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, 2018

2019

[    ] 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 ]

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 Par Value

QCRH

The Nasdaq Global Market

 

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 May 1, 2018,2019, the Registrant had outstanding 13,952,80015,758,261 shares of common stock, $1.00 par value per share.

 



Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

Page


Number(s)

Part I

FINANCIAL INFORMATION

Item 1

Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets

                   3


As of March 31, 20182019 and December 31, 20172018

4

Consolidated Statements of Income


For the Three Months Ended March 31, 20182019 and 20172018

5

 4

Consolidated Statements of Comprehensive Income


For the Three Months Ended March 31, 20182019 and 20172018

6

 5

Consolidated Statements of Changes in Stockholders' Equity


For the Three Months Ended March 31, 20182019 and 20172018

7

 6

Consolidated Statements of Cash Flows


For the Three Months Ended March 31, 20182019 and 20172018

8

 7

Notes to Consolidated Financial Statements

10

Note 1. Summary of Significant Accounting Policies

10

 9

Note 2. Investment Securities

12

 11

Note 3. Loans/Leases Receivable

16

 16

Note 4. Derivatives

25

Note 5. Subordinated Notes

26

Note 6. Earnings Per Share

26

 25

Note 5.7. Fair Value

27

 25

Note 6.8. Business Segment Information

29

 29

Note 7.9. Regulatory Capital Requirements

30

 30

Note 8. Revenue Recognition

 32

Note 9. Acquisitions

                 33

Item 2

Item 2

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

Introduction

32

 34

General

32

 34

Executive Overview

32

 35

Long-Term Financial Goals

34

 36

Strategic Developments

35

 37

GAAP to Non-GAAP Reconciliations

36

 39

Net Interest Income (Tax Equivalent Basis)

38

 41

Critical Accounting Policies

40

 45

Results of Operations

45
41

Interest Income

41

2


 

Financial Condition

46

 51

Investment Securities

46

 52

Loans/Leases

47

 53

Allowance for Estimated Losses on Loans/Leases

49

 55

Nonperforming Assets

51

 57

Deposits

51

 58

Borrowings

52

 59

Stockholders' Equity

53

 60

Liquidity and Capital Resources

54

 61

Special Note Concerning Forward-Looking Statements

55

 63

Item 3

Item 3

Quantitative and Qualitative Disclosures About Market Risk

57

 64

Item 4

Item 4

Controls and Procedures

59

 66

Part II

OTHER INFORMATION

60

Part II

OTHER INFORMATIONItem 1

Item 1

Legal Proceedings

60

 67

Item 1A

Risk FactorsItem 1A

Risk Factors

60

 67

Item 2

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

60

 67

Item 3

Defaults upon Senior Securities

                 67

Item 4

Mine Safety Disclosures

                 67

Item 5

Other Information

                 67

Item 6

Exhibits

                 68

Signatures3

 

Defaults upon Senior Securities

60

 69

Item 4

Mine Safety Disclosures

60

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

Item 5

Other Information

60

Item 6

Exhibits

61

Signatures

62

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 March 31, 2019 and December 31, 2018

 

 

 

 

 

 

 

 

    

March 31,

    

December 31, 

 

 

2019

 

2018

 

 

(dollars in thousands)

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

76,527

 

$

85,523

Federal funds sold

 

 

1,872

 

 

26,398

Interest-bearing deposits at financial institutions

 

 

214,160

 

 

133,198

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost

 

 

395,302

 

 

401,913

Securities available for sale, at fair value

 

 

260,447

 

 

261,056

Total securities

 

 

655,749

 

 

662,969

 

 

 

  

 

 

  

Loans receivable held for sale

 

 

1,994

 

 

1,295

Loans/leases receivable held for investment

 

 

3,797,438

 

 

3,731,459

Gross loans/leases receivable

 

 

3,799,432

 

 

3,732,754

Less allowance for estimated losses on loans/leases

 

 

(41,164)

 

 

(39,847)

Net loans/leases receivable

 

 

3,758,268

 

 

3,692,907

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

68,323

 

 

67,783

Premises and equipment, net

 

 

77,194

 

 

75,582

Restricted investment securities

 

 

22,904

 

 

25,689

Other real estate owned, net

 

 

9,110

 

 

9,378

Goodwill

 

 

77,872

 

 

77,832

Intangibles

 

 

16,918

 

 

17,450

Other assets

 

 

87,765

 

 

75,001

Total assets

 

$

5,066,662

 

$

4,949,710

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

821,599

 

$

791,102

Interest-bearing

 

 

3,372,621

 

 

3,185,929

Total deposits

 

 

4,194,220

 

 

3,977,031

 

 

 

  

 

 

  

Short-term borrowings

 

 

15,886

 

 

28,774

Federal Home Loan Bank advances

 

 

126,180

 

 

266,492

Other borrowings

 

 

35,000

 

 

67,250

Subordinated notes

 

 

68,215

 

 

4,782

Junior subordinated debentures

 

 

37,713

 

 

37,670

Other liabilities

 

 

101,041

 

 

94,573

Total liabilities

 

 

4,578,255

 

 

4,476,572

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

Preferred stock, $1 par value; shares authorized 250,000 March 2019 and December 2018- No shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 March 2019 - 15,755,442 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding

 

 

15,755

 

 

15,718

Additional paid-in capital

 

 

271,673

 

 

270,761

Retained earnings

 

 

204,179

 

 

192,203

Accumulated other comprehensive loss:

 

 

 

 

 

 

Securities available for sale

 

 

(1,131)

 

 

(4,268)

Derivatives

 

 

(2,069)

 

 

(1,276)

Total stockholders' equity

 

 

488,407

 

 

473,138

Total liabilities and stockholders' equity

 

$

5,066,662

 

$

4,949,710

 

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 March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands, except share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

45,568

 

$

34,214

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,666

 

 

1,556

 

Nontaxable

 

 

3,545

 

 

3,289

 

Interest-bearing deposits at financial institutions

 

 

923

 

 

197

 

Restricted investment securities

 

 

307

 

 

234

 

Federal funds sold

 

 

93

 

 

56

 

Total interest and dividend income

 

 

52,102

 

 

39,546

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

12,479

 

 

4,881

 

Short-term borrowings

 

 

71

 

 

33

 

Federal Home Loan Bank advances

 

 

903

 

 

1,064

 

Other borrowings

 

 

605

 

 

718

 

Subordinated notes

 

 

564

 

 

 —

 

Junior subordinated debentures

 

 

572

 

 

447

 

Total interest expense

 

 

15,194

 

 

7,143

 

Net interest income

 

 

36,908

 

 

32,403

 

Provision for loan/lease losses

 

 

2,134

 

 

2,540

 

Net interest income after provision for loan/lease losses

 

 

34,774

 

 

29,863

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

2,493

 

 

2,237

 

Investment advisory and management fees

 

 

1,736

 

 

952

 

Deposit service fees

 

 

1,554

 

 

1,531

 

Gains on sales of residential real estate loans, net

 

 

369

 

 

101

 

Gains on sales of government guaranteed portions of loans, net

 

 

31

 

 

358

 

Swap fee income

 

 

3,198

 

 

959

 

Earnings on bank-owned life insurance

 

 

540

 

 

418

 

Debit card fees

 

 

792

 

 

766

 

Correspondent banking fees

 

 

216

 

 

265

 

Other

 

 

1,064

 

 

954

 

Total noninterest income

 

 

11,993

 

 

8,541

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

20,879

 

 

15,978

 

Occupancy and equipment expense

 

 

3,694

 

 

3,066

 

Professional and data processing fees

 

 

2,750

 

 

2,708

 

Acquisition costs

 

 

 —

 

 

93

 

Post-acquisition compensation, transition and integration costs

 

 

134

 

 

 —

 

FDIC insurance, other insurance and regulatory fees

 

 

964

 

 

756

 

Loan/lease expense

 

 

214

 

 

291

 

Net cost and gains/losses on operations of other real estate

 

 

298

 

 

132

 

Advertising and marketing

 

 

785

 

 

693

 

Bank service charges

 

 

483

 

 

440

 

Correspondent banking expense

 

 

204

 

 

204

 

CDI amortization

 

 

532

 

 

305

 

Other

 

 

1,498

 

 

1,197

 

Total noninterest expense

 

 

32,435

 

 

25,863

 

Net income before income taxes

 

 

14,332

 

 

12,541

 

Federal and state income tax expense

 

 

1,414

 

 

1,991

 

Net income

 

$

12,918

 

$

10,550

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.82

 

$

0.76

 

Diluted earnings per common share

 

$

0.81

 

$

0.74

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,693,345

 

 

13,888,661

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,940

 

 

14,205,584

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

0.06

 

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 COMPREHENSIVE INCOME (UNAUDITED)

Three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

    

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Net income

 

$

12,918

 

$

10,550

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

4,144

 

 

(5,366)

 

Less reclassification adjustment for adoption of ASU 2016-01

 

 

 —

 

 

855

 

 

 

 

4,144

 

 

(4,511)

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

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

 

 

(1,162)

 

 

150

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

(157)

 

 

(81)

 

 

 

 

(1,005)

 

 

231

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

3,139

 

 

(4,280)

 

Tax expense (benefit)

 

 

795

 

 

(1,078)

 

Other comprehensive income (loss), net of tax

 

 

2,344

 

 

(3,202)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

15,262

 

$

7,348

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

See Notes to Consolidated Financial Statements (Unaudited)

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 

6


 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2018

 

$

15,718

 

$

270,761

 

$

192,203

 

$

(5,544)

 

$

473,138

Net income

 

 

 —

 

 

 —

 

 

12,918

 

 

 —

 

 

12,918

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

2,344

 

 

2,344

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(942)

 

 

 —

 

 

(942)

Issuance of 4,446 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 4

 

 

124

 

 

 —

 

 

 —

 

 

128

Issuance of 25,238 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

25

 

 

263

 

 

 —

 

 

 —

 

 

288

Stock-based compensation expense

 

 

 —

 

 

722

 

 

 —

 

 

 —

 

 

722

Restricted stock awards and restricted stock units - 12,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  shares of common stock, net of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  withheld for payment of taxes

 

 

13

 

 

(50)

 

 

 —

 

 

 —

 

 

(37)

Exchange of 5,169 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(5)

 

 

(147)

 

 

 —

 

 

 —

 

 

(152)

Balance, March 31, 2019

 

$

15,755

 

$

271,673

 

$

204,179

 

$

(3,200)

 

$

488,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2017

 

$

13,918

 

$

189,077

 

$

151,963

 

$

(1,671)

 

$

353,287

Net income

 

 

 —

 

 

 —

 

 

10,550

 

 

 —

 

 

10,550

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(3,202)

 

 

(3,202)

Impact of adoption of ASU 2016-01

 

 

 —

 

 

 

 

 

667

 

 

(667)

 

 

 —

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(834)

 

 

 —

 

 

(834)

Issuance of 2,669 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 3

 

 

100

 

 

 —

 

 

 —

 

 

103

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  options exercised

 

 

13

 

 

193

 

 

 —

 

 

 —

 

 

206

Stock-based compensation expense

 

 

 —

 

 

496

 

 

 —

 

 

 —

 

 

496

Restricted stock awards - 6,860 shares of common stock

 

 

 7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

Exchange of 3,814 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(4)

 

 

(174)

 

 

 —

 

 

 —

 

 

(178)

Balance, March 31, 2018

 

$

13,937

 

$

189,685

 

$

162,346

 

$

(5,540)

 

$

360,428

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 

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 

7


 

See Notes to Consolidated Financial Statements (Unaudited)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net income

 

$

12,918

 

$

10,550

 

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

 

 

  

 

 

  

 

Depreciation

 

 

1,235

 

 

1,021

 

Provision for loan/lease losses

 

 

2,134

 

 

2,540

 

Stock-based compensation expense

 

 

722

 

 

495

 

Deferred compensation expense accrued

 

 

733

 

 

512

 

Losses (gains) on other real estate owned, net

 

 

224

 

 

118

 

Amortization of premiums on securities, net

 

 

448

 

 

439

 

Loans originated for sale

 

 

(18,034)

 

��

(12,939)

 

Proceeds on sales of loans

 

 

17,735

 

 

13,764

 

Gains on sales of residential real estate loans

 

 

(369)

 

 

(101)

 

Gains on sales of government guaranteed portions of loans

 

 

(31)

 

 

(358)

 

Gains on sales of premises and equipment

 

 

(47)

 

 

 —

 

Amortization of core deposit intangible

 

 

532

 

 

305

 

Accretion of acquisition fair value adjustments, net

 

 

(1,069)

 

 

(699)

 

Increase in cash value of bank-owned life insurance

 

 

(540)

 

 

(418)

 

Decrease (increase) in other assets

 

 

1,121

 

 

(4,438)

 

Decrease in other liabilities

 

 

(9,110)

 

 

(2,888)

 

Net cash provided by operating activities

 

$

8,602

 

$

7,903

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Net decrease in federal funds sold

 

 

24,526

 

 

15,692

 

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

 

 

(80,962)

 

 

10,714

 

Proceeds from sales of other real estate owned

 

 

202

 

 

736

 

Activity in securities portfolio:

 

 

 

 

 

 

 

Purchases

 

 

(4,079)

 

 

(7,100)

 

Calls, maturities and redemptions

 

 

4,510

 

 

4,540

 

Paydowns

 

 

10,426

 

 

9,085

 

Activity in restricted investment securities:

 

 

  

 

 

 

 

Purchases

 

 

(3,110)

 

 

(4,451)

 

Redemptions

 

 

5,895

 

 

1,820

 

Net increase in loans/leases originated and held for investment

 

 

(65,777)

 

 

(90,378)

 

Purchase of premises and equipment

 

 

(3,970)

 

 

(704)

 

Proceeds from sales of premises and equipment

 

 

117

 

 

 —

 

Net cash used in investing activities

 

$

(112,222)

 

$

(60,046)

 

 

 

 

  

 

 

  

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

 

Net increase in deposit accounts

 

 

217,257

 

 

13,377

 

Net increase (decrease) in short-term borrowings

 

 

(12,888)

 

 

2,867

 

Activity in Federal Home Loan Bank advances:

 

 

  

 

 

 

 

Term advances

 

 

5,000

 

 

 —

 

Calls and maturities

 

 

(15,000)

 

 

 —

 

Net change in short-term and overnight advances

 

 

(130,365)

 

 

24,345

 

Activity in other borrowings:

 

 

  

 

 

 

 

Calls, maturities and scheduled principal payments

 

 

(1,937)

 

 

(1,938)

 

Prepayments

 

 

(21,313)

 

 

 —

 

  Paydown of revolving line of credit

 

 

(9,000)

 

 

 —

 

Proceeds from subordinated notes

 

 

63,393

 

 

 —

 

Payment of cash dividends on common stock

 

 

(939)

 

 

(693)

 

Proceeds from issuance of common stock, net

 

 

416

 

 

309

 

Net cash provided by financing activities

 

$

94,624

 

$

38,267

 

Net decrease in cash and due from banks

 

 

(8,996)

 

 

(13,876)

 

 

 

 

 

 

 

 

 

Cash and due from banks, beginning

 

 

85,523

 

 

75,722

 

Cash and due from banks, ending

 

$

76,527

 

$

61,846

 

 

(Continued)

8

QCR HOLDINGS, INC. AND SUBSIDIARIES

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 

(Continued)

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three months ended March 31, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

2019

    

2018

 

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

 

 

  

 

 

  

 

Interest

 

$

14,146

 

$

3,655

 

Income/franchise taxes

 

 

(590)

 

 

75

 

 

 

 

  

 

 

 

 

Supplemental schedule of noncash investing activities:

 

 

  

 

 

 

 

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

 

 

2,344

 

 

(3,202)

 

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

 

 

(152)

 

 

(178)

 

Transfers of loans to other real estate owned

 

 

158

 

 

46

 

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

 

 

13,882

 

 

103

 

Dividends payable

 

 

942

 

 

834

 

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

 

 

 —

 

 

2,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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  $- 

 

See Notes to Consolidated Financial Statements (Unaudited)

9


 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 20182019

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, 2018, included in the Company’sCompany's Annual Report on Form 10-K10‑K filed with the SEC on March 12, 2018. 15, 2019. 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, 2018 2019 are not necessarily indicative of the results expected for the year ending December 31, 2018, 2019, 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.GAAP: Generally Accepted Accounting Principles

AOCI: Accumulated other comprehensive income (loss)

Guaranty: Guaranty Bankshares, Ltd.

AFS: Available for sale

Guaranty Bank: Guaranty Bank and Trust Company

AFS: Available for saleASC: Accounting Standards Codification

HTM: Held to maturity

ASC: Accounting Standards CodificationASC 805: Business Combination Standard

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

amended

TCE: Tangible common equity

FASB: Financial Accounting Standards Board

TCE: Tangible common equityTDRs: Troubled debt restructurings

FDIC: Federal Deposit Insurance Corporation

TDRs: Troubled debt restructuringsTEY: Tax equivalent yield

FHLB: Federal Home Loan Bank

TEY: Tax equivalent yieldThe Company: QCR Holdings, Inc.

FRB: Federal Reserve Bank of Chicago

The Company: QCR Holdings, Inc.

GAAP: Generally Accepted Accounting Principles

USDA: U.S. Department of Agriculture

 

10


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, SFC Bank and RB&T. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. The Company also engages in wealth management services through its banking subsidiaries and its subsidiaries, the Bates Companies. All material intercompany transactions and balances have been eliminated in consolidation.

