,537,027

 

 

2,950,839

 

Acquisition costs

 

 

1,292,043

 

 

407,997

 

Post-acquisition compensation, transition and integration costs

 

 

493,063

 

 

522,740

 

FDIC insurance, other insurance and regulatory fees

 

 

932,746

 

 

690,894

 

Loan/lease expense

 

 

369,379

 

 

257,540

 

Net income from operations of other real estate

 

 

(50,362)

 

 

(160,640)

 

Advertising and marketing

 

 

983,762

 

 

669,923

 

Bank service charges

 

 

461,656

 

 

460,153

 

Correspondent banking expense

 

 

205,121

 

 

204,189

 

CDI amortization

 

 

541,665

 

 

230,867

 

Other

 

 

1,982,408

 

 

1,221,028

 

Total noninterest expense

 

 

30,499,610

 

 

23,395,747

 

Net income before income taxes

 

 

10,416,870

 

 

9,775,468

 

Federal and state income tax expense

 

 

1,608,035

 

 

1,921,533

 

Net income

 

$

8,808,835

 

$

7,853,935

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.56

 

$

0.60

 

Diluted earnings per common share

 

$

0.55

 

$

0.58

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,625,123

 

 

13,151,350

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,324

 

 

13,507,955

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

0.05

 

See Notes to Consolidated Financial Statements (Unaudited)

5


 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31,

  

2018

  

2017

 

Interest and dividend income:

        

Loans/leases, including fees

 $34,213,732  $27,211,417 

Securities:

        

Taxable

  1,555,884   1,142,235 

Nontaxable

  3,289,002   2,647,722 

Interest-bearing deposits at financial institutions

  197,003   198,652 

Restricted investment securities

  234,344   130,430 

Federal funds sold

  56,331   14,643 

Total interest and dividend income

  39,546,296   31,345,099 
         

Interest expense:

        

Deposits

  4,881,149   2,232,756 

Short-term borrowings

  32,913   23,960 

Federal Home Loan Bank advances

  1,064,113   403,469 

Other borrowings

  718,176   683,208 

Junior subordinated debentures

  447,027   332,823 

Total interest expense

  7,143,378   3,676,216 

Net interest income

  32,402,918   27,668,883 
         

Provision for loan/lease losses

  2,539,839   2,105,109 

Net interest income after provision for loan/lease losses

  29,863,079   25,563,774 
         

Noninterest income:

        

Trust department fees

  2,237,081   1,740,207 

Investment advisory and management fees

  952,344   961,599 

Deposit service fees

  1,531,453   1,316,390 

Gains on sales of residential real estate loans, net

  100,815   96,323 

Gains on sales of government guaranteed portions of loans, net

  358,434   950,641 

Swap fee income

  958,694   113,520 

Earnings on bank-owned life insurance

  417,987   469,687 

Debit card fees

  766,108   702,801 

Correspondent banking fees

  264,827   245,189 

Other

  953,706   687,397 

Total noninterest income

  8,541,449   7,283,754 
         

Noninterest expense:

        

Salaries and employee benefits

  15,977,975   13,307,331 

Occupancy and equipment expense

  3,065,811   2,502,219 

Professional and data processing fees

  2,707,716   2,083,392 

Acquisition costs

  92,539   5,630 

FDIC insurance, other insurance and regulatory fees

  756,211   621,242 

Loan/lease expense

  290,747   293,538 

Net cost of operations of other real estate

  131,742   14,230 

Advertising and marketing

  693,239   609,431 

Bank service charges

  440,571   423,901 

Correspondent banking expense

  204,754   198,351 

CDI amortization

  304,551   230,867 

Other

  1,197,641   982,985 

Total noninterest expense

  25,863,497   21,273,117 

Net income before income taxes

  12,541,031   11,574,411 

Federal and state income tax expense

  1,991,070   2,389,446 

Net income

 $10,549,961  $9,184,965 
         

Basic earnings per common share

 $0.76  $0.70 

Diluted earnings per common share

 $0.74  $0.68 
         

Weighted average common shares outstanding

  13,888,661   13,133,382 

Weighted average common and common equivalent shares outstanding

  14,205,584   13,488,417 
         

Cash dividends declared per common share

 $0.06  $0.05 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

113,655,270

 

$

84,571,466

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

4,671,333

 

 

3,770,022

 

Nontaxable

 

 

10,100,598

 

 

8,198,173

 

Interest-bearing deposits at financial institutions

 

 

748,953

 

 

559,697

 

Restricted investment securities

 

 

776,013

 

 

435,096

 

Federal funds sold

 

 

222,814

 

 

104,778

 

Total interest and dividend income

 

 

130,174,981

 

 

97,639,232

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

20,132,044

 

 

8,779,548

 

Short-term borrowings

 

 

173,469

 

 

76,365

 

Federal Home Loan Bank advances

 

 

3,218,769

 

 

1,365,433

 

Other borrowings

 

 

2,375,837

 

 

2,103,731

 

Junior subordinated debentures

 

 

1,473,965

 

 

1,042,227

 

Total interest expense

 

 

27,374,084

 

 

13,367,304

 

Net interest income

 

 

102,800,897

 

 

84,271,928

 

Provision for loan/lease losses

 

 

11,046,402

 

 

6,214,538

 

Net interest income after provision for loan/lease losses

 

 

91,754,495

 

 

78,057,390

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

6,490,896

 

 

5,153,609

 

Investment advisory and management fees

 

 

3,069,423

 

 

2,798,886

 

Deposit service fees

 

 

4,797,385

 

 

4,297,210

 

Gains on sales of residential real estate loans, net

 

 

539,266

 

 

307,360

 

Gains on sales of government guaranteed portions of loans, net

 

 

404,851

 

 

1,129,668

 

Swap fee income

 

 

3,717,761

 

 

635,353

 

Securities losses, net

 

 

 —

 

 

(25,124)

 

Earnings on bank-owned life insurance

 

 

1,291,686

 

 

1,357,049

 

Debit card fees

 

 

2,456,134

 

 

2,201,125

 

Correspondent banking fees

 

 

672,807

 

 

684,306

 

Other

 

 

2,822,331

 

 

2,228,133

 

Total noninterest income

 

 

26,262,540

 

 

20,767,575

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

49,214,623

 

 

39,662,218

 

Occupancy and equipment expense

 

 

9,516,939

 

 

7,716,829

 

Professional and data processing fees

 

 

8,015,966

 

 

7,374,930

 

Acquisition costs

 

 

1,798,184

 

 

407,997

 

Post-acquisition compensation, transition and integration costs

 

 

658,377

 

 

522,740

 

FDIC insurance, other insurance and regulatory fees

 

 

2,529,415

 

 

1,957,413

 

Loan/lease expense

 

 

920,215

 

 

811,362

 

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

 

 

11,190

 

 

(118,453)

 

Advertising and marketing

 

 

2,430,085

 

 

1,846,942

 

Bank service charges

 

 

1,368,318

 

 

1,331,499

 

Correspondent banking expense

 

 

614,212

 

 

604,233

 

CDI amortization

 

 

1,150,767

 

 

692,600

 

Other

 

 

4,504,639

 

 

3,263,183

 

Total noninterest expenses

 

 

82,732,930

 

 

66,073,493

 

Income before income taxes

 

 

35,284,105

 

 

32,751,472

 

Federal and state income tax expense

 

 

5,479,924

 

 

6,946,555

 

Net income

 

$

29,804,181

 

$

25,804,917

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

2.06

 

$

1.96

 

Diluted earnings per common share

 

$

2.02

 

$

1.91

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

14,477,783

 

 

13,151,672

 

Weighted average common and common equivalent shares outstanding

 

 

14,786,777

 

 

13,509,566

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.18

 

$

0.15

 

See Notes to ConsolidatedFinancial Statements(Unaudited)

6


 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2018 and 2017

  

Three Months Ended March 31,

 
  

2018

  

2017

 

Net income

 $10,549,961  $9,184,965 
         

Other comprehensive income (loss):

        
         

Unrealized gains (losses) on securities available for sale:

        
    Unrealized holding gains (losses) arising during the period before tax  (5,366,113)  598,190 

Less reclassification for adoption of ASU 2016-01

  666,900   

-    

 
   (4,699,213)  598,190 

Unrealized gains (losses) on interest rate cap derivatives:

        

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

  150,478   (45,202)

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

  (80,515)  (122,813)
   230,993   77,611 
         

Other comprehensive income (loss), before tax

  (4,468,220)  675,801 

Tax expense (benefit)

  (1,266,680)  265,062 

Other comprehensive income (loss), net of tax

  (3,201,540)  410,739 
         

Comprehensive income

 $7,348,421  $9,595,704 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

    

 

    

2018

    

2017

 

Net income

 

$

8,808,835

 

$

7,853,935

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

(1,652,382)

 

 

289,086

 

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

 

 

 —

 

 

(63,588)

 

 

 

 

(1,652,382)

 

 

352,674

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period before tax

 

 

576,559

 

 

(8,446)

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

(187,087)

 

 

(95,361)

 

 

 

 

763,646

 

 

86,915

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

(888,736)

 

 

439,589

 

Tax expense (benefit)

 

 

(276,849)

 

 

165,012

 

Other comprehensive income (loss), net of tax

 

 

(611,887)

 

 

274,577

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

8,196,948

 

$

8,128,512

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 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 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

 

Net income

 

$

29,804,181

 

$

25,804,917

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

(8,530,983)

 

 

2,057,586

 

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

 

 

 —

 

 

(25,124)

 

Less reclassification adjustment for adoption of ASU 2016-01

 

 

855,039

 

 

 —

 

 

 

 

(7,675,944)

 

 

2,082,710

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

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

 

 

404,100

 

 

(186,000)

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

(89,914)

 

 

(354,813)

 

 

 

 

494,014

 

 

168,813

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

(7,181,930)

 

 

2,251,523

 

Tax expense (benefit)

 

 

(2,033,882)

 

 

864,468

 

Other comprehensive income (loss), net of tax

 

 

(5,148,048)

 

 

1,387,055

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

24,656,133

 

$

27,191,972

 

 

See Notes to Consolidated Financial Statements (Unaudited)

              

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 income, 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 

 

See Notes to Consolidated Financial Statements (Unaudited)

7


 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine Months Ended September 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 payroll taxes for restriced stock and in connection with stock options exercised

 

 

(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 payroll taxes for restricted stock and in connection with stock options exercised

 

 

642

 

 

(17,023)

 

 

 —

 

 

 —

 

 

(16,381)

Balance, June 30, 2018

 

$

13,973,940

 

$

190,533,240

 

$

171,955,296

 

$

(6,874,311)

 

$

369,588,165

Net income

 

 

 —

 

 

 —

 

 

8,808,835

 

 

 —

 

 

8,808,835

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(611,887)

 

 

(611,887)

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(937,607)

 

 

 —

 

 

(937,607)

Issuance of 1,699,414 shares of common stock, net of issuance costs as a result of merger with Springfield Bancshares

 

 

1,699,414

 

 

78,831,543

 

 

 —

 

 

 —

 

 

80,530,957

Issuance of 3,205 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

 

 

3,205

 

 

120,396

 

 

 —

 

 

 —

 

 

123,601

Issuance of 1,754 shares of common stock as a result of stock options exercised

 

 

1,754

 

 

32,300

 

 

 —

 

 

 —

 

 

34,054

Stock-based compensation expense

 

 

 —

 

 

318,906

 

 

 —

 

 

 —

 

 

318,906

Restricted stock awards - 5,300 shares of common stock

 

 

5,300

 

 

(5,300)

 

 

 —

 

 

 —

 

 

 —

Exchange of 9,853 shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised

 

 

(9,853)

 

 

(457,782)

 

 

 —

 

 

 —

 

 

(467,635)

Balance September 30, 2018

 

$

15,673,760

 

$

269,373,303

 

$

179,826,524

 

$

(7,486,198)

 

$

457,387,389

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

(Continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2018 and 2017

 

  

2018

  

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net income

 $10,549,961  $9,184,965 

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

        

Depreciation

  1,020,975   896,952 

Provision for loan/lease losses

  2,539,839   2,105,109 

Stock-based compensation expense

  495,493   388,753 

Deferred compensation expense accrued

  511,502   404,723 

Losses on other real estate owned, net

  118,159   - 

Amortization of premiums on securities, net

  438,641   347,178 

Loans originated for sale

  (12,939,466)  (21,416,325)

Proceeds on sales of loans

  13,763,966   22,547,789 

Gains on sales of residential real estate loans

  (100,815)  (96,323)

Gains on sales of government guaranteed portions of loans

  (358,434)  (950,641)

Amortization of core deposit intangible

  304,551   230,867 

Accretion of acquisition fair value adjustments, net

  (732,689)  (1,915,001)

Increase in cash value of bank-owned life insurance

  (417,987)  (469,687)

Decrease (increase) in other assets

  (4,403,592)  5,427,798 

Decrease in other liabilities

  (2,886,830)  (5,852,341)

Net cash provided by operating activities

 $7,903,274  $10,833,816 
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Net decrease in federal funds sold

  15,692,000   6,459,000 

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

  10,713,457   (93,471,781)

Proceeds from sales of other real estate owned

  736,370   34,191 

Activity in securities portfolio:

        

Purchases

  (7,100,109)  (12,138,040)

Calls, maturities and redemptions

  4,540,000   17,385,968 

Paydowns

  9,085,377   8,486,628 

Activity in restricted investment securities:

        

Purchases

  (4,450,550)  (7,600)

Redemptions

  1,820,000   1,315,500 

Net increase in loans/leases originated and held for investment

  (90,378,382)  (29,236,438)

Purchase of premises and equipment

  (704,413)  (1,396,902)

Net cash used in investing activities

 $(60,046,250) $(102,569,474)
         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Net increase in deposit accounts

  13,377,517   136,704,261 

Net increase (decrease) in short-term borrowings

  2,866,631   (20,501,291)

Activity in Federal Home Loan Bank advances:

        

Calls and maturities

  -   (4,000,000)

Net change in short-term and overnight advances

  24,345,000   (26,950,000)

Activity in other borrowings:

        

Calls, maturities and scheduled principal payments

  (1,937,500)  (8,000,000)

Payment of cash dividends on common stock

  (692,874)  (522,574)

Proceeds from issuance of common stock, net

  308,527   761,238 

Net cash provided by financing activities

 $38,267,301  $77,491,634 

Net decrease in cash and due from banks

  (13,875,675)  (14,244,024)

Cash and due from banks, beginning

  75,721,663   70,569,993 

Cash and due from banks, ending

 $61,845,988  $56,325,969 

8


 

(Continued)

QCR HOLDINGS, INC. AND SUBSIDIARIES

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

Three and Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 payroll taxes for restricted stock and in connection with stock options exercised

 

 

(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 payroll taxes for restricted stock and in connection with stock options exercised

 

 

(594)

 

 

(26,730)

 

 

 —

 

 

 —

 

 

(27,324)

Balance, June 30, 2017

 

$

13,175,234

 

$

158,001,006

 

$

135,254,306

 

$

(1,347,111)

 

$

305,083,435

Net income

 

 

 —

 

 

 —

 

 

7,853,935

 

 

 —

 

 

7,853,935

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

274,577

 

 

274,577

Common cash dividends declared, $0.05 per share

 

 

 —

 

 

 —

 

 

(658,110)

 

 

 —

 

 

(658,110)

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

 

 

2,319

 

 

88,052

 

 

 —

 

 

 —

 

 

90,371

Issuance of 19,906 shares of common stock as a result of stock options exercised

 

 

19,906

 

 

73,915

 

 

 —

 

 

 —

 

 

93,821

Stock-based compensation expense

 

 

 —

 

 

300,599

 

 

 —

 

 

 —

 

 

300,599

Restricted stock awards - 4,500 shares of common stock

 

 

4,500

 

 

(4,500)

 

 

 —

 

 

 —

 

 

 —

Balance September 30, 2017

 

$

13,201,959

 

$

158,459,072

 

$

142,450,131

 

$

(1,072,534)

 

$

313,038,628

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

See Notes to Consolidated Financial Statements (Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three Months Ended March 31, 2018 and 2017

 

  

2018

  

2017

 

Supplemental disclosure of cash flow information, cash payments for:

        

Interest

 $3,654,713  $3,747,218 

Income/franchise taxes

 $74,604  $4,842 
         

Supplemental schedule of noncash investing activities:

        

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

 $(3,201,540) $410,739 

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

 $(177,923) $(290,290)

Transfers of loans to other real estate owned

 $46,244  $136,450 

Dividends payable

 $833,730  $656,574 

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

 $103,080  $303,383 

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

 $2,614,261  $- 

9


 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

    

2018

    

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net income

 

$

29,804,181

 

$

25,804,917

 

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

 

 

  

 

 

  

 

Depreciation

 

 

3,256,799

 

 

2,810,971

 

Provision for loan/lease losses

 

 

11,046,402

 

 

6,214,538

 

Stock-based compensation expense

 

 

1,106,311

 

 

857,666

 

Deferred compensation expense accrued

 

 

1,453,042

 

 

1,098,741

 

Losses (gains) on other real estate owned, net

 

 

48,598

 

 

(154,743)

 

Amortization of premiums on securities, net

 

 

1,201,320

 

 

1,330,946

 

Securities losses, net

 

 

 —

 

 

25,124

 

Loans originated for sale

 

 

(39,923,078)

 

 

(40,423,117)

 

Proceeds on sales of loans

 

 

38,954,289

 

 

42,705,325

 

Gains on sales of residential real estate loans

 

 

(539,266)

 

 

(307,360)

 

Gains on sales of government guaranteed portions of loans

 

 

(404,851)

 

 

(1,129,668)

 

Amortization of core deposit intangible

 

 

1,150,767

 

 

692,600

 

Accretion of acquisition fair value adjustments, net

 

 

(2,951,021)

 

 

(4,063,435)

 

Increase in cash value of bank-owned life insurance

 

 

(1,291,686)

 

 

(1,357,049)

 

Increase (decrease) in other assets

 

 

(8,292,864)

 

 

1,666,921

 

Decrease (increase) in other liabilities

 

 

2,252,939

 

 

(8,610,333)

 

Net cash provided by operating activities

 

$

36,871,882

 

$

27,162,044

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Net decrease (increase) in federal funds sold

 

 

(2,873,000)

 

 

1,689,000

 

Net decrease in interest-bearing deposits at financial institutions

 

 

22,099,041

 

 

22,727,542

 

Proceeds from sales of other real estate owned

 

 

1,288,208

 

 

829,213

 

Activity in securities portfolio:

 

 

 

 

 

  

 

Purchases

 

 

(66,419,802)

 

 

(103,509,208)

 

Calls, maturities and redemptions

 

 

22,915,126

 

 

40,435,714

 

Paydowns

 

 

36,279,229

 

 

30,123,674

 

Sales

 

 

1,938,043

 

 

21,969,870

 

Activity in restricted investment securities:

 

 

 

 

 

  

 

Purchases

 

 

(5,351,875)

 

 

(3,788,275)

 

Redemptions

 

 

109,200

 

 

199,900

 

Net increase in loans/leases originated and held for investment

 

 

(208,737,932)

 

 

(269,891,345)

 

Purchase of premises and equipment

 

 

(7,112,494)

 

 

(4,045,217)

 

Net cash paid for SFC Bank acquisition

 

 

(3,747,209)

 

 

 —

 

Cash prepaid for Guaranty Bank acquisition

 

 

 —

 

 

(7,803,420)

 

Net cash used in investing activities

 

$

(209,613,465)

 

$

(271,062,552)

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

 

Net increase in deposit accounts

 

 

82,308,885

 

 

225,109,315

 

Net decrease in short-term borrowings

 

 

(2,207,101)

 

 

(23,960,582)

 

Activity in Federal Home Loan Bank advances:

 

 

 

 

 

  

 

Term advances

 

 

 —

 

 

1,600,000

 

Calls and maturities

 

 

(27,000,000)

 

 

(6,000,000)

 

Net change in short-term and overnight advances

 

 

120,330,000

 

 

35,955,000

 

Activity in other borrowings:

 

 

 

 

 

  

 

Proceeds from other borrowings

 

 

9,000,000

 

 

7,000,000

 

Calls, maturities and scheduled principal payments

 

 

(10,612,500)

 

 

(9,500,000)

 

Payment of cash dividends on common stock

 

 

(2,362,486)

 

 

(1,836,150)

 

Proceeds from issuance of common stock, net

 

 

969,779

 

 

1,237,492

 

Net cash provided by financing activities

 

$

170,426,577

 

$

229,605,075

 

Net decrease in cash and due from banks

 

 

(2,315,006)

 

 

(14,295,433)

 

Cash and due from banks, beginning

 

 

75,721,663

 

 

70,569,993

 

Cash and due from banks, ending

 

$

73,406,657

 

$

56,274,560

 

 

(Continued)

10


QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

2018

    

2017

 

Supplemental disclosure of cash flow information, cash payments (receipts) for:

 

 

  

 

 

  

 

Interest

 

$

23,102,221

 

$

13,140,273

 

Income/franchise taxes

 

$

(1,099,902)

 

$

10,881,610

 

 

 

 

  

 

 

  

 

Supplemental schedule of noncash investing activities:

 

 

  

 

 

  

 

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

 

$

(5,148,048)

 

$

1,387,055

 

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

 

$

(661,939)

 

$

(314,614)

 

Transfers of loans to other real estate owned

 

$

46,243

 

$

286,212

 

Due to broker for purchases of securities

 

$

 —

 

$

1,300,000

 

Dividends payable

 

$

937,606

 

$

658,110

 

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

 

$

2,440,649

 

$

264,721

 

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

 

$

2,614,261

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information for acquisitions:

 

 

  

 

 

  

 

Fair value of assets acquired:

 

 

  

 

 

  

 

Cash and due from banks

 

$

4,586,326

 

$

 —

 

Interest-bearing deposits at financial institutions

 

 

62,924,396

 

 

 —

 

Securities

 

 

4,845,441

 

 

 —

 

Loans receivable, net

 

 

477,336,699

 

 

 —

 

Bank-owned life insurance

 

 

7,091,883

 

 

 

 

Premises and equipment, net

 

 

6,091,978

 

 

 —

 

Restricted investment securities

 

 

3,654,200

 

 

 —

 

Core deposit intangible

 

 

8,208,728

 

 

 —

 

Other assets

 

 

989,056

 

 

 —

 

Total assets acquired

 

$

575,728,707

 

$

 —

 

 

 

 

  

 

 

  

 

Fair value of liabilities assumed:

 

 

  

 

 

  

 

Deposits

 

$

439,579,328

 

$

 —

 

Short-term borrowings

 

 

1,143,478

 

 

 —

 

FHLB advances

 

 

73,610,427

 

 

 —

 

Other borrowings

 

 

9,543,810

 

 

 

 

Other liabilities

 

 

8,408,464

 

 

 —

 

Total liabilities assumed

 

 

532,285,507

 

 

 —

 

Net assets acquired

 

$

43,443,200

 

$

 —

 

Consideration paid:

 

 

  

 

 

  

 

Cash paid *

 

$

8,333,535

 

$

 —

 

Common stock

 

 

80,637,194

 

 

 —

 

Total consideration paid

 

 

88,970,729

 

 

 —

 

Goodwill

 

$

45,527,529

 

$

 —

 

 

 

 

 

 

 

 

 

* Net cash paid at closing totalted $3,747,209

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

11


Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31,September 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’sCompany's Annual Report on Form 10-K10‑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-Q10‑Q and Rule 10-10‑01 of Regulation S-X.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’smanagement's discussion and analysis are due to rounding. The results of the interim period ended March 31,September 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.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

 

12


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 which include fourthe accounts of five commercial banks:  QCBT, CRBT, CSB, RB&T and RB&T.SFC Bank. 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’sCompany's Annual Report on Form 10-K10‑K for the year ended December 31, 2017 for additional information about the acquisition.

The merger with Springfield Bancshares occurred on July 1, 2018; therefore, the financial results for the period since acquisition is included in this report. See Note 2 to the Consolidated Financial Statements for additional information about the merger. 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Recent accounting developments:  In May 2014, FASB issued ASU 2014-2014‑09,Revenue from Contracts with Customers. ASU 2014-2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-2014‑09 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 2014-2014‑09 was originally effective for the Company on January 1, 2017; however, FASB issued ASU 2015-2015‑14 which defers the effective date in order to provide additional time for both public and private entities to evaluate the impact. ASU 2014-2014‑09 was adopted by the Company on January 1, 2018 and did not have a significant impact on the Company’sCompany's consolidated financial statements.

In January 2016, FASB issued ASU 2016-2016‑01,Financial Instruments–Overall. ASU 2016-2016‑01 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’sentity'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 2016-2016‑01 by the Company on January 1, 2018, the fair value of the Company’sCompany'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 2016-2016‑02,Leases. Under ASU 2016-2016‑02, 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 2016-2016‑02. 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 2016-2016‑02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The Company is in the process of analyzinghas analyzed the impact of adoption and has concluded that it will not have a significant impact on the Company’s consolidated financial statements.

13


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

In June 2016, the FASB issued ASU 2016-2016‑13,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’sasset's life. For public companies, ASU 2016-2016‑13 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’sCompany's consolidated financial statements.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

In February 2018, the FASB issued ASU 2018-2018‑02,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-timeone-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 2018-2018‑02 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 2018-2018‑02 and apply the guidance to the consolidated financial statements for the year ended December 31, 2017.

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

NOTE 2 – MERGERS/ACQUISITIONS

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. The Company acquired 100% of Springfield Bancshares common stock in the merger. 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.

The merger with Springfield Bancshares allowed the Company to enter the Springfield, Missouri market which is consistent with the Company’s strategic plan to selectively acquire other high-performing financial institutions in vibrant mid-sized metropolitan markets with a concentration of commercial clients. Financial metrics related to the transaction were favorable, as measured by EPS and ROAA accretion.

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 $80.6 million and total consideration paid by the Company of $89.0 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 September 30, 2018 Consolidated Balance Sheet.  The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805.  The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects.  The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill.  This goodwill is not deductible for tax purposes.

14


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

 

 

 

 

 

    

As of

 

 

July 1, 2018

ASSETS

 

 

  

Cash and due from banks

 

$

4,586,326

Interest-bearing deposits at financial institutions

 

 

62,924,396

Securities

 

 

4,845,441

Loans/leases receivable, net

 

 

477,336,699

Bank-owned life insurance

 

 

7,091,883

Premises and equipment

 

 

6,091,978

Restricted investment securities

 

 

3,654,200

Core deposit intangible

 

 

8,208,728

Other assets

 

 

989,056

Total assets acquired

 

$

575,728,707

 

 

 

  

LIABILITIES

 

 

  

Deposits

 

$

439,579,328

Short-term borrowings

 

 

1,143,478

FHLB advances

 

 

73,610,427

Other borrowings

 

 

9,543,810

Other liabilities

 

 

8,408,464

Total liabilities assumed

 

$

532,285,507

Net assets acquired

 

$

43,443,200

 

 

 

  

CONSIDERATION PAID:

 

 

  

Cash

 

$

8,333,535

Common stock

 

 

80,637,194

Total consideration paid

 

$

88,970,729

Goodwill

 

$

45,527,529

Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date.  Credit discounts are included in the determination of fair value.  A third party valuation consultant assisted with the determination of fair value.

Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans.  PCI loans are accounted for in accordance with ASC 310-30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower.  Performing loans are accounted for in accordance with ASC 310-20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.

For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount.  Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected remaining life of the loan.  Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively.  The present value of any decreases in expected cash flows after the purchase date is recognized by recording and allowance for loan and lease losses and provision for loan losses.

For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loans.

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The following table presents the purchased loans as of the acquisition date:

 

 

 

 

 

 

 

 

 

 

 

    

PCI

    

Performing

    

    

 

 

 

Loans

 

Loans

 

Total

Contractually required principal payments

 

$

7,552,912

 

$

479,439,547

 

$

486,992,459

Nonaccretable discount

 

 

(1,562,455)

 

 

 —

 

 

(1,562,455)

Principal cash flows expected to be collected

 

$

5,990,457

 

$

479,439,547

 

$

485,430,004

Accretable discount

 

 

(293,445)

 

 

(7,799,860)

 

 

(8,093,305)

Fair Value of acquired loans

 

$

5,697,012

 

$

471,639,687

 

$

477,336,699

Changes in accretable yield for the loans acquired were as follows for the three months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

PCI

 

Performing

 

 

 

 

    

Loans

    

Loans

    

Total

Discount added at acquisition

 

$

(293,445)

 

$

(7,799,860)

 

$

(8,093,305)

     Reclassification of nonaccretable discount to accretable

 

 

(891,569)

 

 

 —

 

 

(891,569)

Accretion recognized

 

 

262,852

 

 

951,592

 

 

1,214,444

Balance at the end of the period

 

$

(922,162)

 

$

(6,848,268)

 

$

(7,770,430)

During the current quarter, there was no nonaccretable discount that was accelerated due to the early repayment of PCI loans.  However, $891,569 of nonaccretable discount was reclassified to accretable during the third quarter of 2018 due to significant improvement on one specific credit subsequent to the acquisition date.  Of this amount, $262,852 was accreted to income in the third quarter of 2018, while the remainder will be accreted over the next 11 months, which is the remaining contractual life of the loan.

Premises and equipment acquired with a fair value of $6,091,978 includes one branch location including a write-up of $617,286.  The fair value was determined with the assistance of a third party appraiser.  The assets and related fair value adjustments  will be recognized as an increase in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $8,208,728 which is the portion of the acquisition purchase price which represents the value assigned to the existing deposit base.  The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years).

The following table presents the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value:

 

 

 

 

 

    

September 30, 2018

Balance at acquisition

 

$

8,208,728

Amortization expense

 

 

(237,114)

Balance at the end of the period

 

$

7,971,614

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

8,208,728

Accumulated amortization

 

 

(237,114)

Net book value

 

$

7,971,614

 

 

 

 

The following presents the remaining estimated amortization of the core deposit intangible:

 

 

 

 

Years ending December 31,

    

Amount

2018

 

$

237,114

2019

 

 

932,810

2020

 

 

915,051

2021

 

 

893,192

2022

 

 

867,227

Thereafter

 

 

4,126,220

 

 

$

7,971,614

 

 

 

 

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

FHLB advances and other borrowings assumed with a fair value of $83,154,237 included $40,000,000 in overnight FHLB advances, $33,610,427 of FHLB term advances, $4,743,810 in subordinated debentures and a $4,800,000 bank stock loan.  The $4.8 million bank stock loan was paid off immediately after the acquisition date on July 2, 2018, at its book value.

The following table presents the assumed FHLB advances and other borrowings as of the acquisition date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

Rate

Terms

Maturity Date

Collateral

FHLB advance

 

$ 40,000,000

2.10%

daily interest payments; principal due at maturity

7/2/2018

commercial and residential real estate loans

FHLB advance

 

4,991,962

2.01%

monthly interest payments; principal due at maturity

7/30/2018

commercial and residential real estate loans

FHLB advance

 

4,966,060

2.09%

monthly interest payments; principal due at maturity

10/1/2018

commercial and residential real estate loans

FHLB advance

 

4,848,879

2.09%

monthly interest payments; principal due at maturity

9/30/2019

commercial and residential real estate loans

FHLB advance

 

4,787,502

1.50%

monthly interest payments; principal due at maturity

2/10/2020

commercial and residential real estate loans

FHLB advance

 

4,756,169

1.93%

monthly interest payments; principal due at maturity

5/27/2020

commercial and residential real estate loans

FHLB advance

 

4,664,663

1.96%

monthly interest payments; principal due at maturity

1/27/2021

commercial and residential real estate loans

FHLB advance

 

4,595,192

2.00%

monthly interest payments; principal due at maturity

7/29/2021

commercial and residential real estate loans

Subordinated debenture

 

952,566

4.00%

monthly interest payments; principal due at maturity

4/30/2021

unsecured

Subordinated debenture

 

952,566

4.00%

monthly interest payments; principal due at maturity

4/30/2021

unsecured

Subordinated debenture

 

946,226

4.00%

monthly interest payments; principal due at maturity

9/15/2021

unsecured

Subordinated debenture

 

946,226

4.00%

monthly interest payments; principal due at maturity

9/15/2021

unsecured

Subordinated debenture

 

946,226

4.00%

monthly interest payments; principal due at maturity

9/15/2021

unsecured

Bank stock loan

 

4,800,000

5.25%

monthly interest payments; principal due at maturity

3/13/2020

4,000,000 issued and outstanding shares of common stock of SFC Bank

    Fair value of FHLB and other borrowings assumed

 

$ 83,154,237

 

 

 

 

 

 

 

 

 

 

 

During the first nine months of 2018, the Company incurred $1.4 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs.    SFC Bank results are included in the consolidated statements of income effective on the merger date.  For the period July 1, 2018 to September 30, 2018, SFC Bank reported revenues of $7.4 million and net income of $2.2 million, which included $279 thousand of after tax post-acquisition, compensation, transition and integration costs.

 

 

NOTE 23 – INVESTMENT SECURITIES

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

     

Gross

  

Gross

     

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Cost

  

Gains

  

(Losses)

  

Value

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

March 31, 2018:

                

    

Cost

    

Gains

    

(Losses)

    

Value

September 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

                

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 $377,534,337  $2,244,218  $(5,024,697) $374,753,858 

 

$

394,371,195

 

$

3,887,422

 

$

(10,753,857)

 

$

387,504,760

Other securities

  1,050,000   -   (11,175)  1,038,825 

 

 

1,050,000

 

 

 —

 

 

(13,480)

 

 

1,036,520

 $378,584,337  $2,244,218  $(5,035,872) $375,792,683 

 

$

395,421,195

 

$

3,887,422

 

$

(10,767,337)

 

$

388,541,280

                

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $37,591,155  $21,236  $(744,881) $36,867,510 

 

$

37,715,802

 

$

9,963

 

$

(1,234,016)

 

$

36,491,749

Residential mortgage-backed and related securities

  162,453,605   60,222   (5,224,784)  157,289,043 

 

 

162,933,727

 

 

35,691

 

 

(7,236,822)

 

 

155,732,596

Municipal securities

  61,862,665   238,583   (899,444)  61,201,804 

 

 

60,101,620

 

 

150,615

 

 

(1,348,028)

 

 

58,904,207

Other securities

  4,254,716   31,867   -   4,286,583 

 

 

4,254,364

 

 

 —

 

 

(59,474)

 

 

4,194,890

 $266,162,141  $351,908  $(6,869,109) $259,644,940 

 

$

265,005,513

 

$

196,269

 

$

(9,878,340)

 

$

255,323,442

                

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 

 

11

17


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – 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’sCompany'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’sCompany'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 March 31,September 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

September 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

170,633,644

 

$

(5,439,521)

 

$

64,984,249

 

$

(5,314,336)

 

$

235,617,893

 

$

(10,753,857)

Other securities

 

 

536,520

 

 

(13,480)

 

 

 —

 

 

 —

 

 

536,520

 

 

(13,480)

 

 

$

171,170,164

 

$

(5,453,001)

 

$

64,984,249

 

$

(5,314,336)

 

$

236,154,413

 

$

(10,767,337)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

18,437,573

 

$

(521,633)

 

$

15,829,173

 

$

(712,383)

 

$

34,266,746

 

$

(1,234,016)

Residential mortgage-backed and related securities

 

 

44,903,593

 

 

(1,712,003)

 

 

105,007,537

 

 

(5,524,819)

 

 

149,911,130

 

 

(7,236,822)

Municipal securities

 

 

79,442,346

 

 

(976,811)

 

 

10,952,533

 

 

(371,217)

 

 

90,394,879

 

 

(1,348,028)

Other securities

 

 

4,194,890

 

 

(59,474)

 

 

 —

 

 

 

 

 

4,194,890

 

 

(59,474)

 

 

$

146,978,402

 

$

(3,269,921)

 

$

131,789,243

 

$

(6,608,419)

 

$

278,767,645

 

$

(9,878,340)

 

 

Less than 12 Months

  

12 Months or More

  

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Gross

      

Gross

      

Gross

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

March 31, 2018:

                        

Securities HTM:

                        

Municipal securities

 $69,404,232  $(2,881,032) $59,545,239  $(2,143,665) $128,949,471  $(5,024,697)

Other securities

  1,038,825   (11,175)  -   -   1,038,825   (11,175)
 $70,443,057  $(2,892,207) $59,545,239  $(2,143,665) $129,988,296  $(5,035,872)
                        

Securities AFS:

                        

U.S. govt. sponsored agency securities

 $29,643,497  $(589,515) $3,634,609  $(155,365) $33,278,106  $(744,880)

Residential mortgage-backed and related securities

  94,102,512   (2,858,578)  55,394,159   (2,366,206)  149,496,671   (5,224,784)

Municipal securities

  36,845,821   (659,492)  8,217,318   (239,952)  45,063,139   (899,444)
 $160,591,830  $(4,107,585) $67,246,086  $(2,761,523) $227,837,916  $(6,869,108)

 

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)

 

$

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)

 

$

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)

 

 

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)

 

 

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)

 

 

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)

 

$

128,656,909

 

$

(1,138,843)

 

$

71,569,641

 

$

(1,761,568)

 

$

200,226,550

 

$

(2,900,411)

At March 31,September 30, 2018, the investment portfolio included 604613 securities. Of this number, 290434 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 1.8%3.2% of the total amortized cost of

18


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

the portfolio. Of these 290434 securities, 105171 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not 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 nine months ended March 31,September 30, 2018 and 2017.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

There were noAll sales of securities for the three and nine months ended March 31,September 30, 2018 and 2017.2017 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 Months Ended

    

Nine Months Ended

    

 

 

 

 

 

September 30, 2018

 

September 30, 2017

 

September 30, 2018

 

September 30, 2017

 

Proceeds from sales of securities

 

 

 

 

$

1,938,043

 

$

8,415,795

 

$

1,938,043

 

$

21,969,870

 

Gross gains from sales of securities

 

 

 

 

 

 —

 

 

6,312

 

 

 —

 

 

65,880

 

Gross losses from sales of securities

 

 

 

 

 

 —

 

 

(69,900)

 

 

 —

 

 

(91,004)

 

The amortized cost and fair value of securities as of March 31,September 30, 2018 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because

19


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

 

    

Amortized Cost

    

Fair Value

Securities HTM:

        

 

 

  

 

 

  

Due in one year or less

 $3,344,356  $3,345,990 

 

$

1,710,335

 

$

1,711,153

Due after one year through five years

  25,163,524   25,191,668 

 

 

27,876,391

 

 

27,826,476

Due after five years

  350,076,457   347,255,025 

 

 

365,834,469

 

 

359,003,651

 $378,584,337  $375,792,683 
        

 

$

395,421,195

 

$

388,541,280

Securities AFS:

        

 

 

  

 

 

  

Due in one year or less

 $3,368,633  $3,381,748 

 

$

3,153,996

 

$

3,156,871

Due after one year through five years

  23,949,100   23,738,028 

 

 

25,663,131

 

 

25,220,152

Due after five years

  76,390,803   75,236,121 

 

 

73,254,659

 

 

71,213,823

  103,708,536   102,355,897 

 

 

102,071,786

 

 

99,590,846

Residential mortgage-backed and related securities

  162,453,605   157,289,043 

 

 

162,933,727

 

 

155,732,596

 $266,162,141  $259,644,940 

 

$

265,005,513

 

$

255,323,442

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

 

 

 

 

 

 

 

Amortized Cost

  

Fair Value

 

    

Amortized Cost

    

Fair Value

Securities HTM:

        

 

 

  

 

 

  

Municipal securities

 $209,306,946  $207,262,788 

 

$

229,992,901

 

$

226,439,711

        

 

 

  

 

 

  

 

Securities AFS:

        

 

 

  

 

 

  

U.S. govt. sponsored agency securities

  5,048,812   4,947,644 

 

 

4,998,969

 

 

4,847,750

Municipal securities

  54,016,828   53,258,850 

 

 

50,248,182

 

 

49,027,162

Corporate securities

 

 

4,006,462

 

 

3,948,640

 $59,065,640  $58,206,494 

 

$

59,253,613

 

$

57,823,552

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of March 31,September 30, 2018, the Company’sCompany's municipal securities portfolios were comprised of general obligation bonds issued by 128113 issuers with fair values totaling $101.3$86.2 million and revenue bonds issued by 148163 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $334.6$360.2 million. The Company held investments in general obligation bonds in 2627 states, including six states in which the aggregate fair value exceeded $5.0$5.0 million. The Company held investments in revenue bonds in 1619 states, including seven states in which the aggregate fair value exceeded $5.0$5.0 million.

As of December 31, 2017, the Company’sCompany's municipal securities portfolios were comprised of general obligation bonds issued by 131 issuers with fair values totaling $108.0$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$337.3 million. The Company held investments in general obligation bonds in 26 states, including sixnine states in which the aggregate fair value exceeded $5.0$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$5.0 million.

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

March 31, 2018:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer
(Fair Value)

 
                 

North Dakota

  7  $21,627,097  $20,756,566  $2,965,224 

Illinois

  20   18,532,776   18,513,766   925,688 

Iowa

  16   13,878,991   13,830,003   864,375 

Texas

  17   10,763,333   10,554,430   620,849 

Missouri

  17   8,314,872   8,323,476   489,616 

Ohio

  8   7,378,887   7,296,859   912,107 

Other

  43   22,261,263   22,068,390   513,218 

Total general obligation bonds

  128  $102,757,219  $101,343,490  $791,746 

December 31, 2017:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer
(Fair Value)

 
                 

North Dakota

  7  $21,626,574  $21,724,197  $3,103,457 

Illinois

  20   19,328,700   19,514,024   975,701 

Iowa

  16   13,881,689   13,969,512   873,095 

Texas

  17   11,253,775   11,308,848   665,226 

Missouri

  17   9,243,355   9,308,287   547,546 

Ohio

  9   8,002,705   7,938,028   882,003 

Other

  45   24,000,278   24,215,119   538,114 

Total general obligation bonds

  131  $107,337,076  $107,978,015  $824,260 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

March 31, 2018:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer
(Fair Value)

 
                 

Missouri

  58  $108,311,804  $108,445,780  $1,869,755 

Iowa

  29   68,370,374   68,236,038   2,352,967 

Ohio

  10   55,757,914   55,699,375   5,569,938 

Indiana

  26   49,258,364   48,833,113   1,878,197 

Illinois

  2   17,205,951   17,373,994   8,686,997 

Kansas

  6   12,651,338   12,172,961   2,028,827 

North Dakota

  5   11,220,278   10,644,441   2,128,888 

Other

  12   13,863,760   13,206,470   1,100,539 

Total revenue bonds

  148  $336,639,783  $334,612,172  $2,260,893 

December 31, 2017:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer
(Fair Value)

 
                 

Missouri

  56  $106,259,015  $106,232,837  $1,897,015 

Iowa

  29   68,724,899   69,079,470   2,382,051 

Ohio

  10   55,766,091   55,820,203   5,582,020 

Indiana

  26   51,171,818   50,861,336   1,956,205 

Illinois

  2   17,211,441   17,408,544   8,704,272 

Kansas

  6   12,873,329   12,877,087   2,146,181 

North Dakota

  5   11,451,560   11,351,676   2,270,335 

Other

  11   13,805,340   13,716,132   1,246,921 

Total revenue bonds

  145  $337,263,493  $337,347,285  $2,326,533 

Both general obligation and revenue bonds are diversified across many issuers. As of March 31,September 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’Company's stockholders' equity. Of the general obligation and revenue bonds in the Company’sCompany'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

20


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company’sCompany's municipal securities are owned by each of the fourfive charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of March 31,September 30, 2018, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter’scharter's total risk-based capital.

As of March 31,September 30, 2018, the Company’sCompany's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 34 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31,September 30, 2018 and December 31, 2017 is presented as follows:

 

 

 

 

 

 

 

As of

 

As of

 

As of March 31,

  

As of December 31,

 

 

September 30, 

 

December 31, 

 

2018

  

2017

 

    

2018

    

2017

        

 

 

 

 

 

 

C&I loans*

 $1,201,085,625  $1,134,516,315 

 

$

1,380,542,524

 

$

1,134,516,315

CRE loans

        

 

 

  

 

 

  

Owner-occupied CRE

  346,996,627   332,742,477 

 

 

449,056,125

 

 

332,742,477

Commercial construction, land development, and other land

  171,404,628   186,402,404 

 

 

224,295,259

 

 

186,402,404

Other non owner-occupied CRE

  839,302,131   784,347,000 

 

 

1,053,974,806

 

 

784,347,000

  1,357,703,386   1,303,491,882 

 

 

1,727,326,190

 

 

1,303,491,882

        

Direct financing leases **

  137,614,465   141,448,232 

 

 

126,751,783

 

 

141,448,232

Residential real estate loans ***

  254,484,231   258,646,265 

 

 

309,287,535

 

 

258,646,265

Installment and other consumer loans

  95,911,569   118,610,799 

 

 

100,191,471

 

 

118,610,799

  3,046,799,276   2,956,713,493 

 

 

3,644,099,503

 

 

2,956,713,493

Plus deferred loan/lease origination costs, net of fees

  8,103,163   7,771,907 

 

 

9,286,864

 

 

7,771,907

  3,054,902,439   2,964,485,400 

 

 

3,653,386,367

 

 

2,964,485,400

Less allowance

  (36,532,602)  (34,355,728)

 

 

(43,077,457)

 

 

(34,355,728)

 $3,018,369,837  $2,930,129,672 

 

$

3,610,308,910

 

$

2,930,129,672

        
        

* Direct financing leases:

        

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 $152,430,047  $156,583,887 

 

$

140,055,010

 

$

156,583,887

Estimated unguaranteed residual values of leased assets

  929,932   929,932 

 

 

929,932

 

 

929,932

Unearned lease/residual income

  (15,745,514)  (16,065,587)

 

 

(14,233,159)

 

 

(16,065,587)

  137,614,465   141,448,232 

 

 

126,751,783

 

 

141,448,232

Plus deferred lease origination costs, net of fees

  4,350,767   4,624,027 

 

 

4,039,635

 

 

4,624,027

  141,965,232   146,072,259 

 

 

130,791,418

 

 

146,072,259

Less allowance

  (2,730,301)  (2,382,098)

 

 

(2,632,247)

 

 

(2,382,098)

 $139,234,931  $143,690,161 

 

$

128,159,171

 

$

143,690,161


*     Includes equipment financing agreements outstanding at m2, totaling $78,911,791$98,823,351 and $66,758,397$66,758,397 as of March 31,September 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’smanagement's expertise and understanding of the current states of particular industries to determine informal

21


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and nine months ended March 31,September 30, 2018 and 2017.

***Includes residential real estate loans held for sale totaling $279,750$2,557,907 and $645,001$645,001 as of March 31,September 30, 2018, and December 31, 2017, respectively.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Changes in accretable yield for acquired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

Nine months ended September 30, 2018

 

 

    

PCI

    

Performing

    

 

 

 

PCI

    

Performing

    

 

 

 

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

Balance at the beginning of the period

 

$

(142,048)

 

$

(5,051,424)

 

$

(5,193,472)

 

$

(191,132)

 

$

(6,280,075)

 

$

(6,471,207)

 

Discount added at acquisition

 

 

(293,445)

 

 

(7,799,860)

 

 

(8,093,305)

 

 

(293,445)

 

 

(7,799,860)

 

 

(8,093,305)

 

Reclassification of nonaccretable discount to accretable

 

 

(891,569)

 

 

 —

 

 

(891,569)

 

 

(891,569)

 

 

 —

 

 

(891,569)

 

Accretion recognized

 

 

268,694

 

 

1,579,568

 

 

1,848,262

 

 

317,778

 

 

2,808,219

 

 

3,125,997

 

Balance at the end of the period

 

$

(1,058,368)

 

$

(11,271,716)

 

$

(12,330,084)

 

$

(1,058,368)

 

$

(11,271,716)

 

$

(12,330,084)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

 

Three months ended September 30, 2017

 

Nine months ended September 30, 2017

 

 

PCI

  

Performing

     

    

PCI

    

Performing

    

 

 

PCI

    

Performing

    

 

 

 

Loans

  

Loans

  

Total

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

Balance at the beginning of the period

 $(191,132) $(6,280,075) $(6,471,207)

 

$

(83,860)

 

$

(5,325,471)

 

$

(5,409,331)

 

$

(194,306)

 

$

(9,115,614)

 

$

(9,309,920)

 

Accretion recognized

  34,236   620,532   654,768 

 

 

25,158

 

 

658,547

 

 

683,705

 

 

135,604

 

 

4,448,690

 

 

4,584,294

 

Balance at the end of the period

 $(156,896) $(5,659,543) $(5,816,439)

 

$

(58,702)

 

$

(4,666,924)

 

$

(4,725,626)

 

$

(58,702)

 

$

(4,666,924)

 

$

(4,725,626)

 

  

Three months ended March 31, 2017

 
  

PCI

  

Performing

     
  

Loans

  

Loans

  

Total

 

Balance at the beginning of the period

 $(194,306) $(9,115,614) $(9,309,920)

Accretion recognized

  66,690   2,171,540   2,238,230 

Balance at the end of the period

 $(127,616) $(6,944,074) $(7,071,690)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

As of March 31, 2018

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

 

Current

  

30-59 Days Past

Due

  

60-89 Days Past

Due

  

Accruing Past Due

90 Days or More

  

Nonaccrual

Loans/Leases

  

Total

 

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $1,197,675,583  $1,714,614  $210,724  $36,162  $1,448,542  $1,201,085,625 

 

$

1,371,826,021

 

$

143,866

 

$

526,049

 

$

 —

 

$

8,046,588

 

$

1,380,542,524

 

CRE

                        

 

 

  

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

 

Owner-Occupied CRE

  346,524,727   142,587   -   -   329,313   346,996,627 

 

 

447,031,462

 

 

1,506,334

 

 

109,681

 

 

 —

 

 

408,648

 

 

449,056,125

 

Commercial Construction, Land Development, and Other Land

  168,928,348   55,561   568,523   -   1,852,196   171,404,628 

 

 

217,512,489

 

 

3,994,986

 

 

 —

 

 

1,131,975

 

 

1,655,809

 

 

224,295,259

 

Other Non Owner-Occupied CRE

  834,328,826   105,223   -   -   4,868,082   839,302,131 

 

 

1,043,267,553

 

 

413,292

 

 

 —

 

 

 —

 

 

10,293,961

 

 

1,053,974,806

 

Direct Financing Leases

  133,012,415   1,196,302   599,350   -   2,806,398   137,614,465 

 

 

123,407,592

 

 

1,153,460

 

 

224,015

 

 

 —

 

 

1,966,716

 

 

126,751,783

 

Residential Real Estate

  250,956,900   2,304,607   35,457   -   1,187,267   254,484,231 

 

 

306,900,388

 

 

 —

 

 

1,142,787

 

 

270,413

 

 

973,947

 

 

309,287,535

 

Installment and Other Consumer

  95,435,771   190,027   13,806   4,778   267,187   95,911,569 

 

 

99,501,411

 

 

38,912

 

 

413,565

 

 

6,967

 

 

230,616

 

 

100,191,471

 

 $3,026,862,570  $5,708,921  $1,427,860  $40,940  $12,758,985  $3,046,799,276 

 

$

3,609,446,916

 

$

7,250,850

 

$

2,416,097

 

$

1,409,355

 

$

23,576,285

 

$

3,644,099,503

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

  99.34%  0.19%  0.05%  0.00%  0.42%  100.00%

 

 

99.05

%  

 

0.20

%  

 

0.07

%  

 

0.04

%  

 

0.65

%  

 

100.00

%

 

  

As of December 31, 2017

 

Classes of Loans/Leases

 

Current

  

30-59 Days Past

Due

  

60-89 Days Past

Due

  

Accruing Past Due

90 Days or More

  

Nonaccrual

Loans/Leases

  

Total

 
                         

C&I

 $1,124,734,486  $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%

22


 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – 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 March 31,September 30, 2018 and December 31, 2017 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

As of March 31, 2018

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases *

  

Accruing
TDRs

  

Total

NPLs

  

Percentage of

Total NPLs

 

    

More

    

Loans/Leases*

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

C&I

 $36,162  $1,448,542  $4,714,450  $6,199,154   34.29%

 

$

 —

 

$

8,046,588

 

$

677,859

 

$

8,724,447

 

29.85

%

CRE

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

  -   329,313   107,322   436,635   2.42%

 

 

 —

 

 

408,648

 

 

106,470

 

 

515,118

 

1.76

%

Commercial Construction, Land Development, and Other Land

  -   1,852,196   -   1,852,196   10.25%

 

 

1,131,975

 

 

1,655,809

 

 

 —

 

 

2,787,784

 

9.54

%

Other Non Owner-Occupied CRE

  -   4,868,082   -   4,868,082   26.93%

 

 

 —

 

 

10,293,961

 

 

2,975,703

 

 

13,269,664

 

45.41

%

Direct Financing Leases

  -   2,806,398   169,198   2,975,596   16.46%

 

 

 —

 

 

1,966,716

 

 

163,681

 

 

2,130,397

 

7.29

%

Residential Real Estate

  -   1,187,267   271,694   1,458,961   8.07%

 

 

270,413

 

 

973,947

 

 

305,792

 

 

1,550,152

 

5.30

%

Installment and Other Consumer

  4,778   267,187   12,828   284,793   1.58%

 

 

6,967

 

 

230,616

 

 

10,410

 

 

247,993

 

0.85

%

 $40,940  $12,758,985  $5,275,492  $18,075,417   100.00%

 

$

1,409,355

 

$

23,576,285

 

$

4,239,915

 

$

29,225,555

 

100.00

%


*Nonaccrual loans/leases included $2,637,483$3,036,422 of TDRs, including $25,984$336,168 in C&I loans, $1,312,469$2,026,376 in CRE loans, $1,208,050$587,613 in direct financing leases, $84,555$82,151 in residential real estate loans, and $6,425$4,114 in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases **

  

Accruing
TDRs

  

Total

NPLs

  

Percentage of

Total NPLs

 

    

More

    

Loans/Leases **

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

C&I

 $-  $1,231,353  $5,224,182  $6,455,535   34.63%

 

$

 —

 

$

1,231,353

 

$

5,224,182

 

$

6,455,535

 

34.63

%

CRE

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

  -   333,900   107,322   441,222   2.37%

 

 

 —

 

 

333,900

 

 

107,322

 

 

441,222

 

2.37

%

Commercial Construction, Land Development, and Other Land

  -   4,844,312   -   4,844,312   25.99%

 

 

 —

 

 

4,844,312

 

 

 —

 

 

4,844,312

 

25.99

%

Other Non Owner-Occupied CRE

  -   1,243,728   -   1,243,728   6.67%

 

 

 —

 

 

1,243,728

 

 

 —

 

 

1,243,728

 

6.67

%

Direct Financing Leases

  -   2,175,044   1,494,448   3,669,492   19.68%

 

 

 —

 

 

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%

 

 

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%

 

 

14,152

 

 

249,091

 

 

14,027

 

 

277,270

 

1.49

%

 $88,671  $11,441,234  $7,112,472  $18,642,377   100.00%

 

$

88,671

 

$

11,441,234

 

$

7,112,472

 

$

18,642,377

 

100.00

%


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

23

18


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – continued

Changes in the allowance by portfolio segment for the three and nine months ended March 31,September 30, 2018 and 2017, respectively, are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

    

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 

 

$

15,233,871

 

$

15,819,040

 

$

2,724,355

 

$

2,433,102

 

$

1,334,708

 

$

37,545,076

Provisions (credits) charged to expense

  808,161   965,383   604,783   (39,337)  200,849   2,539,839 

 

 

3,698,588

 

 

2,254,313

 

 

124,803

 

 

131,977

 

 

(3,853)

 

 

6,205,828

Loans/leases charged off

  (95,499)  -   (283,887)  (52,325)  (4,747)  (436,458)

 

 

(87,040)

 

 

(387,499)

 

 

(427,638)

 

 

(58,241)

 

 

(30,230)

 

 

(990,648)

Recoveries on loans/leases previously charged off

  29,547   9,949   27,307   450   6,240   73,493 

 

 

71,440

 

 

30,344

 

 

210,727

 

 

 —

 

 

4,690

 

 

317,201

Balance, ending

 $15,065,245  $14,938,020  $2,730,301  $2,375,219  $1,423,817  $36,532,602 

 

$

18,916,859

 

$

17,716,198

 

$

2,632,247

 

$

2,506,838

 

$

1,305,315

 

$

43,077,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

    

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 

 

$

14,207,733

 

$

12,999,233

 

$

2,638,301

 

$

2,430,454

 

$

1,080,911

 

$

33,356,632

Provisions charged to expense

  593,359   966,271   505,015   43,520   (3,056)  2,105,109 

Provisions (credits) charged to expense

 

 

469,977

 

 

1,349,393

 

 

179,190

 

 

(11,654)

 

 

99,530

 

 

2,086,436

Loans/leases charged off

  (218,273)  -   (658,684)  (13,623)  (2,046)  (892,626)

 

 

(338,361)

 

 

 —

 

 

(268,669)

 

 

(25,822)

 

 

(16,872)

 

 

(649,724)

Recoveries on loans/leases previously charged off

  33,894   6,386   20,031   3,623   25,285   89,219 

 

 

63,366

 

 

10,748

 

 

103,936

 

 

6,000

 

 

4,947

 

 

188,997

Balance, ending

 $12,954,090  $12,643,266  $2,978,260  $2,375,864  $1,107,670  $32,059,150 

 

$

14,402,715

 

$

14,359,374

 

$

2,652,758

 

$

2,398,978

 

$

1,168,516

 

$

34,982,341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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

 

 

5,283,763

 

 

4,091,170

 

 

1,417,494

 

 

149,923

 

 

104,052

 

 

11,046,402

 

Loans/leases charged off

 

 

(911,429)

 

 

(387,499)

 

 

(1,505,824)

 

 

(110,566)

 

 

(36,063)

 

 

(2,951,381)

 

Recoveries on loans/leases previously charged off

 

 

221,489

 

 

49,839

 

 

338,479

 

 

1,050

 

 

15,851

 

 

626,708

 

Balance, ending

 

$

18,916,859

 

$

17,716,198

 

$

2,632,247

 

$

2,506,838

 

$

1,305,315

 

$

43,077,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 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 charged to expense

 

 

2,345,121

 

 

2,655,521

 

 

981,877

 

 

148,017

 

 

84,002

 

 

6,214,538

 

Loans/leases charged off

 

 

(630,704)

 

 

(10,375)

 

 

(1,611,432)

 

 

(101,006)

 

 

(40,436)

 

 

(2,393,953)

 

Recoveries on loans/leases previously charged off

 

 

143,188

 

 

43,619

 

 

170,415

 

 

9,623

 

 

37,463

 

 

404,308

 

Balance, ending

 

$

14,402,715

 

$

14,359,374

 

$

2,652,758

 

$

2,398,978

 

$

1,168,516

 

$

34,982,341

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

As of March 31, 2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 $567,321  $1,670,897  $628,379  $248,592  $112,177  $3,227,366 

 

$

4,787,321

 

$

3,555,829

 

$

363,439

 

$

226,263

 

$

102,649

 

$

9,035,501

 

Allowance for nonimpaired loans/leases

  14,497,924   13,267,123   2,101,922   2,126,627   1,311,640   33,305,236 

 

 

14,129,538

 

 

14,160,369

 

 

2,268,808

 

 

2,280,575

 

 

1,202,666

 

 

34,041,956

 

 $15,065,245  $14,938,020  $2,730,301  $2,375,219  $1,423,817  $36,532,602 

 

$

18,916,859

 

$

17,716,198

 

$

2,632,247

 

$

2,506,838

 

$

1,305,315

 

$

43,077,457

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

                        

Impaired loans/leases

 $6,010,688  $7,094,483  $2,975,596  $1,556,817  $281,197  $17,918,781 

 

$

11,064,848

 

$

15,944,006

 

$

2,147,125

 

$

1,148,009

 

$

241,614

 

$

30,545,602

 

Nonimpaired loans/leases

  1,195,074,937   1,350,608,903   134,638,869   252,927,414   95,630,372   3,028,880,495 

 

 

1,369,477,676

 

 

1,711,382,184

 

 

124,604,658

 

 

308,139,526

 

 

99,949,857

 

 

3,613,553,901

 

 $1,201,085,625  $1,357,703,386  $137,614,465  $254,484,231  $95,911,569  $3,046,799,276 
                        

 

$

1,380,542,524

 

$

1,727,326,190

 

$

126,751,783

 

$

309,287,535

 

$

100,191,471

 

$

3,644,099,503

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

  9.44%  23.55%  21.12%  15.97%  39.89%  18.01%

 

 

43.27

%  

 

22.30

%  

 

16.93

%  

 

19.71

%  

 

42.48

%  

 

29.58

%

Allowance as a percentage of nonimpaired loans/leases

  1.21%  0.98%  1.56%  0.84%  1.37%  1.10%

 

 

1.03

%  

 

0.83

%  

 

1.82

%  

 

0.74

%  

 

1.20

%  

 

0.94

%

Total allowance as a percentage of total loans/leases

  1.25%  1.10%  1.98%  0.93%  1.48%  1.20%

 

 

1.37

%  

 

1.03

%  

 

2.08

%  

 

0.81

%  

 

1.30

%  

 

1.18

%

 

  

As of December 31, 2017

 
  

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

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%

24


 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – 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.

25


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 threenine months ended March 31,September 30, 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

Average

 

 

 

Recognized for

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 $5,038,888  $5,053,164  $-  $5,297,775  $75,406  $75,406 

 

$

4,549,509

 

$

4,563,785

 

$

 —

 

$

2,139,521

 

$

145,605

 

$

145,605

CRE

                        

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

  289,261   289,261   -   289,261   5,822   5,822 

 

 

288,409

 

 

288,409

 

 

 —

 

 

288,936

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  1,227,579   1,227,579   -   1,235,654   -   - 

 

 

2,018,910

 

 

2,018,910

 

 

 —

 

 

504,880

 

 

26,649

 

 

26,649

Direct Financing Leases

  1,927,663   1,927,663   -   2,355,745   6,291   6,291 

 

 

1,569,905

 

 

1,569,905

 

 

 —

 

 

2,295,387

 

 

10,852

 

 

10,852

Residential Real Estate

  911,804   986,583   -   884,441   -   - 

 

 

663,167

 

 

737,946

 

 

 —

 

 

649,064

 

 

207

 

 

207

Installment and Other Consumer

  140,857   140,857   -   120,043   -   - 

 

 

130,814

 

 

130,814

 

 

 —

 

 

104,290

 

 

 —

 

 

 —

 $9,536,052  $9,625,107  $-  $10,182,919  $87,519  $87,519 

 

$

9,220,714

 

$

9,309,769

 

$

 —

 

$

5,982,078

 

$

183,313

 

$

183,313

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

C&I

 $957,524  $957,524  $567,321  $824,536  $1,983  $1,983 

 

$

6,515,339

 

$

6,515,339

 

$

4,787,321

 

$

1,845,156

 

$

5,878

 

$

5,878

CRE

                        

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

  147,375   147,375   43,875   149,669   -   - 

 

 

138,201

 

 

138,201

 

 

34,701

 

 

145,082

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  5,430,268   5,430,268   1,627,022   5,137,290   -   - 

 

 

5,801,618

 

 

5,801,618

 

 

2,145,425

 

 

5,116,524

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  -   -   -   -   -   - 

 

 

7,696,868

 

 

7,696,868

 

 

1,375,703

 

 

1,924,217

 

 

8,506

 

 

8,506

Direct Financing Leases

  1,047,933   1,047,933   628,379   962,961   -   - 

 

 

577,220

 

 

577,220

 

 

363,439

 

 

532,999

 

 

 —

 

 

 —

Residential Real Estate

  547,158   570,234   248,592   544,558   2,934   2,934 

 

 

484,842

 

 

507,918

 

 

226,263

 

 

447,006

 

 

8,877

 

 

8,877

Installment and Other Consumer

  140,340   140,340   112,177   128,285   83   83 

 

 

110,800

 

 

110,800

 

 

102,649

 

 

127,434

 

 

229

 

 

229

 $8,270,598  $8,293,674  $3,227,366  $7,747,299  $5,000  $5,000 

 

$

21,324,888

 

$

21,347,964

 

$

9,035,501

 

$

10,138,418

 

$

23,490

 

$

23,490

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 $5,996,412  $6,010,688  $567,321  $6,122,311  $77,389  $77,389 

 

$

11,064,848

 

$

11,079,124

 

$

4,787,321

 

$

3,984,677

 

$

151,483

 

$

151,483

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

  436,636   436,636   43,875   438,930   5,822   5,822 

 

 

426,610

 

 

426,610

 

 

34,701

 

 

434,018

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  5,430,268   5,430,268   1,627,022   5,137,290   -   - 

 

 

5,801,618

 

 

5,801,618

 

 

2,145,425

 

 

5,116,524

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  1,227,579   1,227,579   -   1,235,654   -   - 

 

 

9,715,778

 

 

9,715,778

 

 

1,375,703

 

 

2,429,097

 

 

35,155

 

 

35,155

Direct Financing Leases

  2,975,596   2,975,596   628,379   3,318,706   6,291   6,291 

 

 

2,147,125

 

 

2,147,125

 

 

363,439

 

 

2,828,386

 

 

10,852

 

 

10,852

Residential Real Estate

  1,458,962   1,556,817   248,592   1,428,999   2,934   2,934 

 

 

1,148,009

 

 

1,245,864

 

 

226,263

 

 

1,096,070

 

 

9,084

 

 

9,084

Installment and Other Consumer

  281,197   281,197   112,177   248,328   83   83 

 

 

241,614

 

 

241,614

 

 

102,649

 

 

231,724

 

 

229

 

 

229

 $17,806,650  $17,918,781  $3,227,366  $17,930,218  $92,519  $92,519 

 

$

30,545,602

 

$

30,657,733

 

$

9,035,501

 

$

16,120,496

 

$

206,803

 

$

206,803

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

26

20


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31,September 30, 2018 and 2017, respectively, are presented as follows:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 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

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 

 

Investment

 

Recognized

 

Received

 

 

Investment

 

Recognized

 

Received

 

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 $835,955  $846,392  $-  $927,387  $7,352  $7,352 

 

$

2,794,748

 

$

16,792

 

$

16,792

 

 

$

1,301,977

 

$

25,816

 

$

25,816

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

  -   -   -   -   -   - 

 

 

288,611

 

 

 —

 

 

 —

 

 

 

53,661

 

 

6,783

 

 

6,783

 

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

  1,174,260   1,174,260   -   1,183,813   -   - 

 

 

1,009,590

 

 

9,189

 

 

9,189

 

 

 

1,173,629

 

 

 —

 

 

 —

 

Direct Financing Leases

  1,593,104   1,593,104   -   1,868,355   18,895   18,895 

 

 

1,780,494

 

 

2,483

 

 

2,483

 

 

 

2,820,518

 

 

39,759

 

 

39,759

 

Residential Real Estate

  1,147,434   1,222,215   -   1,025,656   1,161   1,161 

 

 

665,567

 

 

207

 

 

207

 

 

 

690,791

 

 

 —

 

 

 —

 

Installment and Other Consumer

  175,957   175,957   -   115,846   -   - 

 

 

115,314

 

 

 —

 

 

 —

 

 

 

139,533

 

 

 —

 

 

 —

 

 $4,926,710  $5,011,928  $-  $5,121,057  $27,408  $27,408 

 

$

6,654,324

 

$

28,671

 

$

28,671

 

 

$

6,180,109

 

$

72,358

 

$

72,358

 

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 $8,352,499  $8,356,338  $1,751,774  $8,110,658  $62,666  $62,666 

 

$

3,401,073

 

$

1,916

 

$

1,916

 

 

$

5,157,671

 

$

53,127

 

$

53,127

 

CRE

                        

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

  

 

 

  

 

Owner-Occupied CRE

  322,148   322,148   57,398   322,148   -   - 

 

 

140,495

 

 

 —

 

 

 —

 

 

 

155,020

 

 

 —

 

 

 —

 

Commercial Construction, Land Development, and Other Land

  4,349,267   4,349,267   823,061   4,351,542   -   - 

 

 

5,483,757

 

 

 —

 

 

 —

 

 

 

4,345,880

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

  78,386   78,386   7,986   39,193   -   - 

 

 

3,848,434

 

 

8,506

 

 

8,506

 

 

 

4,929,960

 

 

 —

 

 

 —

 

Direct Financing Leases

  1,488,964   1,488,964   795,840   1,300,811   -   - 

 

 

557,572

 

 

 —

 

 

 —

 

 

 

893,042

 

 

 —

 

 

 —

 

Residential Real Estate

  633,340   633,340   274,566   636,134   4,240   4,240 

 

 

461,398

 

 

2,984

 

 

2,984

 

 

 

550,476

 

 

5,601

 

 

5,601

 

Installment and Other Consumer

  48,770   48,770   37,932   49,563   112   112 

 

 

113,122

 

 

69

 

 

69

 

 

 

48,164

 

 

99

 

 

99

 

 $15,273,374  $15,277,213  $3,748,557  $14,810,049  $67,018  $67,018 

 

$

14,005,851

 

$

13,475

 

$

13,475

 

 

$

16,080,213

 

$

58,827

 

$

58,827

 

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Total Impaired Loans/Leases:

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

C&I

 $9,188,454  $9,202,730  $1,751,774  $9,038,045  $70,018  $70,018 

 

$

6,195,821

 

$

18,708

 

$

18,708

 

 

$

6,459,648

 

$

78,943

 

$

78,943

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

  322,148   322,148   57,398   322,148   -   - 

 

 

429,106

 

 

 —

 

 

 —

 

 

 

208,681

 

 

6,783

 

 

6,783

 

Commercial Construction, Land Development, and Other Land

  4,349,267   4,349,267   823,061   4,351,542   -   - 

 

 

5,483,757

 

 

 —

 

 

 —

 

 

 

4,345,880

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

  1,252,646   1,252,646   7,986   1,223,006   -   - 

 

 

4,858,024

 

 

17,695

 

 

17,695

 

 

 

6,103,589

 

 

 —

 

 

 —

 

Direct Financing Leases

  3,082,068   3,082,068   795,840   3,169,166   18,895   18,895 

 

 

2,338,066

 

 

2,483

 

 

2,483

 

 

 

3,713,560

 

 

39,759

 

 

39,759

 

Residential Real Estate

  1,780,774   1,855,555   274,566   1,661,790   5,401   5,401 

 

 

1,126,965

 

 

3,191

 

 

3,191

 

 

 

1,241,267

 

 

5,601

 

 

5,601

 

Installment and Other Consumer

  224,727   224,727   37,932   165,409   112   112 

 

 

228,436

 

 

69

 

 

69

 

 

 

187,697

 

 

99

 

 

99

 

 $20,200,084  $20,289,141  $3,748,557  $19,931,106  $94,426  $94,426 

 

$

20,660,175

 

$

42,146

 

$

42,146

 

 

$

22,260,322

 

$

131,185

 

$

131,185

 

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

27

21


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – 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

 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

 

    

Investment

    

Balance

    

Allowance

 

 

            

 

 

  

 

 

  

 

 

  

 

 

Impaired Loans/Leases with No Specific Allowance Recorded:

            

 

 

  

 

 

  

 

 

  

 

 

C&I

 $1,634,269  $1,644,706  $- 

 

$

1,634,269

 

$

1,644,706

 

$

 —

 

 

CRE

            

 

 

  

 

 

 

 

 

  

 

 

Owner-Occupied CRE

  289,261   289,261   - 

 

 

289,261

 

 

289,261

 

 

 —

 

 

Commercial Construction, Land Development, and Other Land

  -   -   - 

 

 

 —

 

 

 —

 

 

 —

 

 

Other Non Owner-Occupied CRE

  1,171,565   1,171,565   - 

 

 

1,171,565

 

 

1,171,565

 

 

 —

 

 

Direct Financing Leases

  2,944,540   2,944,540   - 

 

 

2,944,540

 

 

2,944,540

 

 

 —

 

 

Residential Real Estate

  943,388   1,018,167   - 

 

 

943,388

 

 

1,018,167

 

 

 —

 

 

Installment and Other Consumer

  134,245   134,245   - 

 

 

134,245

 

 

134,245

 

 

 —

 

 

 $7,117,268  $7,202,484  $- 

 

$

7,117,268

 

$

7,202,484

 

$

 —

 

 

            

 

 

  

 

 

  

 

 

  

 

 

Impaired Loans/Leases with Specific Allowance Recorded:

            

 

 

  

 

 

  

 

 

  

 

 

C&I

 $4,613,940  $4,617,879  $715,627 

 

$

4,613,940

 

$

4,617,879

 

$

715,627

 

 

CRE

            

 

 

 

 

 

  

 

 

 

 

 

Owner-Occupied CRE

  151,962   151,962   48,462 

 

 

151,962

 

 

151,962

 

 

48,462

 

 

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235 

 

 

4,844,312

 

 

4,844,312

 

 

1,379,235

 

 

Other Non Owner-Occupied CRE

  72,163   72,163   1,763 

 

 

72,163

 

 

72,163

 

 

1,763

 

 

Direct Financing Leases

  724,953   724,953   504,469 

 

 

724,953

 

 

724,953

 

 

504,469

 

 

Residential Real Estate

  761,458   761,458   355,167 

 

 

761,458

 

 

761,458

 

 

355,167

 

 

Installment and Other Consumer

  68,109   68,109   38,596 

 

 

68,109

 

 

68,109

 

 

38,596

 

 

 $11,236,897  $11,240,836  $3,043,319 

 

$

11,236,897

 

$

11,240,836

 

$

3,043,319

 

 

            

 

 

  

 

 

  

 

 

  

 

 

Total Impaired Loans/Leases:

            

 

 

  

 

 

  

 

 

 

 

 

C&I

 $6,248,209  $6,262,585  $715,627 

 

$

6,248,209

 

$

6,262,585

 

$

715,627

 

 

CRE

            

 

 

 

 

 

  

 

 

 

 

 

Owner-Occupied CRE

  441,222   441,222   48,462 

 

 

441,222

 

 

441,222

 

 

48,462

 

 

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235 

 

 

4,844,312

 

 

4,844,312

 

 

1,379,235

 

 

Other Non Owner-Occupied CRE

  1,243,728   1,243,728   1,763 

 

 

1,243,728

 

 

1,243,728

 

 

1,763

 

 

Direct Financing Leases

  3,669,492   3,669,492   504,469 

 

 

3,669,492

 

 

3,669,492

 

 

504,469

 

 

Residential Real Estate

  1,704,846   1,779,625   355,167 

 

 

1,704,846

 

 

1,779,625

 

 

355,167

 

 

Installment and Other Consumer

  202,354   202,354   38,596 

 

 

202,354

 

 

202,354

 

 

38,596

 

 

 $18,354,163  $18,443,318  $3,043,319 

 

$

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’smanagement's current estimates.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

For C&I and CRE loans, the Company’sCompany'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’sCompany's credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’sCompany's loan system.

28


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 March 31,September 30, 2018 and December 31, 2017:

As of March 31, 2018

CRE

Non Owner-Occupied

Internally Assigned Risk Rating

C&I

Owner-Occupied

CRE

Commercial

Construction,

Land

Development,

and Other Land

Other CRE

Total

As a % of

Total

Pass (Ratings 1 through 5)

$1,079,132,775$337,628,357$166,752,090$813,622,461$2,397,135,68396.66%

Special Mention (Rating 6)

20,327,3655,576,2011,780,00015,242,64242,926,2081.73%

Substandard (Rating 7)

22,713,6943,792,069��2,872,53810,437,02839,815,3291.61%

Doubtful (Rating 8)

------
$1,122,173,834$346,996,627$171,404,628$839,302,131$2,479,877,220100.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 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)

 

$

1,236,971,045

 

$

438,799,404

 

$

216,655,705

 

$

1,021,710,298

 

$

2,914,136,452

 

96.85

%

Special Mention (Rating 6)

 

 

28,051,461

 

 

6,972,157

 

 

3,850,042

 

 

10,356,053

 

 

49,229,713

 

1.64

%

Substandard (Rating 7)

 

 

16,693,746

 

 

3,284,564

 

 

3,789,512

 

 

21,908,455

 

 

45,676,277

 

1.51

%

Doubtful (Rating 8)

 

 

2,921

 

 

 —

 

 

 —

 

 

 —

 

 

2,921

 

 —

%

 

 

$

1,281,719,173

 

$

449,056,125

 

$

224,295,259

 

$

1,053,974,806

 

$

3,009,045,363

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

 

As of March 31, 2018

     

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

 

C&I

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

  

As a % of

Total

 

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Performing

 $77,987,539  $134,638,869  $253,025,270  $95,626,776  $561,278,454   99.00%

 

$

98,150,050

 

$

124,621,386

 

$

307,737,383

 

$

99,943,478

 

$

630,452,297

 

99.28

%

Nonperforming

  924,252   2,975,596   1,458,961   284,793   5,643,602   1.00%

 

 

673,301

 

 

2,130,397

 

 

1,550,152

 

 

247,993

 

 

4,601,843

 

0.72

%

 $78,911,791  $137,614,465  $254,484,231  $95,911,569  $566,922,056   100.00%

 

$

98,823,351

 

$

126,751,783

 

$

309,287,535

 

$

100,191,471

 

$

635,054,140

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

Non Owner-Occupied

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

     

CRE

         

 

 

 

 

 

Land

 

 

 

 

 

 

 

         

Non Owner-Occupied

         

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

 

C&I

  

Owner-Occupied

CRE

  

Commercial

Construction,

Land

Development,

and Other Land

  

Other CRE

  

Total

  

As a % of

Total

 

    

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%

 

$

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%

 

 

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%

 

 

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%

 

 

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%

 

$

1,067,757,917

 

$

332,742,477

 

$

186,402,404

 

$

784,347,000

 

$

2,371,249,799

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

As of December 31, 2017

     

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

 

C&I

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

  

As a % of

Total

 

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 $65,847,177  $137,778,740  $256,935,448  $118,333,529  $578,894,894   98.88%

 

$

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%

 

 

911,220

 

 

3,669,492

 

 

1,710,818

 

 

277,270

 

 

6,568,800

 

1.12

%

 $66,758,397  $141,448,232  $258,646,266  $118,610,799  $585,463,694   100.00%

 

$

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.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of March 31,September 30, 2018 and December 31, 2017, TDRs totaled $7,912,975$7,276,337 and $9,394,967,$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 nine months ended March 31,September 30, 2018 and 2017. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial

29


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

charge-offs at the time of the restructuring.  No loans were restructured during the three months ended September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

For the three months ended September 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

 

$

273,717

 

$

273,717

 

$

273,717

 

 4

 

$

620,452

 

$

620,452

 

$

 —

 

Other Non Owner-Occupied CRE

 

 2

 

 

980,899

 

 

980,899

 

 

60,000

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Direct Financing Leases

 

 2

 

 

44,374

 

 

44,374

 

 

 —

 

 4

 

 

416,597

 

 

416,597

 

 

 —

 

 

 

 5

 

$

1,298,990

 

$

1,298,990

 

$

333,717

 

 8

 

$

1,037,049

 

$

1,037,049

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

Other Non Owner-Occupied CRE

 

 2

 

$

2,975,703

 

$

2,975,703

 

$

815,703

 

 —

 

$

 —

 

$

 —

 

$

 —

 

Residential Real Estate

 

 1

 

 

35,287

 

 

35,287

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 3

 

$

3,010,990

 

$

3,010,990

 

$

815,703

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 8

 

$

 4,309,980

 

$

4,309,980

 

$

1,149,420

 

 8

 

$

1,037,049

 

$

1,037,049

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

For the nine months ended September 30, 2017

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

For the three months ended March 31, 2018

  

For the three months ended March 31, 2017

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Number of

Loans /

Leases

  

Pre-

Modification Recorded

Investment

  

Post-

Modification

Recorded

Investment

  

Specific

Allowance

  

Number of

Loans /

Leases

  

Pre-

Modification

Recorded

Investment

  

Post-

Modification

Recorded

Investment

  

Specific

Allowance

 

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

                                

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Significant Payment Delay

                                

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

  -  $-  $-  $-   2  $133,689  $133,689  $- 

 

 1

 

$

273,717

 

$

273,717

 

$

273,717

 

 7

 

$

801,650

 

$

801,650

 

$

 —

 

Other Non Owner-Occupied CRE

 

 2

 

 

980,899

 

 

980,899

 

 

60,000

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real Estate

 

 1

 

 

46,320

 

 

46,320

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Direct Financing Leases

 

 4

 

 

91,898

 

 

91,898

 

 

 —

 

27

 

 

1,889,000

 

 

1,889,000

 

 

 —

 

 

 8

 

$

1,392,834

 

$

1,392,834

 

$

333,717

 

34

 

$

2,690,650

 

$

2,690,650

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

Other Non Owner-Occupied CRE

 

 2

 

$

2,975,703

 

$

2,975,703

 

$

815,703

 

 —

 

$

 —

 

$

 —

 

$

 —

 

Residential Real Estate

  1   46,320   46,320   -   -   -   -   - 

 

 1

 

 

35,287

 

 

35,287

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Direct Financing Leases

  2   47,524   47,524   -   8   669,861   669,861   - 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 2

 

 

104,382

 

 

104,382

 

 

 —

 

  3  $93,844  $93,844  $-   10  $803,550  $803,550  $- 

 

 3

 

$

3,010,990

 

$

3,010,990

 

$

815,703

 

 2

 

$

104,382

 

$

104,382

 

$

 —

 

                                

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

                                

Direct Financing Leases

  -  $-  $-  $-   1  $6,263  $6,263  $- 
  -  $-  $-  $-   1  $6,263  $6,263  $- 
                                

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

TOTAL

  3  $93,844  $93,844  $-   11  $809,813  $809,813  $- 

 

11

 

$

4,403,824

 

$

4,403,824

 

$

1,149,420

 

36

 

$

2,795,032

 

$

2,795,032

 

$

 —

 

Of the TDRs reported above, oneloans restructured during the nine months ended September 30, 2018, four with a post-modification recorded balance of $46,320 was$1,300,424 were on nonaccrual as of March 31, 2018. nonaccrual. Of the TDRs reported above, noneloans restructured during the nine moths ended September 30, 2017, three with a post-modification recorded balance of $1,384,680 were on nonaccrual as of March 31, 2017.

nonaccrual. For the three and nine months ended March 31,September 30, 2018, eighttwo of the Company’sCompany'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 otherThese TDRs related to other customers whose loans were restructured in the second and third quarters quarter of 20172018 with pre-modification balances totaling $378$774 thousand.