The acquisition of Guarantythe Bates Companies, headquartered in Rockford, Illinois, occurred on October 1, 2018. The merger with Springfield Bancshares, the holding company of SFC Bank, headquartered in Cedar Rapids, IowaSpringfield, Missouri, occurred on October 2, 2017 and Guaranty Bank was merged into CRBT on December 2, 2017. July 1, 2018. The financial results for the periods since acquisitionacquisition/merger are included in this report. See Note 2 of to the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2017 2018 for additional information about the acquisition.acquisition and merger.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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

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

In February 2016, the FASB issued ASU 2016-2016‑02,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 analyzing thestandard was adopted on January 1, 2019 and did not have a significant impact of adoption on the Company’s consolidated financial statements.Consolidated Financial Statements.

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’s consolidated financial statements.Company's Consolidated Financial Statements.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

In February 2018, January 2017, the FASB issued ASU 20182017-04, Intangibles -02,Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Goodwill and Other Comprehensive Income. Under(Topic 350). ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the standard, entities are allowed to make a one-time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a resultsecond step of the change inanalysis. ASU 2017-04 requires entities to compare the federal tax rate as definedfair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the Tax Act. ASU 2018-02carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal yearsannual and interim periods beginning after December 15, 2018, including interim periods within those years. Companies may choose to2019, with early adopt for fiscal years or interim periods that have not been issued or made available for issuance as of February 14, 2018. adoption permitted. The Company chose to early adopt ASU 2018-02 and apply thedoes not expect this guidance to the consolidated financial statements for the year ended December 31, 2017.have a significant impact on its Consolidated Financial Statements.

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.

11


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 2 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2018 2019 and December 31, 2017 2018 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

 

(dollars in thousands)

March 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

                

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

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

 

$

394,252

 

$

13,126

 

$

(2,056)

 

$

405,322

Other securities

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

 

 

1,050

 

 

 —

 

 

(1)

 

 

1,049

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

 

$

395,302

 

$

13,126

 

$

(2,057)

 

$

406,371

                

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

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

 

$

36,141

 

$

89

 

$

(387)

 

$

35,843

Residential mortgage-backed and related securities

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

 

 

163,438

 

 

351

 

 

(2,097)

 

 

161,692

Municipal securities

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

 

 

55,585

 

 

649

 

 

(110)

 

 

56,124

Other securities

  4,254,716   31,867   -   4,286,583 

 

 

6,754

 

 

74

 

 

(40)

 

 

6,788

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

 

$

261,918

 

$

1,163

 

$

(2,634)

 

$

260,447

                

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

400,863

 

$

5,661

 

$

(6,803)

 

$

399,721

Other securities

 

 

1,050

 

 

 —

 

 

(1)

 

 

1,049

 

 

$

401,913

 

$

5,661

 

$

(6,804)

 

$

400,770

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

37,150

 

$

39

 

$

(778)

 

$

36,411

Residential mortgage-backed and related securities

 

 

163,698

 

 

182

 

 

(4,631)

 

 

159,249

Municipal securities

 

 

59,069

 

 

180

 

 

(703)

 

 

58,546

Other securities

 

 

6,754

 

 

100

 

 

(4)

 

 

6,850

 

 

$

266,671

 

$

501

 

$

(6,116)

 

$

261,056


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

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.

12


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 2019 and December 31, 2017, 2018, 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

 

 

(dollars in thousands)

March 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

8,722

 

$

(6)

 

$

64,045

 

$

(2,050)

 

$

72,767

 

$

(2,056)

Other securities

 

 

 —

 

 

 —

 

 

549

 

 

(1)

 

 

549

 

 

(1)

 

 

$

8,722

 

$

(6)

 

$

64,594

 

$

(2,051)

 

$

73,316

 

$

(2,057)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

803

 

$

(9)

 

$

29,973

 

$

(378)

 

$

30,776

 

$

(387)

Residential mortgage-backed and related securities

 

 

4,160

 

 

(43)

 

 

129,508

 

 

(2,054)

 

 

133,668

 

 

(2,097)

Municipal securities

 

 

 —

 

 

 —

 

 

12,804

 

 

(110)

 

 

12,804

 

 

(110)

Other securities

 

 

4,214

 

 

(40)

 

 

 —

 

 

 —

 

 

4,214

 

 

(40)

 

 

$

9,177

 

$

(92)

 

$

172,285

 

$

(2,542)

 

$

181,462

 

$

(2,634)

 

 

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

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

March 31, 2018:

                        

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

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

 

$

114,201

 

$

(2,187)

 

$

69,412

 

$

(4,616)

 

$

183,613

 

$

(6,803)

Other securities

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

 

 

549

 

 

(1)

 

 

 —

 

 

 —

 

 

549

 

 

(1)

 $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)
                        

December 31, 2017:

                        

Securities HTM:

                        

Municipal securities

 $23,750,826  $(354,460) $72,611,780  $(2,133,659) $96,362,606  $(2,488,119)
                        
    

 

$

114,750

 

$

(2,188)

 

$

69,412

 

$

(4,616)

 

$

184,162

 

$

(6,804)

Securities AFS:

                        

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $28,576,258  $(200,022) $3,640,477  $(149,945) $32,216,735  $(349,967)

 

$

1,565

 

$

(34)

 

$

29,605

 

$

(744)

 

$

31,170

 

$

(778)

Residential mortgage-backed and related securities

  88,927,779   (871,855)  57,931,731   (1,441,674)  146,859,510   (2,313,529)

 

 

12,810

 

 

(148)

 

 

133,535

 

 

(4,483)

 

 

146,345

 

 

(4,631)

Municipal securities

  10,229,337   (41,151)  9,997,433   (169,949)  20,226,770   (211,100)

 

 

28,356

 

 

(394)

 

 

15,932

 

 

(309)

 

 

44,288

 

 

(703)

Other securities

  923,535   (25,815)  -   -   923,535   (25,815)

 

 

4,249

 

 

(4)

 

 

 —

 

 

 —

 

 

4,249

 

 

(4)

 $128,656,909  $(1,138,843) $71,569,641  $(1,761,568) $200,226,550  $(2,900,411)

 

$

46,980

 

$

(580)

 

$

179,072

 

$

(5,536)

 

$

226,052

 

$

(6,116)

At March 31, 2018, 2019, the investment portfolio included 604606 securities. Of this number, 290182 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 1.8%0.4% of the total amortized cost of the portfolio. Of these 290182 securities, 105170 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 months ended March 31, 2018 2019 and 2017.2018.

13


 

Part I

Item 1

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

There were no sales of securities for the three months ended March 31, 2018 2019 and 2017.

2018.

The amortized cost and fair value of securities as of March 31, 2018 2019 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

Amortized Cost

  

Fair Value

 

 

(dollars in thousands)

Securities HTM:

        

 

 

  

 

 

  

Due in one year or less

 $3,344,356  $3,345,990 

 

$

2,060

 

$

2,064

Due after one year through five years

  25,163,524   25,191,668 

 

 

28,228

 

 

28,544

Due after five years

  350,076,457   347,255,025 

 

 

365,014

 

 

375,763

 $378,584,337  $375,792,683 
        

 

$

395,302

 

$

406,371

Securities AFS:

        

 

 

  

 

 

  

Due in one year or less

 $3,368,633  $3,381,748 

 

$

1,375

 

$

1,387

Due after one year through five years

  23,949,100   23,738,028 

 

 

52,247

 

 

51,874

Due after five years

  76,390,803   75,236,121 

 

 

44,858

 

 

45,494

  103,708,536   102,355,897 

 

 

98,480

 

 

98,755

Residential mortgage-backed and related securities

  162,453,605   157,289,043 

 

 

163,438

 

 

161,692

 $266,162,141  $259,644,940 

 

$

261,918

 

$

260,447

Portions of the U.S. government sponsored agency securities, municipal securities and municipalother 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

 

 

(dollars in thousands)

Securities HTM:

        

 

 

  

 

 

  

Municipal securities

 $209,306,946  $207,262,788 

 

$

205,929

 

$

209,592

        

 

 

  

 

 

  

 

Securities AFS:

        

 

 

  

 

 

  

U.S. govt. sponsored agency securities

  5,048,812   4,947,644 

 

 

4,999

 

 

4,955

Municipal securities

  54,016,828   53,258,850 

 

 

47,809

 

 

48,158

Other securities

 

 

6,505

 

 

6,541

 $59,065,640  $58,206,494 

 

$

59,313

 

$

59,654

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

As of March 31, 2018, 2019, the Company’sCompany's municipal securities portfolios were comprised of general obligation bonds issued by 128106 issuers with fair values totaling $101.3$86.0 million and revenue bonds issued by 148161 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $334.6$375.4 million. The Company held investments in general obligation bonds in 2625 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, 2018, the Company’sCompany's municipal securities portfolios were comprised of general obligation bonds issued by 131110 issuers with fair values totaling $108.0$86.4 million and revenue bonds issued by 145160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $337.3$371.9 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0$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.

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:

14


 

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 – 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, 2018 2019 and December 31, 2017, 2018 the Company did not hold general obligation orheld revenue bonds of anyone single issuer, located in Ohio, of which the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. 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 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, 2018, 2019, 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, 2018, 2019, 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.

15

15


Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

– continued

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31, 2018 2019 and December 31, 2017 2018 is presented as follows:

 

As of March 31,

  

As of December 31,

 

 

 

 

 

 

 

 

2018

  

2017

 

 

 

 

 

        

 

As of March 31, 

 

As of December 31, 

C&I loans*

 $1,201,085,625  $1,134,516,315 

    

2019

    

2018

 

(dollars in thousands)

 

 

 

 

 

 

C&I loans *

 

$

1,479,247

 

$

1,429,410

CRE loans

        

 

 

  

 

 

 

Owner-occupied CRE

  346,996,627   332,742,477 

 

 

488,827

 

 

500,654

Commercial construction, land development, and other land

  171,404,628   186,402,404 

 

 

267,830

 

 

236,787

Other non owner-occupied CRE

  839,302,131   784,347,000 

 

 

1,034,188

 

 

1,028,670

  1,357,703,386   1,303,491,882 

 

 

1,790,845

 

 

1,766,111

        

 

 

 

 

 

 

Direct financing leases **

  137,614,465   141,448,232 

 

 

108,543

 

 

117,969

Residential real estate loans ***

  254,484,231   258,646,265 

 

 

288,502

 

 

290,759

Installment and other consumer loans

  95,911,569   118,610,799 

 

 

123,087

 

 

119,381

  3,046,799,276   2,956,713,493 

 

 

3,790,224

 

 

3,723,630

Plus deferred loan/lease origination costs, net of fees

  8,103,163   7,771,907 

 

 

9,208

 

 

9,124

  3,054,902,439   2,964,485,400 

 

 

3,799,432

 

 

3,732,754

Less allowance

  (36,532,602)  (34,355,728)

 

 

(41,164)

 

 

(39,847)

 $3,018,369,837  $2,930,129,672 

 

$

3,758,268

 

$

3,692,907

        
        

* Direct financing leases:

        

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 $152,430,047  $156,583,887 

 

$

119,914

 

$

130,371

Estimated unguaranteed residual values of leased assets

  929,932   929,932 

 

 

745

 

 

828

Unearned lease/residual income

  (15,745,514)  (16,065,587)

 

 

(12,116)

 

 

(13,230)

  137,614,465   141,448,232 

 

 

108,543

 

 

117,969

Plus deferred lease origination costs, net of fees

  4,350,767   4,624,027 

 

 

3,158

 

 

3,642

  141,965,232   146,072,259 

 

 

111,701

 

 

121,611

Less allowance

  (2,730,301)  (2,382,098)

 

 

(1,606)

 

 

(1,792)

 $139,234,931  $143,690,161 

 

$

110,095

 

$

119,819

 

*     Includes equipment financing agreements outstanding at m2, totaling $78,911,791$112.8 million and $66,758,397$103.4 million as of March 31, 2018 2019 and December 31, 2017, 2018, 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 valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three months ended March 31, 2018 2019 and 2017.

2018.

***Includes residential real estate loans held for sale totaling $279,750$2.0 million and $645,001$1.3 million as of March 31, 2018, 2019 and December 31, 2017, 2018, respectively.

 

16


Part I

Item 1

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

Changes in accretable yield for acquired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

 

 

PCI

    

Performing

    

 

 

 

 

    

Loans

    

Loans

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(667)

 

$

(9,656)

 

$

(10,324)

 

Accretion recognized

 

 

348

 

 

826

 

 

1,174

 

Balance at the end of the period

 

$

(319)

 

$

(8,830)

 

$

(9,150)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018

 

 

PCI

    

Performing

    

 

 

 

Three months ended March 31, 2018

 

    

Loans

    

Loans

    

Total

 

 

PCI

  

Performing

     

 

(dollars in thousands)

 

 

Loans

  

Loans

  

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 $(191,132) $(6,280,075) $(6,471,207)

 

$

(191)

 

$

(6,280)

 

$

(6,471)

 

Accretion recognized

  34,236   620,532   654,768 

 

 

34

 

 

621

 

 

655

 

Balance at the end of the period

 $(156,896) $(5,659,543) $(5,816,439)

 

$

(157)

 

$

(5,659)

 

$

(5,816)

 

  

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, 2018 2019 and December 31, 2017 2018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

 

 

 

 

 

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

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

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

 

$

1,466,599

 

$

1,479

 

$

7,171

 

$

 —

 

$

3,998

 

$

1,479,247

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

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

 

 

487,774

 

 

238

 

 

613

 

 

 —

 

 

202

 

 

488,827

 

Commercial Construction, Land Development, and Other Land

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

 

 

266,591

 

 

699

 

 

236

 

 

 —

 

 

304

 

 

267,830

 

Other Non Owner-Occupied CRE

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

 

 

1,028,663

 

 

299

 

 

400

 

 

 —

 

 

4,826

 

 

1,034,188

 

Direct Financing Leases

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

 

 

105,451

 

 

1,151

 

 

196

 

 

 —

 

 

1,745

 

 

108,543

 

Residential Real Estate

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

 

 

281,729

 

 

4,993

 

 

100

 

 

 —

 

 

1,680

 

 

288,502

 

Installment and Other Consumer

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

 

 

121,943

 

 

406

 

 

26

 

 

61

 

 

651

 

 

123,087

 

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

 

$

3,758,750

 

$

9,265

 

$

8,742

 

$

61

 

$

13,406

 

$

3,790,224

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

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

 

 

99.18

%  

 

0.24

%  

 

0.23

%  

 

0.00

%  

 

0.35

%  

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

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

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $1,124,734,486  $8,306,829  $243,647  $-  $1,231,353  $1,134,516,315 

 

$

1,423,406

 

$

930

 

$

597

 

$

389

 

$

4,088

 

$

1,429,410

 

CRE

                        

 

 

  

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

 

Owner-Occupied CRE

  331,868,142   540,435   -   -   333,900   332,742,477 

 

 

500,138

 

 

 —

 

 

193

 

 

107

 

 

216

 

 

500,654

 

Commercial Construction, Land Development, and Other Land

  181,558,092   -   -   -   4,844,312   186,402,404 

 

 

234,704

 

 

1,764

 

 

 —

 

 

 —

 

 

319

 

 

236,787

 

Other Non Owner-Occupied CRE

  782,526,249   572,877   4,146   -   1,243,728   784,347,000 

 

 

1,022,664

 

 

484

 

 

 —

 

 

 —

 

 

5,522

 

 

1,028,670

 

Direct Financing Leases

  137,708,397   1,305,191   259,600   -   2,175,044   141,448,232 

 

 

114,078

 

 

1,642

 

 

488

 

 

 —

 

 

1,761

 

 

117,969

 

Residential Real Estate

  253,261,821   3,552,709   393,410   74,519   1,363,806   258,646,265 

 

 

284,844

 

 

3,877

 

 

206

 

 

89

 

 

1,743

 

 

290,759

 

Installment and Other Consumer

  117,773,259   517,537   56,760   14,152   249,091   118,610,799 

 

 

118,343

 

 

356

 

 

24

 

 

47

 

 

611

 

 

119,381

 

 $2,929,430,446  $14,795,578  $957,563  $88,671  $11,441,234  $2,956,713,493 

 

$

3,698,177

 

$

9,053

 

$

1,508

 

$

632

 

$

14,260

 

$

3,723,630

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of total loan/lease portfolio

  99.08%  0.50%  0.03%  0.00%  0.39%  100.00%

 

 

99.32

%  

 

0.24

%  

 

0.04

%  

 

0.02

%  

 

0.38

%  

 

100.00

%

17


 

Part I

Item 1

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

NPLs by classes of loans/leases as of March 31, 2018 2019 and December 31, 2017 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

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

 

 

(dollars in thousands)

 

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

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

 

$

 —

 

$

3,998

 

$

551

 

$

4,549

 

26.35

%

CRE

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

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

 

 

 —

 

 

202

 

 

104

 

 

306

 

1.77

%

Commercial Construction, Land Development, and Other Land

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

 

 

 —

 

 

304

 

 

 —

 

 

304

 

1.76

%

Other Non Owner-Occupied CRE

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

 

 

 —

 

 

4,826

 

 

2,984

 

 

7,810

 

45.25

%

Direct Financing Leases

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

 

 

 —

 

 

1,745

 

 

155

 

 

1,900

 

11.01

%

Residential Real Estate

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

 

 

 —

 

 

1,680

 

 

 —

 

 

1,680

 

9.73

%

Installment and Other Consumer

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

 

 

61

 

 

651

 

 

 —

 

 

712

 

4.12

%

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

 

$

61

 

$

13,406

 

$

3,794

 

$

17,261

 

100.00

%

 

*Nonaccrual loans/leases included $2,637,483$1.5 million of TDRs, including $25,984$249 thousand in C&I loans, $1,312,469$679 thousand in CRE loans, $1,208,050$279 thousand in direct financing leases, $84,555$291 thousand in residential real estate loans, and $6,425$3 thousand in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

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

 

 

 

(dollars in thousands)

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

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

 

$

389

 

$

4,088

 

$

454

 

$

4,931

 

26.58

%

CRE

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

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

 

 

107

 

 

216

 

 

 —

 

 

323

 

1.74

%

Commercial Construction, Land Development, and Other Land

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

 

 

 —

 

 

319

 

 

 —

 

 

319

 

1.72

%

Other Non Owner-Occupied CRE

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

 

 

 —

 

 

5,522

 

 

2,984

 

 

8,506

 

45.86

%

Direct Financing Leases

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

 

 

 —

 

 

1,761

 

 

111

 

 

1,872

 

10.09

%

Residential Real Estate

  74,519   1,363,806   272,493   1,710,818   9.18%

 

 

89

 

 

1,743

 

 

100

 

 

1,932

 

10.41

%

Installment and Other Consumer

  14,152   249,091   14,027   277,270   1.49%

 

 

47

 

 

611

 

 

 9

 

 

667

 

3.60

%

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

 

$

632

 

$

14,260

 

$

3,658

 

$

18,550

 

100.00

%

*     As of December 31, 2018 accruing past due 90 days or more included $496 thousand of TDRs, including $389 thousand in C&I loans and $107 thousand in CRE loans.

**Nonaccrual loans/leases included $2,282,495$2.3 million of TDRs, including $122,598$265 thousand in C&I loans, $1,336,871$1.4 million in CRE loans, $700,255$321 thousand in direct financing leases, $115,190$344 thousand in residential real estate loans, and $7,581$3 thousand in installment loans.

18

18


Part I

Item 1

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

Changes in the allowance by portfolio segment for the three months ended March 31, 2018 2019 and 2017,2018, respectively, are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

Three Months Ended March 31, 2018

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 $14,323,036  $13,962,688  $2,382,098  $2,466,431  $1,221,475  $34,355,728 

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

Provisions (credits) charged to expense

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

 

 

1,007

 

 

534

 

 

445

 

 

(18)

 

 

166

 

 

2,134

Loans/leases charged off

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

 

 

(334)

 

 

 —

 

 

(652)

 

 

 —

 

 

(74)

 

 

(1,060)

Recoveries on loans/leases previously charged off

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

 

 

166

 

 

50

 

 

21

 

 

 —

 

 

 6

 

 

243

Balance, ending

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

 

$

17,259

 

$

18,303

 

$

1,606

 

$

2,539

 

$

1,457

 

$

41,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

Three Months Ended March 31, 2017

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

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

 

$

14,323

 

$

13,963

 

$

2,382

 

$

2,466

 

$

1,222

 

$

34,356

Provisions charged to expense

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

Provisions (credits) charged to expense

 

 

808

 

 

965

 

 

605

 

 

(39)

 

 

201

 

 

2,540

Loans/leases charged off

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

 

 

(95)

 

 

 —

 

 

(284)

 

 

(52)

 

 

(5)

 

 

(436)

Recoveries on loans/leases previously charged off

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

 

 

30

 

 

10

 

 

27

 

 

 —

 

 

 6

 

 

73

Balance, ending

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

 

$

15,066

 

$

14,938

 

$

2,730

 

$

2,375

 

$

1,424

 

$

36,533

The allowance by impairment evaluation and by portfolio segment as of March 31, 2018 2019 and December 31, 2017 2018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

As of March 31, 2018

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

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

 

$

841

 

$

2,113

 

$

142

 

$

236

 

$

107

 

$

3,439

 

Allowance for nonimpaired loans/leases

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

 

 

16,418

 

 

16,190

 

 

1,464

 

 

2,303

 

 

1,350

 

 

37,725

 

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

 

$

17,259

 

$

18,303

 

$

1,606

 

$

2,539

 

$

1,457

 

$

41,164

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

                        

Impaired loans/leases

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

 

$

4,301

 

$

10,155

 

$

2,185

 

$

1,693

 

$

925

 

$

19,259

 

Nonimpaired loans/leases

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

 

 

1,474,946

 

 

1,780,690

 

 

106,358

 

 

286,809

 

 

122,162

 

 

3,770,965

 

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

 

$

1,479,247

 

$

1,790,845

 

$

108,543

 

$

288,502

 

$

123,087

 

$

3,790,224

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

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

 

 

19.55

%  

 

20.81

%  

 

6.50

%  

 

13.94

%  

 

11.57

%  

 

17.86

%

Allowance as a percentage of nonimpaired loans/leases

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

 

 

1.11

%  

 

0.91

%  

 

1.38

%  

 

0.80

%  

 

1.11

%  

 

1.00

%

Total allowance as a percentage of total loans/leases

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

 

 

1.17

%  

 

1.02

%  

 

1.48

%  

 

0.88

%  

 

1.18

%  

 

1.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

As of December 31, 2017

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 $715,627  $1,429,460  $504,469  $355,167  $38,596  $3,043,319 

 

$

973

 

$

2,124

 

$

194

 

$

257

 

$

111

 

$

3,659

 

Allowance for nonimpaired loans/leases

  13,607,409   12,533,228   1,877,629   2,111,264   1,182,879   31,312,409 

 

 

15,447

 

 

15,595

 

 

1,598

 

 

2,300

 

 

1,248

 

 

36,188

 

 $14,323,036  $13,962,688  $2,382,098  $2,466,431  $1,221,475  $34,355,728 

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 $6,248,209  $6,529,262  $3,669,492  $1,704,846  $202,354  $18,354,163 

 

$

4,499

 

$

10,447

 

$

2,249

 

$

2,110

 

$

898

 

$

20,203

 

Nonimpaired loans/leases

  1,128,268,106   1,296,962,620   137,778,740   256,941,419   118,408,445   2,938,359,330 

 

 

1,424,911

 

 

1,755,664

 

 

115,720

 

 

288,649

 

 

118,483

 

 

3,703,427

 

 $1,134,516,315  $1,303,491,882  $141,448,232  $258,646,265  $118,610,799  $2,956,713,493 

 

$

1,429,410

 

$

1,766,111

 

$

117,969

 

$

290,759

 

$

119,381

 

$

3,723,630

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

  11.45%  21.89%  13.75%  20.83%  19.07%  16.58%

 

 

21.62

%  

 

20.33

%  

 

8.63

%  

 

12.18

%  

 

12.38

%  

 

18.11

%

Allowance as a percentage of nonimpaired loans/leases

  1.21%  0.97%  1.36%  0.82%  1.00%  1.07%

 

 

1.08

%  

 

0.89

%  

 

1.38

%  

 

0.80

%  

 

1.05

%  

 

0.98

%

Total allowance as a percentage of total loans/leases

  1.26%  1.07%  1.68%  0.95%  1.03%  1.16%

 

 

1.15

%  

 

1.00

%  

 

1.52

%  

 

0.88

%  

 

1.14

%  

 

1.07

%

19


 

Part I

Item 1

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

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

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2019 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,256

 

$

2,300

 

$

 —

 

$

2,124

 

$

23

 

$

23

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

104

 

 

104

 

 

 —

 

 

106

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

500

 

 

500

 

 

 —

 

 

503

 

 

 7

 

 

 7

Other Non Owner-Occupied CRE

 

 

1,675

 

 

1,675

 

 

 —

 

 

1,687

 

 

22

 

 

22

Direct Financing Leases

 

 

1,948

 

 

1,948

 

 

 —

 

 

2,011

 

 

11

 

 

11

Residential Real Estate

 

 

705

 

 

779

 

 

 —

 

 

713

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

778

 

 

778

 

 

 —

 

 

770

 

 

 3

 

 

 3

 

 

$

7,966

 

$

8,084

 

$

 —

 

$

7,914

 

$

72

 

$

72

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,045

 

$

2,045

 

$

841

 

$

1,946

 

$

 9

 

$

 9

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

289

 

 

646

 

 

33

 

 

297

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

144

 

 

144

 

 

28

 

 

146

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

7,443

 

 

7,443

 

 

2,052

 

 

7,510

 

 

48

 

 

48

Direct Financing Leases

 

 

237

 

 

237

 

 

142

 

 

206

 

 

 —

 

 

 —

Residential Real Estate

 

 

988

 

 

988

 

 

236

 

 

915

 

 

 1

 

 

 1

Installment and Other Consumer

 

 

147

 

 

147

 

 

107

 

 

137

 

 

 —

 

 

 —

 

 

$

11,293

 

$

11,650

 

$

3,439

 

$

11,157

 

$

58

 

$

58

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

4,301

 

$

4,345

 

$

841

 

$

4,070

 

$

32

 

$

32

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

393

 

 

750

 

 

33

 

 

403

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

644

 

 

644

 

 

28

 

 

649

 

 

 7

 

 

 7

Other Non Owner-Occupied CRE

 

 

9,118

 

 

9,118

 

 

2,052

 

 

9,197

 

 

70

 

 

70

Direct Financing Leases

 

 

2,185

 

 

2,185

 

 

142

 

 

2,217

 

 

11

 

 

11

Residential Real Estate

 

 

1,693

 

 

1,767

 

 

236

 

 

1,628

 

 

 1

 

 

 1

Installment and Other Consumer

 

 

925

 

 

925

 

 

107

 

 

907

 

 

 3

 

 

 3

 

 

$

19,259

 

$

19,734

 

$

3,439

 

$

19,071

 

$

130

 

$

130

20


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

Average

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

5,039

 

$

5,053

 

$

 —

 

$

5,298

 

$

75

 

$

75

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

289

 

 

289

 

 

 —

 

 

289

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

1,227

 

 

1,227

 

 

 —

 

 

1,236

 

 

 —

 

 

 —

Direct Financing Leases

 

 

1,928

 

 

1,928

 

 

 —

 

 

2,356

 

 

 6

 

 

 6

Residential Real Estate

 

 

912

 

 

987

 

 

 —

 

 

884

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

141

 

 

141

 

 

 —

 

 

120

 

 

 —

 

 

 —

 

 

$

9,536

 

$

9,625

 

$

 —

 

$

10,183

 

$

87

 

$

87

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

958

 

$

958

 

$

567

 

$

825

 

$

 2

 

$

 2

CRE

 

 

 

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

148

 

 

148

 

 

44

 

 

150

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

5,430

 

 

5,430

 

 

1,627

 

 

5,137

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Direct Financing Leases

 

 

1,048

 

 

1,048

 

 

628

 

 

963

 

 

 —

 

 

 —

Residential Real Estate

 

 

547

 

 

570

 

 

249

 

 

544

 

 

 3

 

 

 3

Installment and Other Consumer

 

 

140

 

 

140

 

 

112

 

 

128

 

 

 —

 

 

 —

 

 

$

8,271

 

$

8,294

 

$

3,227

 

$

7,747

 

$

 5

 

$

 5

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

5,997

 

$

6,011

 

$

567

 

$

6,123

 

$

77

 

$

77

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

437

 

 

437

 

 

44

 

 

439

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

5,430

 

 

5,430

 

 

1,627

 

 

5,137

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

1,227

 

 

1,227

 

 

 —

 

 

1,236

 

 

 —

 

 

 —

Direct Financing Leases

 

 

2,976

 

 

2,976

 

 

628

 

 

3,319

 

 

 6

 

 

 6

Residential Real Estate

 

 

1,459

 

 

1,557

 

 

249

 

 

1,428

 

 

 3

 

 

 3

Installment and Other Consumer

 

 

281

 

 

281

 

 

112

 

 

248

 

 

 —

 

 

 —

 

 

$

17,807

 

$

17,919

 

$

3,227

 

$

17,930

 

$

92

 

$

92

21


 

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

C&I

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

CRE

                        

Owner-Occupied CRE

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

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

Other Non Owner-Occupied CRE

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

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

  140,857   140,857   -   120,043   -   - 
  $9,536,052  $9,625,107  $-  $10,182,919  $87,519  $87,519 
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                        

C&I

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

CRE

                        

Owner-Occupied CRE

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

Commercial Construction, Land Development, and Other Land

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

Other Non Owner-Occupied CRE

  -   -   -   -   -   - 

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

  140,340   140,340   112,177   128,285   83   83 
  $8,270,598  $8,293,674  $3,227,366  $7,747,299  $5,000  $5,000 
                         

Total Impaired Loans/Leases:

                        

C&I

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

CRE

                        

Owner-Occupied CRE

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

Commercial Construction, Land Development, and Other Land

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

Other Non Owner-Occupied CRE

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

Direct Financing Leases

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

Residential Real Estate

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

Installment and Other Consumer

  281,197   281,197   112,177   248,328   83   83 
  $17,806,650  $17,918,781  $3,227,366  $17,930,218  $92,519  $92,519 

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

Part I

Item 1

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid 

 

 

 

 

Recorded

 

Principal

 

Related

 

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

 

                        

 

(dollars in thousands)

 

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

C&I

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

 

$

1,846

 

$

4,540

 

$

 —

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

  -   -   -   -   -   - 

 

 

106

 

 

106

 

 

 —

 

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

 

 

507

 

 

507

 

 

 —

 

Other Non Owner-Occupied CRE

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

 

 

1,804

 

 

1,804

 

 

 —

 

Direct Financing Leases

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

 

 

1,929

 

 

1,929

 

 

 —

 

Residential Real Estate

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

 

 

984

 

 

1,058

 

 

 —

 

Installment and Other Consumer

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

 

 

762

 

 

762

 

 

 —

 

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

 

$

7,938

 

$

10,706

 

$

 —

 

                        

 

 

  

 

 

  

 

 

  

 

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 

 

$

2,653

 

$

2,653

 

$

973

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

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

 

 

304

 

 

660

 

 

39

 

Commercial Construction, Land Development, and Other Land

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

 

 

149

 

 

149

 

 

33

 

Other Non Owner-Occupied CRE

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

 

 

7,577

 

 

7,577

 

 

2,052

 

Direct Financing Leases

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

 

 

320

 

 

320

 

 

194

 

Residential Real Estate

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

 

 

1,126

 

 

1,126

 

 

257

 

Installment and Other Consumer

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

 

 

136

 

 

136

 

 

111

 

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

 

$

12,265

 

$

12,621

 

$

3,659

 

                        

 

 

  

 

 

  

 

 

  

 

Total Impaired Loans/Leases:

                        

 

 

  

 

 

  

 

 

 

 

C&I

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

 

$

4,499

 

$

7,193

 

$

973

 

CRE

                        

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

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

 

 

410

 

 

766

 

 

39

 

Commercial Construction, Land Development, and Other Land

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

 

 

656

 

 

656

 

 

33

 

Other Non Owner-Occupied CRE

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

 

 

9,381

 

 

9,381

 

 

2,052

 

Direct Financing Leases

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

 

 

2,249

 

 

2,249

 

 

194

 

Residential Real Estate

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

 

 

2,110

 

 

2,184

 

 

257

 

Installment and Other Consumer

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

 

 

898

 

 

898

 

 

111

 

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

 

$

20,203

 

$

23,327

 

$

3,659

 

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

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2017 are presented as follows:

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

 
             

Impaired Loans/Leases with No Specific Allowance Recorded:

            

C&I

 $1,634,269  $1,644,706  $- 

CRE

            

Owner-Occupied CRE

  289,261   289,261   - 

Commercial Construction, Land Development, and Other Land

  -   -   - 

Other Non Owner-Occupied CRE

  1,171,565   1,171,565   - 

Direct Financing Leases

  2,944,540   2,944,540   - 

Residential Real Estate

  943,388   1,018,167   - 

Installment and Other Consumer

  134,245   134,245   - 
  $7,117,268  $7,202,484  $- 
             

Impaired Loans/Leases with Specific Allowance Recorded:

            

C&I

 $4,613,940  $4,617,879  $715,627 

CRE

            

Owner-Occupied CRE

  151,962   151,962   48,462 

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235 

Other Non Owner-Occupied CRE

  72,163   72,163   1,763 

Direct Financing Leases

  724,953   724,953   504,469 

Residential Real Estate

  761,458   761,458   355,167 

Installment and Other Consumer

  68,109   68,109   38,596 
  $11,236,897  $11,240,836  $3,043,319 
             

Total Impaired Loans/Leases:

            

C&I

 $6,248,209  $6,262,585  $715,627 

CRE

            

Owner-Occupied CRE

  441,222   441,222   48,462 

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235 

Other Non Owner-Occupied CRE

  1,243,728   1,243,728   1,763 

Direct Financing Leases

  3,669,492   3,669,492   504,469 

Residential Real Estate

  1,704,846   1,779,625   355,167 

Installment and Other Consumer

  202,354   202,354   38,596 
  $18,354,163  $18,443,318  $3,043,319 

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

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.

22


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, 2018 2019 and December 31, 2017:

2018:

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 March 31, 2019

 

 

 

 

 

 

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

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 

$

1,333,088

 

$

481,630

 

$

263,078

 

$

1,011,063

 

$

3,088,859

 

97.83

%

Special Mention (Rating 6)

 

 

17,813

 

 

4,721

 

 

65

 

 

2,170

 

 

24,769

 

0.78

%

Substandard (Rating 7)

 

 

15,578

 

 

2,476

 

 

4,687

 

 

20,955

 

 

43,696

 

1.38

%

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 

 

$

1,366,479

 

$

488,827

 

$

267,830

 

$

1,034,188

 

$

3,157,324

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2019

 

 

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

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

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

 

$

112,371

 

$

106,642

 

$

286,822

 

$

122,374

 

$

628,209

 

99.26

%

Nonperforming

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

 

 

397

 

 

1,901

 

 

1,680

 

 

713

 

 

4,691

 

0.74

%

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

 

$

112,768

 

$

108,543

 

$

288,502

 

$

123,087

 

$

632,900

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

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

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 $1,031,963,703  $318,293,608  $179,142,839  $767,119,909  $2,296,520,059   96.85%

 

$

1,294,418

 

$

487,949

 

$

230,473

 

$

1,008,626

 

$

3,021,466

 

97.72

%

Special Mention (Rating 6)

  10,944,924   8,230,060   1,780,000   10,068,870   31,023,854   1.31%

 

 

23,302

 

 

9,599

 

 

3,848

 

 

5,309

 

 

42,058

 

1.36

%

Substandard (Rating 7)

  24,578,731   6,218,809   5,479,565   7,158,221   43,435,326   1.83%

 

 

8,286

 

 

3,106

 

 

2,466

 

 

14,735

 

 

28,593

 

0.92

%

Doubtful (Rating 8)

  270,559   -   -   -   270,559   0.01%

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 $1,067,757,917  $332,742,477  $186,402,404  $784,347,000  $2,371,249,799   100.00%

 

$

1,326,006

 

$

500,654

 

$

236,787

 

$

1,028,670

 

$

3,092,117

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

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

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

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

 

$

102,713

 

$

116,097

 

$

288,827

 

$

118,714

 

$

626,351

 

99.18

%

Nonperforming

  911,220   3,669,492   1,710,818   277,270   6,568,800   1.12%

 

 

691

 

 

1,872

 

 

1,932

 

 

667

 

 

5,162

 

0.82

%

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

 

$

103,404

 

$

117,969

 

$

290,759

 

$

119,381

 

$

631,513

 

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.