For the three and nine months ended March 31,September 30, 2017, twofour of the Company’sCompany'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 twoTwo of these TDRs were related to the sameone customer andwhose loans were restructured in the fourthsecond quarter of 20162017 with pre-modification balances totaling $195$112 thousand and the other two TDRs related to another customer whose loans were restructured in the fourth quarter of 2016 with pre-modification balances totaling $195 thousand.

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.

30


 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – continued

NOTE 5 – 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 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

 

 

September 30, 2018

 

 

December 31, 2017

 

1-month FHLB Advance

 

6/3/2014

 

6/5/2019

 

Other Assets

 

$

15,000,000

 

1.00

%  

 

$

164,214

 

 

$

190,085

 

1-month FHLB Advance

 

6/5/2014

 

6/5/2021

 

Other Assets

 

 

15,000,000

 

1.50

%  

 

 

539,253

 

 

 

316,615

 

 

 

 

 

 

 

 

 

$

30,000,000

 

 

 

 

$

703,467

 

 

$

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

 

September 30, 2018

 

 

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

$

10,000,000

 

5.19

%  

 

 

5.85

%  

 

$

54,280

 

 

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

 

8,000,000

 

5.19

%  

 

 

5.85

%  

 

 

43,424

 

 

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Other Liabilities

 

 

10,000,000

 

3.90

%  

 

 

4.54

%  

 

 

52,884

 

 

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Other Liabilities

 

 

3,000,000

 

4.49

%  

 

 

5.17

%  

 

 

15,703

 

 

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Other Liabilities

 

 

3,500,000

 

4.09

%  

 

 

4.75

%  

 

 

17,956

 

 

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Other Liabilities

 

 

4,500,000

 

4.09

%  

 

 

4.75

%  

 

 

23,086

 

 

 

 

  

 

 

 

 

 

$

39,000,000

 

4.58

%  

 

 

5.24

%  

 

$

207,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

31


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 46 - EARNINGS PER SHARE

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

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

Three months ended

 

Nine months ended

 

 

2018

  

2017

 

 

 

September 30, 

 

September 30, 

 

        

 

 

2018

    

 

2017

    

 

2018

    

 

2017

 

Net income

 $10,549,961  $9,184,965 

 

$

8,808,835

 

$

7,853,935

 

$

29,804,181

 

$

25,804,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic EPS

 $0.76  $0.70 

 

$

0.56

 

$

0.60

 

$

2.06

 

$

1.96

 

Diluted EPS

 $0.74  $0.68 

 

$

0.55

 

$

0.58

 

$

2.02

 

$

1.91

 

        

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

  13,888,661   13,133,382 

 

 

15,625,123

 

 

13,151,350

 

 

14,477,783

 

 

13,151,672

 

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

  316,923   355,035 

 

 

297,201

 

 

356,605

 

 

308,994

 

 

357,894

 

Weighted average common and common equivalent shares outstanding

  14,205,584   13,488,417 

 

 

15,922,324

 

 

13,507,955

 

 

14,786,777

 

 

13,509,566

 

The increase in weighted average common shares outstanding when comparing the three and nine months ended March 31,September 30, 2018 to March 31,September 30, 2017 was primarily due to the common stock issuance as a result of the merger with Springfield Banshares as discussed in Note 2 to of the Consolidated Financial Statements, includedand in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.acquisition of Guaranty Bank.

NOTE 57 – 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.

32


 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – continued

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

     

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Quoted Prices

  

Significant

     

 

 

 

 

Fair Value Measurements at Reporting Date Using

     

in Active

  

Other

  

Significant

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

     

Markets for

  

Observable

  

Unobservable

 

 

 

 

 

in Active

 

Other

 

Significant

     

Identical Assets

  

Inputs

  

Inputs

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

                

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

March 31, 2018:

                

September 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $36,867,510  $-  $36,867,510  $- 

 

$

36,491,749

 

$

 —

 

$

36,491,749

 

$

 —

Residential mortgage-backed and related securities

  157,289,043   -   157,289,043   - 

 

 

155,732,596

 

 

 —

 

 

155,732,596

 

 

 —

Municipal securities

  61,201,804   -   61,201,804   - 

 

 

58,904,207

 

 

 —

 

 

58,904,207

 

 

 —

Other securities

  4,286,583   -   4,286,583   - 

 

 

4,194,890

 

 

 —

 

 

4,194,890

 

 

 —

Interest rate caps

  657,178   -   657,178   - 

 

 

703,467

 

 

 —

 

 

703,467

 

 

 —

Interest rate swaps - assets

  4,500,318   -   4,500,318   - 

 

 

7,045,220

 

 

 —

 

 

7,045,220

 

 

 —

Total assets measured at fair value

 $264,802,436  $-  $264,802,436  $- 

 

$

263,072,129

 

$

 —

 

$

263,072,129

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 $4,500,318  $-  $4,500,318  $- 

 

$

6,837,887

 

$

 —

 

$

6,837,887

 

$

 —

Total liabilities measured at fair value

 $4,500,318  $-  $4,500,318  $- 

 

$

6,837,887

 

$

 —

 

$

6,837,887

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

                

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2017:

                

December 31, 2017:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $38,096,534  $-  $38,096,534  $- 

 

$

38,096,534

 

$

 —

 

$

38,096,534

 

$

 —

Residential mortgage-backed and related securities

  163,301,304   -   163,301,304   - 

 

 

163,301,304

 

 

 —

 

 

163,301,304

 

 

 —

Municipal securities

  66,625,496   -   66,625,496   - 

 

 

66,625,496

 

 

 —

 

 

66,625,496

 

 

 —

Other securities

  4,884,573   1,028   4,883,545   - 

 

 

4,884,573

 

 

1,028

 

 

4,883,545

 

 

 —

Interest rate caps

  506,700   -   506,700   - 

 

 

506,700

 

 

 —

 

 

506,700

 

 

 —

Interest rate swaps - assets

  4,397,238   -   4,397,238   - 

 

 

4,397,238

 

 

 —

 

 

4,397,238

 

 

 —

Total assets measured at fair value

 $277,811,845  $1,028  $277,810,817  $- 

 

$

277,811,845

 

$

1,028

 

$

277,810,817

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 $4,397,238  $-  $4,397,238  $- 

 

$

4,397,238

 

$

 —

 

$

4,397,238

 

$

 —

Total liabilities measured at fair value

 $4,397,238  $-  $4,397,238  $- 

 

$

4,397,238

 

$

 —

 

$

4,397,238

 

$

 —

There were no transfers of assets or liabilities between Levels 1,2, and 3 of the fair value hierarchy for the three and nine months ended March 31,September 30, 2018 or 2017.

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

The 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’sCompany's Annual Report on Form 10-K10‑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).

33


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

     

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

  

Level 1

  

Level 2

  

Level 3

 

 

 

 

    

Fair Value Measurements at Reporting Date Using

March 31, 2018:

                

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

September 30, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 $5,564,760  $-  $-  $5,564,760 

 

$

13,400,072

 

$

 —

 

$

 —

 

$

13,400,072

OREO

  13,770,025   -   -   13,770,025 

 

 

13,180,082

 

 

 —

 

 

 —

 

 

13,180,082

 $19,334,785  $-  $-  $19,334,785 

 

$

26,580,154

 

$

 —

 

$

 —

 

$

26,580,154

                

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

                

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 $8,972,337  $-  $-  $8,972,337 

 

$

8,972,337

 

$

 —

 

$

 —

 

$

8,972,337

OREO

  14,642,973   -   -   14,642,973 

 

 

14,642,973

 

 

 —

 

 

 —

 

 

14,642,973

 $23,615,310  $-  $-  $23,615,310 

 

$

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’smanagement's historical knowledge, changes in market conditions from the time of valuation, and/or management’smanagement's expertise and knowledge of the client and client’sclient's business.

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

 

Quantitative Information about Level Fair Value Measurements

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value
March 31, 2018

  

Fair Value
December 31, 2017

 

Valuation Technique

Unobservable Input

 

Range

 

 

September 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

              

    

2018

    

2017

    

Valuation Technique

    

Unobservable Input

    

Range

 

Impaired loans/leases

 $5,564,760  $8,972,337 

Appraisal of collateral

Appraisal adjustments

  -10.00%to-30.00% 

 

$

13,400,072

 

$

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% 

 

 

13,180,082

 

 

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 or liabilities measured at fair value during the three and nine months ended March 31,September 30, 2018 and 2017.

34


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

 

Fair Value

 

As of March 31, 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

 $61,845,988  $61,845,988  $75,721,663  $75,721,663 

Federal funds sold

Level 2

  14,505,000   14,505,000   30,197,000   30,197,000 

Interest-bearing deposits at financial institutions

Level 2

  45,051,555   45,051,555   55,765,012   55,765,012 

Investment securities:

                 

HTM

Level 2

  378,584,337   375,792,683   379,474,205   379,749,804 

AFS

See Previous Table

  259,644,940   259,644,940   272,907,907   272,907,907 

Loans/leases receivable, net

Level 3

  5,152,556   5,564,760   8,307,719   8,972,337 

Loans/leases receivable, net

Level 2

  3,013,217,281   2,948,650,000   2,921,821,953   2,892,963,000 

Interest rate caps

Level 2

  657,178   657,178   506,700   506,700 

Interest rate swaps - assets

Level 2

  4,500,318   4,500,318   4,397,238   4,397,238 

Deposits:

                 

Nonmaturity deposits

Level 2

  2,603,999,039   2,603,999,039   2,670,583,178   2,670,583,178 

Time deposits

Level 2

  676,002,453   670,297,000   596,071,878   591,772,000 

Short-term borrowings

Level 2

  16,859,753   16,859,753   13,993,122   13,993,122 

FHLB advances

Level 2

  216,345,000   216,397,000   192,000,000   192,115,000 

Other borrowings

Level 2

  64,062,500   64,583,000   66,000,000   66,520,000 

Junior subordinated debentures

Level 2

  37,534,402   29,318,931   37,486,487   29,253,624 

Interest rate swaps - liabilities

Level 2

  4,500,318   4,500,318   4,397,238   4,397,238 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

As of September 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

 

$

73,406,657

 

$

73,406,657

 

$

75,721,663

 

$

75,721,663

Federal funds sold

 

Level 2

 

 

33,070,000

 

 

33,070,000

 

 

30,197,000

 

 

30,197,000

Interest-bearing deposits at financial institutions

 

Level 2

 

 

96,590,367

 

 

96,590,367

 

 

55,765,012

 

 

55,765,012

Investment securities:

 

  

 

 

 

 

 

 

 

 

  

 

 

  

HTM

 

Level 2

 

 

395,421,195

 

 

392,621,219

 

 

379,474,205

 

 

379,749,804

AFS

 

See Previous Table

 

 

255,323,442

 

 

255,323,442

 

 

272,907,907

 

 

272,907,907

Loans/leases receivable, net

 

Level 3

 

 

12,407,474

 

 

13,400,072

 

 

8,307,719

 

 

8,972,337

Loans/leases receivable, net

 

Level 2

 

 

3,597,901,436

 

 

3,527,043,000

 

 

2,921,821,953

 

 

2,892,963,000

Interest rate caps

 

Level 2

 

 

703,467

 

 

703,467

 

 

506,700

 

 

506,700

Interest rate swaps - assets

 

Level 2

 

 

7,045,220

 

 

7,045,220

 

 

4,397,238

 

 

4,397,238

Deposits:

 

  

 

 

 

 

 

 

 

 

  

 

 

  

Nonmaturity deposits

 

Level 2

 

 

2,917,002,466

 

 

2,917,002,466

 

 

2,670,583,178

 

 

2,670,583,178

Time deposits

 

Level 2

 

 

871,274,455

 

 

863,227,000

 

 

596,071,878

 

 

591,772,000

Short-term borrowings

 

Level 2

 

 

12,929,499

 

 

12,929,499

 

 

13,993,122

 

 

13,993,122

FHLB advances

 

Level 2

 

 

359,128,925

 

 

358,357,000

 

 

192,000,000

 

 

192,115,000

Other borrowings

 

Level 2

 

 

73,950,426

 

 

74,600,000

 

 

66,000,000

 

 

66,520,000

Junior subordinated debentures

 

Level 2

 

 

37,626,070

 

 

29,946,263

 

 

37,486,487

 

 

29,253,624

Interest rate swaps - liabilities

 

Level 2

 

 

6,837,887

 

 

6,837,887

 

 

4,397,238

 

 

4,397,238

 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 68 – 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’sCompany's internal organization, focusing on the financial information that the Company’sCompany's operating decision-makers routinely use to make decisions about operating matters.

The Company’sCompany's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the fourfive subsidiary banks wholly owned by the Company:  QCBT, CRBT, CSB, RB&T and RB&T.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’sCompany's Wealth Management segment represents the trust and asset management and investment management and advisory services offered at the Company’s fourCompany'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’sCompany'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.

35


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Selected financial information on the Company’sCompany's business segments is presented as follows as of and for the three and nine months ended March 31,September 30, 2018 and 2017.

  

Commercial Banking

  

Wealth

      

Intercompany

  

Consolidated

 
  

QCBT

  

CRBT

  

CSB

  

RB&T

  

Management

  

All Other

  

Eliminations

  

Total

 

Three Months Ended March 31, 2018

                                

Total revenue

 $15,807,570  $15,997,332  $8,163,323  $4,997,945  $3,189,425  $12,532,043  $(12,599,893) $48,087,745 

Net interest income

  12,120,302   10,835,848   6,743,947   3,465,154   -   (762,333)  -   32,402,918 

Provision

  1,120,409   601,828   575,602   242,000   -   -   -   2,539,839 

Net income

  4,457,868   4,616,528   1,868,588   741,295   770,865   10,514,510   (12,419,693)  10,549,961 

Goodwill

  3,222,688   15,223,179   9,888,225   -   -   -   -   28,334,092 

Core deposit intangible

  -   3,566,728   5,207,674   -   -   -   -   8,774,402 

Total assets

  1,526,829,646   1,331,208,620   696,978,705   468,112,032   -   447,591,932   (444,406,521)  4,026,314,414 
                                 

Three Months Ended March 31, 2017

                                

Total revenue

 $13,535,941  $10,386,545  $8,131,706  $3,947,799  $2,701,806  $9,876,143  $(9,951,087) $38,628,853 

Net interest income

  11,301,482   6,974,047   7,026,508   2,968,074   -   (601,228)  -   27,668,883 

Provision

  931,109   250,000   774,000   150,000   -   -   -   2,105,109 

Net income

  3,655,006   2,892,560   1,895,134   844,569   561,062   9,184,968   (9,848,334)  9,184,965 

Goodwill

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

Core deposit intangible

  -   1,222,019   5,928,327   -   -   -   -   7,150,346 

Total assets

  1,442,952,197   929,111,309   608,431,003   398,454,864   -   377,316,912   (375,253,667)  3,381,012,618 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Banking

 

Wealth

 

 

 

 

Intercompany

 

Consolidated

 

    

QCBT

    

CRBT

    

CSB

    

RB&T

    

SFC Bank

    

Management

    

All other

    

Eliminations

    

Total

Three Months Ended September 30, 2018

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

17,321,929

 

$

16,799,795

 

$

8,888,955

 

$

5,244,856

 

$

7,360,191

 

$

3,255,241

 

$

12,475,438

 

$

(12,707,109)

 

$

58,639,296

Net interest income

 

 

12,218,192

 

 

10,832,532

 

 

7,101,066

 

 

3,414,760

 

 

5,700,566

 

 

 —

 

 

(958,624)

 

 

4,991

 

 

38,313,483

Provision

 

 

409,086

 

 

452,742

 

 

20,000

 

 

4,849,000

 

 

475,000

 

 

 —

 

 

 —

 

 

 —

 

 

6,205,828

Net income  (loss)

 

 

4,827,397

 

 

4,868,765

 

 

2,533,392

 

 

(2,519,016)

 

 

2,197,448

 

 

768,095

 

 

8,600,144

 

 

(12,467,390)

 

 

8,808,835

Goodwill

 

 

3,222,688

 

 

14,979,984

 

 

9,888,225

 

 

 —

 

 

45,527,529

 

 

 —

 

 

 —

 

 

 —

 

 

73,618,426

Core deposit intangible

 

 

 —

 

 

3,313,000

 

 

4,852,300

 

 

 —

 

 

7,971,614

 

 

 —

 

 

 —

 

 

 —

 

 

16,136,914

Total assets

 

 

1,579,327,112

 

 

1,354,294,043

 

 

734,535,978

 

 

484,059,163

 

 

623,519,770

 

 

 —

 

 

554,345,558

 

 

(537,349,129)

 

 

4,792,732,495

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended September 30, 2017

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

11,771,842

 

$

10,892,025

 

$

7,678,006

 

$

4,534,768

 

$

 —

 

$

2,689,853

 

$

10,028,660

 

$

(7,052,986)

 

$

40,542,168

Net interest income

 

 

11,664,970

 

 

7,903,483

 

 

6,379,111

 

 

3,245,346

 

 

 —

 

 

 —

 

 

(636,562)

 

 

 —

 

 

28,556,348

Provision

 

 

1,140,436

 

 

200,000

 

 

574,000

 

 

172,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,086,436

Net income

 

 

3,929,158

 

 

3,130,319

 

 

1,669,209

 

 

726,926

 

 

 —

 

 

539,091

 

 

7,853,935

 

 

(9,994,703)

 

 

7,853,935

Goodwill

 

 

3,222,688

 

 

 —

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,110,913

Core deposit intangible

 

 

 —

 

 

1,122,263

 

 

5,566,350

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,688,613

Total assets

 

 

1,456,251,244

 

 

1,007,062,151

 

 

631,963,143

 

 

445,098,530

 

 

 —

 

 

 —

 

 

395,697,820

 

 

(385,609,794)

 

 

3,550,463,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

49,812,373

 

$

49,301,104

 

$

25,458,573

 

$

15,362,717

 

$

7,360,191

 

$

9,560,319

 

$

38,031,924

 

$

(38,449,680)

 

$

156,437,521

Net interest income

 

 

36,628,528

 

 

32,149,435

 

 

20,579,523

 

 

10,281,763

 

 

5,700,566

 

 

 —

 

 

(2,543,909)

 

 

4,991

 

 

102,800,897

Provision for loan/lease losses

 

 

2,783,988

 

 

1,682,312

 

 

816,602

 

 

5,288,500

 

 

475,000

 

 

 —

 

 

 —

 

 

 —

 

 

11,046,402

Net income (loss)

 

 

13,796,167

 

 

14,190,335

 

 

6,560,327

 

 

(964,098)

 

 

2,197,448

 

 

2,335,871

 

 

29,520,347

 

 

(37,832,216)

 

 

29,804,181

Goodwill

 

 

3,222,688

 

 

14,979,984

 

 

9,888,225

 

 

 —

 

 

45,527,529

 

 

 —

 

 

 —

 

 

 —

 

 

73,618,426

Core deposit intangible

 

 

 —

 

 

3,313,000

 

 

4,852,300

 

 

 —

 

 

7,971,614

 

 

 —

 

 

 —

 

 

 —

 

 

16,136,914

Total assets

 

 

1,579,327,112

 

 

1,354,294,043

 

 

734,535,978

 

 

484,059,163

 

 

623,519,770

 

 

 —

 

 

554,345,558

 

 

(537,349,129)

 

 

4,792,732,495

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nine Months Ended September 30, 2017

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 

$

39,517,823

 

$

31,428,339

 

$

23,981,019

 

$

12,723,998

 

$

 —

 

$

7,952,495

 

$

30,086,617

 

$

(27,283,484)

 

$

118,406,807

Net interest income

 

 

34,381,270

 

 

22,107,955

 

 

20,326,439

 

 

9,308,932

 

 

 —

 

 

 —

 

 

(1,852,668)

 

 

 —

 

 

84,271,928

Provision for loan/lease losses

 

 

2,624,538

 

 

750,000

 

 

2,209,000

 

 

631,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,214,538

Net income

 

 

11,657,941

 

 

8,893,461

 

 

5,484,383

 

 

2,406,337

 

 

 —

 

 

1,554,618

 

 

25,804,917

 

 

(29,996,740)

 

 

25,804,917

Goodwill

 

 

3,222,688

 

 

 —

 

 

9,888,225

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,110,913

Core deposit intangible

 

 

 —

 

 

1,122,263

 

 

5,566,350

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,688,613

Total assets

 

 

1,456,251,244

 

 

1,007,062,151

 

 

631,963,143

 

 

445,098,530

 

 

 —

 

 

 —

 

 

395,697,820

 

 

(385,609,794)

 

 

3,550,463,094

 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 79 – 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’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 March 31,September 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’banks' actual capital amounts and ratios as of March 31,September 30, 2018 and December 31, 2017 are presented in the following table (dollars in thousands). As of March 31,September 30, 2018 and December 31, 2017, each of the subsidiary banks met the requirements to be “well capitalized”.

36


 

                  

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 March 31, 2018:

                                

Company:

                                

Total risk-based capital

 $395,160   11.25% $281,109 

>

 8.00% $346,994 

>

 9.875% $351,386 

>

 10.00%

Tier 1 risk-based capital

  358,627   10.21%  210,832 

>

 6.00   276,717 

>

 7.875   281,109 

>

 8.00 

Tier 1 leverage

  358,627   9.08%  157,993 

>

 4.00   157,993 

>

 4.000   197,491 

>

 5.00 

Common equity Tier 1

  321,093   9.14%  158,124 

>

 4.50   224,009 

>

 6.375   228,401 

>

 6.50 

Quad City Bank & Trust:

                                

Total risk-based capital

 $160,996   12.32% $104,544 

>

 8.00% $129,047 

>

 9.875% $130,680 

>

 10.00%

Tier 1 risk-based capital

  147,618   11.30%  78,408 

>

 6.00   102,911 

>

 7.875   104,544 

>

 8.00 

Tier 1 leverage

  147,618   9.63%  61,343 

>

 4.00   61,343 

>

 4.000   76,678 

>

 5.00 

Common equity Tier 1

  147,618   11.30%  58,806 

>

 4.50   83,309 

>

 6.375   84,942 

>

 6.50 

Cedar Rapids Bank & Trust:

                                

Total risk-based capital

 $142,034   11.96% $94,998 

>

 8.00% $117,264 

>

 9.875% $118,748 

>

 10.00%

Tier 1 risk-based capital

  129,507   10.91%  71,249 

>

 6.00   93,514 

>

 7.875   94,998 

>

 8.00 

Tier 1 leverage

  129,507   9.87%  52,483 

>

 4.00   52,483 

>

 4.000   65,603 

>

 5.00 

Common equity Tier 1

  129,507   10.91%  53,437 

>

 4.50   75,702 

>

 6.375   77,186 

>

 6.50 

Community State Bank:

                                

Total risk-based capital

 $67,996   11.39% $47,738 

>

 8.00% $58,926 

>

 9.875% $59,672 

>

 10.00%

Tier 1 risk-based capital

  63,105   10.58%  35,803 

>

 6.00   46,992 

>

 7.875   47,738 

>

 8.00 

Tier 1 leverage

  63,105   9.35%  27,010 

>

 4.00   27,010 

>

 4.000   33,763 

>

 5.00 

Common equity Tier 1

  63,105   10.58%  26,853 

>

 4.50   38,041 

>

 6.375   38,787 

>

 6.50 

Rockford Bank & Trust:

                                

Total risk-based capital

 $46,567   11.07% $33,644 

>

 8.00% $41,530 

>

 9.875% $42,055 

>

 10.00%

Tier 1 risk-based capital

  41,305   9.82%  25,233 

>

 6.00   33,119 

>

 7.875   33,644 

>

 8.00 

Tier 1 leverage

  41,305   8.93%  18,498 

>

 4.00   18,498 

>

 4.000   23,123 

>

 5.00 

Common equity Tier 1

  41,305   9.82%  18,925 

>

 4.50   26,810 

>

 6.375   27,336 

>

 6.50 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued – 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 September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

449,655

 

10.87

%  

$

330,798

 

> 

 

8.00

%  

$

408,329

 

> 

 

9.875

%  

$

413,497

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

406,578

 

9.83

%  

 

248,098

 

> 

 

6.00

 

 

325,629

 

> 

 

7.875

 

 

330,798

 

> 

 

8.00

 

Tier 1 leverage

 

 

406,578

 

8.87

%  

 

183,278

 

> 

 

4.00

 

 

183,278

 

> 

 

4.000

 

 

229,098

 

> 

 

5.00

 

Common equity Tier 1

 

 

368,952

 

8.92

%  

 

186,074

 

> 

 

4.50

 

 

263,605

 

> 

 

6.375

 

 

268,773

 

> 

 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

160,806

 

11.72

%  

$

109,744

 

> 

 

8.00

%  

$

135,466

 

> 

 

9.875

%  

$

137,180

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

147,532

 

10.75

%  

 

82,308

 

> 

 

6.00

 

 

108,029

 

> 

 

7.875

 

 

109,744

 

> 

 

8.00

 

Tier 1 leverage

 

 

147,532

 

9.32

%  

 

63,297

 

> 

 

4.00

 

 

63,297

 

> 

 

4.000

 

 

79,121

 

> 

 

5.00

 

Common equity Tier 1

 

 

147,532

 

10.75

%  

 

61,731

 

> 

 

4.50

 

 

87,452

 

> 

 

6.375

 

 

89,167

 

> 

 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

145,066

 

11.79

%  

$

98,462

 

> 

 

8.00

%  

$

121,540

 

> 

 

9.875

%  

$

123,078

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

131,839

 

10.71

%  

 

73,847

 

> 

 

6.00

 

 

96,924

 

> 

 

7.875

 

 

98,462

 

> 

 

8.00

 

Tier 1 leverage

 

 

131,839

 

9.83

%  

 

53,659

 

> 

 

4.00

 

 

53,659

 

> 

 

4.000

 

 

67,074

 

> 

 

5.00

 

Common equity Tier 1

 

 

131,839

 

10.71

%  

 

55,385

 

> 

 

4.50

 

 

78,462

 

> 

 

6.375

 

 

80,001

 

> 

 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

72,601

 

11.43

%  

$

50,801

 

> 

 

8.00

%  

$

62,708

 

> 

 

9.875

%  

$

63,501

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

67,149

 

10.57

%  

 

38,101

 

> 

 

6.00

 

 

50,007

 

> 

 

7.875

 

 

50,801

 

> 

 

8.00

 

Tier 1 leverage

 

 

67,149

 

9.62

%  

 

27,918

 

> 

 

4.00

 

 

27,918

 

> 

 

4.000

 

 

34,898

 

> 

 

5.00

 

Common equity Tier 1

 

 

67,149

 

10.57

%  

 

28,576

 

> 

 

4.50

 

 

40,482

 

> 

 

6.375

 

 

41,276

 

> 

 

6.50

 

Rockford Bank & Trust:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

45,314

 

10.19

%  

$

35,583

 

> 

 

8.00

%  

$

43,923

 

> 

 

9.875

%  

$

44,479

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

39,692

 

8.92

%  

 

26,688

 

> 

 

6.00

 

 

35,027

 

> 

 

7.875

 

 

35,583

 

> 

 

8.00

 

Tier 1 leverage

 

 

39,692

 

8.20

%  

 

19,365

 

> 

 

4.00

 

 

19,365

 

> 

 

4.000

 

 

24,207

 

> 

 

5.00

 

Common equity Tier 1

 

 

39,692

 

8.92

%  

 

20,016

 

> 

 

4.50

 

 

28,356

 

> 

 

6.375

 

 

28,912

 

> 

 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

 

 

 

  

 

 

 

Total risk-based capital

 

$

54,108

 

11.64

%  

$

37,196

 

> 

 

8.00

%  

$

45,914

 

> 

 

9.875

%  

$

46,495

 

> 

 

10.00

%

Tier 1 risk-based capital

 

 

48,870

 

10.51

%  

 

27,897

 

> 

 

6.00

 

 

36,615

 

> 

 

7.875

 

 

37,196

 

> 

 

8.00

 

Tier 1 leverage

 

 

48,870

 

9.31

%  

 

20,988

 

> 

 

4.00

 

 

20,988

 

> 

 

4.000

 

 

26,235

 

> 

 

5.00

 

Common equity Tier 1

 

 

48,870

 

10.51

%  

 

20,923

 

> 

 

4.50

 

 

29,640

 

> 

 

6.375

 

 

30,222

 

> 

 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 

For Capital

  

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

                 

Adequacy Purposes

  

Capitalized Under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

         

For Capital

  

With Capital

  

Prompt Corrective

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

Actual

  

Adequacy Purposes

  

Conservation Buffer*

  

Action Provisions

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

 

Amount

  

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

 

    

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%

 

$

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 

 

 

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 

 

 

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 

 

 

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%

 

$

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 

 

 

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 

 

 

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 

 

 

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%

 

$

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 

 

 

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 

 

 

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 

 

 

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%

 

$

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 

 

 

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 

 

 

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 

 

 

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%

 

$

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 

 

 

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 

 

 

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 

 

 

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).

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

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 810 – REVENUE RECOGNITION

As of January 1, 2018, the Company adopted ASU 2014-2014‑09 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’sCompany's revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional

37


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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 2014-2014‑09, 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’scustomer'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.

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.

32

NOTE 11 –SUBSEQUENT EVENTS - ACQUISITIONSTable of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 9 –ACQUISITIONS

BATES COMPANIES

On March 20,October 1, 2018 the Company announced the signingsuccessful completion of definitive agreements to acquirethe previously announced acquisition of 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$700 million of assets under management.

In the acquisition, the Company will acquire acquired 100% of the Bates Companies’Companies' outstanding common stock for an aggregate consideration of $3.0$3.0 million cash and up to $3.0$3.0 million of the Company’sCompany's common stock.  InOf the total cash consideration, $1.5 million in cash was paid at closing.  This was funded through operating cash.  The additional $1.5 million was recorded as a promissory note and will be repaid in five equal, annual installments of $300,000 each on the first through fifth anniversaries of the closing date.  Interest will be paid at a rate of 2.18% per annum, based on the applicable federal rate as of the closing date.  Additionally, in a private placement exempt from registration with the SEC, the Company expects towill issue upon closing of the transaction approximately 21,528 common shares or $1.0$1.0 million  of Company stock.stock in November 2018.  Assuming all future performance based contingent consideration is realized, total stock consideration can reach $3.0$3.0 million, which would result in the Company expecting to issueissuing approximately 64,58370,504 common shares based on the 10-day volume weighted average of the closing stock price atof the dateCompany ending five days prior to closing.

During the first nine months of announcement.2018, the Company incurred $401 thousand of expenses related to the acquisition, comprised primarily of legal and accounting costs.

 

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

SPRINGFIELD BANCSHARES, INC.

38


 

On April 18, 2018, the Company announced the signing of a definitive agreement to purchase 100% of the outstanding common stock of Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. The Company will continue to operate SFC Bank, retaining its separate charter and brand within the Springfield, Missouri market. SFC Bank has one banking location and approximately $563.2 million in assets and $446.5 million in deposits as of March 31, 2018.

In the acquisition, the stockholders of Springfield Bancshares will receive 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held. Based upon the closing price of the Company’s common stock as of April 16, 2018, the transaction is valued at approximately $86.7 million.

This transaction is subject to regulatory approvals, approval by Springfield Bancshares’ stockholders and certain customary closing conditions. The transaction is expected to close in the third quarter of 2018.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTIONINTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and nine months ending March 31,September 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.

GENERALGENERAL

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


QCBT, CRBT and CSB are Iowa-chartered commercial banks, and RB&T is an Illinois-chartered commercial bank and SFC Bank is a Missouri-chartered commercial bank. AllWith the exception of SFC Bank, all are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by law by the FDIC.  SFC Bank’s application to become a member of the Federal Reserve system is in process with the Federal Reserve.

·

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 QCRthe Company 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. CSBand 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.

·

SFC Bank was merged into the Company in 2018, as further described in Note 2 to the Consolidated Financial Statements.  SFC Bank provides full-service commercial and consumer banking to the Springfield, Missouri area through its branch office located on Glenstone Avenue in Springfield, Missouri.

 

39


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 $10.5$8.8 million and diluted EPS of $0.74$0.55 for the quarter ended March 31,September 30, 2018. By comparison, for the quarter ended December 31,June 30, 2018, the Company reported net income of $10.4 million and diluted EPS of $0.73. For the quarter ended September 30, 2017, the Company reported net income of $9.9$7.9 million and diluted EPS of $0.70.$0.58.  For the quarternine months ended March 31,September 30, 2018, the Company reported net income of $29.8 million, and diluted EPS of $2.02.  By comparison, for the nine months ended September 30, 2017, the Company reported net income of $9.2$25.8 million, and diluted EPS of $0.68.

$1.91.

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

Annualized net interest·

Net income growth of 7.5%;$8.8 million, or $0.55 per diluted share;

·

Core net income (non-GAAP) of $10.4 million, or $0.65 per diluted share;

·

Annualized loan and lease growth of 12.2% ;7.9% for the quarter and 10.5% year-to-date;

Annualized wealth management revenue growth·

Provision for loan and lease losses of 10.8%;$6.2 million for the quarter;

Swap fee income·

Nonperforming loans increased $15.3 million; and  gains on the sale of government guaranteed loans of $1.3 million; and

A definitive agreement to enter the Springfield, Missouri market by merging·

Completion of merger with Springfield Bancshares.Bancshares, Inc. on July 1, 2018.

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

  

For the three months ended

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
             

Net income

 $10,549,961  $9,901,590  $9,184,965 
             

Diluted earnings per common share

 $0.74  $0.70  $0.68 
             
             

Weighted average common and common equivalent shares outstanding

  14,205,584   14,193,191   13,488,417 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 2018

 

December 31, 2017

 

September 30, 2017

 

September 30, 2018

 

September 30, 2017

 

Net income

 

$

8,808,835

 

$

9,901,590

 

$

7,853,935

 

$

29,804,181

 

$

25,804,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.55

 

$

0.70

 

$

0.58

 

$

2.02

 

$

1.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,324

 

 

14,193,191

 

 

13,507,955

 

 

14,786,777

 

 

13,509,566

 

The increase in weighted average common shares outstanding when comparing the three months ended March 31, 2018 and December 31,from September 30, 2017 to March 31, 2017September 30, 2018 was primarily due to the common stock issued to Guaranty as consideration fora result of the merger with Springfield Bancshares and 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 nine months ended

 

 

    

September 30, 2018

    

June 30, 2018

    

September 30, 2017

    

September 30, 2018

    

September 30, 2017

 

Net interest income

 

$

38,313,483

 

$

32,084,496

 

$

28,556,348

 

$

102,800,897

 

$

84,271,928

 

Provision expense

 

 

6,205,828

 

 

2,300,735

 

 

2,086,436

 

 

11,046,402

 

 

6,214,538

 

Noninterest income

 

 

8,808,825

 

 

8,912,266

 

 

6,701,303

 

 

26,262,540

 

 

20,767,575

 

Noninterest expense

 

 

30,499,610

 

 

26,369,823

 

 

23,395,747

 

 

82,732,930

 

 

66,073,493

 

Federal and state income tax expense

 

 

1,608,035

 

 

1,880,819

 

 

1,921,533

 

 

5,479,924

 

 

6,946,555

 

Net income

 

$

8,808,835

 

$

10,445,385

 

$

7,853,935

 

$

29,804,181

 

$

25,804,917

 

40


 

  

For the three months ended

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
             

Net interest income

 $32,402,918  $31,793,353  $27,668,883 

Provision expense

  2,539,839   2,255,381   2,105,109 

Noninterest income

  8,541,449   9,714,717   7,283,754 

Noninterest expense

  25,863,497   31,351,204   21,273,117 

Federal and state income tax expense (benefit)

  1,991,070   (2,000,105)  2,389,446 

Net income

 $10,549,961  $9,901,590  $9,184,965 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

·

Net interest income in the firstthird quarter of 2018 was up 2%19% compared to the fourthsecond quarter of 2018.  Net interest income increased 34% compared to the third quarter of 2017 and up 17% compared22% when comparing the first nine months of 2018 to the first quarter of 2017same period in the prior year.  This increase was primarily due to strong loan and lease growth and the acquisitionacquisitions of SFC Bank and Guaranty Bank.

·

Provision expense in the firstthird quarter of 2018 increased 13%170% compared to the fourthsecond quarter of 20172018 and 21%increased 197% from the same period of 2017 and2017.  Provision expense increased 78% in the first nine months of 2018 from the same period of 2017.  The increase was primarily attributable to  bothtwo unrelated borrowers as well as to strong loan growth and accounting for acquired loans. Asloans (as acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.allowance).  See the Provision for Loan Lease Losses section of this report for additional details.

·

Noninterest income in the firstthird quarter of 2018 decreased 12%1% compared to the fourthsecond quarter of 2017,2018 primarily due to lower swap fee income. Noninterest income in the firstthird quarter of 2018 increased 17%31% from the firstthird quarter of 2017 whichand 26% when comparing the first nine 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.income and the acquisitions of Guaranty Bank and SFC Bank.

·

Noninterest expense decreased 18%increased 16% from the fourthsecond quarter of 2017. The fourth2018. Noninterest expense increased 30% from the third quarter of 2017 included $4.4 millionand 25% when comparing the first nine months of non-recurring costs related2018 to the acquisitionsame period in the prior year primarily due to the acquisitions of Guaranty Bank and a core processor termination fee related to CSB. Noninterest expense increased 22% from the first quarter of 2017 primarily due to the acquisition of GuarantySFC Bank.

·

Federal and state income tax expense in the firstthird quarter of 2018 increased significantlydecreased 15% compared to the fourthsecond quarter of 2017. The fourth quarter of 2017 included a one-time tax benefit of $2.9 million as a result of the Tax Act.2018. Federal and state income tax expense in the firstthird quarter of 2018 decreased 17%16% compared to the firstthird quarter of 2017 and decreased 21% when comparing the first nine months of 2018 to the same period in the prior year primarily due to a lower federal tax rate. See the Income Taxes“Income Taxes” section of this reportReport 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’sCompany'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’sCompany's Annual Report on Form 10-K10‑K for the year ended December 31, 2017. The Company’sCompany's long-term financial goals are as follows:

Improve balance sheet efficiency by maintaining·

Strong organic loan and lease growth in order to maintain 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·

Grow core deposits to maintain reliance on wholesale funding at less than 15% of total assets;

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

·

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

41


 

Table of Contents

Part I

Item 2

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

·

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

·

Grow wealth management segment net income by 10% annually.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ending

 

Goal

Key Metric

Target**

    

September 30, 2018

 

June 30, 2018

 

September 30, 2017

 

Balance sheet efficiency

Gross loans and leases to total assets

73% - 78%

 

 

76

%  

 

 

76

%

 

 

75

%

 

 

NIM TEY (non-GAAP)*

> 3.65%

 

 

3.60

%  

 

 

3.52

%

 

 

3.71

%

 

Profitability

ROAA

> 1.10%

 

 

0.75

%  

 

 

1.03

%

 

 

0.90

%

 

 

Core ROAA (non-GAAP)*

> 1.10%

 

 

0.89

%  

 

 

1.08

%

 

 

0.97

%

 

Asset quality

NPAs to total assets

< 0.75%

 

 

0.87

%  

 

 

0.65

%

 

 

0.95

%

 

 

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

< 0.25% annually

 

 

0.09

%  

 

 

0.11

%

 

 

0.11

%

 

Reliance on wholesale funding

Wholesale funding to total assets****

< 15%

 

 

16

%  

 

 

13

%

 

 

12

%

 

Funding mix

Noninterest bearing deposits as a percentage of total assets

> 30%

 

 

17

%  

 

 

18

%

 

 

20

%

 

Consistent, high quality noninterest income revenue streams

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

> $4 million annually

 

$

5.5

million  

 

$

5.9

million  

 

$

2.4

million

 

 

Grow wealth management net income***

> 10% annually

 

 

50

%  

 

 

54

%

 

 

24

%

 


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

 

 

 

For the Quarter Ending

GoalKey MetricTarget**

March 31, 2018

December 31, 2017

March 31, 2017

Balance sheet efficiency

Gross loans and leases to total assets

73 - 78%

76%

74%

72%

 

NIM(TEY)(non-GAAP)*

> 3.65%

3.64%

3.69%

3.90%

Profitability

ROAA

> 1.10%

1.06%

1.01%

1.12%

 

Core ROAA (non-GAAP)*

 

1.06%

1.01%

1.12%

 

NPAs to total assets

< 0.75%

0.77%

0.81%

0.81%

Asset quality

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

< 0.25% annually

0.05%

0.19%

0.13%

Reliance on wholesale funding

Wholesale funding to total assets****

< 15%

14%

10%

9%

Funding mix

Noninterest bearing deposits as a percentage of total assets

> 30%

19%

20%

23%

Consistent, high quality noninterest income revenue streams

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

> $4 million annually

$5.3 million

$4.3 million

$4.3 million

 

Grow wealth management segment net income***

> 10% annually

37%

35%

25%

See GAAP to Non-GAAP reconciliations.

**     

Targets will be re-evaluated and adjusted as appropriate.

*** 

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

**** 

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

***   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 firstthird quarter of 2018 to support its corporate strategy and the long-term financial goals shown above.

·

The Company grew loans and leases in the first three monthsthird quarter of 2018 by 12.2%7.9% on an annualized basis. This growth exceeded the targeted organic growthbasis, excluding acquired loans of 10-12% for the full year.SFC Bank. Strong loan and lease growth for the remainder of the year will help keep the Company’sCompany's loan and leases to asset ratio within the targeted range of 73-78%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’sCompany's efficiency ratio. The Company announced in MarchJuly 2018 the signingcompletion of definitive agreements to acquirethe merger of Springfield Bancshares. On October 1, 2018 the Company announced the successful completion of the previously announced acquisition of the Bates Companies, headquartered in Rockford, Illinois. The acquisition and mergesubsequent merger of the Bates Companies into RB&T. The Company announced in April 2018&T will enhance the signingwealth management services of a definitive agreement to acquire Springfield Bancshares. RB&T by adding approximately $700 million of assets under management. See Note 9Notes 2 and 11 to the Consolidated Financial Statements for additional details about these strategic transactions.

42


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

·

The Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreasedincreased by four22 basis points to 0.77%0.87%, as compared to the fourthsecond quarter 2017.2018. This increase was primarily due to two large credits in the Rockford, Illinois market. The Company remains committed to improving asset quality ratios in 2018 and beyond.

·

Management has continued to focus on reducing the Company’sCompany's reliance on wholesale funding. Wholesalefunding, however,  wholesale funding increased 3% in the firstthird quarter 2018 due to the strong loan and lease growth which outpaced the Company’s deposit growth. All increases to wholesale funding were short-term in nature.of 2018. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

·

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 192191 downstream banks with average total noninterest bearing deposits of $220.9$197.5 million and average total interest bearing deposits of $206.1$221.1 million during the first quarternine months of 2018. The Company acted as the correspondent bank for 183 downstream banks with average total noninterest bearing deposits of correspondents of $320.7 million during the first quarter of 2017. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

·

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

·

As a result of the 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 March 31,September 30, 2018, the Company had $2.65$2.71 billion of total financial assets in trust (and related) accounts and $1.05$1.08 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. TheOn October 1, 2018 the Company announced in March 2018 the signingsuccessful completion of definitive agreements to acquire and mergethe previously announced acquisition of the Bates Companies, into RB&T.headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will addenhance the wealth management services of RB&T by adding approximately $700 million of assets under management.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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’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;

43


Table of Contents

Part I

Item 2

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

·

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’sCompany's capital position without regard to the effects of intangible assets.

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

NIM (TEY) is a financial measure that the Company’sCompany'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

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

 

RECONCILIATIONS

 

2018

 

2018

 

2018

 

2017

 

2017

 

 

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

 

 

 

 

 

  

 

 

 

 

 

  

 

 

  

 

Stockholders' equity (GAAP)

 

$

457,387

 

$

369,588

 

$

360,428

 

$

353,287

 

$

313,039

 

Less: Intangible assets

 

 

89,755

 

 

36,561

 

 

37,108

 

 

37,413

 

 

19,800

 

TCE (non-GAAP)

 

$

367,632

 

$

333,027

 

$

323,320

 

$

315,874

 

$

293,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (GAAP)

 

$

4,792,732

 

$

4,106,883

 

$

4,026,314

 

$

3,982,665

 

$

3,550,463

 

Less: Intangible assets

 

 

89,755

 

 

36,561

 

 

37,108

 

 

37,413

 

 

198,000

 

TA (non-GAAP)

 

$

4,702,977

 

$

4,070,322

 

$

3,989,206

 

$

3,945,252

 

$

3,352,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

 

 

7.82

%  

 

8.18

%  

 

8.10

%  

 

8.01

%  

 

8.31

%

 

39

44


Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

  

As of

 
  

March 31,

  

December 31,

  

September 30,

  

June 30,

  

March 31,

 

GAAP TO NON-GAAP RECONCILIATIONS

 

2018

  

2017

  

2017

  

2017

  

2017

 
  

(dollars in thousands, except per share data)

 

TCE / TA RATIO

                    
                     

Stockholders' equity (GAAP)

 $360,428  $353,287  $313,039  $305,083  $295,840 

Less: Intangible assets

  37,108   37,413   19,800   20,030   20,261 

TCE (non-GAAP)

 $323,320  $315,874  $293,239  $285,053  $275,579 
                     

Total assets (GAAP)

 $4,026,314  $3,982,665  $3,550,463  $3,457,187  $3,381,013 

Less: Intangible assets

  37,108   37,413   19,800   20,030   20,261 

TA (non-GAAP)

 $3,989,206  $3,945,252  $3,530,663  $3,437,157  $3,360,752 
                     

TCE / TA ratio (non-GAAP)

  8.10%  8.01%  8.31%  8.29%  8.20%

  

For the Quarter Ended

 
  

March 31,

  

December 31,

  

September 30,

  

June 30,

  

March 31,

 

CORE NET INCOME

 

2018

  

2017

  

2017

  

2017

  

2017

 
                     

Net income (GAAP)

 $10,550  $9,902  $7,854  $8,766  $9,185 
                     

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

                    

Income:

                    

Securities gains, net

 $-  $(41) $(41) $25  $- 

Total nonrecurring income (non-GAAP)

 $-  $(41) $(41) $25  $- 
                     

Expense:

                    

Acquisition costs

 $73  $430  $265  $-  $- 

Post-acquisition compensation, transition and integration costs

  -   2,462   340   -   - 

Total nonrecurring expense (non-GAAP)

 $73  $2,892  $605  $-  $- 
                     
                     

Adjustment of tax expense related to the Tax Act

 $-  $2,919  $-  $-  $- 
                     

Core net income (non-GAAP)

 $10,623  $9,916  $8,500  $8,741  $9,185 
                     
                     

CORE EPS

                    
                     

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

 $10,623  $9,916  $8,500  $8,741  $9,185 
                     

Weighted average common shares outstanding

  13,888,661   13,845,497   13,151,350   13,170,283   13,133,382 

Weighted average common and common equivalent shares outstanding

  14,205,584   14,193,191   13,507,955   13,532,324   13,488,417 
                     

Core EPS (non-GAAP):

                    

Basic

 $0.76  $0.72  $0.65  $0.66  $0.70 

Diluted

 $0.75  $0.70  $0.63  $0.65  $0.68 
                     
                     

CORE ROAA

                    
                     

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

 $10,623  $9,916  $8,500  $8,741  $9,185 
                     

Average Assets

 $3,994,691  $3,923,337  $3,503,148  $3,378,195  $3,274,713 
                     

Core ROAA (annualized) (non-GAAP)

  1.06%  1.01%  0.97%  1.03%  1.12%

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.

40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

For the Nine Months Ended

 

 

 

 

September 30, 

    

June 30, 

    

December 31, 

    

 

September 30, 

 

September 30, 

 

 

 

    

2018

    

2018

    

2017

 

 

2018

 

2017

 

 

 

 

(dollars in thousands,except per share data)

 

 

CORE NET INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

8,809

 

$

10,445

 

$

9,902

 

 

$

29,804

 

$

25,805

 

 

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

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Income:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Securities gains, net

 

$

 —

 

$

 —

 

$

(41)

 

 

$

 —

 

$

(16)

 

 

Total nonrecurring income (non-GAAP)

 

$

 —

 

$

 —

 

$

(41)

 

 

$

 —

 

$

(16)

 

 

Expense:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Acquisition costs

 

$

1,495

 

$

327

 

$

430

 

 

$

1,616

 

$

265

 

 

Post-acquisition compensation, transition and integration costs

 

 

111

 

 

130

 

 

2,462

 

 

 

520

 

 

340

 

 

Total nonrecurring expense (non-GAAP)

 

$

1,606

 

$

457

 

$

2,892

 

 

$

2,136

 

$

605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment of tax expense related to the Tax Act

 

$

 —

 

$

 —

 

$

2,919

 

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core net income (non-GAAP)

 

$

10,415

 

$

10,902

 

$

9,916

 

 

$

31,940

 

$

26,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORE EPS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

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

 

$

10,415

 

$

10,902

 

$

9,916

 

 

$

31,940

 

$

26,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,625,123

 

 

13,919,565

 

 

13,845,497

 

 

 

14,477,783

 

 

13,151,752

 

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,324

 

 

14,232,423

 

 

14,193,191

 

 

 

14,786,777

 

 

13,509,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core EPS (non-GAAP):

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

  

 

 

Basic

 

$

0.67

 

$

0.78

 

$

0.72

 

 

$

2.21

 

$

2.01

 

 

Diluted

 

$

0.65

 

$

0.77

 

$

0.70

 

 

$

2.16

 

$

1.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CORE ROAA

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

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

 

$

10,415

 

$

10,902

 

$

9,916

 

 

$

31,940

 

$

26,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

4,677,875

 

$

4,053,684

 

$

3,923,337

 

 

$

4,342,083

 

$

3,385,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core ROAA (annualized) (non-GAAP)

 

 

0.89

%  

 

1.08

%  

 

1.01

%  

 

 

1.00

%  

 

1.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM (TEY)*

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

 

 

Net interest income (GAAP)

 

$

38,314

 

$

32,085

 

$

31,793

 

 

$

102,801

 

$

84,272

 

 

Plus: Taxequivalent adjustment

 

 

1,548

 

 

1,462

 

 

2,585

 

 

 

4,329

 

 

6,632

 

 

Net interest income - taxequivalent (non-GAAP)

 

$

39,862

 

$

33,547

 

$

34,378

 

 

$

107,130

 

$

90,904

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

4,387,487

 

$

3,820,333

 

$

3,699,193

 

 

$

3,989,099

 

$

3,186,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.46

%  

 

3.37

%  

 

3.41

%  

 

 

3.45

%  

 

3.54

%

 

NIM (TEY) (non-GAAP)

 

 

3.60

%  

 

3.52

%  

 

3.69

%  

 

 

3.59

%  

 

3.81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

Noninterest expense (GAAP)

 

$

30,500

 

$

26,370

 

$

31,351

 

 

$

82,733

 

$

66,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

38,314

 

$

32,085

 

$

31,793

 

 

$

102,801

 

$

84,272

 

 

Noninterest income (GAAP)

 

 

8,809

 

 

8,912

 

 

9,714

 

 

 

26,262

 

 

20,768

 

 

Total income

 

$

47,123

 

$

40,997

 

$

41,507

 

 

$

129,063

 

$

105,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

64.72

%  

 

64.32

%  

 

75.53

%  

 

 

64.10

%  

 

62.90

%

 

35% for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

  

For the Quarter Ended

 
  

March 31,

  

December 31,

  

September 30,

   

June 30,

  

March 31,

 

GAAP TO NON-GAAP RECONCILIATIONS (CONTINUED)

 

2018

  

2017

  

2017

   

2017

  

2017

 
  

(dollars in thousands)

 

NIM (TEY) *

                     
                      

Net interest income (GAAP)

 $32,403  $31,793  $28,556   $28,047  $27,669 
                      

Plus: Tax equivalent adjustment

  1,353   2,585   2,311    2,201   1,950 
                      

Net interest income - tax equivalent (Non-GAAP)

 $33,756  $34,378  $30,867   $30,248  $29,619 
                      

Average earning assets

 $3,759,475  $3,699,193  $3,303,014   $3,180,779  $3,076,356 
                      

NIM (GAAP)

  3.50%  3.41%  3.43%   3.54%  3.65%

NIM (TEY) (Non-GAAP)

  3.64%  3.69%  3.71%   3.81%  3.90%
                      

EFFICIENCY RATIO

                     
                      

Noninterest expense (GAAP)

 $25,863  $31,351  $23,395   $21,405  $21,273 
                      

Net interest income (GAAP)

 $32,403  $31,793  $28,556 

#

 $28,047  $27,669 

Noninterest income (GAAP)

  8,541   9,714   6,702    6,782   7,284 

Total income

 $40,944  $41,507  $35,258   $34,829  $34,953 
                      

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

  63.17%  75.53%  66.35%   61.46%  60.86%

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’sCompany's federal income tax rate was cutreduced 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’sit's important to note the difference in the federal income tax rate and the impact on the Company’sCompany's tax exempt earning assets (loans and securities) and the related tax equivalent yield reporting.