23

23


Part I

Item 1

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

As of March 31, 2018 2019 and December 31, 2017, 2018, TDRs totaled $7,912,975$5.3 million and $9,394,967,$6.5 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three months ended March 31, 2018 2019 and 2017.2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2019

 

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

 

 

(dollars in thousands)

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

 

Direct Financing Leases

 

 4

 

 

122,126

 

 

122,126

 

 

 —

 

 

 

 4

 

$

122,126

 

$

122,126

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

For the three months ended March 31, 2018

  

For the three months ended March 31, 2017

 

 

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

 

                                

 

(dollars in thousands)

 

CONCESSION - Significant Payment Delay

                                

 

  

 

 

  

 

 

  

 

 

  

 

C&I

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

Residential Real Estate

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

 

 1

 

$

46

 

$

46

 

$

 —

 

Direct Financing Leases

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

 

 2

 

 

48

 

 

48

 

 

 —

 

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

 

 3

 

$

94

 

$

94

 

$

 —

 

                                

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  $- 

Of the TDRs reported above, loans restructured during the three months ended March 31, 2019, none were on nonaccrual. Of the loans restructured during the three months ended March 31, 2018, one with a post-modification recorded balance of $46,320$46 thousand was on nonaccrual as of March 31, 2018. Of the TDRs reported above, none were on nonaccrual as of March 31, 2017.

nonaccrual.

For the three months ended March 31, 2018, eight2019, none 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.

For the three months ended March 31, 2018, eight of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. Three of these TDRs were related to one customer whose loans were restructured in the second quarter of 2017 with pre-modification balances totaling $78$78 thousand and the other TDRs related to other customersanother customer whose loans were restructured in the second and third quarters of 2017 with pre-modification balances totaling $378$378 thousand.  

Not included in the table above, the Company had two TDRs that were restructured and charged off for the three months ended March 31, 2019, totaling $56 thousand.  The Company had two TDRs that were restructured and charged off for the three months ended March 31, 2018, totaling $95 thousand.

For the three months ended March 31, 2017, two of the Company’s TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These two TDRs were related to the same customer and were restructured in the fourth quarter of 2016 with pre-modification balances totaling $195 thousand.

24


 

Part I

Item 1

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

NOTE 4 – DERIVATIVES

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

 

 

March 31, 2019

 

December 31, 2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-month FHLB Advance

 

6/3/2014

 

6/5/2019

 

Other Assets

 

$

15,000

 

0.94

%  

 

$

56

 

$

 

117

 

 

1-month FHLB Advance

 

6/5/2014

 

6/5/2021

 

Other Assets

 

 

15,000

 

1.44

%  

 

 

241

 

 

 

342

 

 

 

 

 

 

 

 

 

 

$

30,000

 

 

 

 

$

297

 

$

 

459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

March 31, 2019

 

December 31, 2018

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

$

10,000

 

5.44

%  

 

 

5.85

%  

 

$

(557)

 

$

(298)

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

 

8,000

 

5.44

%  

 

 

5.85

%  

 

 

(445)

 

 

(239)

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Other Liabilities

 

 

10,000

 

4.34

%  

 

 

4.54

%  

 

 

(540)

 

 

(288)

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Other Liabilities

 

 

3,000

 

4.80

%  

 

 

5.17

%  

 

 

(166)

 

 

(89)

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Other Liabilities

 

 

3,500

 

4.36

%  

 

 

4.75

%  

 

 

(194)

 

 

(104)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Other Liabilities

 

 

4,500

 

4.36

%  

 

 

4.75

%  

 

 

(249)

 

 

(133)

 

 

  

 

 

 

 

 

$

39,000

 

4.89

%  

 

 

5.24

%  

 

$

(2,151)

 

$

(1,151)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair values of derivatives designated as cash flow hedgers 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.

The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Notional Amount

 

Estimated Fair Value

 

Notional Amount

 

Estimated Fair Value

 

 

 

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

490,780

 

$

36,078

 

$

445,022

 

$

22,196

Non-Hedging Interest Rate Derivatives Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

490,780

 

$

36,078

 

$

445,022

 

$

22,196

Swap fee income totaled $3.2 million and $959 thousand for the three months ended March 31, 2019 and 2018, respectively.  Swap fee income totaled $10.8 million for the year ended December 31, 2018.

25


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 5 – SUBORDINATED NOTES

On February 12, 2019, the Company completed an underwritten public offering of $65.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on February 15, 2029.  Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million.  The subordinated notes, which qualify as Tier 2 capital for the Company, are at a fixed rate of 5.375% per year until but excluding February 15, 2024.  On this date, the interest rate will change to an annual floating rate equal to three-month LIBOR plus 282 basis points until the maturity date.  The interest on the subordinated notes are payable semi-annually, commencing on August 15, 2019 during the five year fixed term and thereafter quarterly, commencing on February 15, 2024.  The subordinated notes have an optional redemption at par in whole or in part on any interest payment date on or after February 15, 2024.  The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.  Unamortized debt issuance costs related to the subordinated notes totaled $1.6 million at March 31, 2019.

Immediately following the issuance, the Company repaid term notes totaling $21.3 million and the outstanding balance of $9.0 million on its revolving line of credit.  The Company intends to use the remaining net proceeds from this offering for general corporate purposes, including the pursuit of opportunistic acquisitions of similar or complementary financial service organizations, repaying indebtedness, financing investments and capital expenditures, repurchasing shares of the Company’s common stock, investing in the subsidiary banks as regulatory capital or other strategic opportunities that may arise in the future.

NOTE 46 - EARNINGS PER SHARE

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

 

 

 

 

 

 

 

 

Three months ended

 

 

Three months ended

 

 

March 31, 

 

 

March 31,

 

    

 

2019

    

 

2018

 

 

2018

  

2017

 

 

(dollars in thousands, except share data)

 

        

 

 

 

 

 

 

 

Net income

 $10,549,961  $9,184,965 

 

$

12,918

 

$

10,550

 

        

 

 

 

 

 

 

 

 

 

  

 

 

  

 

Basic EPS

 $0.76  $0.70 

 

$

0.82

 

$

0.76

 

Diluted EPS

 $0.74  $0.68 

 

$

0.81

 

$

0.74

 

        

 

 

 

 

 

 

 

Weighted average common shares outstanding

  13,888,661   13,133,382 

 

 

15,693,345

 

 

13,888,661

 

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

  316,923   355,035 

Weighted average common shares issuable upon exercise of stock options and

 

 

 

 

 

 

 

under the employee stock purchase plan

 

 

229,595

 

 

316,923

 

Weighted average common and common equivalent shares outstanding

  14,205,584   13,488,417 

 

 

15,922,940

 

 

14,205,584

 

The increase in weighted average common shares outstanding when comparing the three months ended March 31, 2019 to March 31, 2018 to March 31, 2017 was primarily due to the common stock issuance as a result of the merger with Springfield Banshares as discussed in Note 2 to the Consolidated Financial Statements included in of the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2017.2018.

26


 

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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.

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

Assets and liabilities measured at fair value on a recurring basis comprise the following at March 31, 2018 2019 and December 31, 2017:

2018:

     

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:

                

 

(dollars in thousands)

March 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $36,867,510  $-  $36,867,510  $- 

 

$

35,843

 

$

 —

 

$

35,843

 

$

 —

Residential mortgage-backed and related securities

  157,289,043   -   157,289,043   - 

 

 

161,692

 

 

 —

 

 

161,692

 

 

 —

Municipal securities

  61,201,804   -   61,201,804   - 

 

 

56,124

 

 

 —

 

 

56,124

 

 

 —

Other securities

  4,286,583   -   4,286,583   - 

 

 

6,788

 

 

 —

 

 

6,788

 

 

 —

Interest rate caps

  657,178   -   657,178   - 

 

 

297

 

 

 —

 

 

297

 

 

 —

Interest rate swaps - assets

  4,500,318   -   4,500,318   - 

 

 

36,078

 

 

 —

 

 

36,078

 

 

 —

Total assets measured at fair value

 $264,802,436  $-  $264,802,436  $- 

 

$

296,822

 

$

 —

 

$

296,822

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 $4,500,318  $-  $4,500,318  $- 

 

$

38,229

 

$

 —

 

$

38,229

 

$

 —

Total liabilities measured at fair value

 $4,500,318  $-  $4,500,318  $- 

 

$

38,229

 

$

 —

 

$

38,229

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

                

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2017:

                

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

                

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $38,096,534  $-  $38,096,534  $- 

 

$

36,411

 

$

 —

 

$

36,411

 

$

 —

Residential mortgage-backed and related securities

  163,301,304   -   163,301,304   - 

 

 

159,249

 

 

 —

 

 

159,249

 

 

 —

Municipal securities

  66,625,496   -   66,625,496   - 

 

 

58,546

 

 

 —

 

 

58,546

 

 

 —

Other securities

  4,884,573   1,028   4,883,545   - 

 

 

6,850

 

 

 —

 

 

6,850

 

 

 —

Interest rate caps

  506,700   -   506,700   - 

 

 

459

 

 

 —

 

 

459

 

 

 —

Interest rate swaps - assets

  4,397,238   -   4,397,238   - 

 

 

22,196

 

 

 —

 

 

22,196

 

 

 —

Total assets measured at fair value

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

 

$

283,711

 

$

 —

 

$

283,711

 

$

 —

                

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 $4,397,238  $-  $4,397,238  $- 

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

Total liabilities measured at fair value

 $4,397,238  $-  $4,397,238  $- 

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

There were no transfers of assets or liabilities between Levels 1,2, and 3 of the fair value hierarchy for the three months ended March 31, 2018 2019 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

2018.

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).

27


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. 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 14 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Statements. 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 interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2018 2019 and December 31, 2017:

2018:

     

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

 

(dollars in thousands)

March 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 $5,564,760  $-  $-  $5,564,760 

 

$

8,665

 

$

 —

 

$

 —

 

$

8,665

OREO

  13,770,025   -   -   13,770,025 

 

 

9,838

 

 

 —

 

 

 —

 

 

9,838

 $19,334,785  $-  $-  $19,334,785 

 

$

18,503

 

$

 —

 

$

 —

 

$

18,503

                

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

                

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 $8,972,337  $-  $-  $8,972,337 

 

$

9,657

 

$

 —

 

$

 —

 

$

9,657

OREO

  14,642,973   -   -   14,642,973 

 

 

10,128

 

 

 —

 

 

 —

 

 

10,128

 $23,615,310  $-  $-  $23,615,310 

 

$

19,785

 

$

 —

 

$

 —

 

$

19,785

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.

28

27


Part I

Item 1

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

    

2019

    

2018

    

Valuation Technique

    

Unobservable Input

    

Range

 

 

Fair Value
March 31, 2018

  

Fair Value
December 31, 2017

 

Valuation Technique

Unobservable Input

 

Range

 

 

(dollars in thousands)

 

              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans/leases

 $5,564,760  $8,972,337 

Appraisal of collateral

Appraisal adjustments

  -10.00%to-30.00% 

 

$

8,665

 

$

9,657

 

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% 

 

 

9,838

 

 

10,128

 

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 months ended March 31, 2018 2019 and 2017.

2018.

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 March 31, 2019

 

As of December 31, 2018

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

Level 1

 

$

76,527

 

$

76,527

 

$

85,523

 

$

85,523

Federal funds sold

 

Level 2

 

 

1,872

 

 

1,872

 

 

26,398

 

 

26,398

Interest-bearing deposits at financial institutions

 

Level 2

 

 

214,160

 

 

214,160

 

 

133,198

 

 

133,198

Investment securities:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

HTM

 

Level 2

 

 

395,302

 

 

406,371

 

 

401,913

 

 

400,771

AFS

 

See Previous Table

 

 

260,447

 

 

260,447

 

 

261,056

 

 

261,056

Loans/leases receivable, net

 

Level 3

 

 

8,023

 

 

8,665

 

 

8,942

 

 

9,657

Loans/leases receivable, net

 

Level 2

 

 

3,750,245

 

 

3,711,945

 

 

3,683,965

 

 

3,639,329

Interest rate caps

 

Level 2

 

 

297

 

 

297

 

 

459

 

 

459

Interest rate swaps - assets

 

Level 2

 

 

36,078

 

 

36,078

 

 

22,196

 

 

22,196

Deposits:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Nonmaturity deposits

 

Level 2

 

 

3,159,581

 

 

3,159,581

 

 

3,002,327

 

 

3,002,327

Time deposits

 

Level 2

 

 

1,034,639

 

 

1,025,570

 

 

974,704

 

 

968,906

Short-term borrowings

 

Level 2

 

 

15,886

 

 

15,886

 

 

28,774

 

 

28,774

FHLB advances

 

Level 2

 

 

126,180

 

 

126,273

 

 

266,492

 

 

265,926

Other borrowings

 

Level 2

 

 

35,000

 

 

35,954

 

 

67,250

 

 

67,770

Subordinated notes

 

Level 2

 

 

68,215

 

 

68,379

 

 

4,782

 

 

4,933

Junior subordinated debentures

 

Level 2

 

 

37,713

 

 

30,366

 

 

37,670

 

 

29,992

Interest rate swaps - liabilities

 

Level 2

 

 

38,229

 

 

38,229

 

 

23,347

 

 

23,347

 

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.

29


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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, SFC Bank and RB&T. Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

The Company’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 and the Bates Companies 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.

Selected financial information on the Company’sCompany's business segments is presented as follows as of and for the three months ended March 31, 2018 2019 and 2017.

2018.

  

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

    

SFC Bank

    

RB&T

    

Management

    

All other

    

Eliminations

    

Total

 

(dollars in thousands)

Three Months Ended March 31, 2019

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

18,544

 

$

19,244

 

$

9,270

 

$

7,288

 

$

5,596

 

$

4,229

 

$

14,582

 

$

(14,658)

 

$

64,095

Net interest income

 

12,139

 

 

10,407

 

 

6,966

 

 

5,227

 

 

3,428

 

 

 —

 

 

(1,259)

 

 

 —

 

 

36,908

Provision

 

1,020

 

 

425

 

 

150

 

 

500

 

 

39

 

 

 —

 

 

 —

 

 

 —

 

 

2,134

Net income  (loss)

 

4,185

 

 

5,100

 

 

2,157

 

 

1,653

 

 

517

 

 

1,158

 

 

12,598

 

 

(14,450)

 

 

12,918

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

 —

 

 

3,806

 

 

 —

 

 

77,872

Intangibles

 

 —

 

 

3,061

 

 

4,501

 

 

7,501

 

 

 —

 

 

 —

 

 

1,855

 

 

 —

 

 

16,918

Total assets

 

1,660,374

 

 

1,446,637

 

 

785,076

 

 

638,542

 

 

513,045

 

 

 —

 

 

624,420

 

 

(601,432)

 

 

5,066,662

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended March 31, 2018

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

15,808

 

$

15,997

 

$

8,163

 

$

 —

 

$

4,998

 

$

3,189

 

$

12,533

 

$

(12,600)

 

$

48,087

Net interest income

 

12,120

 

 

10,836

 

 

6,744

 

 

 —

 

 

3,465

 

 

 —

 

 

(762)

 

 

 —

 

 

32,403

Provision

 

1,120

 

 

602

 

 

576

 

 

 —

 

 

242

 

 

 —

 

 

 —

 

 

 —

 

 

2,540

Net income (loss)

 

4,458

 

 

4,617

 

 

1,869

 

 

 —

 

 

741

 

 

771

 

 

10,514

 

 

(12,420)

 

 

10,550

Goodwill

 

3,223

 

 

15,223

 

 

9,888

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,334

Intangibles

 

 —

 

 

3,567

 

 

5,207

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,774

Total assets

 

1,526,829

 

 

1,331,209

 

 

696,979

 

 

 —

 

 

468,112

 

 

 —

 

 

447,592

 

 

(444,407)

 

 

4,026,314

 

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, 2018 2019 and December 31, 2017, 2018, 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, 2018 2019 and

30


Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

December 31, 2017 2018 are presented in the following table (dollars in thousands). As of March 31, 2018 2019 and December 31, 2017, 2018, each of the subsidiary banks met the requirements to be “well capitalized”.