45


Table of Contents

Part I

Item 2

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

Net interest income, on a tax equivalent basis, increased 14%29% to $33.8$39.9 million for the quarter ended March 31,September 30, 2018, compared to the same quarter of the prior year, and increased 18% to $107.1 million for the nine months ended September 30, 2018 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased 17% over34% for the quarter ended September 30, 2018 compared to the same period.quarter of the prior year, and increased 22% for the nine months ended September 30, 2018 compared to the same period of the prior year. Net interest income improved due to several factors:

·

The merger of SFC Bank in the third quarter of 2018 and the acquisition of Guaranty Bank in the fourth quarter of 2017;

·

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

·

The acquisition of Guaranty Bank, whose strong NIM has contributed to the Company’s results; and

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

 

 

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

 

    

2018

    

 

2018

    

 

2017

 

    

2018

 

    

2018

    

 

2017

 

Average Yield on Interest-Earning Assets

 

 

4.65

%  

 

4.44

%  

 

4.34

%  

 

4.51

%  

 

4.28

%  

 

4.06

%

Average Cost of Interest-Bearing Liabilities

 

 

1.35

%  

 

1.21

%  

 

0.87

%  

 

1.35

%  

 

1.21

%  

 

0.87

%

Net Interest Spread

 

 

3.30

%  

 

3.23

%  

 

3.47

%  

 

3.16

%  

 

3.07

%  

 

3.19

%

NIM

 

 

3.60

%  

 

3.52

%  

 

3.71

%  

 

3.46

%  

 

3.37

%  

 

3.43

%

NIM Excluding Acquisition Accounting Net Accretion

 

 

3.44

%  

 

3.46

%  

 

3.65

%  

 

3.31

%  

 

3.31

%  

 

3.37

%

 

  

Tax Equivalent Basis

  

GAAP

 
  

For the Quarter Ended

  

For the Quarter Ended

 
  

March 31,

2018

  

December 31,

2017

  

March 31,

2017

  

March 31,

2018

  

December 31,

2017

  

March 31,

2017

 
                         

Average Yield on Interest-Earning Assets

  4.41%  4.34%  4.39%  4.27%  4.06%  4.13%

Average Cost of Interest-Bearing Liabilities

  1.03%  0.88%  0.69%  1.03%  0.88%  0.69%

Net Interest Spread

  3.38%  3.46%  3.70%  3.24%  3.18%  3.44%

NIM

  3.64%  3.69%  3.90%  3.50%  3.41%  3.65%

NIM Excluding Acquisition Accounting Net Accretion

  3.56%  3.61%  3.65%  3.42%  3.33%  3.39%

NIM on a tax equivalent basis was down five basis points on a linked quarter basis. However, excluding the tax equivalent adjustment, NIM expanded nine basis points on the same linked quarter basis. The Company’s expansion of yield on earning assets outpaced the increased cost of funds. The Company’s success in expanded yields on earning assets is the result of the following:

Floating rate loans and securities repricing with recent rate hikes,

Growing certain niches (loans and securities) that tend to have higher spreads, and

Improved pricing on C&I and CRE term loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

 

GAAP

 

 

 

 

 

For the Nine Months Ended

 

 

For the Nine Months Ended

 

 

 

 

    

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

 

 

2018

    

 

2017

    

 

2018

 

    

2017

 

 

Average Yield on Interest-Earning Assets

 

 

4.51

%  

 

4.37

%  

 

4.36

%  

 

4.10

%

 

Average Cost of Interest-Bearing Liabilities

 

 

1.21

%  

 

0.78

%  

 

1.21

%  

 

0.78

%

 

Net Interest Spread

 

 

3.30

%  

 

3.59

%  

 

3.15

%  

 

3.32

%

 

NIM

 

 

3.59

%  

 

3.81

%  

 

3.45

%  

 

3.54

%

 

NIM Excluding Acquisition Accounting Net Accretion

 

 

3.44

%  

 

3.56

%  

 

3.29

%  

 

3.28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’sit's important to understand the impact of acquisition accounting net accretion when comparing periods. The acquisition accounting net accretion was relatively flat on a linked quarter basis; however, the acquisition accounting net accretion in the first quarter of 2017 was significant and totaled approximately $1.9 million which added 25 basis points to NIM for that quarter. 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 Nine Months Ended

 

 

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

 

2018

    

 

2018

    

 

2017

 

 

2018

 

    

2017

 

 

 

dollars in thousands

 

Acquisition Accounting Net Accretion in NIM

 

$

1,740

 

$

545

 

$

474

 

$

2,984

 

$

4,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46


 

Table of Contents

Part I

Item 2

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

NIM on a tax equivalent basis was up 8 basis points on a linked quarter basis.  Excluding acquisition accounting net accretion, NIM was down 2 basis points on a linked quarter basis.  This modest margin compression was primarily due to the following:

·

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;

·

With the flat yield curve and continued competition in our markets, loan pricing continues to be pressured but the pressure has eased moderately as evidenced by the third quarter results.  The Company had success in widening spreads as core loan yields increased 10 basis points on a linked quarter basis; however, the pace and magnitude of the widening has been offset by the increasing cost of funds; and

·

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

The Company’sCompany's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company’sCompany'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.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.

47


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

  

For the three months ended March 31,

 
  

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

 $19,703  $56   1.15% $11,092  $15   0.55%

Interest-bearing deposits at financial institutions

  49,531   197   1.61%  92,551   199   0.87%

Investment securities (1)

  649,035   5,839   3.65%  560,455   5,158   3.73%

Restricted investment securities

  21,830   234   4.35%  13,871   130   3.80%

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

  3,019,376   34,573   4.64%  2,398,387   27,793   4.70%
                         

Total interest earning assets

 $3,759,475  $40,899   4.41% $3,076,356  $33,295   4.39%
                         

Noninterest-earning assets:

                        

Cash and due from banks

 $67,224          $65,291         

Premises and equipment

  63,394           60,977         

Less allowance

  (35,136)          (31,498)        

Other

  139,734           103,587         
                         

Total assets

 $3,994,691          $3,274,713         
                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                        

Interest-bearing liabilities:

                        

Interest-bearing deposits

 $1,828,228   3,019   0.67% $1,407,645   1,140   0.33%

Time deposits

  616,661   1,862   1.22%  511,119   1,093   0.87%

Short-term borrowings

  17,271   33   0.77%  25,188   24   0.39%

FHLB advances

  236,689   1,064   1.82%  114,356   403   1.43%

Other borrowings

  64,680   718   4.50%  74,761   683   3.71%

Junior subordinated debentures

  37,510   447   4.83%  33,497   333   4.03%
                         

Total interest-bearing liabilities

 $2,801,039  $7,143   1.03% $2,166,566  $3,676   0.69%
                         

Noninterest-bearing demand deposits

 $794,673          $773,245         

Other noninterest-bearing liabilities

  42,454           43,996         

Total liabilities

 $3,638,166          $2,983,807         
                         

Stockholders' equity

  356,525           290,906         
                         

Total liabilities and stockholders' equity

 $3,994,691          $3,274,713         
                         

Net interest income

     $33,756          $29,619     
                         

Net interest spread

          3.38%          3.70%
                         

Net interest margin

          3.64%          3.90%
                         

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

  134.22%          141.99%        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 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

 

$

23,199

 

$

105

 

 

1.80

%  

 

$

19,966

 

$

52

 

 

1.03

%

Interest-bearing deposits at financial institutions

 

 

61,815

 

 

323

 

 

2.07

%  

 

 

42,178

 

 

141

 

 

1.33

%

Investment securities (1)

 

 

667,142

 

 

5,973

 

 

3.55

%  

 

 

593,451

 

 

5,808

 

 

3.88

%

Restricted investment securities

 

 

22,683

 

 

330

 

 

5.77

%  

 

 

17,793

 

 

173

 

 

3.86

%

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

 

 

3,612,648

 

 

44,648

 

 

4.90

%  

 

 

2,629,626

 

 

29,978

 

 

4.52

%

Total interest earning assets

 

 

4,387,487

 

 

51,379

 

 

4.65

%  

 

 

3,303,014

 

 

36,152

 

 

4.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

78,103

 

 

 

 

 

 

 

 

 

64,272

 

 

 

 

 

 

 

Premises and equipment

 

 

72,489

 

 

 

 

 

 

 

 

 

61,585

 

 

 

 

 

 

 

Less allowance

 

 

(38,083)

 

 

 

 

 

 

 

 

 

(34,086)

 

 

 

 

 

 

 

Other

 

 

177,879

 

 

 

 

 

 

 

 

 

108,363

 

 

 

 

 

 

 

Total assets

 

$

4,677,875

 

 

 

 

 

 

 

 

$

3,503,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

2,214,480

 

 

5,432

 

 

0.97

%  

 

$

1,613,162

 

 

2,230

 

 

0.55

%

Time deposits

 

 

825,020

 

 

3,290

 

 

1.58

%  

 

 

530,120

 

 

1,326

 

 

0.99

%

Short-term borrowings

 

 

21,407

 

 

78

 

 

1.45

%  

 

 

16,138

 

 

33

 

 

0.81

%

FHLB advances

 

 

209,111

 

 

1,273

 

 

2.42

%  

 

 

146,556

 

 

608

 

 

1.65

%

Other borrowings

 

 

74,503

 

 

925

 

 

4.93

%  

 

 

72,617

 

 

726

 

 

3.97

%

Junior subordinated debentures

 

 

37,600

 

 

519

 

 

5.48

%  

 

 

33,563

 

 

362

 

 

4.28

%

Total interest-bearing liabilities

 

 

3,382,121

 

 

11,517

 

 

1.35

%  

 

 

2,412,156

 

 

5,285

 

 

0.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

800,577

 

 

 

 

 

 

 

 

 

738,824

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

59,112

 

 

 

 

 

 

 

 

 

42,572

 

 

 

 

 

 

 

Total liabilities

 

 

4,241,810

 

 

 

 

 

 

 

 

 

3,193,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

436,065

 

 

 

 

 

 

 

 

 

309,596

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,677,875

 

 

 

 

 

 

 

 

$

3,503,148

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

39,862

 

 

 

 

 

 

 

 

$

30,867

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.30

%  

 

 

 

 

 

 

 

 

3.47

%

Net interest margin

 

 

 

 

 

 

 

 

3.60

%  

 

 

 

 

 

 

 

 

3.71

%

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

 

 

129.73

%  

 

 

 

 

 

 

 

 

136.93

%  

 

 

 

 

 

 


(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.

48


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the three months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

 

from

 

of Change (1)

 

 

    

Prior Period

    

Rate

    

Volume

 

 

 

2018 vs. 2017

 

 

 

(dollars in thousands)

 

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

53

 

$

44

 

$

 9

 

Interest-bearing deposits at financial institutions

 

 

182

 

 

100

 

 

82

 

Investment securities (2)

 

 

165

 

 

(2,261)

 

 

2,426

 

Restricted investment securities

 

 

157

 

 

101

 

 

56

 

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

 

 

14,670

 

 

2,694

 

 

11,976

 

Total change in interest income

 

 

15,227

 

 

678

 

 

14,549

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

 

3,202

 

 

2,162

 

 

1,040

 

Time deposits

 

 

1,964

 

 

1,014

 

 

950

 

Short-term borrowings

 

 

45

 

 

32

 

 

13

 

Federal Home Loan Bank advances

 

 

665

 

 

347

 

 

318

 

Other borrowings

 

 

199

 

 

180

 

 

19

 

Junior subordinated debentures

 

 

157

 

 

110

 

 

47

 

Total change in interest expense

 

 

6,232

 

 

3,845

 

 

2,387

 

Total change in net interest income

 

$

8,995

 

$

(3,167)

 

$

12,162

 


Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2018(1)

  

Inc./(Dec.)

  

Components

 
  

from

  

of Change (1)

 
  

December 31, 2017

  

Rate

  

Volume

 
  

(dollars in thousands)

 

INTEREST INCOME

            

Federal funds sold

 $41  $24  $17 

Interest-bearing deposits at financial institutions

  (2)  484   (486)

Investment securities (2)

  681   (738)  1,419 

Restricted investment securities

  104   21   83 

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

  6,780   (2,266)  9,046 
             

Total change in interest income

 $7,604  $(2,475) $10,079 
             

INTEREST EXPENSE

            

Interest-bearing deposits

 $1,879  $1,459  $420 

Time deposits

  769   512   257 

Short-term borrowings

  9   54   (45)

Federal Home Loan Bank advances

  661   135   526 

Other borrowings

  35   481   (446)

Junior subordinated debentures

  114   71   43 
             

Total change in interest expense

 $3,467  $2,712  $755 
             

Total change in net interest income

 $4,137  $(5,187) $9,324 

(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.

 

44

49


Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 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

 

$

20,488

 

$

223

 

 

1.46

%  

 

$

16,600

 

$

105

 

 

0.85

%  

Interest-bearing deposits at financial institutions

 

 

55,408

 

 

749

 

 

1.81

%  

 

 

73,655

 

 

560

 

 

1.02

%  

Investment securities (1)

 

 

654,818

 

 

17,391

 

 

3.55

%  

 

 

575,884

 

 

16,350

 

 

3.80

%  

Restricted investment securities

 

 

21,871

 

 

776

 

 

4.74

%  

 

 

14,963

 

 

435

 

 

3.89

%  

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

 

 

3,236,514

 

 

115,365

 

 

4.77

%  

 

 

2,505,614

 

 

86,821

 

 

4.63

%  

Total interest earning assets

 

 

3,989,099

 

 

134,504

 

 

4.51

%  

 

 

3,186,716

 

 

104,271

 

 

4.37

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

71,198

 

 

 

 

 

 

 

 

 

64,363

 

 

 

 

 

 

 

Premises and equipment, net

 

 

66,516

 

 

 

 

 

 

 

 

 

61,296

 

 

 

 

 

 

 

Less allowance for estimated losses on loans/leases

 

 

(36,726)

 

 

 

 

 

 

 

 

 

(32,648)

 

 

 

 

 

 

 

Other

 

 

151,996

 

 

 

 

 

 

 

 

 

105,625

 

 

 

 

 

 

 

Total assets

 

$

4,242,083

 

 

 

 

 

 

 

 

$

3,385,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing demand deposits

 

$

1,987,371

 

 

12,541

 

 

0.84

%  

 

$

1,528,971

 

 

5,205

 

 

0.46

%  

Time deposits

 

 

702,441

 

 

7,591

 

 

1.44

%  

 

 

522,986

 

 

3,575

 

 

0.91

%  

Short-term borrowings

 

 

19,234

 

 

173

 

 

1.20

%  

 

 

19,754

 

 

76

 

 

0.51

%  

Federal Home Loan Bank advances

 

 

206,875

 

 

3,219

 

 

2.08

%  

 

 

112,550

 

 

1,365

 

 

1.62

%  

Other borrowings

 

 

68,742

 

 

2,376

 

 

4.62

%  

 

 

73,126

 

 

2,104

 

 

3.85

%  

Junior subordinated debentures

 

 

37,557

 

 

1,474

 

 

5.25

%  

 

 

33,530

 

 

1,042

 

 

4.15

%  

Total interest-bearing liabilities

 

 

3,022,220

 

 

27,374

 

 

1.21

%  

 

 

2,290,917

 

 

13,367

 

 

0.78

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

784,401

 

 

 

 

 

 

 

 

 

751,318

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

49,588

 

 

 

 

 

 

 

 

 

42,660

 

 

 

 

 

 

 

Total liabilities

 

 

3,856,209

 

 

 

 

 

 

 

 

 

3,084,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

385,874

 

 

 

 

 

 

 

 

 

300,457

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,242,083

 

 

 

 

 

 

 

 

$

3,385,352

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

107,130

 

 

 

 

 

 

 

 

$

90,904

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.30

%  

 

 

 

 

 

 

 

 

3.59

%  

Net interest margin

 

 

 

 

 

 

 

 

3.59

%  

 

 

 

 

 

 

 

 

3.81

%  

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

 

 

131.99

%  

 

 

 

 

 

 

 

 

139.10

%  

 

 

 

 

 

 


(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.

 

50


Table of Contents

Part I

Item 2

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Changes of Interest Income/Interest Expense

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

from

 

of Change (1)

 

    

Prior Period

    

Rate

    

Volume

 

 

2018 vs. 2017

 

 

(dollars in thousands)

INTEREST INCOME

 

 

  

 

 

  

 

 

  

Federal funds sold

 

$

118

 

$

89

 

$

29

Interest-bearing deposits at other financial institutions

 

 

189

 

 

424

 

 

(235)

Investment securities (2)

 

 

1,041

 

 

(1,585)

 

 

2,626

Restricted investment securities

 

 

341

 

 

110

 

 

231

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

 

 

28,544

 

 

2,556

 

 

25,988

Total change in interest income

 

 

30,233

 

 

1,594

 

 

28,639

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

Interest-bearing demand deposits

 

 

7,336

 

 

5,430

 

 

1,906

Time deposits

 

 

4,016

 

 

2,525

 

 

1,491

Short-term borrowings

 

 

97

 

 

101

 

 

(4)

Federal Home Loan Bank advances

 

 

1,854

 

 

468

 

 

1,386

Other borrowings

 

 

272

 

 

470

 

 

(198)

Junior subordinated debentures

 

 

432

 

 

297

 

 

135

Total change in interest expense

 

 

14,007

 

 

9,291

 

 

4,716

Total change in net interest income

 

$

16,226

 

$

(7,697)

 

$

23,923


(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’sCompany'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’sCompany'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’sCompany'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’borrowers' sensitivity to interest rate movements.

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

51


Table of Contents

Part I

Item 2

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

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’sCompany's financial statements and the accompanying notes presented elsewhere herein, as well as the section entitled “Financial Condition” of this Management’sManagement's Discussion and Analysis that discusses the allowance.

Although management believes the level of the allowance as of March 31,September 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 on a tax equivalent basis increased 26%42%, comparing the third quarter of 2018 to the same period of 2017, and increased 29% comparing the first quarternine months of 2018 to the same period of 2017. This increase was primarily the result of the acquisitions of SFC Bank and Guaranty Bank, strong organic loan growth,  and improved pricing with the acquisitionrising rate environment.  Although the latter has been less than the Company would like due to competitive pressures and the flat yield curve, the Company is focused on growing loans at higher rates with widening spreads to more than offset the  effect of Guaranty Bank.

the rising cost of funds.

Overall, the Company’sCompany's average earning assets increased 22%33%, comparing the firstthird quarter of 2018 to the firstthird quarter of 2017. During the same time period, average gross loans and leases increased 26%37%, while average investment securities increased 16%12% with a portion beingallocable to  private placement tax-exempt municipal securities.  Average earning assets increased 25%, comparing the first nine months of 2018 to the same period of 2017.  Average gross loans and leases increased 29% and average investment securities increased 14%, comparing the first nine months of 2018 to the same period to 2017. These increases were also the result of  the acquisition of SFC Bank and Guaranty Bank.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Bank and strong loan growth.

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 firstthird quarter of 2018 increased 94%118% from the third quarter of 2017 and increased 105%comparing the first quarternine months of 2018 to the same period of 2017.  The acquisitionacquisitions of Guaranty Bank and SFC Bank primarily contributed to this increase.increase as the Company added over $650 million in deposits and $78 million in FHLB advances.  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 sensitive deposits with select major customers thatsensitivity, many of which have repriced withpricing tied to a certain index.  As a result, the increase in certaincost 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. With strongrates 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  relationships with pricing tied to a certain index.  Additionally, the loan growth outpacinghas outpaced deposit growth, short-term borrowings have increased to temporarily fill in the first quarter of 2018, short-term borrowings increasedfunding gap and the cost of these funds havehas increased with the rising rate environment.

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The Company’sCompany'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’sCompany's franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.

PROVISION FOR LOAN/LEASE LOSSES

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

The Company’sCompany's provision totaled $2.5$6.2 million for the firstthird quarter of 2018, which was an increase of $435 thousand$4.1 million or 21%197% from the same quarter of the prior year.   The increase fromProvision for the first quarternine months of 2017the year totaled $11.0 million, which was up $4.8 million or 78%, compared to the first quarternine months of 2018 was2017.  The increaseswere primarily attributable to additional provision of $4.7 million related to two unrelated borrowers as well as to loan growth and the accounting for the loans acquired through the acquisitions of CSB and Guaranty Bank.acquisitions.

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. 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 $363 thousand$2.3 million for the first threenine months of 2018, increased the Company’sCompany's allowance to $36.5$43.1 million at March 31,September 30, 2018. As of March 31,September 30, 2018, the Company’sCompany's allowance to total loans/leases was 1.20%1.18%, which has increasedwas down from 1.16%1.21% at December 31, 2017June 30, 2018 and decreaseddown from 1.32%1.31% at March 31,September 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 ($7.314.4 million and $8.0$5.6 million at March 31,September 30, 2018 and March 31,September 30, 2017, respectively). When factoring this remaining discount into the Company’sCompany's allowance to total loans and leases calculation, the Company’sCompany's allowance as a percentage of total loans and leases increasesincreased from 1.20%1.18% to 1.43%1.57% as of March 31,September 30, 2018 and increasesincreased from 1.32%1.31% to 1.64%1.52% as of March 31,September 30, 2017.

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

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Trust department fees

 

$

2,195,828

 

$

1,721,401

 

$

474,427

 

27.6

%

 

Investment advisory and management fees

 

 

1,059,413

 

 

968,452

 

 

90,961

 

9.4

 

 

Deposit service fees

 

 

1,655,529

 

 

1,522,461

 

 

133,068

 

8.7

 

 

Gains on sales of residential real estate loans, net

 

 

336,679

 

 

98,409

 

 

238,270

 

242.1

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

46,417

 

 

91,974

 

 

(45,557)

 

(49.5)

 

 

Swap fee income

 

 

1,110,182

 

 

194,256

 

 

915,926

 

471.5

 

 

Securities gains (losses), net

 

 

 —

 

 

(63,588)

 

 

63,588

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

474,426

 

 

428,002

 

 

46,424

 

10.8

 

 

Debit card fees

 

 

845,740

 

 

754,803

 

 

90,937

 

12.0

 

 

Correspondent banking fees

 

 

195,450

 

 

239,060

 

 

(43,610)

 

(18.2)

 

 

Other

 

 

889,161

 

 

746,073

 

 

143,088

 

19.2

 

 

Total noninterest income

 

$

8,808,825

 

$

6,701,303

 

$

2,107,522

 

31.4

%

 

 

46

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NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three months ended March 31, 2018 and 2017.

  

Three Months Ended

         
  

March 31,

2018

  

March 31,

2017

  

$ Change

  

% Change

 
                 

Trust department fees

 $2,237,081  $1,740,207  $496,874   28.6

%

Investment advisory and management fees

  952,344   961,599   (9,255)  (1.0)

Deposit service fees

  1,531,453   1,316,390   215,063   16.3 

Gains on sales of residential real estate loans, net

  100,815   96,323   4,492   4.7 

Gains on sales of government guaranteed portions of loans, net

  358,434   950,641   (592,207)  (62.3)

Swap fee income

  958,694   113,520   845,174   744.5 

Earnings on bank-owned life insurance

  417,987   469,687   (51,700)  (11.0)

Debit card fees

  766,108   702,801   63,307   9.0 

Correspondent banking fees

  264,827   245,189   19,638   8.0 

Other

  953,706   687,397   266,309   38.7 

Total noninterest income

 $8,541,449  $7,283,754  $1,257,695   17.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

 

% Change

 

 

Trust department fees

 

$

6,490,896

 

$

5,153,609

 

$

1,337,287

 

25.9

%

 

Investment advisory and management fees

 

 

3,069,423

 

 

2,798,886

 

 

270,537

 

9.7

 

 

Deposit service fees

 

 

4,797,385

 

 

4,297,210

 

 

500,175

 

11.6

 

 

Gains on sales of residential real estate loans, net

 

 

539,266

 

 

307,360

 

 

231,906

 

75.5

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

404,851

 

 

1,129,668

 

 

(724,817)

 

(64.2)

 

 

Swap fee income

 

 

3,717,761

 

 

635,353

 

 

3,082,408

 

485.1

 

 

Securities gains (losses), net

 

 

 —

 

 

(25,124)

 

 

25,124

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

1,291,686

 

 

1,357,049

 

 

(65,363)

 

(4.8)

 

 

Debit card fees

 

 

2,456,134

 

 

2,201,125

 

 

255,009

 

11.6

 

 

Correspondent banking fees

 

 

672,807

 

 

684,306

 

 

(11,499)

 

(1.7)

 

 

Other

 

 

2,822,331

 

 

2,228,133

 

 

594,198

 

26.7

 

 

Total noninterest income

 

$

26,262,540

 

$

20,767,575

 

$

5,494,965

 

26.5

%

 

In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in early 2018 coupled with strong growth in assets under management, trust department fees increased 29%28%, comparing the third quarter of 2018 to the same period of the prior year. Trust department fees increased 26% when comparing the first quarternine months 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 decreased 1%increased 9%, comparing the firstthird quarter of 2018 to the same period of the prior year.

year, and they increased 10% when comparing the first nine months of 2018 to the first nine months 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’sCompany'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. TheOn October 1, 2018 the Company announced in March 2018 the signingsuccessful completion of definitive agreements to acquire and mergethe previously announced acquisition of the Bates Companies, into RB&T.headquartered in Rockford, Illinois. The acquisition and subsequent merger of the Bates Companies into RB&T will addenhance the wealth management services of RB&T by adding approximately $700 million of assets under management.