                 

For Capital

  

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 

Adequacy Purposes

  

Capitalized Under

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

         

For Capital

  

With Capital

  

Prompt Corrective

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

Actual

  

Adequacy Purposes

  

Conservation Buffer*

  

Action Provisions

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

Amount

  

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

As of March 31, 2018:

                                

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 $395,160   11.25% $281,109 

>

 8.00% $346,994 

>

 9.875% $351,386 

>

 10.00%

 

$

538,030

 

12.26

%  

$

351,173

> 

8.00

%  

$

460,914

> 

10.50

%  

$

438,966

> 

10.00

%

Tier 1 risk-based capital

  358,627   10.21%  210,832 

>

 6.00   276,717 

>

 7.875   281,109 

>

 8.00 

 

 

433,453

 

9.87

%  

 

263,379

> 

6.00

 

 

373,121

> 

8.50

 

 

351,173

> 

8.00

 

Tier 1 leverage

  358,627   9.08%  157,993 

>

 4.00   157,993 

>

 4.000   197,491 

>

 5.00 

 

 

433,453

 

8.90

%  

 

194,905

> 

4.00

 

 

194,905

> 

4.00

 

 

243,632

> 

5.00

 

Common equity Tier 1

  321,093   9.14%  158,124 

>

 4.50   224,009 

>

 6.375   228,401 

>

 6.50 

 

 

395,740

 

9.02

%  

 

197,535

> 

4.50

 

 

307,276

> 

7.00

 

 

295,328

> 

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%

 

$

166,864

 

11.59

%  

$

115,131

> 

8.00

%  

$

151,110

> 

10.50

%  

$

143,914

> 

10.00

%

Tier 1 risk-based capital

  147,618   11.30%  78,408 

>

 6.00   102,911 

>

 7.875   104,544 

>

 8.00 

 

 

153,375

 

10.66

%  

 

86,349

> 

6.00

 

 

122,327

> 

8.50

 

 

115,131

> 

8.00

 

Tier 1 leverage

  147,618   9.63%  61,343 

>

 4.00   61,343 

>

 4.000   76,678 

>

 5.00 

 

 

153,375

 

9.21

%  

 

66,621

> 

4.00

 

 

66,621

> 

4.00

 

 

83,277

> 

5.00

 

Common equity Tier 1

  147,618   11.30%  58,806 

>

 4.50   83,309 

>

 6.375   84,942 

>

 6.50 

 

 

153,375

 

10.66

%  

 

64,761

> 

4.50

 

 

100,740

> 

7.00

 

 

93,544

> 

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%

 

$

152,230

 

11.59

%  

$

105,103

> 

8.00

%  

$

137,947

> 

10.50

%  

$

131,379

> 

10.00

%

Tier 1 risk-based capital

  129,507   10.91%  71,249 

>

 6.00   93,514 

>

 7.875   94,998 

>

 8.00 

 

 

139,406

 

10.61

%  

 

78,827

> 

6.00

 

 

111,672

> 

8.50

 

 

105,103

> 

8.00

 

Tier 1 leverage

  129,507   9.87%  52,483 

>

 4.00   52,483 

>

 4.000   65,603 

>

 5.00 

 

 

139,406

 

10.03

%  

 

55,617

> 

4.00

 

 

55,617

> 

4.00

 

 

69,521

> 

5.00

 

Common equity Tier 1

  129,507   10.91%  53,437 

>

 4.50   75,702 

>

 6.375   77,186 

>

 6.50 

 

 

139,406

 

10.61

%  

 

59,120

> 

4.50

 

 

91,965

> 

7.00

 

 

85,396

> 

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%

 

$

82,640

 

12.23

%  

$

54,069

> 

8.00

%  

$

70,966

> 

10.50

%  

$

67,587

> 

10.00

%

Tier 1 risk-based capital

  63,105   10.58%  35,803 

>

 6.00   46,992 

>

 7.875   47,738 

>

 8.00 

 

 

76,329

 

11.29

%  

 

40,552

> 

6.00

 

 

57,449

> 

8.50

 

 

54,069

> 

8.00

 

Tier 1 leverage

  63,105   9.35%  27,010 

>

 4.00   27,010 

>

 4.000   33,763 

>

 5.00 

 

 

76,329

 

9.97

%  

 

30,630

> 

4.00

 

 

30,630

> 

4.00

 

 

38,287

> 

5.00

 

Common equity Tier 1

  63,105   10.58%  26,853 

>

 4.50   38,041 

>

 6.375   38,787 

>

 6.50 

 

 

76,329

 

11.29

%  

 

30,414

> 

4.50

 

 

47,311

> 

7.00

 

 

43,931

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

62,958

 

13.04

%  

$

38,639

> 

8.00

%  

$

50,713

> 

10.50

%  

$

48,298

> 

10.00

%

Tier 1 risk-based capital

 

 

56,666

 

11.73

%  

 

28,979

> 

6.00

 

 

41,053

> 

8.50

 

 

38,639

> 

8.00

 

Tier 1 leverage

 

 

56,666

 

10.36

%  

 

21,883

> 

4.00

 

 

21,883

> 

4.00

 

 

27,353

> 

5.00

 

Common equity Tier 1

 

 

56,666

 

11.73

%  

 

21,734

> 

4.50

 

 

33,809

> 

7.00

 

 

31,394

> 

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%

 

$

51,286

 

10.93

%  

$

37,530

> 

8.00

%  

$

49,259

> 

10.50

%  

$

46,913

> 

10.00

%

Tier 1 risk-based capital

  41,305   9.82%  25,233 

>

 6.00   33,119 

>

 7.875   33,644 

>

 8.00 

 

 

45,408

 

9.68

%  

 

28,148

> 

6.00

 

 

39,876

> 

8.50

 

 

37,530

> 

8.00

 

Tier 1 leverage

  41,305   8.93%  18,498 

>

 4.00   18,498 

>

 4.000   23,123 

>

 5.00 

 

 

45,408

 

8.84

%  

 

20,544

> 

4.00

 

��

20,544

> 

4.00

 

 

25,681

> 

5.00

 

Common equity Tier 1

  41,305   9.82%  18,925 

>

 4.50   26,810 

>

 6.375   27,336 

>

 6.50 

 

 

45,408

 

9.68

%  

 

21,111

> 

4.50

 

 

32,839

> 

7.00

 

 

30,494

> 

6.50

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

460,416

 

10.69

%  

$

344,551

> 

8.00

%  

$

425,305

> 

9.875

%  

$

430,689

> 

10.00

%

Tier 1 risk-based capital

 

 

420,569

 

9.77

%  

 

258,413

> 

6.00

 

 

339,168

> 

7.875

 

 

344,551

> 

8.00

 

Tier 1 leverage

 

 

420,569

 

8.87

%  

 

189,858

> 

4.00

 

 

189,858

> 

4.000

 

 

237,322

> 

5.00

 

Common equity Tier 1

 

 

382,899

 

8.89

%  

 

193,810

> 

4.50

 

 

274,564

> 

6.375

 

 

279,948

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

162,009

 

11.38

%  

$

113,900

> 

8.00

%  

$

140,596

> 

9.875

%  

$

142,376

> 

10.00

%

Tier 1 risk-based capital

 

 

148,529

 

10.43

%  

 

85,425

> 

6.00

 

 

112,121

> 

7.875

 

 

113,900

> 

8.00

 

Tier 1 leverage

 

 

148,529

 

9.04

%  

 

65,744

> 

4.00

 

 

65,744

> 

4.000

 

 

82,180

> 

5.00

 

Common equity Tier 1

 

 

148,529

 

10.43

%  

 

64,069

> 

4.50

 

 

90,764

> 

6.375

 

 

92,544

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

146,292

 

11.55

%  

$

101,310

> 

8.00

%  

$

125,054

> 

9.875

%  

$

126,637

> 

10.00

%

Tier 1 risk-based capital

 

 

133,982

 

10.58

%  

 

75,982

> 

6.00

 

 

99,727

> 

7.875

 

 

101,310

> 

8.00

 

Tier 1 leverage

 

 

133,982

 

9.98

%  

 

53,682

> 

4.00

 

 

53,682

> 

4.000

 

 

67,103

> 

5.00

 

Common equity Tier 1

 

 

133,982

 

10.58

%  

 

56,987

> 

4.50

 

 

80,731

> 

6.375

 

 

82,314

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

75,233

 

11.24

%  

$

53,567

> 

8.00

%  

$

66,122

> 

9.875

%  

$

66,959

> 

10.00

%

Tier 1 risk-based capital

 

 

69,101

 

10.32

%  

 

40,175

> 

6.00

 

 

52,730

> 

7.875

 

 

53,567

> 

8.00

 

Tier 1 leverage

 

 

69,101

 

9.19

%  

 

30,070

> 

4.00

 

 

30,070

> 

4.000

 

 

37,588

> 

5.00

 

Common equity Tier 1

 

 

69,101

 

10.32

%  

 

30,131

> 

4.50

 

 

42,686

> 

6.375

 

 

43,523

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

57,051

 

12.24

%  

$

37,278

> 

8.00

%  

$

46,016

> 

9.875

%  

$

46,598

> 

10.00

%

Tier 1 risk-based capital

 

 

51,279

 

11.00

%  

 

27,959

> 

6.00

 

 

36,696

> 

7.875

 

 

37,278

> 

8.00

 

Tier 1 leverage

 

 

51,279

 

9.39

%  

 

21,849

> 

4.00

 

 

21,849

> 

4.000

 

 

27,312

> 

5.00

 

Common equity Tier 1

 

 

51,279

 

11.00

%  

 

20,969

> 

4.50

 

 

29,706

> 

6.375

 

 

30,289

> 

6.50

 

Rockford Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

50,648

 

10.89

%  

$

37,208

> 

8.00

%  

$

45,929

> 

9.875

%  

$

46,511

> 

10.00

%

Tier 1 risk-based capital

 

 

44,821

 

9.64

%  

 

27,906

> 

6.00

 

 

36,627

> 

7.875

 

 

37,208

> 

8.00

 

Tier 1 leverage

 

 

44,821

 

8.93

%  

 

20,081

> 

4.00

 

 

20,081

> 

4.000

 

 

25,101

> 

5.00

 

Common equity Tier 1

 

 

44,821

 

9.64

%  

 

20,930

> 

4.50

 

 

29,650

> 

6.375

 

 

30,232

> 

6.50

 

 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

                  

For Capital

  

To Be Well

 
                  

Adequacy Purposes

  

Capitalized Under

 
          

For Capital

  

With Capital

  

Prompt Corrective

 
  

Actual

  

Adequacy Purposes

  

Conservation Buffer*

  

Action Provisions

 
  

Amount

  

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

 

As of December 31, 2017:

                                

Company:

                                

Total risk-based capital

 $383,282   11.15% $275,090 

>

 8.00% $318,073 

>

 9.25% $343,862 

>

 10.00%

Tier 1 risk-based capital

  348,530   10.14%  206,317 

>

 6.00   249,300 

>

 7.25   275,090 

>

 8.00 

Tier 1 leverage

  348,530   8.98%  155,256 

>

 4.00   155,256 

>

 4.00   194,070 

>

 5.00 

Common equity Tier 1

  313,012   9.10%  154,738 

>

 4.50   197,721 

>

 5.75   223,510 

>

 6.50 

Quad City Bank & Trust:

                                

Total risk-based capital

 $160,112   12.35% $103,711 

>

 8.00% $119,916 

>

 9.25% $129,639 

>

 10.00%

Tier 1 risk-based capital

  147,472   11.38%  77,783 

>

 6.00   93,988 

>

 7.25   103,711 

>

 8.00 

Tier 1 leverage

  147,472   9.52%  61,985 

>

 4.00   61,985 

>

 4.00   77,481 

>

 5.00 

Common equity Tier 1

  147,472   11.38%  58,337 

>

 4.50   74,542 

>

 5.75   84,265 

>

 6.50 

Cedar Rapids Bank & Trust:

                                

Total risk-based capital

 $138,492   11.88% $93,272 

>

 8.00% $107,846 

>

 9.25% $116,590 

>

 10.00%

Tier 1 risk-based capital

  126,601   10.86%  69,954 

>

 6.00   84,528 

>

 7.25   93,272 

>

 8.00 

Tier 1 leverage

  126,601   11.68%  43,348 

>

 4.00   43,348 

>

 4.00   54,185 

>

 5.00 

Common equity Tier 1

  126,601   10.86%  52,465 

>

 4.50   67,039 

>

 5.75   75,783 

>

 6.50 

Community State Bank:

                                

Total risk-based capital

 $66,271   11.71% $45,293 

>

 8.00% $52,370 

>

 9.25% $56,616 

>

 10.00%

Tier 1 risk-based capital

  61,941   10.94%  33,970 

>

 6.00   41,047 

>

 7.25   45,293 

>

 8.00 

Tier 1 leverage

  61,941   9.77%  25,354 

>

 4.00   25,354 

>

 4.00   31,693 

>

 5.00 

Common equity Tier 1

  61,941   10.94%  25,477 

>

 4.50   32,554 

>

 5.75   36,801 

>

 6.50 

Rockford Bank & Trust:

                                

Total risk-based capital

 $45,684   11.28% $32,413 

>

 8.00% $37,477 

>

 9.25% $40,516 

>

 10.00%

Tier 1 risk-based capital

  40,615   10.02%  24,310 

>

 6.00   29,374 

>

 7.25   32,413 

>

 8.00 

Tier 1 leverage

  40,615   8.94%  18,177 

>

 4.00   18,177 

>

 4.00   22,721 

>

 5.00 

Common equity Tier 1

  40,615   10.02%  18,232 

>

 4.50   23,297 

>

 5.75   26,335 

>

 6.50 

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

*    March 31,

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

NOTE 8 – REVENUE RECOGNITION

As of January 1, 2018, 2019 minimums reflect the Company adopted ASU 2014-09 usingfully phased-in ratios (including the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue as approximately 89% of the Company’s revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional disclosures have been added in accordance with the ASU. See Note 1 for additional information on this new accounting standard.

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

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

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

 

 

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.

31


 

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

2NOTE 9 –ACQUISITIONS

BATES COMPANIES

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

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

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

SPRINGFIELD BANCSHARES, INC.

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 months ending March 31, 2018.2019. 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, SFC Bank and RB&T.


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

·

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

·

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

·

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 services 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.

·

SFC Bank was merged into the Company in 2018, as further described in Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  SFC Bank provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri.

·

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.

EXECUTIVE OVERVIEW

The Company reported net income of $12.9 million and diluted EPS of $0.81 for the quarter ended March 31, 2019. By comparison, for the quarter ended December 31, 2018, the Company reported net income of $13.3 million and diluted EPS of $0.84.  For the quarter ended March 31, 2018, the Company reported net income of $10.5 million, and diluted EPS of $0.74.

32


 

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 million and diluted EPS of $0.74 for the quarter ended March 31, 2018. By comparison, for the quarter ended December 31, 2017, the Company reported net income of $9.9 million and diluted EPS of $0.70. For the quarter ended March 31, 2017, the Company reported net income of $9.2 million and diluted EPS of $0.68.

The first quarter of 20182019 was highlighted by several significant items:

Annualized net interest·

Net income growth of 7.5%;$12.9 million, or $0.81 per diluted share;

·

Adjusted net income (non-GAAP) of $13.0 million, or $0.82 per diluted share;

·

Annualized loan and lease growth of 12.2% ;7.1% for the quarter;

·

Annualized wealth management revenuedeposit growth of 10.8%;21.8% for the quarter;

Swap fee·

Noninterest income and gains onof $12.0 million for the sale of government guaranteed loans of $1.3 million;quarter; and

A definitive agreement to enter·

Nonperforming assets down $1.6 million, or 5.6%, from the Springfield, Missouri market by merging with Springfield Bancshares.prior quarter.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2019

 

December 31, 2018

 

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,918

 

$

13,316

 

$

10,550

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.81

 

$

0.84

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,940

 

 

15,898,591

 

 

14,205,584

 

  

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 

The increase in weighted average common shares outstanding when comparing the three months endedfrom March 31, 2018 andto December 31, 2017 to2018 and March 31, 20172019 was primarily due to the common stock issued as a result of the merger with Springfield Bancshares as further described in Note 2 to Guaranty as considerationthe Company’s Annual Report on Form 10-K for the acquisition of Guaranty Bank.

year ended December 31, 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

March 31, 2019

    

December 31, 2018

    

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

36,908

 

$

39,595

 

$

32,403

 

Provision expense

 

 

2,134

 

 

1,612

 

 

2,540

 

Noninterest income

 

 

11,993

 

 

15,278

 

 

8,541

 

Noninterest expense

 

 

32,435

 

 

36,410

 

 

25,863

 

Federal and state income tax expense

 

 

1,414

 

 

3,535

 

 

1,991

 

Net income

 

$

12,918

 

$

13,316

 

$

10,550

 

 

  

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 

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

·

Net interest income in the first quarter of 2019 was down 7% compared to the fourth quarter of 2018. The decrease was primarily due to a $1.5 million decline in acquisition accretion, net, quarter over quarter, as well as an increase in deposit and borrowing costs along with strong deposit growth.  Net interest income increased 14% compared to the first quarter of 2018.  This increase was primarily due to strong loan growth and the addition of SFC Bank.

33


 

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’s financial results:

Net interest income in the first quarter of 2018 was up 2% compared to the fourth quarter of 2017 and up 17% compared to the first quarter of 2017 due to strong loan and lease growth and the acquisition of Guaranty Bank.·

Provision expense in the first quarter of  20182019 increased 13%32% compared to the fourth quarter of 2017 and 21% from2018.  The increase was primarily due to a lower than normal provision in the same periodfourth quarter of 2017 and2018 as a result of a more favorable outcome than expected on a large credit that was attributablepartially charged off.  Provision expense decreased 16% compared to both strong loan growth and accountingthe first quarter of 2018.  See the Provision for acquired loans. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.Loan Lease Losses section of this report for additional details.

·

Noninterest income in the first quarter of 20182019 decreased 12%22% compared to the fourth quarter of 2017,2018 primarily due to lower swap fee income. Noninterest income in the first quarter of 20182019 increased 17%40% from the first quartersame period of 2017, which2018.  This increase was primarily attributable to higher swap fee income as well as solid growth in wealth management fee income.income and the addition of SFC Bank.

·

Noninterest expense decreased 18%11% from the fourth quarter of 2017. The2018. In the fourth quarter of 2017 included $4.42018, there was $1.4 million of non-recurringpost-acquisition compensation, transition and integration cost as compared to $134 thousand in the first quarter of 2019.  Also, the fourth quarter of 2018 had $2.5 million in net costs relatedand losses on operations of other real estate as compared to $298 thousand in the acquisitionfirst quarter of Guaranty Bank and a core processor termination fee related to CSB.2019.  Noninterest expense increased 22%25% from the first quarter of 20172018 primarily due to the acquisitionaddition of GuarantySFC Bank.

·

Federal and state income tax expense in the first quarter of 2018 increased significantly2019 decreased 60% compared to the fourth 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 first quarter of 20182019 decreased 17%29% compared to the firstsame quarter of 2017 primarily due to a lower federal tax rate.2018. See the Income Taxes“Income Taxes” section of this report for additional details.details on these decreases.

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, 2017.2018. 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;·

Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income to more than $4between $8 million and $12 million annually; and

·

Grow wealth management segment net income by 10% annually.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ending

 

Goal

Key Metric

Target **

    

March 31, 2019

 

December 31, 2018

 

March 31, 2018

 

Balance sheet efficiency

Gross loans and leases to total assets

73% - 78%

 

 

75

%  

 

 

75

%

 

 

76

%

 

 

NIM TEY (non-GAAP)*

> 3.35%

 

 

3.40

%  

 

 

3.63

%

 

 

3.64

%

 

Profitability

ROAA

> 1.10%

 

 

1.04

%  

 

 

1.10

%

 

 

1.06

%

 

 

Adjusted ROAA (non-GAAP)*

> 1.10%

 

 

1.05

%  

 

 

1.20

%

 

 

1.06

%

 

Asset quality

NPAs to total assets

< 0.75%

 

 

0.52

%  

 

 

0.56

%

 

 

0.77

%

 

 

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

< 0.25% annually

 

 

0.09

%  

 

 

0.13

%

 

 

0.05

%

 

Reliance on wholesale funding

Wholesale funding to total assets****

< 15%

 

 

12

%  

 

 

14

%

 

 

14

%

 

Consistent, high quality noninterest income revenue streams

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

$8-12 million annually

 

$

12.9

million  

 

$

11.2

million  

 

$

5.3

million

 

 

Grow wealth management net income***

> 10% annually

 

 

50

%  

 

 

32

%

 

 

37

%

 

 

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

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

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

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

STRATEGIC DEVELOPMENTS

The Company took the following actions during the first quarter of 20182019 to support its corporate strategy and the long-term financial goals shown above.above:

·

The Company grew loans and leases in the first three monthsquarter of 20182019 by 12.2%7.1% on an annualized basis. This growth exceeded the targeted organic growth of 10-12% for the full year. Strong loan and lease growth for the remainder of the year will help keep the Company’s loanCompany's loans and leases to assetassets ratio within the targeted range of 73-78%73‑78%.

·

The Company has participated, and intends to continue to participate, as an acquirer 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 March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The Company announced in April 2018 the signing of a definitive agreement to acquire Springfield Bancshares. See Note 9 to the Consolidated Financial Statements for additional details about these strategic transactions.

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 decreased by four4 basis points to 0.77%, as0.52% compared to the fourth quarter 2017.2018. The Company remains committed to improving asset quality ratios in 20182019 and beyond.

·

Management has continued to focus on reducing the Company’sCompany's reliance on wholesale funding. Wholesale funding increasedas a percentage of total assets decreased 2% in the first quarter 2018of 2019 due to the strong loan and leasecore deposit growth which outpaced the Company’s depositloan growth. All increases to wholesale funding were short-term in nature. 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 196 downstream banks with average total noninterest bearing deposits of $170.4 million and average total interest bearing deposits of $286.1 million during the first three months of 2019. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total

35


Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

noninterest bearing deposits of $220.9 million and average total interest bearing deposits of $206.1 million during the first quarter 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 borrowerborrowers and the Company. Swap fee income totaled $3.2 million for the three months ended March 31, 2019 as compared to $959 thousand for the three months ended March 31, 2018.

·

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, 2018,2019, the Company had $2.65$2.92 billion of total financial assets in trust (and related) accounts and $1.05$1.70 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management will help drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as the acquisition of managed assets. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.

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“adjusted net income”, “core net income attributable to QCR Holdings, Inc. common stockholders”, “core“adjusted EPS”, “core“adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, 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·

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

·

NIM (TEY) (non-GAAP) isand adjusted NIM (non-GAAP) are 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”“adjusted” 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.

performance.

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.

In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a great deal, making comparions difficult.

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.

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Table of Contents

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

    

March 31, 

    

December 31, 

    

March 31, 

 

RECONCILIATIONS

 

2019

 

2018

 

2018

 

 

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

 

 

 

 

 

  

 

 

  

 

Stockholders' equity (GAAP)

 

$

488,407

 

$

473,138

 

$

360,428

 

Less: Intangible assets

 

 

94,790

 

 

95,282

 

 

37,108

 

TCE (non-GAAP)

 

$

393,617

 

$

377,856

 

$

323,320

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (GAAP)

 

$

5,066,662

 

$

4,949,710

 

$

4,026,314

 

Less: Intangible assets

 

 

94,790

 

 

95,282

 

 

37,108

 

TA (non-GAAP)

 

$

4,971,872

 

$

4,854,428

 

$

3,989,206

 

 

 

 

 

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

 

 

 7.92

%  

 

7.78

%  

 

8.10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

March 31, 

    

December 31, 

    

March 31, 

 

 

    

2019

    

2018

    

2018

    

ADJUSTED NET INCOME

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

12,918

 

$

13,316

 

$

10,550

 

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

 

 

  

 

 

  

 

 

  

 

Expense:

 

 

  

 

 

  

 

 

  

 

Acquisition costs

 

$

 —

 

$

29

 

$

73

 

Post-acquisition compensation, transition and integration costs

 

 

106

 

 

1,127

 

 

 —

 

Total nonrecurring expense (non-GAAP)

 

$

106

 

$

1,156

 

$

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

13,024

 

$

14,472

 

$

10,623

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED EPS

 

 

  

 

 

  

 

 

  

 

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

 

$

13,024

 

$

14,472

 

$

10,623

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,693,345

 

 

15,641,401

 

 

13,888,661

 

Weighted average common and common equivalent shares outstanding

 

 

15,922,940

 

 

15,898,591

 

 

14,205,584

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EPS (non-GAAP):

 

 

  

 

 

  

 

 

  

 

Basic

 

$

0.83

 

$

0.93

 

$

0.76

 

Diluted

 

$

0.82

 

$

0.91

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED ROAA

 

 

  

 

 

  

 

 

  

 

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

 

$

13,024

 

$

14,472

 

$

10,623

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

4,968,502

 

$

4,842,232

 

$

3,994,691

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted ROAA (annualized) (non-GAAP)

 

 

1.05

%  

 

1.20

%  

 

1.06

%  

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED NIM (TEY)*

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

36,908

 

$

39,593

 

$

32,403

 

Plus: Taxequivalent adjustment

 

 

1,794

 

 

1,751

 

 

1,353

 

Net interest income - taxequivalent (non-GAAP)

 

$

38,702

 

$

41,344

 

$

33,756

 

    Less: Accquisition accounting net accretion

 

 

1,069

 

 

2,609

 

 

699

 

Adjusted net interest income

 

 

37,633

 

 

38,735

 

 

33,057

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

4,612,553

 

$

4,513,277

 

$

3,759,475

 

 

 

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.25

%  

 

3.48

%  

 

3.50

%  

NIM (TEY) (non-GAAP)

 

 

3.40

%  

 

3.63

%  

 

3.64

%  

Adjusted NIM (TEY) (non-GAAP)

 

 

3.31

%  

 

3.40

%  

 

3.57

%  

 

 

 

 

 

 

 

 

 

  

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

 

 

 

Noninterest expense (GAAP)

 

$

32,435

 

$

36,410

 

$

25,863

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

36,908

 

$

39,593

 

$

32,403

 

Noninterest income (GAAP)

 

 

11,993

 

 

15,279

 

 

8,541

 

Total income

 

$

48,901

 

$

54,872

 

$

40,944

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

66.33

%  

 

66.35

%  

 

63.17

%  

*     Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21%.

39

37


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.

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

Net interest income, on a tax equivalent basis, increased 14%15% to $33.8$38.7 million for the quarter ended March 31, 2018,2019, compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased 17%14% over the same period.period of the prior year. Net interest income improved due to severaltwo main factors:

Organic·

The merger of Springfield Bancshares in the third quarter of 2018; and

·

Strong organic loan and leasedeposit growth has been strong over the past 12 months pushing loans/leases up to 76% of total assets;months.

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

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

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

 
  

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 Quarter Ended

 

 

For the Quarter Ended

 

 

 

March 31, 

 

 

December 31, 

 

 

March 31, 

 

 

March 31, 

 

 

December 31, 

 

 

March 31, 

 

 

 

2019

    

 

2018

    

 

2018

 

    

2019

    

 

2018

    

 

2018

 

Average Yield on Interest-Earning Assets

 

4.74

%  

 

4.79

%  

 

4.41

%  

 

4.58

%  

 

4.63

%  

 

4.27

%

Average Cost of Interest-Bearing Liabilities

 

1.72

%  

 

1.49

%  

 

1.03

%  

 

1.72

%  

 

1.49

%  

 

1.03

%

Net Interest Spread

 

3.02

%  

 

3.30

%  

 

3.38

%  

 

2.86

%  

 

3.14

%  

 

3.24

%

NIM

 

3.40

%  

 

3.63

%  

 

3.64

%  

 

3.25

%  

 

3.48

%  

 

3.50

%

NIM Excluding Acquisition Accounting Net Accretion

 

3.31

%  

 

3.40

%  

 

3.57

%  

 

3.15

%  

 

3.25

%  

 

3.42

%

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

 

 

March 31, 

 

 

December 31,

 

 

March 31, 

 

    

2019

    

 

2018

    

 

2018

 

 

dollars in thousands

 

 

 

 

 

 

 

 

 

Acquisition Accounting Net Accretion in NIM

 

1,069

 

$

2,609

 

$

699

NIM on a tax equivalent basis was down 23 basis points on a linked quarter basis.  Excluding acquisition accounting net accretion, NIM was down 9 basis points on a linked quarter basis.  This 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 relationships 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.  The Company had success in widening spreads as core loan yields increase on a linked quarter basis; however, the pace and magnitude of the widening has been offset by the increasing cost of funds;

·

Excess liquidity due to strong deposit growth; and

·

The impact of the issuance of $65 million of subordinated notes during the first 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.

38


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

management strategies which include 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.

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, 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

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

 

$

15,736

 

$

93

 

 

2.40

%  

 

$

19,703

 

$

56

 

 

1.15

%

Interest-bearing deposits at financial institutions

 

 

155,463

 

 

923

 

 

2.41

%  

 

 

49,531

 

 

197

 

 

1.61

%

Investment securities (1)

 

 

660,454

 

 

6,096

 

 

3.74

%  

 

 

649,035

 

 

5,839

 

 

3.65

%

Restricted investment securities

 

 

21,285

 

 

307

 

 

5.85

%  

 

 

21,830

 

 

234

 

 

4.35

%

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

 

 

3,759,615

 

 

46,477

 

 

5.01

%  

 

 

3,019,376

 

 

34,573

 

 

4.64

%

Total interest earning assets

 

 

4,612,553

 

 

53,896

 

 

4.74

%  

 

 

3,759,475

 

 

40,899

 

 

4.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

78,631

 

 

 

 

 

 

 

 

 

67,224

 

 

 

 

 

 

 

Premises and equipment

 

 

76,523

 

 

 

 

 

 

 

 

 

63,394

 

 

 

 

 

 

 

Less allowance

 

 

(40,461)

 

 

 

 

 

 

 

 

 

(35,136)

 

 

 

 

 

 

 

Other

 

 

241,256

 

 

 

 

 

 

 

 

 

139,734

 

 

 

 

 

 

 

Total assets

 

$

4,968,502

 

 

 

 

 

 

 

 

$

3,994,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

2,288,109

 

 

7,174

 

 

1.27

%  

 

$

1,828,228

 

 

3,019

 

 

0.67

%

Time deposits

 

 

1,012,459

 

 

5,305

 

 

2.12

%  

 

 

616,661

 

 

1,862

 

 

1.22

%

Short-term borrowings

 

 

14,377

 

 

71

 

 

2.00

%  

 

 

17,271

 

 

33

 

 

0.77

%

FHLB advances

 

 

147,355

 

 

903

 

 

2.49

%  

 

 

236,689

 

 

1,064

 

 

1.82

%

Other borrowings

 

 

43,701

 

 

605

 

 

5.61

%  

 

 

64,680

 

 

718

 

 

4.50

%

Subordinated notes

 

 

38,637

 

 

564

 

 

5.92

%  

 

 

 —

 

 

 —

 

 

 —

%

Junior subordinated debentures

 

 

37,686

 

 

572

 

 

6.16

%  

 

 

37,510

 

 

447

 

 

4.83

%

Total interest-bearing liabilities

 

 

3,582,324

 

 

15,194

 

 

1.72

%  

 

 

2,801,039

 

 

7,143

 

 

1.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

810,300

 

 

 

 

 

 

 

 

 

794,673

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

93,455

 

 

 

 

 

 

 

 

 

42,454

 

 

 

 

 

 

 

Total liabilities

 

 

4,486,079

 

 

 

 

 

 

 

 

 

3,638,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

482,423

 

 

 

 

 

 

 

 

 

356,525

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,968,502

 

 

 

 

 

 

 

 

$

3,994,691

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

38,702

 

 

 

 

 

 

 

 

$

33,756

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.02

%  

 

 

 

 

 

 

 

 

3.38

%

Net interest margin

 

 

 

 

 

 

 

 

3.25

%  

 

 

 

 

 

 

 

 

3.50

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

 

 3.40

%  

 

 

 

 

 

 

 

 

3.64

%

Adjusted net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

 

3.31

%  

 

 

 

 

 

 

 

 

3.57

%

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

 

 

128.76

%  

 

 

 

 

 

 

 

 

134.22

%  

 

 

 

 

 

 

 

  

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%        

(1)

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

(2)

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

(3)

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

39


 

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

 

from

 

of Change (1)

 

 

    

Prior Period

    

Rate

    

Volume

 

 

 

(dollars in thousands)

 

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

37

 

$

109

 

$

(72)

 

Interest-bearing deposits at financial institutions

 

 

726

 

 

136

 

 

590

 

Investment securities (2)

 

 

257

 

 

153

 

 

104

 

Restricted investment securities

 

 

73

 

 

113

 

 

(40)

 

Gross loans/leases receivable (2) (3)

 

 

11,904

 

 

2,918

 

 

8,986

 

Total change in interest income

 

 

12,997

 

 

3,429

 

 

9,568

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

 

4,155

 

 

3,246

 

 

909

 

Time deposits

 

 

3,443

 

 

1,838

 

 

1,605

 

Short-term borrowings

 

 

38

 

 

74

 

 

(36)

 

Federal Home Loan Bank advances

 

 

(161)

 

 

1,518

 

 

(1,679)

 

Other borrowings

 

 

(113)

 

 

768

 

 

(881)

 

Subordinated notes

 

 

564

 

 

 —

 

 

564

 

Junior subordinated debentures

 

 

125

 

 

123

 

 

 2

 

Total change in interest expense

 

 

8,051

 

 

7,567

 

 

484

 

 

 

 

 

 

 

 

 

 

 

 

Total change in net interest income

 

$

4,946

 

$

(4,138)

 

$

9,084

 

 

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

(3)

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

(4)

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING POLICIES

The Company’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 mostthe following as a critical accounting policies:

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value.  Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment.  A more detailed discussion of this critical accounting policy tocan be that related tofound in the allowanceCompany's Annual Report on Form 10‑K for loan and lease losses.the year ended December 31, 2018.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 includeA more detailed discussion of this critical accounting policy can be found in the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.Company's Annual Report on Form 10‑K for the year ended December 31, 2018.

 

Qualitative factors include management’s view regarding the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and complexity of individual credits in relation to loan/lease structures, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology.

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

Although management believes the level of the allowance as of March 31, 2018 was adequate to absorb losses in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased 26%32%, comparing the first quarter of 20182019 to the same period of 2017.2018. This increase was primarily the result of the addition of SFC Bank, strong organic loan growth,  and improved pricing with the acquisition of Guaranty Bank.

rising rate environment. 

Overall, the Company’sCompany's average earning assets increased 22%23%, comparing the first quarter of 20182019 to the first quarter of 2017.2018. During the same time period, average gross loans and leases increased 26%25%, while average investment securities increased 16% with a portion being private placement tax-exempt municipal securities.2%. These increases were also the result of  the acquisitionaddition of Guaranty Bank.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SFC Bank and strong organic 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 first quarter of 20182019 increased 94%113% from the first quarter of 2017.2018.  The acquisitionaddition of GuarantySFC Bank primarily contributed to this increase.increase as the Company added over $439 million in deposits.  Additionally, as the Company has rate sensitive deposits with select major customers that have repriced withgrown organically at a significant pace over the increase in certain market interest rates. With strongpast several years, the loan growth outpacing deposit growthhas been funded in the first quarterlarger part by bigger depositor relationships with higher rate sensitivity, many of 2018, short-term borrowings increased andwhich have pricing tied to a certain index.  As a result, the cost of these funds haveis higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest rates rise (which has been the case over the past several quarters).  The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on  relationships with pricing tied to a certain index.  Additionally, the cost of funds on the Company’s short-term wholesale funds has increased with the rising rate environment.

 

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$2.1 million for the first quarter of 2018,2019, which was an increasea decrease of $435$405 thousand or 21%16% from the same quarter of the prior year. The increase fromyear, primarily attributable to lower loan growth in the first quarter of 2017 to the first quarter of 2018 was primarily attributable to loan growth and the2019 than 2018.