Deposit service fees expanded 16%9% comparing the third quarter of 2018 to the same period of the prior year and expanded 12% when comparing the first quarternine months of 2018 to the same period of the prior year. This increase was primarily the result of the growth in deposits due to the acquisitionacquisitions of Guaranty Bank and SFC 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.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Gains on sales of residential real estate loans increased 5%242% when comparing the third quarter of 2018 to the same period of the prior year and increased 76% when comparing the first quarternine months 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’sCompany'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’sCompany's gains on the sale of government-guaranteed portions of loans for the firstthird quarter of 2018 decreased 62%50% compared to the firstthird quarter of 2017.2017 and decreased 64% when comparing the first nine months of 2018 to the same period of the prior year. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the

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SBA and the USDA. In the past several years, the Company’sCompany's portfolio of government-guaranteed loans has grown as a direct result of the Company’sCompany'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’sCompany'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 its 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 over the past several years.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 $959 thousand$1.1 million for the firstthird quarter of 2018, compared to $114$194 thousand for the third quarter of 2017. Swap fee income totaled $3.7 million for the first quarternine months of 2018 compared to $635 thousand in the first nine months of 2017.  Future levels of swap fee income are also dependent upon prevailing interest rates.

Earnings on BOLI decreasedincreased 11% comparing the firstthird quarter of 2018 to the second quarter of 2018 and decreased 5% comparing the first quarternine months of 2018 to the first nine months of 2017.  There were no purchases of BOLI within the last 12 months. Notably, a small portion of the Company’sCompany's BOLI is variable rate whereby the returns are determined by the performance of the equity market. Equity market performance accounted for the majority of the volatility.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 9%12% comparing the firstthird quarter of 2018 to the firstthird quarter of the prior year.year and 12% comparing the first nine months of 2018 to the first nine months 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 8%decreased 18% comparing the firstthird quarter of 2018 to the firstthird quarter of the prior year.year and decreased 2% comparing the first nine months of 2018 to the first nine months 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 192191 banks in Iowa, Illinois and Wisconsin.

Other noninterest income increased 19% comparing the third quarter of 2018 to the third quarter of the prior year and increased 27% comparing the first nine months of 2018 to the first nine months of 2017.  These increases were primarily driven by fluctuations in net gains recognized on the disposal of leased assets.

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Other noninterest income increased 39% comparing the first quarter of 2018 to the first quarter of the prior year. The primary reason for the increase was gain on disposal of leased assets which totaled $106 thousand in the first quarter of 2018 as compared to $2 thousand in the first quarter of 2017.

NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended March 31,September 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Salaries and employee benefits

 

$

17,432,632

 

$

13,423,943

 

$

4,008,689

 

29.9

%

 

Occupancy and equipment expense

 

 

3,318,470

 

 

2,516,274

 

 

802,196

 

31.9

 

 

Professional and data processing fees

 

 

2,537,027

 

 

2,950,839

 

 

(413,812)

 

(14.0)

 

 

Acquisition costs

 

 

1,292,043

 

 

407,997

 

 

884,046

 

216.7

 

 

Post-acquisition compensation, transition and integration costs

 

 

493,063

 

 

522,740

 

 

(29,677)

 

(5.7)

 

 

FDIC insurance, other insurance and regulatory fees

 

 

932,746

 

 

690,894

 

 

241,852

 

35.0

 

 

Loan/lease expense

 

 

369,379

 

 

257,540

 

 

111,839

 

43.4

 

 

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

 

 

(50,362)

 

 

(160,640)

 

 

110,278

 

(68.6)

 

 

Advertising and marketing

 

 

983,762

 

 

669,923

 

 

313,839

 

46.8

 

 

Bank service charges

 

 

461,656

 

 

460,153

 

 

1,503

 

0.3

 

 

Correspondent banking expense

 

 

205,121

 

 

204,189

 

 

932

 

0.5

 

 

CDI amortization expense

 

 

541,665

 

 

230,867

 

 

310,798

 

134.6

 

 

Other

 

 

1,982,408

 

 

1,221,028

 

 

761,380

 

62.4

 

 

Total noninterest expense

 

$

30,499,610

 

$

23,395,747

 

$

7,103,863

 

30.4

%

 

 

  

Three Months Ended

         
  

March 31,

2018

  

March 31,

2017

  

$ Change

  

% Change

 
                 

Salaries and employee benefits

 $15,977,975  $13,307,331  $2,670,644   20.1

%

Occupancy and equipment expense

  3,065,811   2,502,219   563,592   22.5 

Professional and data processing fees

  2,707,716   2,083,392   624,324   30.0 

Acquisition costs

  92,539   5,630   86,909   1,543.7 

FDIC insurance, other insurance and regulatory fees

  756,211   621,242   134,969   21.7 

Loan/lease expense

  290,747   293,538   (2,791)  (1.0)

Net cost of operations of other real estate

  131,742   14,230   117,512   825.8 

Advertising and marketing

  693,239   609,431   83,808   13.8 

Bank service charges

  440,571   423,901   16,670   3.9 

Correspondent banking expense

  204,754   198,351   6,403   3.2 

CDI amortization expense

  304,551   230,867   73,684   31.9 

Other

  1,197,641   982,985   214,656   21.8 

Total noninterest expense

 $25,863,497  $21,273,117  $4,590,380   21.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

$ Change

    

% Change

 

 

Salaries and employee benefits

 

$

49,214,623

 

$

39,662,218

 

$

9,552,405

 

24.1

%

 

Occupancy and equipment expense

 

 

9,516,939

 

 

7,716,829

 

 

1,800,110

 

23.3

 

 

Professional and data processing fees

 

 

8,015,966

 

 

7,374,930

 

 

641,036

 

8.7

 

 

Acquisition costs

 

 

1,798,184

 

 

407,997

 

 

1,390,187

 

340.7

 

 

Post-acquisition compensation, transition and integration costs

 

 

658,377

 

 

522,740

 

 

135,637

 

25.9

 

 

FDIC insurance, other insurance and regulatory fees

 

 

2,529,415

 

 

1,957,413

 

 

572,002

 

29.2

 

 

Loan/lease expense

 

 

920,215

 

 

811,362

 

 

108,853

 

13.4

 

 

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

 

 

11,190

 

 

(118,453)

 

 

129,643

 

(109.4)

 

 

Advertising and marketing

 

 

2,430,085

 

 

1,846,942

 

 

583,143

 

31.6

 

 

Bank service charges

 

 

1,368,318

 

 

1,331,499

 

 

36,819

 

2.8

 

 

Correspondent banking expense

 

 

614,212

 

 

604,233

 

 

9,979

 

1.7

 

 

CDI amortization

 

 

1,150,767

 

 

692,600

 

 

458,167

 

66.2

 

 

Other

 

 

4,504,639

 

 

3,263,183

 

 

1,241,456

 

38.0

 

 

Total noninterest expense

 

$

82,732,930

 

$

66,073,493

 

$

16,659,437

 

25.2

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company’sCompany's general efficiency. One-time charges relating to the acquisition of Springfield Bancsharesacquisitions are expected to impact expense in later periods ofthroughout 2018.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the firstthird quarter of 2017 to the firstthird quarter of 2018 by 20%30%.  This line item also increased 24% when comparing the first nine months of 2018 to the first nine months of 2017. This increase was primarily related to new hires, merit increases and the addition of theSFC Bank and Guaranty Bank employees. Newemployees, new hires throughout 2017 included rolesand merit increases. To help support recent and expected growth, the Company is adding to operational infrastructure and investing in Information Technology, Accounting, Internal Audit, Trustadditional staffing both at the corporate level and Commercial Banking.

at some of the bank charters.  Some of these hires are opportunistic, as the Company takes advantage of  talent availability in the marketplace as a result of ongoing industry consolidation. 

Occupancy and equipment expense increased 23%32%, comparing the third quarter of 2018 to the same period of the prior year and increased 23% comparing the first quarternine months of 2018 to the same period of the prior year. The increased expense was mostlyprimarily due to the addition of Guaranty Bank and SFC Bank.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Professional and data processing fees increased 30%decreased 14%, comparing the firstthird quarter of 2018 to the same period in 2017.2017, and increased 9% comparing the first nine months of 2018 to the same period of the prior year. This increased expense was partially due to the addition of GuarantySFC 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 beoccur in late 2018.mid 2019. 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 $93$1.3 million for the third quarter of 2018 and $1.8 million for the first nine months of 2018. Acquisition costs for the third quarter and the first nine months of 2017 totaled $408 thousand.  These costs were comprised primarily of legal, accounting and investment banking costs related to the acquisitions described in Notes 2 and 11 to the Consolidated Financial Statements.

Post-acquisition costs totaled $493 thousand for the third quarter of 2018 and $6$658 thousand for the first quarternine months of 20182018.  These costs were comprised primarily of personnel costs, IT integration, and 2017, respectively.

data conversion costs related to acquisitions.

FDIC insurance, other insurance and regulatory fee expense increased 22%35%, comparing the firstthird quarter of 2018 to the firstthird quarter of 2017.2017 and increased 29% comparing the first nine months of 2018 to the same period of the prior year. The increase in expense was due to the acquisitionacquisitions of Guaranty Bank and SFC Bank.

Loan/lease expense decreased 1%,increased 43% when comparing the firstthird quarter of 2018 to the same quarter of 2017.2017 and increased 13% comparing the first nine months 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 ofof/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 costincome from operations of other real estate totaled $132$50 thousand for the firstthird quarter of 2018, compared to net costs$161 thousand for the third quarter of 2017.  Net cost of operations of $14other real estate totaled $11 thousand for the first quarternine months of 2017.

2018 compared to net income from operations of $118 thousand for the same period of the prior year.

Advertising and marketing expense increased 14%47%, comparing the firstthird quarter of 2018 to the firstthird quarter of 2017.2017 and increased 32% comparing the first nine months of 2018 to the same period of the prior year. The increase in expense was primarily due to the additionadditions of Guaranty Bank and SFC Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’sQCBT's correspondent banking customer portfolio, increased 4%remained flat from the firstthird quarter of 2017 to the firstthird quarter of 2018. The increase was due, in large part,2018 and increased 3%, comparing the first nine months of 2018 to the success QCBT has had in growing its correspondent banking customer portfolio.same period of the prior year.  As transactions volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Correspondent banking expense increased 3%was flat when comparing the firstthird quarter of 2018 to the firstthird quarter of 2017 dueand increased 2% when comparing the first nine months of 2018 to both increases in volume and in the numbersame period of correspondent banking clients.the prior year.   These are direct costs incurred to provide services to QCBT’sQCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

CDI amortization expense increased 32%135% when comparing the firstthird quarter of 2018 to the firstthird quarter of 2017.2017 and increased 66% when comparing the first nine months of 2018 to the same period of the prior year. The increase was due to the acquisitionacquisitions of Guaranty Bank and SFC Bank.

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Item 2

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

Other noninterest expense was up 22%62% when comparing the firstthird quarter of 2018 to the firstthird quarter of 2017.2017 and increased 38% when comparing the first nine months 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 lease termination fees at Guaranty Realty as well as the additionadditions of Guaranty Bank and SFC Bank.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

In the firstthird quarter of 2018, the Company incurred income tax expense of $2.0$1.6 million. During the first nine months of the year, the Company incurred income tax expense of $5.5 million.  Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended March 31,September 30, 2018 and 2017.

  

For the Three Months Ended March 31,

 
  

2018

  

2017

 
      

% of

      

% of

 
      

Pretax

      

Pretax

 
  

Amount

  

Income

  

Amount

  

Income

 
                 

Computed "expected" tax expense

 $2,633,669   21.0% $4,051,044   35.0%

Tax exempt income, net

  (943,101)  (7.5)  (1,305,427)  (11.3)

Bank-owned life insurance

  (87,777)  (0.7)  (164,391)  (1.4)

State income taxes, net of federal benefit, current year

  551,468   4.4   408,325   3.5 

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

  (132,361)  (1.1)  (533,322)  (4.6)

Other

  (30,828)  (0.2)  (66,783)  (0.6)

Federal and state income tax expense

 $1,991,070   15.9% $2,389,446   20.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

For the Nine Months Ended September 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

 

$

2,187,543

 

21.0

%  

$

3,421,414

 

35.0

%  

$

7,409,662

 

21.0

%  

$

11,463,015

 

35.0

%

 

Tax exempt income, net

 

 

(1,046,728)

 

(10.0)

 

 

(1,479,786)

 

(15.1)

 

 

(2,945,918)

 

(8.3)

 

 

(4,219,116)

 

(12.9)

 

 

Bank-owned life insurance

 

 

(89,489)

 

(0.9)

 

 

(149,802)

 

(1.5)

 

 

(261,114)

 

(0.7)

 

 

(474,968)

 

(1.4)

 

 

State income taxes, net of federal benefit, current year

 

 

392,789

 

3.8

 

 

389,200

 

4.0

 

 

1,501,913

 

4.3

 

 

1,191,935

 

3.6

 

 

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

 

 

(8,802)

 

(0.1)

 

 

(190,554)

 

(1.9)

 

 

(341,807)

 

(1.0)

 

 

(813,421)

 

(2.5)

 

 

Other

 

 

172,722

 

1.6

 

 

(68,939)

 

(0.8)

 

 

117,188

 

0.2

 

 

(200,890)

 

(0.6)

 

 

Federal and state income tax expense

 

$

1,608,035

 

15.4

%  

$

1,921,533

 

19.7

%  

$

5,479,924

 

15.5

%  

$

6,946,555

 

21.2

%

 

The effective tax rate for the quarter ended March 31,September 30, 2018 was 15.9%15.4% which was a 4.7%4.3% decrease from the effective tax rate of 20.6%19.7% for the quarter ended March 31,September 30, 2017. The effective tax rate for the nine months ended September 30, 2018 was 15.5%, which was a decrease over the effective tax rate of 21.2% for the nine months ended September 30, 2017.  The Tax Act, was  enacted on December 22, 2017 and was effective January 1, 2018, reducingreduced the federal corporate tax rate from 35% to 21%.

FINANCIAL CONDITION

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

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 

Cash and due from banks

 $61,846   2% $75,722   2% $56,326   2%

Federal funds sold and interest-bearing deposits

  59,557   1%  85,962   2%  173,219   5%

Securities

  638,229   16%  652,382   16%  557,646   16%

Net loans/leases

  3,018,370   75%  2,930,130   74%  2,403,791   71%

Other assets

  248,312   6%  238,469   6%  190,031   6%

Total assets

 $4,026,314   100% $3,982,665   100% $3,381,013   100%
                         

Total deposits

 $3,280,001   82% $3,266,655   82% $2,805,931   83%

Total borrowings

  334,802   8%  309,480   8%  231,534   7%

Other liabilities

  51,083   1%  53,243   1%  47,708   1%

Total stockholders' equity

  360,428   9%  353,287   9%  295,840   9%

Total liabilities and stockholders' equity

 $4,026,314   100% $3,982,665   100% $3,381,013   100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2018

 

 

June 30, 2018

 

 

December 31, 2017

 

 

September 30, 2017

 

 

 

 

(dollars in thousands)

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Cash and due from banks

 

$

73,407

 

 1

%  

 

$

69,069

 

 2

%  

 

$

75,722

 

 2

%  

 

$

56,275

 

 2

%

 

Federal funds sold and interest-bearing deposits

 

 

129,660

 

 3

%  

 

 

51,667

 

 1

%  

 

 

85,962

 

 2

%  

 

 

61,789

 

 2

%  

 

Securities

 

 

650,745

 

14

%  

 

 

657,997

 

16

%  

 

 

652,382

 

16

%  

 

 

583,936

 

16

%

 

Net loans/leases

 

 

3,610,309

 

75

%  

 

 

3,077,247

 

75

%  

 

 

2,930,130

 

74

%  

 

 

2,641,772

 

74

%

 

Other assets

 

 

328,611

 

 7

%  

 

 

250,903

 

 6

%  

 

 

238,469

 

 6

%  

 

 

206,691

 

 6

%

 

Total assets

 

$

4,792,732

 

100

%  

 

$

4,106,883

 

100

%  

 

$

3,982,665

 

100

%  

 

$

3,550,463

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,788,277

 

79

%  

 

$

3,298,276

 

81

%  

 

$

3,266,655

 

82

%  

 

$

2,894,268

 

82

%

 

Total borrowings

 

 

483,635

 

10

%  

 

 

380,392

 

 9

%  

 

 

309,480

 

 8

%  

 

 

296,145

 

 8

%

 

Other liabilities

 

 

63,433

 

 1

%  

 

 

58,627

 

 1

%  

 

 

53,243

 

 1

%  

 

 

47,011

 

 1

%

 

Total stockholders' equity

 

 

457,387

 

10

%  

 

 

369,588

 

 9

%  

 

 

353,287

 

 9

%  

 

 

313,039

 

 9

%

 

Total liabilities and stockholders' equity

 

$

4,792,732

 

100

%  

 

$

4,106,883

 

100

%  

 

$

3,982,665

 

100

%  

 

$

3,550,463

 

100

%

 

During the firstthird quarter of 2018, the Company’sCompany's total assets increased $43.6$685.8 million, or 1%17%, to a total of $4.0$4.8 billion. Net loans/leasesThis included $575.7 million in assets acquired and new goodwill of $45.5 million as part of the SFC Bank acquisition (further described in Note 2 to the Consolidated Financial Statements).  The Company organically grew $88.2 million. This loan and its net loan/lease growthportfolio $61.3 million, which was primarily funded by a combination of excess cash, deposits, which increased $13.3 millionan increase in the first quarter of 2018, and borrowings, which increased $25.3 million in the first quarter of 2018. Stockholders’ equity increased $7.1 million, or 2%, in the current quarter due to net retained income.short-term wholesale funding.  Deposits grew $50.3

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

million in the third quarter of 2018, excluding the $439.6 million of deposits acquired.  Borrowings increased $18.9 million in the third quarter of 2018, excluding the $84.3 million of borrowings acquired.

INVESTMENT SECURITIES

The composition of the Company’sCompany's securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, and maximizing return whileand minimizing credit risk. Over the past five years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities whileand 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’sCompany's existing markets) and require a thorough underwriting process before investment.

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

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

U.S. govt. sponsored agency securities

 $36,868   6% $38,097   6% $47,556   9%

Municipal securities

  438,736   69%  445,049   68%  356,776   64%

Residential mortgage-backed and related securities

  157,289   25%  163,301   25%  147,504   26%

Other securities

  5,336   1%  5,935   1%  5,810   1%
  $638,229   100% $652,382   100% $557,646   100%
                         

Securities as a % of Total Assets

  15.85%      16.38%      16.49%    

Net Unrealized Losses as a % of Amortized Cost

  (1.01)%      (0.13)%      (0.79)%    

Duration (in years)

  6.9       7.0       6.1     

Quarterly Yield on Investment Securities (TEY)

  3.65%      3.82%      3.73%    

Quarterly Yield on Investment Securities (GAAP)

  3.03%      2.77%      2.74%    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 2018

 

June 30, 2018

 

December 31, 2017

 

 

September 30, 2017

 

 

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

U.S. govt. sponsored agency securities

 

$

36,492

 

 5

%  

$

35,667

 

 5

%  

$

38,097

 

 6

%  

 

$

39,340

 

 7

%

Municipal securities

 

 

453,275

 

70

%  

 

458,510

 

70

%  

 

445,049

 

68

%  

 

 

379,694

 

65

%

Residential mortgage-backed and related securities

 

 

155,733

 

24

%  

 

158,534

 

24

%  

 

163,301

 

25

%  

 

 

158,969

 

27

%

Other securities

 

 

5,245

 

 1

%  

 

5,286

 

 1

%  

 

5,935

 

 1

%  

 

 

5,933

 

 1

%

 

 

$

650,745

 

100

%  

$

657,997

 

100

%  

$

652,382

 

100

%  

 

$

583,936

 

100

%

 

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

 

  

 

  

 

Securities as a % of Total Assets

 

 

13.58

%  

  

 

 

16.02

%  

  

 

 

16.38

%  

  

 

 

 

16.45

%  

  

 

Net Unrealized Losses as a % of Amortized Cost

 

 

(1.47)

%  

  

 

 

(1.58)

%  

  

 

 

(0.13)

%  

  

 

 

 

(0.16)

%  

  

 

Duration (in years)

 

 

7.0

 

  

 

 

7.0

 

  

 

 

7.0

 

  

 

 

 

6.4

 

  

 

Quarterly Yield on Investment Securities (TEY)

 

 

3.55

%  

  

 

 

3.56

%  

  

 

 

3.82

%  

  

 

 

 

3.88

%  

  

 

Quarterly Yield on Investment Securities (GAAP)

 

 

3.02

%  

  

 

 

3.02

%  

  

 

 

2.77

%  

  

 

 

 

2.85

%  

  

 

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 1728 bps in the first quarternine months of 2018; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 2625 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’sCompany's investment securities.

59

52


Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LOANS/LEASESLOANS/LEASES

Total loans/leases grew 12.2%7.9% on an annualized basis during the firstthird quarter of 2018. The mix of the loan/lease types within the Company’sCompany's loan/lease portfolio is presented in the following table.

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

C&I loans

 $1,201,087   39% $1,134,516   38% $851,578   35%

CRE loans

  1,357,703   45%  1,303,492   44%  1,106,842   46%

Direct financing leases

  137,614   5%  141,448   5%  159,368   7%

Residential real estate loans

  254,484   8%  258,646   9%  231,326   9%

Installment and other consumer loans

  95,912   3%  118,611   4%  78,771   3%
                         

Total loans/leases

 $3,046,800   100% $2,956,713   100% $2,427,885   100%
                         

Plus deferred loan/lease origination costs, net of fees

  8,103       7,773       7,965     

Less allowance

  (36,533)      (34,356)      (32,059)    
                         

Net loans/leases

 $3,018,370      $2,930,130      $2,403,791     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2018

 

June 30, 2018

 

December 31, 2017

 

September 30, 2017

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

 

 

 

(dollars in thousands)

 

 

C&I loans

 

$

1,380,543

 

39

%  

$

1,273,000

 

42

%  

$

1,134,516

 

38

%  

$

1,034,531

 

39

%

 

CRE loans

 

 

1,727,326

 

47

%  

 

1,349,319

 

43

%  

 

1,303,492

 

44

%  

 

1,157,856

 

43

%

 

Direct financing leases

 

 

126,752

 

 3

%  

 

133,196

 

 4

%  

 

141,448

 

 5

%  

 

147,063

 

 6

%

 

Residential real estate loans

 

 

309,287

 

 8

%  

 

257,434

 

 8

%  

 

258,646

 

 9

%  

 

239,958

 

 9

%

 

Installment and other consumer loans

 

 

100,191

 

 3

%  

 

92,952

 

 3

%  

 

118,611

 

 4

%  

 

89,605

 

 3

%

 

Total loans/leases

 

$

3,644,099

 

100

%  

$

3,105,901

 

100

%  

$

2,956,713

 

100

%  

$

2,669,013

 

100

%

 

Plus deferred loan/lease origination costs, net of fees

 

 

9,287

 

 

 

 

8,891

 

 

 

 

7,773

 

  

 

 

7,741

 

  

 

 

Less allowance

 

 

(43,077)

 

 

 

 

(37,545)

 

 

 

 

(34,356)

 

  

 

 

(34,982)

 

  

 

 

Net loans/leases

 

$

3,610,309

 

 

 

$

3,077,247

 

 

 

$

2,930,130

 

  

 

$

2,641,772

 

  

 

 

As CRE loans have historically been the Company’sCompany's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’sCompany'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 March 31,September 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 $66.6$107.5 million induring 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 March 31,September 30, 2018 and December 31, 2017, the amount of nationally syndicated loans totaled $39.9$48.4 million and $51.2 million, respectively.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

  

As of March 31,

  

As of December 31,

  

As of March 31,

 
  

2018

  

2017

  

2017

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

Lessors of Nonresidential Buildings

 $435,919   32% $388,648   30% $327,077   30%

Lessors of Residential Buildings

  221,978   16%  199,047   15%  147,335   13%

Hotels

  70,887   5%  70,447   5%  37,998   4%

Nonresidential Property Managers

  56,572   4%  51,621   4%  57,112   5%

New Housing For-Sale Builders

  52,951   4%  61,480   5%  57,733   5%

Land Subdivision

  45,356   3%  44,192   3%  47,254   4%

Nursing Care Facilities

  38,830   3%  47,008   4%  34,611   3%

Lessors of Other Real Estate Property

  31,121   2%  29,078   2%  20,989   2%

Other *

  404,089   30%  411,971   32%  376,733   34%
                         

Total CRE Loans

 $1,357,703   100% $1,303,492   100% $1,106,842   100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

As of June 30, 

 

 

As of December 31, 

 

 

As of September 30, 

 

 

 

 

2018

 

2018

 

 

2017

 

 

2017

 

 

 

    

Amount

    

%

    

Amount

    

%

 

    

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

Lessors of Nonresidential Buildings

 

$

605,517

 

35

%  

$

439,067

 

33

%

 

$

388,648

 

30

%  

 

$

345,387

 

30

%

 

Lessors of Residential Buildings

 

 

321,357

 

19

%  

 

230,187

 

17

%

 

 

199,047

 

15

%  

 

 

159,542

 

14

%

 

Hotels

 

 

87,850

 

5

%  

 

73,335

 

5

%

 

 

70,447

 

5

%  

 

 

42,121

 

 4

%

 

Nonresidential Property Managers

 

 

56,600

 

3

%  

 

55,979

 

4

%

 

 

51,621

 

4

%  

 

 

53,231

 

 5

%

 

Land Subdivision

 

 

50,252

 

3

%  

 

39,883

 

3

%

 

 

44,192

 

3

%  

 

 

41,795

 

 3

%

 

Nursing Care Facilities

 

 

39,306

 

2

%  

 

37,417

 

3

%

 

 

47,008

 

4

%  

 

 

41,264

 

 3

%

 

New Housing For-Sale Builders

 

 

37,911

 

2

%  

 

38,392

 

3

%

 

 

61,480

 

5

%  

 

 

56,390

 

 5

%

 

Lessors of Other Real Estate Property

 

 

34,376

 

2

%  

 

28,149

 

2

%

 

 

29,078

 

2

%  

 

 

21,160

 

 2

%

 

Other *

 

 

494,157

 

29

%  

 

406,910

 

30

%

 

 

411,971

 

32

%  

 

 

396,966

 

34

%

 

Total CRE Loans

 

$

1,727,326

 

100

%  

$

1,349,319

 

100

%

 

$

1,303,492

 

100

%  

 

$

1,157,856

 

100

%

 


*     “Other” consists of all other industries. None of these had concentrations greater than $27.2$34.0 million, or approximately 2% of total CRE loans in the most recent period presented.