In accordance with GAAP for business combination accounting, for theacquired loans acquired through the acquisitions of CSB and Guaranty Bank.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

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Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

charge-offs of $363 thousand$1.1 million for the first three months of 2018,2019, increased the Company’sCompany's allowance to $36.5$41.1 million at March 31, 2018.2019. As of March 31, 2018,2019, the Company’sCompany's allowance to total loans/leases was 1.20%1.08%, which has increasedwas up from 1.16%1.07% at December 31, 20172018 and decreaseddown from 1.32%1.20% at March 31, 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.2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($7.310.4 million and $8.0$7.3 million at March 31, 20182019 and March 31, 2017,2018, 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.

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

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three months ended March 31, 20182019 and 2017.2018.

  

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust department fees

 

$

2,493

 

$

2,237

 

$

256

 

11.4

%

 

Investment advisory and management fees

 

 

1,736

 

 

952

 

 

784

 

82.4

 

 

Deposit service fees

 

 

1,554

 

 

1,531

 

 

23

 

1.5

 

 

Gains on sales of residential real estate loans, net

 

 

369

 

 

101

 

 

268

 

265.3

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

31

 

 

358

 

 

(327)

 

(91.3)

 

 

Swap fee income

 

 

3,198

 

 

959

 

 

2,239

 

233.5

 

 

Earnings on bank-owned life insurance

 

 

540

 

 

418

 

 

122

 

29.2

 

 

Debit card fees

 

 

792

 

 

766

 

 

26

 

3.4

 

 

Correspondent banking fees

 

 

216

 

 

265

 

 

(49)

 

(18.5)

 

 

Other

 

 

1,064

 

 

954

 

 

110

 

11.5

 

 

Total noninterest income

 

$

11,993

 

$

8,541

 

$

3,452

 

40.4

%

 

In recent years, the Company has been successful in expanding its wealth management customerclient base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditionsincome. Assets under management increased $167.6 million in early 2018 coupledthe first quarter of 2019 with 70 new client relationships. With strong growth in assets under management, trust department fees increased 29%11%, comparing the first quarter of 20182019 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 82%, comparing the first quarter of 20182019 to the same period of the prior year.

In October 2018, the Company acquired the Bates Companies which increased the assets under management by approximately $704 million as of closing.  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. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.

Deposit service fees expanded 16%2% comparing the first quarter of 20182019 to the same period of the prior year. This increase was primarily the result of the growth in deposits due to the acquisition of Guaranty Bank. Additionally, theThe Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased 265% when comparing the first quarter of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank which recognized $284 thousand of gains on sales of residential real estate in the first quarter of 2019. Overall, refinancing activity has slowed, as many of the

42

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Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Gains on sales of residential real estate loans increased 5% when comparing the first quarter 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 first quarter of 20182019 decreased 62%91% compared to the first quarter of 2017.2018. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, theThe Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In the past several years, the Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’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,Recently, competitors have been offering SBA loan candidates traditional financing without the guarantee and the Company may execute on this strategy, which may delay the gains on sales of some loansis not willing to achieve better pricing.

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.including tax credit project 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 borrowerborrowers 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 $3.2 million for the first quarter of 2019, compared to $959 thousand for the first quarter of 2018, compared to $114 thousand for the first quarter of 2017.2018.  Future levels of swap fee income are alsosomewhat dependent upon prevailing interest rates.

Earnings on BOLI decreased 11%increased 29% comparing the first quarter of 20182019 to the first quarter of 2017.2018.  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.and can lead to volatility in earnings. 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%3% comparing the first quarter of 20182019 to the first quarter of the prior year. This increase was primarily related to the acquisition of Guaranty Bank in the fourth quarter of 2017.recent acquisitions. 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.

activity.

Correspondent banking fees increased 8%decreased 19% comparing the first quarter of 20182019 to the first quarter of the prior year. 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 192200 banks in Iowa, Illinois and Wisconsin.

Other noninterest income increased 12% comparing the first quarter of 2019 to the first quarter of the prior year.  This increase was primarily due to loan related fee income and equity investment income.

43

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 months ended March 31, 20182019 and 2017.2018.

  

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

20,879

 

$

15,978

 

$

4,901

 

30.7

%

 

Occupancy and equipment expense

 

 

3,694

 

 

3,066

 

 

628

 

20.5

 

 

Professional and data processing fees

 

 

2,750

 

 

2,708

 

 

42

 

1.6

 

 

Acquisition costs

 

 

 —

 

 

93

 

 

(93)

 

(100.0)

 

 

Post-acquisition compensation, transition and integration costs

 

 

134

 

 

 —

 

 

134

 

100.0

 

 

FDIC insurance, other insurance and regulatory fees

 

 

964

 

 

756

 

 

208

 

27.5

 

 

Loan/lease expense

 

 

214

 

 

291

 

 

(77)

 

(26.5)

 

 

Net cost and gains/losses on operations of other real estate

 

 

298

 

 

132

 

 

166

 

125.8

 

 

Advertising and marketing

 

 

785

 

 

693

 

 

92

 

13.3

 

 

Bank service charges

 

 

483

 

 

440

 

 

43

 

9.8

 

 

Correspondent banking expense

 

 

204

 

 

204

 

 

 —

 

 —

 

 

CDI amortization expense

 

 

532

 

 

305

 

 

227

 

74.4

 

 

Other

 

 

1,498

 

 

1,197

 

 

301

 

25.1

 

 

Total noninterest expense

 

$

32,435

 

$

25,863

 

$

6,572

 

25.4

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company’sCompany's general efficiency. One-time charges relatingto post-acquisition transition and integration costs related to the acquisitioncore conversion of Springfield BancsharesSFC Bank are expected to impact expense in later periods of 2018.

throughout 2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 20172019 to the first quarter of 2018 by 20%31%.  This increase was primarily related to new hires, merit increases and the addition of SFC Bank employees, new hires and merit increases. Over the Guaranty Bank employees. Newpast year, the Company has added several producers to bolster growth prospects.  And, to help support recent and expected growth, the Company is adding to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters.  Some of these hires throughout 2017 included rolesare opportunistic, as the Company takes advantage of  talent availability in Information Technology, Accounting, Internal Audit, Trust and Commercial Banking.

the marketplace as a result of ongoing industry consolidation.

Occupancy and equipment expense increased 23%21%, comparing the first quarter of 20182019 to the same period of the prior year. The increased expense was mostly due tohigher information technology service contract costs, increases in repairs and maintenance costs and the additionadditions of Guaranty Bank.

Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

SFC Bank and the Bates Companies.

Professional and data processing fees increased 30%2%, comparing the first quarter of 20182019 to the same period in 2017.2018. This increased expense was partiallymostly due to the addition of Guaranty Bank. Additionally, legalrecent mergers/acquisitions. Legal expense was alsocontinues to be 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.early 2020. 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.

There were no acquisition costs in the first quarter of 2019.  Acquisition costs totaled $93 thousand and $6 thousand for the first quarter of 20182018. These costs were comprised primarily of legal, accounting and 2017, respectively.investment banking costs related to the mergers/acquisitions.

Post-acquisition costs totaled $134 thousand for the first quarter of 2019.  These costs were comprised primarily of personnel costs, IT integration, and data conversion costs related to mergers/acquisitions.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

FDIC insurance, other insurance and regulatory fee expense increased 22%28%, comparing the first quarter of 20182019 to the first quarter of 2017.2018. The increase in expense was due to the acquisitionaddition of Guaranty Bank.

SFC Bank and organic asset growth.

Loan/lease expense decreased 1%,27% when comparing the first quarter of 20182019 to the same quarter of 2017.2018. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost ofand gains/losses on 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 cost fromof operations of other real estate totaled $298 thousand for the first quarter of 2019, compared to $132 thousand for the first quarter of 2018, compared to net costs of operations of $14 thousand for the2018.  The first quarter of 2017.

2019 amount included the write-down of two OREO properties totaling $224 thousand.

Advertising and marketing expense increased 14%13%, comparing the first quarter of 20182019 to the first quarter of 2017.2018. The increase in expense was primarily due to the addition of GuarantySFC 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%10% from the first quarter of 20172018 to the first quarter of 2018. The increase was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio.2019.  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 first quarter of 20182019 to the first quarter of 2017 due to both increases in volume and in the number of correspondent banking clients.2018.   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%74% when comparing the first quarter of 20182019 to the first quarter of 2017.2018. The increase was due to the acquisitionaddition of GuarantySFC Bank.

Other noninterest expense was up 22%25% when comparing the first quarter of 20182019 to the first quarter of 2017.2018. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to the addition of GuarantySFC Bank.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INCOME TAXES

In the first quarter of 2018,2019, the Company incurred income tax expense of $2.0$1.4 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 months ended March 31, 20182019 and 2017.2018.

In the first quarter of 2019, the Company incurred income tax expense of $1.4 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 months ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

For the Three Months Ended March 31,

 

 

2019

 

2018

 

 

 

2018

  

2017

 

 

 

 

 

% of

 

 

 

 

% of

 

 

     

% of

      

% of

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

     

Pretax

      

Pretax

 

    

Amount

    

Income

    

Amount

    

Income

 

 

 

Amount

  

Income

  

Amount

  

Income

 

 

(dollars in thousands)

 

                

 

 

 

 

 

 

 

 

 

 

 

 

Computed "expected" tax expense

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

 

$

3,010

 

21.0

%  

$

2,634

 

21.0

%

 

Tax exempt income, net

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

 

 

(1,107)

 

(7.7)

 

 

(943)

 

(7.5)

 

Bank-owned life insurance

  (87,777)  (0.7)  (164,391)  (1.4)

 

 

(113)

 

(0.8)

 

 

(88)

 

(0.7)

 

State income taxes, net of federal benefit, current year

  551,468   4.4   408,325   3.5 

 

 

649

 

4.5

 

 

551

 

4.4

 

Tax credits

 

 

(39)

 

(0.3)

 

 

 —

 

 —

 

True-up adjustment to year-end provision

 

 

(715)

 

(5.0)

 

 

 —

 

 —

 

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

  (132,361)  (1.1)  (533,322)  (4.6)

 

 

(100)

 

(0.7)

 

 

(132)

 

(1.1)

 

Other

  (30,828)  (0.2)  (66,783)  (0.6)

 

 

(171)

 

(1.2)

 

 

(31)

 

(0.2)

 

Federal and state income tax expense

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

 

$

1,414

 

9.9

%  

$

1,991

 

15.9

%

 

 

The effective tax rate for the quarter ended March 31, 20182019 was 15.9%9.9%, which was a 4.7%6% decrease from the effective tax rate of 20.6%15.9% for the quarter ended March 31, 2017. The Tax Act was enacted on December 22, 2017 and was effective January 1, 2018 reducing the federal corporate tax rate from 35% to 21%.

FINANCIAL CONDITION

Following is a table that represents the major categories of2018.   During the Company’s balance sheet.year-end tax preparation process, the

45


 

  

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%

During the first quarter of 2018, the Company’s total assets increased $43.6 million, or 1%, to a total of $4.0 billion. Net loans/leases grew $88.2 million. This loan and lease growth was funded by a combination of excess cash, deposits, which increased $13.3 million 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.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Company identified a one-time true-up adjustment for $715 thousand.  Excluding this, the Company’s effective tax rate was approximately 15.0%.

 

FINANCIAL CONDITION

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Cash, federal funds sold, and interest-bearing deposits

 

$

292,559

 

 6

%  

 

$

245,119

 

 5

%  

 

$

121,403

 

 3

%

 

Securities

 

 

655,749

 

13

%  

 

 

662,969

 

13

%  

 

 

638,229

 

16

%

 

Net loans/leases

 

 

3,758,268

 

74

%  

 

 

3,692,907

 

75

%  

 

 

3,018,370

 

75

%

 

Other assets

 

 

360,086

 

 7

%  

 

 

348,715

 

 7

%  

 

 

248,312

 

 6

%

 

Total assets

 

$

5,066,662

 

100

%  

 

$

4,949,710

 

100

%  

 

$

4,026,314

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

4,194,220

 

83

%  

 

$

3,977,031

 

80

%  

 

$

3,280,001

 

82

%

 

Total borrowings

 

 

282,994

 

 5

%  

 

 

404,968

 

 8

%  

 

 

334,802

 

 8

%

 

Other liabilities

 

 

101,041

 

 2

%  

 

 

94,573

 

 2

%  

 

 

51,083

 

 1

%

 

Total stockholders' equity

 

 

488,407

 

10

%  

 

 

473,138

 

10

%  

 

 

360,428

 

 9

%

 

Total liabilities and stockholders' equity

 

$

5,066,662

 

100

%  

 

$

4,949,710

 

100

%  

 

$

4,026,314

 

100

%

 

During the first quarter of 2019, the Company's total assets increased $117 million, or 2.4%, to a total of $5.1 billion. The Company grew its net loan/lease portfolio $65 million, which was primarily funded by an increase in core deposit growth.  Deposits grew $217 million in the first quarter of 2019, while borrowings decreased $122 million in the first quarter of 2019.

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.

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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

March 31, 2018

 

 

    

Amount

    

%  

    

 

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 

$

35,843

 

 5

%  

 

$

36,411

 

 5

%  

 

$

36,868

 

 6

%

Municipal securities

 

 

450,376

 

69

%  

 

 

459,409

 

70

%  

 

 

438,736

 

68

%

Residential mortgage-backed and related securities

 

 

161,692

 

25

%  

 

 

159,249

 

24

%  

 

 

157,289

 

25

%

Other securities

 

 

7,838

 

 1

%  

 

 

7,900

 

 1

%  

 

 

5,336

 

 1

%

 

 

$

655,749

 

100

%  

 

$

662,969

 

100

%  

 

$

638,229

 

100

%

 

 

 

  

 

  

 

 

 

  

 

  

 

 

 

  

 

  

 

Securities as a % of Total Assets

 

 

12.94

%  

  

 

 

 

13.39

%  

  

 

 

 

15.85

%  

  

 

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

 

 

1.46

%  

  

 

 

 

(1.01)

%  

  

 

 

 

(1.01)

%  

  

 

Duration (in years)

 

 

6.6

 

  

 

 

 

6.8

 

  

 

 

 

6.9

 

  

 

Yield on investment securities (tax equivalent)

 

 

3.74

%  

 

 

 

 

3.58

%  

 

 

 

 

3.65

%  

 

 

Quarterly Yield on Investment Securities (GAAP)

 

 

3.18

%  

  

 

 

 

2.85

%  

  

 

 

 

3.03

%  

  

 

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 17increasing 16 bps in the first quarterthree months of 2018;2019; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 2633 basis points.

The Company has not invested in privatenon-agency commercial or residential 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.

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%7.1% on an annualized basis during the first quarter of 2018.2019. 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

 

 

 

 

March 31, 2019

 

December 31, 2018

 

March 31, 2018

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 

$

1,479,247

 

39

%  

$

1,429,410

 

38

%  

$

1,201,087

 

39

%

 

CRE loans

 

 

1,790,845

 

47

%  

 

1,766,111

 

48

%  

 

1,357,703

 

45

%

 

Direct financing leases

 

 

108,543

 

3

%  

 

117,969

 

 3

%  

 

137,614

 

 5

%

 

Residential real estate loans

 

 

288,502

 

8

%  

 

290,759

 

 8

%  

 

254,484

 

 8

%

 

Installment and other consumer loans

 

 

123,087

 

3

%  

 

119,381

 

 3

%  

 

95,912

 

 3

%

 

Total loans/leases

 

$

3,790,224

 

100

%  

$

3,723,630

 

100

%  

$

3,046,800

 

100

%

 

Plus deferred loan/lease origination costs, net of fees

 

 

9,208

 

 

 

 

9,124

 

  

 

 

8,103

 

  

 

 

Less allowance

 

 

(41,164)

 

 

 

 

(39,847)

 

  

 

 

(36,533)

 

  

 

 

Net loans/leases

 

$

3,758,268

 

 

 

$

3,692,907

 

  

 

$

3,018,370

 

  

 

 

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

47


Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

risk. As of March 31, 20182019 and December 31, 2017,2018, respectively, approximately 26%27% and 28% of the CRE loan portfolio was owner-occupied.

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $66.6$50 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, 20182019 and December 31, 2017,2018, the amount of nationally syndicated loans totaled $39.9$50.7 million and $51.2$40.8 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, 

 

 

 

As of March 31,

  

As of December 31,

  

As of March 31,

 

 

2019

 

 

2018

 

2018

 

 

 

2018

  

2017

  

2017

 

    

Amount

    

%

    

    

Amount

    

%

    

 

Amount

    

%

 

 

 

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

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

 

$

613,024

 

34

%  

 

$

612,327

 

34

%  

 

$

435,919

 

32

%

 

Lessors of Residential Buildings

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

 

 

355,850

 

20

%  

 

 

346,270

 

19

%  

 

 

221,978

 

16

%

 

Hotels

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

 

 

81,107

 

5

%  

 

 

81,345

 

 5

%  

 

 

70,887

 

 5

%

 

Nonresidential Property Managers

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

 

 

65,736

 

4

%  

 

 

69,885

 

 4

%  

 

 

56,572

 

 4

%

 

New Housing For-Sale Builders

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

 

 

47,276

 

3

%  

 

 

47,598

 

 3

%  

 

 

52,951

 

 4

%

 

Land Subdivision

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

 

 

46,042

 

3

%  

 

 

48,378

 

 3

%  

 

 

45,356

 

 3

%

 

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%

 

 

581,810

 

31

%  

 

 

560,308

 

32

%  

 

 

474,040

 

36

%

 

                        

Total CRE Loans

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

 

$

1,790,845

 

100

%  

 

$

1,766,111

 

100

%  

 

$

1,357,703

 

100

%

 

 

*     “Other” consists of all other industries. None of these had concentrations greater than $27.2$37.0 million, or approximately 2%2.1% of total CRE loans in the most recent period presented.

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.