60


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Part I

Item 2

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

The Company’sCompany'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-year15‑year and 20-year20‑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.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

 

As of June 30, 

 

 

As of December 31, 

 

As of September 30, 

 

 

 

2018

 

 

2018

 

 

2017

 

2017

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trucks, Vans and Vocational Vehicles

 

$

37,942

 

16

%  

 

$

35,814

 

15

%

 

$

19,927

 

 9

%  

$

18,146

 

 8

%

Construction - General

 

 

17,201

 

 7

%  

 

 

18,494

 

 8

%

 

 

18,705

 

 9

%  

 

18,807

 

 9

%

Manufacturing - General

 

 

16,666

 

 7

%  

 

 

16,794

 

 7

%

 

 

16,571

 

 8

%  

 

16,997

 

 8

%

Food Processing Equipment

 

 

15,490

 

 7

%  

 

 

14,377

 

 6

%

 

 

12,965

 

 6

%  

 

13,317

 

 6

%

Marine - Travelifts

 

 

12,729

 

 5

%  

 

 

12,875

 

 6

%

 

 

10,802

 

 5

%  

 

10,417

 

 5

%

Trailers

 

 

10,016

 

 4

%  

 

 

10,137

 

 4

%

 

 

8,983

 

 4

%  

 

9,272

 

 4

%

Computer Hardware

 

 

9,656

 

 4

%  

 

 

10,141

 

 4

%

 

 

11,340

 

 5

%  

 

11,483

 

 5

%

Manufacturing - CNC

 

 

6,990

 

 3

%  

 

 

6,344

 

 3

%

 

 

6,742

 

 3

%  

 

6,722

 

 3

%

Other *

 

 

106,156

 

47

%  

 

 

108,321

 

47

%

 

 

109,201

 

51

%  

 

109,798

 

52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total m2 loans and leases

 

$

232,846

 

100

%  

 

$

233,297

 

100

%

 

$

215,236

 

100

%  

$

214,959

 

100

%


  

As of March 31,

  

As of December 31,

  

As of March 31,

 
  

2018

  

2017

  

2017

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

Trucks, Vans and Vocational Vehicles

 $28,219   13% $19,927   9% $14,657   7%

Construction - General

  18,067   8%  18,705   9%  17,914   9%

Manufacturing - General

  16,624   7%  16,571   8%  18,067   9%

Food Processing Equipment

  13,270   6%  12,965   6%  14,102   7%

Marine - Travelifts

  12,843   6%  10,802   5%  8,132   4%

Computer Hardware

  10,694   5%  11,340   5%  10,094   5%

Trailers

  9,161   4%  8,983   4%  9,465   5%

Manufacturing - CNC

  7,239   3%  6,742   3%  6,812   3%

Restaurant

  6,844   3%  7,107   3%  7,841   4%

Other *

  100,693   45%  102,094   47%  101,375   49%
                         

Total m2 loans and leases

 $223,654   100% $215,236   100% $208,459   100%

*     “Other”“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’sCompany's loan and lease portfolio.

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and nine months ended March 31,September 30, 2018 and 2017 are presented as follows:

  

Three Months Ended

 
  

March 31, 2018

  

March 31, 2017

 
  

(dollars in thousands)

 

Balance, beginning

 $34,356  $30,757 

Provisions charged to expense

  2,540   2,105 

Loans/leases charged off

  (436)  (893)

Recoveries on loans/leases previously charged off

  73   90 

Balance, ending

 $36,533  $32,059 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2018

    

September 30, 2017

    

September 30, 2018

    

September 30, 2017

 

(dollars in thousands)

 

(dollars in thousands)

Balance, beginning

$

37,545

 

$

33,357

 

$

34,356

 

$

30,757

Provisions charged to expense

 

6,206

 

 

2,086

 

 

11,046

 

 

6,215

Loans/leases charged off

 

(991)

 

 

(650)

 

 

(2,951)

 

 

(2,394)

Recoveries on loans/leases previously charged off

 

317

 

 

189

 

 

626

 

 

404

Balance, ending

$

43,077

 

$

34,982

 

$

43,077

 

$

34,982

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’smanagement's judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed

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Table of Contents

Part I

Item 2

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

and analyzed monthlyquarterly 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’sCompany's Annual Report  on Form 10-K10‑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.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

  

As of

 

Internally Assigned Risk Rating *

 

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 

Special Mention (Rating 6)

 $42,926  $31,024  $22,841 

Substandard (Rating 7)

  39,815   43,435   50,810 

Doubtful (Rating 8)

  -   271   - 
  $82,741  $74,730  $73,651 
             
             

Criticized Loans **

 $82,741  $74,730  $73,651 

Classified Loans ***

 $39,815  $43,706  $50,810 
             
             

Criticized Loans as a % of Total Loans/Leases

  2.79%  2.52%  3.02%

Classified Loans as a % of Total Loans/Leases

  1.34%  1.47%  2.09%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

Internally Assigned Risk Rating *

    

September 30, 2018

    

June 30, 2018

    

December 31, 2017

    

September 30, 2017

 

 

 

 

(dollars in thousands)

 

 

Special Mention (Rating 6)

 

$

49,230

 

$

44,202

 

$

31,024

 

$

27,315

 

 

Substandard (Rating 7)

 

 

45,676

 

 

42,492

 

 

43,435

 

 

50,323

 

 

Doubtful (Rating 8)

 

 

 3

 

 

 —

 

 

271

 

 

 —

 

 

 

 

$

94,909

 

$

86,694

 

$

74,730

 

$

77,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans **

 

$

94,909

 

$

86,694

 

$

74,730

 

$

77,638

 

 

Classified Loans ***

 

$

45,679

 

$

42,492

 

$

43,706

 

$

50,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

 

2.60

%

 

2.79

%

 

2.52

%

 

2.90

%

 

Classified Loans as a % of Total Loans/Leases

 

 

1.25

%

 

1.37

%

 

1.47

%

 

1.88

%

 


*      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 decreasean 8% increase in classified loans during the third quarter of 2018. Criticized loans increased 9% during the same period.  The Company experienced an increase of 5% in classified loans during the first threenine months of 2018. Criticized loans increased 11%27% during the same period due to one large credit that was added in the third quarter 2017.period. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

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

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
             

Allowance / Gross Loans/Leases

  1.20%  1.16%  1.32%

Allowance / NPLs *

  202.11%  184.28%  149.89%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

September 30, 2018

    

June 30, 2018

    

December 31, 2017

    

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance / Gross Loans/Leases

 

1.18

%  

1.21

%  

1.16

%  

 

1.31

%

 

Allowance / NPLs

 

147.39

%  

270.09

%  

184.28

%  

 

123.05

%

 

Although management believes that the allowance at March 31,September 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’sCompany's loan/lease portfolio.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

In accordance with GAAP for business combination accounting, loans acquired through the acquisitions of CSB and Guaranty Bank are recorded at fair value; therefore, no allowance is associated with the acquired loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($7.3 million and $8.0 million at March 31, 2018 and March 31, 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 1.20% to 1.43% as of March 31, 2018 and increases from 1.32% to 1.64% as of March 31, 2017.. This elimination of the allowance associated with acquired loans also resulted in a decrease of the allowance to NPLs ratio, as the acquired NPLs no longer have an allowance allocated to them and instead, have a loan discount that is separate from the allowance.

See Note 34 to the Consolidated Financial Statements for additional information regarding the Company’sCompany's allowance.

62


Table of Contents

Part I

Item 2

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

NONPERFORMING ASSETS

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

  

As of March 31,

  

As of December 31,

  

As of March 31,

 
  

2018

  

2017

  

2017

 
  

(dollars in thousands)

 

Nonaccrual loans/leases (1) (2)

 $12,759  $11,441  $14,205 

Accruing loans/leases past due 90 days or more

  41   89   955 

TDRs - accruing

  5,276   7,113   6,229 

Total NPLs

  18,076   18,643   21,389 

OREO

  12,750   13,558   5,625 

Other repossessed assets

  200   80   285 

Total NPAs

 $31,026  $32,281  $27,299 
             

NPLs to total loans/leases

  0.59%  0.63%  0.88%

NPAs to total loans/leases plus repossessed property

  1.01%  1.08%  1.12%

NPAs to total assets

  0.77%  0.81%  0.81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

As of June 30, 

 

As of December 31, 

 

As of September 30, 

 

 

 

    

2018

    

2018

    

2017

    

2017

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

23,576

 

$

12,554

 

$

11,441

 

$

20,443

 

 

Accruing loans/leases past due 90 days or more

 

 

1,410

 

 

20

 

 

89

 

 

423

 

 

TDRs - accruing

 

 

4,240

 

 

1,327

 

 

7,113

 

 

7,563

 

 

Total NPLs

 

 

29,226

 

 

13,901

 

 

18,643

 

 

28,429

 

 

OREO

 

 

12,204

 

 

12,750

 

 

13,558

 

 

5,135

 

 

Other repossessed assets

 

 

150

 

 

150

 

 

80

 

 

120

 

 

Total NPAs

 

$

41,580

 

$

26,801

 

$

32,281

 

$

33,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

    

 

0.80

%  

 

0.45

%  

 

0.63

%  

 

1.06

%

 

NPAs to total loans/leases plus repossessed property

 

 

1.13

%  

 

0.86

%  

 

1.08

%  

 

1.26

%

 

NPAs to total assets

 

 

0.87

%  

 

0.65

%  

 

0.81

%  

 

0.95

%

 


(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $1.8 million at September 30, 2018, $2.6 million at March 31, 2018, $2.3 million at December 31, 2017, and $2.4$2.2 million at March 31,September 30, 2017.

NPAs at March 31,September 30, 2018 were $31.0$41.6 million, which was down $1.3up $14.8 million from December 31, 2017June 30, 2018 and up $3.7$7.9 million from March 31,September 30, 2017. ThisThe increase from prior year was due to the addition of one large credit that was added in the third quarter 2017.

of 2018 was primarily due to three loans that were downgraded and moved to nonaccrual status.

The ratio of NPAs to total assets was 0.77%0.87% at March 31,September 30, 2018, which wasup from 0.65% at June 30, 2018 and down from 0.81%0.95% at both December 31, 2017 and March 31,September 30, 2017.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

the third quarter.

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

DEPOSITSDEPOSITS

Deposits increased $13.3$490.0 million during the firstthird quarter of 2018.2018, primarily due to the acquisition of SFC Bank. The table below presents the composition of the Company’sCompany's deposit portfolio.

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 

Noninterest bearing demand deposits

 $784,815   24% $789,548   24% $777,150   28%

Interest bearing demand deposits

  1,789,019   55%  1,855,893   57%  1,486,047   53%

Time deposits

  496,644   15%  516,058   16%  458,170   16%

Brokered deposits

  209,523   6%  105,156   3%  84,564   3%
  $3,280,001   100% $3,266,655   100% $2,805,931   100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2018

    

June 30, 2018

    

December 31, 2017

 

September 30, 2017

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

Noninterest bearing demand deposits

 

$

802,090

 

21

%  

$

746,822

 

23

%  

$

789,548

 

24

%  

$

715,537

 

25

%

 

Interest bearing demand deposits

 

 

2,094,814

 

55

%  

 

1,865,382

 

56

%  

 

1,855,893

 

57

%  

 

1,614,894

 

55

%

 

Time deposits

 

 

615,323

 

16

%  

 

519,999

 

16

%  

 

516,058

 

16

%  

 

430,270

 

15

%

 

Brokered deposits

 

 

276,050

 

 8

%  

 

166,073

 

 5

%  

 

105,156

 

 3

%  

 

133,567

 

 5

%

 

 

 

$

3,788,277

 

100

%  

$

3,298,276

 

100

%  

$

3,266,655

 

100

%  

$

2,894,268

 

100

%

 

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

63


Table of Contents

The Company experienced seasonal declines in commercial deposits with several large deposit customers in the first quarter 2018. To offset this, the Company accessed short-term brokered deposits, which drove the majority of the linked quarter increase in that category. The Company believes this situation is temporary and expects those deposits to return in the second quarter.Part I

Item 2

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

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.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

BORROWINGSBORROWINGS

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’sCompany's short-term borrowings.

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 

Overnight repurchase agreements with customers

 $3,820  $7,003  $7,170 

Federal funds purchased

  13,040   6,990   12,300 
  $16,860  $13,993  $19,470 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

September 30, 2018

    

June 30, 2018

    

December 31, 2017

    

September 30, 2017

 

 

 

(dollars in thousands)

 

Overnight repurchase agreements

 

$

4,259

 

$

2,186

 

$

7,003

 

$

3,671

 

Federal funds purchased

 

 

8,670

 

 

15,400

 

 

6,990

 

 

12,340

 

 

 

$

12,929

 

$

17,586

 

$

13,993

 

$

16,011

 

The Company’sCompany's federal funds purchased fluctuates based on the short-term funding needs of the Company’sCompany'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’sCompany's term and overnight FHLB advances.

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 

Term FHLB advances

 $56,600  $56,600  $59,000 

Overnight FHLB advances

  159,745   135,400   47,550 
  $216,345  $192,000  $106,550 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

September 30, 2018

 

June 30, 2018

    

December 31, 2017

    

September 30, 2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Term FHLB advances

 

$

63,399

 

$

46,600

 

$

56,600

 

$

58,600

Overnight FHLB advances

 

 

295,730

 

 

207,500

 

 

135,400

 

 

110,455

 

 

$

359,129

 

$

254,100

 

$

192,000

 

$

169,055

Term FHLB advances remained the sameincreased $16.8 million in the current quarter, as incompared to the prior quarter. Overnight FHLB advances have increased by $24.3$88.2 million in the third quarter of 2018 due to the acquisition of SFC Bank and strong loan and lease growth, which outpaced the Company’sCompany's deposit growth in the first quarter of 2018.

growth.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

September 30, 2018

    

June 30, 2018

    

December 31, 2017

    

September 30, 2017

 

 

 

(dollars in thousands)

 

Wholesale structured repurchase agreements

 

$

35,000

 

$

35,000

 

$

35,000

 

$

45,000

 

Term notes

 

 

25,187

 

 

27,125

 

 

31,000

 

 

32,500

 

Subordinated debentures

 

 

4,763

 

 

 —

 

 

 —

 

 

 —

 

Revolving line of credit

 

 

9,000

 

 

9,000

 

 

 —

 

 

 —

 

 

 

$

73,950

 

$

71,125

 

$

66,000

 

$

77,500

 

64


 

  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

(dollars in thousands)

 

Wholesale structured repurchase agreements

 $35,000  $35,000  $45,000 

Term notes

  29,063   31,000   27,000 
  $64,063  $66,000  $72,000 

Table of Contents

Part I

Item 2

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

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.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

As described in Note 11 to the Consolidated Financial Statements included in the Company’sCompany's Annual Report on Form 10-K10‑K for the year ended December 31, 2017, the Company has outstanding term notes and an available revolving line of credit. As of March 31,September 30, 2018, the term debt had been paid down to $29.1$25.2 million, as scheduled. The term notes and revolving line of credit werehave been used to help fund acquisitions as described in Note 2 to the CSB and Guaranty Bank acquisitions.Consolidated Financial Statements. As of both March 31,September 30, 2018, and December 31, 2017,$1.0 million of the full $10.0 million line of credit was available. If the line of credit is used, interestInterest is calculated at the effective LIBOR rate plus 2.50% per annum (4.82%(4.90% at March 31,September 30, 2018).

It is management’smanagement'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’sCompany's combined wholesale funding portfolio.

  

March 31, 2018

  

December 31, 2017

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 

Maturity:

 

Amount Due

  

Interest Rate

  

Amount Due

  

Interest Rate

 

Year ending December 31:

 

(dollar amounts in thousands)

 

2018

 $387,594   1.87% $273,677   1.68%

2019

  41,973   2.26   31,950   2.32 

2020

  30,694   2.42   26,600   2.44 

Total Wholesale Funding

 $460,261   1.94% $332,227   1.80%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

 

$

422,889

 

2.28

%  

 

$

273,677

 

1.68

%

2019

 

 

185,976

 

2.14

 

 

 

31,950

 

2.32

 

2020

 

 

48,694

 

2.31

 

 

 

26,600

 

2.44

 

2021

 

 

10,000

 

1.98

 

 

 

 —

 

 —

 

2022

 

 

3,970

 

2.00

 

 

 

 —

 

 —

 

Total Wholesale Funding

 

$

671,529

 

2.24

%  

 

$

332,227

 

1.80

%

During the first threenine months of 2018, wholesale funding increased $128.0$339.3 million. Year-to-date, the Company has repaid $25.4$147.2 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' EQUITYSTOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

September 30, 2018

    

June 30, 2018

    

December 31, 2017

    

 

September 30, 2017

 

 

 

 

(dollars in thousands)

 

 

Common stock

 

$

15,674

 

$

13,974

 

$

13,918

 

 

$

13,202

 

 

Additional paid in capital

 

 

269,373

 

 

190,533

 

 

189,078

 

 

 

158,459

 

 

Retained earnings

 

 

179,826

 

 

171,955

 

 

151,962

 

 

 

142,450

 

 

AOCI (loss)

 

 

(7,486)

 

 

(6,874)

 

 

(1,671)

 

 

 

(1,072)

 

 

Total stockholders' equity

 

$

457,387

 

$

369,588

 

$

353,287

 

 

$

313,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE* / TA

 

 

7.82

%  

 

8.18

%  

 

8.01

%  

 

 

8.31

%

 


  

As of

 
  

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 
  

Amount

  

Amount

  

Amount

 
  

(dollars in thousands)

 

Common stock

 $13,937  $13,918  $13,161 

Additional paid in capital

  189,685   189,078   157,582 

Retained earnings

  162,346   151,962   127,145 

AOCI (loss)

  (5,540)  (1,671)  (2,048)

Total stockholders' equity

 $360,428  $353,287  $295,840 
             

TCE* / TA

  8.10%  8.01%  8.20%

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

65


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’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 $136.5$163.1 million during the firstthird quarter of 2018 and $164.0 million during the full year of 2017. The Company’sCompany'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 March 31,September 30, 2018, the subsidiary banks had 33 lines of credit totaling $372.2$371.9 million, of which $3.2$2.9 million was secured and $369.0 million was unsecured. At March 31,September 30, 2018, the full $372.2$371.9 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 JuneSeptember 30, 2018.2019. At March 31,September 30, 2018, $1.0 million of the full $10.0 million was available.

As of March 31,September 30, 2018, the Company had $417.5$418.6 million in average correspondent banking deposits spread over 192191 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 $60.0$209.6 million during the first threenine months of 2018, compared to $102.6$271.1 million for the same period of 2017. The net decreaseincrease in federal funds sold was $15.7$2.9 million for the first threenine months of 2018, compared to a net decrease of $6.5$1.7 million for the same period of 2017. The net decrease in interest-bearing deposits at financial institutions was $10.7$22.1 million for the first threenine months of 2018, compared to  a net increase of $93.5$22.7 million for the same period of 2017. Proceeds from calls, maturities, and paydowns of securities were $13.64$61.1 million for the first threenine months of 2018, compared to $25.9$92.5 million for the same period of 2017. Purchases of securities used cash of $7.1$66.4 million for the first threenine months of 2018, compared to $12.1$103.5 million for the same period of 2017. The net increase in loans/leases used cash of $90.4$208.7 million for the first threenine months of 2018 compared to $29.2$269.9 million for the same period of 2017.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Financing activities provided cash of $38.3$170.4 million for the first threenine months of 2018, compared to $77.5$229.6 million for same period of 2017. Net increases in deposits totaled $13.4$82.3 million for the first threenine months of 2018, compared to $136.7$225.1 million for the same period of 2017. During the first threenine months of 2018, the Company’sCompany's short-term borrowings increased $2.9decreased $2.2 million, while they decreased $20.5compared to $24.0 million for the same period of 2017. In the first threenine months of 2018, the Company increased short-term and overnight FHLB advances by $24.3$120.3 million and increased other borrowings by $9.0 million.  Maturities and principal payments on FHLB term advances totaled $27.0 million and on other borrowings totaled $10.6 million in the first nine months of 2018. In the first nine months of 2017, the Company increased FHLB advances and

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Table of Contents

Part I

Item 2

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

borrowings by $44.6 million through a mixture of term advances, proceeds from other borrowings and net change in short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $1.9$15.5 million. In the first three months of 2017, the Company reduced FHLB advances and borrowings by $39.0 million through a mixture of maturities, prepayments, and debt retirement.

Total cash provided by operating activities was $7.0$36.9 million for the first threenine months of 2018, compared to $10.8$27.2 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 March 31,September 30, 2018 and December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Amount

    

Amount

    

 

    

 

  

 

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

Interest Rate as of

 

Interest Rate as of

 

Name

 

Date Issued

 

2018

 

2017

 

Interest Rate

 

September 30, 2018

 

December 31, 2017

 

QCR Holdings Statutory Trust II

 

February 2004

 

$

10,310,000

 

$

10,310,000

 

2.85% over 3-month LIBOR

 

5.25

%  

4.54

%

QCR Holdings Statutory Trust III

 

February 2004

 

 

8,248,000

 

 

8,248,000

 

2.85% over 3-month LIBOR

 

5.25

%  

4.54

%

QCR Holdings Statutory Trust V

 

February 2006

 

 

10,310,000

 

 

10,310,000

 

1.55% over 3-month LIBOR

 

3.89

%  

2.91

%

Community National Statutory Trust II

 

September 2004

 

 

3,093,000

 

 

3,093,000

 

2.17% over 3-month LIBOR

 

4.51

%  

3.80

%

Community National Statutory Trust III

 

March 2007

 

 

3,609,000

 

 

3,609,000

 

1.75% over 3-month LIBOR

 

4.08

%  

3.32

%

Guaranty Bankshares Statutory Trust I

 

May 2005

 

 

4,640,000

 

 

4,640,000

 

1.75% over 3-month LIBOR

 

4.08

%  

3.34

%

 

 

  

 

$

40,210,000

 

$

40,210,000

 

Weighted Average Rate

 

4.60

%  

3.82

%

Name

Date Issued

 

Amount Outstanding
March 31, 2018

  

Amount Outstanding
December 31, 2017

 

Interest Rate

 

Interest Rate as of
March 31, 2018

  

Interest Rate as of
December 31, 2017

 
                   

QCR Holdings Statutory Trust II

February 2004

 $10,310,000  $10,310,000 

2.85% over 3-month LIBOR

  5.16%   4.54% 

QCR Holdings Statutory Trust III

February 2004

  8,248,000   8,248,000 

2.85% over 3-month LIBOR

  5.16%   4.54% 

QCR Holdings Statutory Trust V

February 2006

  10,310,000   10,310,000 

1.55% over 3-month LIBOR

  3.27%   2.91% 

Community National Statutory Trust II

September 2004

  3,093,000   3,093,000 

2.17% over 3-month LIBOR

  4.37%   3.80% 

Community National Statutory Trust III

March 2007

  3,609,000   3,609,000 

1.75% over 3-month LIBOR

  3.87%   3.32% 

Guaranty Bankshares Statutory Trust I

May 2005

  4,640,000   4,640,000 

1.75% over 3-month LIBOR

  3.87%   3.34% 
   $40,210,000  $40,210,000 

Weighted Average Rate

  4.35%   3.82% 

As described in Note 5 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 5 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 theits 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 March 31,September 30, 2018, the remaining discount was $2.7$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’banks' financial statements. Refer to Note 79 of the Consolidated Financial Statements for additional information regarding regulatory capital.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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’sCompany'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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Table of Contents

Part I

Item 2

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

The Company’sCompany's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  The factorsFactors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are 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 and Item 1A of Part II of this report. In addition to the risk factors described in that section, there are other factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

·

The strength of the local, state, and national economy.economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation).

·

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.

·

The imposition of tariffs or other governmental policies impacting the value of the agricultural or other products of our borrowers.

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.

 

68


Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’sCompany'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’sCompany's exposure to changes in interest rates, management monitors the Company’sCompany'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’sbank'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’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’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’sCompany'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’sCompany's asset/liability position, the board of directors and management attempt to manage the Company’sCompany'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’sCompany's interest rate risk position somewhat in order to increase its net interest margin. The Company’sCompany'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’sCompany's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth and various interest rate scenarios including no change in rates; 200, 300, 400, and 500 basis point upward shifts; and a 100 basis point downward shift in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

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

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued

Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shift downward of 100 and 200 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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Table of Contents

Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued

income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

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

      

NET INTEREST INCOME EXPOSURE in YEAR 1

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

  

As of March 31,

2018

  

As of December 31,

2017

  

As of December 31,

2016

 
                 

100 basis point downward shift

  -10.0%   0.3%   0.3%   -1.7% 

200 basis point upward shift

  -10.0%   -3.5%   -3.7%   -1.2% 

300 basis point upward shock

  -25.0%   -8.6%   -8.4%   -1.4% 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME EXPOSURE in YEAR 1

 

 

    

 

    

As of September 30, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2018

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.7

%  

0.3

%  

(1.7)

%

200 basis point upward shift

 

(10.0)

%  

(3.5)

%  

(3.7)

%  

(1.2)

%

300 basis point upward shock

 

(25.0)

%  

(8.8)

%  

(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 March 31,September 30, 2018 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn’tdidn'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 mitigate interest rate risk.

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company’sCompany'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’sCompany's business activities.

 

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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.An evaluation was performed under the supervision and with the participation of the Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sCompany's disclosure controls and procedures (as defined in Rule 13a-15(e)13a‑15(e) and 15d-15(e)15d‑15(e) promulgated under the Exchange Act of 1934) as of March 31,September 30, 2018. Based on that evaluation, the Company’sCompany's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’sCompany'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’sCompany'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’sCompany's internal control over financial reporting.

 

71


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

72


 

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

Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION - continued

Item 6           Exhibits

 

10.1

First Amendment to Employment Agreement between QCR Holdings, Inc. and Ronald Nagel, dated September 10, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed with the SEC on September 10, 2018).

31.1

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

 

31.2

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

 

32.1

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

 

32.2

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

 

101

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

 

73


SIGNATURESSIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

Date    May 9, 2018                                    

Date

November 8, 2018

/s/ Douglas M. Hultquist

 

Douglas M. Hultquist, President

 

Chief Executive Officer

 

 

 

 

 

Date  May 9, 2018                                    

November 8, 2018

/s/ Todd A. Gipple

 

Todd A. Gipple, Executive Vice President

 

Chief Operating Officer

 

Chief Financial Officer

 

 

 

 

Date  May 9, 2018                                    

November 8, 2018

/s/ Elizabeth A. Grabin

 

Elizabeth A. Grabin, First Vice President

 

Director of Financial Reporting

 

Principal Accounting Officer

 

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