48

54


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 March 31, 

 

 

As of December 31, 

 

As of March 31, 

 

 

As of March 31,

  

As of December 31,

  

As of March 31,

 

 

2019

 

 

2018

 

2018

 

 

2018

  

2017

  

2017

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trucks, Vans and Vocational Vehicles

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

 

$

43,489

 

19

%  

 

$

40,588

 

18

%  

 

$

28,219

 

13

%

Manufacturing - General

 

 

16,952

 

 7

%  

 

 

16,760

 

 7

%  

 

 

16,624

 

 7

%

Construction - General

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

 

 

16,295

 

 7

%  

 

 

17,236

 

 8

%  

 

 

18,067

 

 8

%

Manufacturing - General

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

Food Processing Equipment

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

 

 

15,622

 

 7

%  

 

 

15,334

 

 7

%  

 

 

13,270

 

 6

%

Marine - Travelifts

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

 

 

11,819

 

 5

%  

 

 

12,370

 

 5

%  

 

 

12,843

 

 6

%

Trailers

 

 

9,603

 

 4

%  

 

 

9,842

 

 4

%  

 

 

9,161

 

 4

%

Computer Hardware

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

 

 

8,350

 

 4

%  

 

 

9,166

 

 4

%  

 

 

10,694

 

 5

%

Trailers

  9,161   4%  8,983   4%  9,465   5%

Manufacturing - CNC

  7,239   3%  6,742   3%  6,812   3%

 

 

6,702

 

 3

%  

 

 

6,616

 

 3

%  

 

 

7,239

 

 3

%

Restaurant

  6,844   3%  7,107   3%  7,841   4%

Crane

 

 

5,749

 

 3

%  

 

 

5,726

 

 3

%  

 

 

5,044

 

 2

%

Other *

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

 

 

93,775

 

41

%  

 

 

95,008

 

41

%  

 

 

102,493

 

46

%

                        

Total m2 loans and leases

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

 

$

228,356

 

100

%  

 

$

228,646

 

100

%  

 

$

223,654

 

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 months ended March 31, 20182019 and 20172018 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

 

 

March 31, 2019

    

March 31, 2018

    

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Balance, beginning

$

39,847

 

$

34,356

 

Provisions charged to expense

 

2,134

 

 

2,540

 

Loans/leases charged off

 

(1,060)

 

 

(436)

 

Recoveries on loans/leases previously charged off

 

243

 

 

73

 

Balance, ending

$

41,164

 

$

36,533

 

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, pasthistorical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmentalgovernment 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 and analyzed monthlyquarterly with specific detailed reviews completed on all loanscredits risk-rated worseless 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, 2017,2018, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the loan reviewcredit administration staff and reported to management and the board of directors.

49

55


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 *

    

March 31, 2019

    

December 31, 2018

    

March 31, 2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Rating 6)

 

$

24,769

 

$

42,058

 

$

42,926

 

 

Substandard (Rating 7)

 

 

43,696

 

 

28,593

 

 

39,815

 

 

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

$

68,465

 

$

70,651

 

$

82,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans **

 

$

68,465

 

$

70,651

 

$

82,741

 

 

Classified Loans ***

 

$

43,696

 

$

28,593

 

$

39,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

 

1.80

%

 

1.89

%

 

2.79

%

 

Classified Loans as a % of Total Loans/Leases

 

 

1.16

%

 

0.77

%

 

1.34

%

 

 

*      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 decrease53% increase in classified loans duringfrom December 31, 2018 to March 31, 2019. The increase was due to one C&I loan relationship and one CRE loan relationship that were downgraded from a rating of special mention to substandard in the first three monthsquarter of 2018.2019.  Criticized loans increased 11%decreased 3% 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

 

 

 

    

March 31, 2019

    

December 31, 2018

    

 

March 31, 2018

 

 

Allowance / Gross Loans/Leases

 

1.08

%  

1.07

%  

 

1.20

%

 

Allowance / NPLs

 

238.48

%  

214.80

%  

 

202.11

%

 

Although management believes that the allowance at March 31, 20182019 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.

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

50

56


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

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, 

 

 

 

    

2019

    

2018

    

2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

13,406

 

$

14,260

 

$

12,759

 

 

Accruing loans/leases past due 90 days or more (3)

 

 

61

 

 

632

 

 

41

 

 

TDRs - accruing

 

 

3,794

 

 

3,659

 

 

5,276

 

 

Total NPLs

 

 

17,261

 

 

18,551

 

 

18,076

 

 

OREO

 

 

9,110

 

 

9,378

 

 

12,750

 

 

Other repossessed assets

 

 

 —

 

 

 8

 

 

200

 

 

Total NPAs

 

$

26,371

 

$

27,937

 

$

31,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

    

 

0.45

%  

 

0.50

%  

 

0.59

%

 

NPAs to total loans/leases plus repossessed property

 

 

0.69

%  

 

0.75

%  

 

1.01

%

 

NPAs to total assets

 

 

0.52

%  

 

0.56

%  

 

0.77

%

 

 

  

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%

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $1.5 million at March 31, 2019, $2.3 million at December 31, 2018, and $2.6 million at March 31, 2018, $2.3 million2018.

(3)

Includes TDRs of $0 thousand at March 31, 2019, $496 thousand at December 31, 2017,2018, and $2.4 million$0 at March 31, 2017.2018.

NPAs at March 31, 20182019 were $31.0$26.4 million, which was down $1.3$1.6 million from December 31, 20172018 and up $3.7down $4.7 million from March 31, 2017. This increase from prior year was due to the addition of one large credit that was added in the third quarter 2017.

2018.

The ratio of NPAs to total assets was 0.52% at March 31, 2019, down from 0.56% at December 31, 2018 and down from 0.77% at March 31, 2018, which was down from 0.81% at both December 31, 2017 and March 31, 2017.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

2018. 

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$217.2 million during the first quarter of 2018.2019, primarily due to growth in correspondent bank deposits and growth in large customers’ balances. 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

 

 

 

 

March 31, 2019

    

December 31, 2018

 

March 31, 2018

 

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

$

821,599

 

20

%  

$

791,102

 

20

%  

$

784,815

 

24

%

 

Interest bearing demand deposits

 

 

2,334,474

 

55

%  

 

2,204,205

 

55

%  

 

1,789,019

 

55

%

 

Time deposits

 

 

719,286

 

17

%  

 

704,903

 

18

%  

 

496,644

 

15

%

 

Brokered deposits

 

 

318,861

 

 8

%  

 

276,821

 

 7

%  

 

209,523

 

 6

%

 

 

 

$

4,194,220

 

100

%  

$

3,977,031

 

100

%  

$

3,280,001

 

100

%

 

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

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.

51


 

In an effort to strengthen the relationship and maximize the liquidity potentialTable 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.Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industy concentrations and large accounts are monitored by the internal asset liability management committee.

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

 

 

    

March 31, 2019

    

December 31, 2018

    

March 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Overnight repurchase agreements

 

$

3,056

 

$

2,084

 

$

3,820

 

Federal funds purchased

 

 

12,830

 

 

26,690

 

 

13,040

 

 

 

$

15,886

 

$

28,774

 

$

16,860

 

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,The subsidiary banks can utilize 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

 

    

March 31, 2019

 

    

December 31, 2018

    

March 31, 2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Term FHLB advances

 

$

66,380

 

 

$

76,327

 

$

56,600

Overnight FHLB advances

 

 

59,800

 

 

 

190,165

 

 

159,745

 

 

$

126,180

 

 

$

266,492

 

$

216,345

Term FHLB advances remained the samedecreased $9.9 million in the current quarter, as incompared to the prior quarter. Overnight FHLB advances have increaseddecreased by $24.3$130.4 million due to the strong loan and lease growth, which outpaced the Company’s deposit growth in the first quarter of 2018.

2019 due to strong deposit growth.

The table below presents the compositionCompany has other borrowings which are wholesale structured repurchase agreements totaling $35.0 milion as of the Company’s other borrowings.

  

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 

Other borrowings includeMarch 31, 2019, December 31, 2018 and March 31, 2018.  The wholesale structured repos whichrepurchase agreements are utilized as an alternative funding source to FHLB advances and customer deposits. Structured reposWholesale structured repurchase agreements 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 inMarch 31, 2019 and $4.8 million as of December 31, 2018.  There were no outstanding subordinated notes as of March 31, 2018.  See Note 115 to the Company’s Consolidated Financial Statements included infor additional information regarding our subordinated notes and the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company has outstandingrepayment of our term notes and an available revolving line of credit. As of March 31, 2018, the term debt had been paid down to $29.1 million, as scheduled. The term notes andour revolving line of credit were used to help fundduring the CSB and Guaranty Bank acquisitions. As of bothquarter ended March 31, 2018 and December 31, 2017, the full $10.0 million line of credit was available. If the line of credit is used, interest is calculated at the effective LIBOR rate plus 2.50% per annum (4.82% at March 31, 2018).

2019.

It is management’smanagement's intention to reduce its reliance on wholesale funding, including FHLB advances, wholesale structured repos,repurchase agreements, 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

52


Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

Maturity:

    

Amount Due

    

Interest Rate

    

 

Amount Due

    

Interest Rate

 

 

 

(dollars in thousands)

Year ending December 31:

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

$

393,464

 

2.38

%  

 

$

510,735

 

2.35

%

2020

 

 

67,557

 

2.35

 

 

 

48,557

 

2.31

 

2021

 

 

15,050

 

2.31

 

 

 

15,050

 

2.31

 

2022

 

 

3,970

 

2.00

 

 

 

3,970

 

2.00

 

Total Wholesale Funding

 

$

480,041

 

2.37

%  

 

$

578,312

 

2.35

%

During the first three months of 2018,2019, wholesale funding decreased $98.3 million. FHLB overnight advances and term advances decreased $130.4 million and $10 million in the first quarter of 2019, respectively. Brokered deposits increased $128.0 million. Year-to-date,$42.1 million in the Company has repaid $25.4 millionfirst quarter 2019 as some of term borrowings at maturity. However, thisthe banks rotated some overnight advances to short-term brokered deposits as the latter was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.cheaper.

STOCKHOLDERS' EQUITYSTOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

As of

 

 

 

March 31, 2018

  

December 31, 2017

  

March 31, 2017

 

    

March 31, 2019

    

December 31, 2018

    

 

March 31, 2018

 

 

 

Amount

  

Amount

  

Amount

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 $13,937  $13,918  $13,161 

 

$

15,755

 

$

15,718

 

 

$

13,937

 

 

Additional paid in capital

  189,685   189,078   157,582 

 

 

271,673

 

 

270,761

 

 

 

189,685

 

 

Retained earnings

  162,346   151,962   127,145 

 

 

204,179

 

 

192,203

 

 

 

162,346

 

 

AOCI (loss)

  (5,540)  (1,671)  (2,048)

 

 

(3,200)

 

 

(5,544)

 

 

 

(5,540)

 

 

Total stockholders' equity

 $360,428  $353,287  $295,840 

 

$

488,407

 

$

473,138

 

 

$

360,428

 

 

            

 

 

 

 

 

 

 

 

 

 

 

 

TCE* / TA

  8.10%  8.01%  8.20%

TCE / TA ratio (non-GAAP)

 

 

 7.92

%  

 

7.78

%  

 

 

8.10

%

 

 

*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.

53


 

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$249.8 million during the first quarter of 20182019 and $164.0$159.7 million during the full year of 2017.2018. 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).

portfolio.

At March 31, 2019, the subsidiary banks had 32 lines of credit totaling $363.8 million, of which $1.8 million was secured and $362.0 million was unsecured. At March 31, 2019, the full $363.8 million was available.

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling $372.2$363.7 million, of which $3.2$1.7 million was secured and $369.0 million was unsecured. At March 31, 2018, the full $372.2 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$362.0 million was unsecured. At December 31, 2017,2018, $343.7 million of the full $375.0$363.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2018.2019. At March 31, 2018,2019, the full $10.0 million was available.

As of March 31, 2018,2019, the Company had $417.5$456.5 million in average correspondent banking deposits spread over 192196 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$112.2 million during the first three months of 2018,2019, compared to $102.6$60.0 million for the same period of 2017.2018. The net decrease in federal funds sold was $15.7$24.5 million for the first three months of 2018,2019, compared to a net decrease of $6.5$15.7 million for the same period of 2017.2018. The net decreaseincrease in interest-bearing deposits at financial institutions was $10.7$81.0 million for the first three months of 2018,2019, compared to a net increasedecrease of $93.5$10.7 million for the same period of 2017.2018. Proceeds from calls, maturities, and paydowns of securities were $13.64$14.9 million for the first three months of 2018,2019, compared to $25.9$13.6 million for the same period of 2017.2018. Purchases of securities used cash of $7.1$4.1 million for the first three months of 2018,2019, compared to $12.1$7.1 million for the same period of 2017.2018. The net increase in loans/leases used cash of $90.4$65.8 million for the first three months of 20182019 compared to $29.2$90.4 million for the same period of 2017.

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

2018.

Financing activities provided cash of $38.3$94.6 million for the first three months of 2018,2019, compared to $77.5$38.3 million for same period of 2017.2018. Net increases in deposits totaled $13.4$217.3 million for the first three months of 2018,2019, compared to $136.7$13.4 million for the same period of 2017.2018. During the first three months of 2018,2019, the Company’sCompany's short-term borrowings increaseddecreased $12.9 million, compared to an increase of $2.9 million, while they decreased $20.5 million for the same period of 2017.2018. In the first three months of 2019, the Company decreased short-term and overnight FHLB advances by $130.4 million.  Maturities and principal payments on FHLB term advances totaled $15.0 million and on other borrowings totaled $32.3 million in the first three months of 2019. During the first three months of 2019, proceeds from subordinated notes were $63.4 million. In the first three months of 2018, the Company increased FHLB advances by $24.3 million short-term and overnight advances, while borrowing maturities and principal payments on borrowings totaled $1.9 million. In the first three months

54


Table of 2017, the Company reduced FHLB advances and borrowings by $39.0 million through a mixture of maturities, prepayments, and debt retirement.Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Total cash provided by operating activities was $7.0$8.6 million for the first three months of 2018,2019, compared to $10.8$7.9 million for the same period of 2017.

2018.

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.

securities and, most recently, subordinated notes.

The following table presents the details of the trust preferred securities outstanding as of March 31, 20182019 and December 31, 2017.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Amount

    

 

    

 

  

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

Interest Rate as of

 

Interest Rate as of

 

Name

Date Issued

 

2019

 

2018

 

Interest Rate

 

March 31, 2019

 

December 31, 2018

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II

February 2004

 

$

10,310

 

$

10,310

 

2.85% over 3-month LIBOR

 

5.44

%  

5.65

%

QCR Holdings Statutory Trust III

February 2004

 

 

8,248

 

 

8,248

 

2.85% over 3-month LIBOR

 

5.44

%  

5.65

%

QCR Holdings Statutory Trust V

February 2006

 

 

10,310

 

 

10,310

 

1.55% over 3-month LIBOR

 

4.34

%  

3.99

%

Community National Statutory Trust II

September 2004

 

 

3,093

 

 

3,093

 

2.17% over 3-month LIBOR

 

4.80

%  

4.96

%

Community National Statutory Trust III

March 2007

 

 

3,609

 

 

3,609

 

1.75% over 3-month LIBOR

 

4.36

%  

4.54

%

Guaranty Bankshares Statutory Trust I

May 2005

 

 

4,640

 

 

4,640

 

1.75% over 3-month LIBOR

 

4.36

%  

4.54

%

 

  

 

$

40,210

 

$

40,210

 

Weighted Average Rate

 

4.89%

%  

4.94

%

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 4 to the Consolidated Financial Statements, on June 21, 2018 the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The Company assumed thefloating rate trust preferred securities originally issued by Community Nationalare 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 connectionaccordance with its acquisition in May 2013. The Company assumedASC 815.  See Note 4 for the trust preferred securities originally issued by Guaranty in connection withnotional amount swapped and the 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, 2018, the remaining discount was $2.7 million.

related effective fixed rates.

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.

55


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, 2018.

 

56


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, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, 400, and 500400 basis point upward shifts; and a 100 and 200 basis point downward shiftshifts 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 and 200 basis point downward shift.shifts. 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  (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shiftshock 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 tois a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

57


Part I

Item 3

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 March 31, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.6

%  

0.7

%  

0.3

%

200 basis point upward shift

 

(10.0)

%  

(2.1)

%  

(2.7)

%  

(3.7)

%

300 basis point upward shock

 

(25.0)

%  

(6.2)

%  

(9.0)

%  

(8.4)

%

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, 20182019 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. 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.

 

58


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, 2018.2019. 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.

 

59


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, 2018. 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

60


 

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

 

3.1

Bylaws of QCR Holdings, Inc., as amended and restated (incorporated by reference to Exhibit 3.1 to the Company’s 8-K filed with the SEC on February 19, 2019).

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, 20182019 and December 31, 2017;2018; (ii) Consolidated Statements of Income for the three months ended March 31, 20182019 and March 31, 2017;2018; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 20182019 and March 31, 2017;2018; (iv) Consolidated Statements of Changes in Stockholders’Stockholders' Equity for the three months ended March 31, 20182019 and March 31, 2017;2018; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 20182019 and March 31, 2017;2018; and (vi) Notes to the Consolidated Financial Statements.

 

61


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                                    2019

/s/ Douglas M. Hultquist

 

Douglas M. Hultquist, President

 

Chief Executive Officer

 

 

 

 

 

Date

May 9, 2018                                    2019

/s/ Todd A. Gipple

 

Todd A. Gipple, Executive Vice President

 

Chief Operating Officer

 

Chief Financial Officer

 

 

 

 

Date

May 9, 2018                                    2019

/s/ Elizabeth A. Grabin

 

Elizabeth A. Grabin, FirstSenior Vice President

 

Director of Financial Reporting

Chief Accounting Officer

 

Principal Accounting Officer

 

69

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