The Company took the following actions during the first quarter of 2018 to support its corporate strategy and the long-term financial goals shown above.
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “core net income”, “core net income attributable to QCR Holdings, Inc. common stockholders”, “core EPS”, “core ROAA”, “NIM (TEY)”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company’s capital position without regard to the effects of intangible assets.
The table following also includes several “core” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future run-rates.
NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures.
The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is a standard ratio in the banking industry and widely utilized by investors.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
|
|
As of
|
|
|
|
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% to $33.8 million for the quarter ended March 31, 2018, compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased 17% over the same period. Net interest income improved due to several factors:
|
●
|
Organic loan and lease growth has been strong over the past 12 months pushing loans/leases up to 76% of total assets;
|
|
●
|
The acquisition of Guaranty Bank, 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.
|
Acquisition accounting net accretion can fluctuate depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The 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.
The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:
|
|
For the three months ended March 31,
|
|
|
|
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% tax rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.
|
(2)
|
Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
|
(3)
|
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
|
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, 2018
|
|
|
Inc./(Dec.)
|
|
|
Components
|
|
|
|
from
|
|
|
of Change (1)
|
|
|
|
December 31, 2017
|
|
|
Rate
|
|
|
Volume
|
|
|
|
(dollars in thousands)
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
41
|
|
|
$
|
24
|
|
|
$
|
17
|
|
Interest-bearing deposits at financial institutions
|
|
|
(2
|
)
|
|
|
484
|
|
|
|
(486
|
)
|
Investment securities (2)
|
|
|
681
|
|
|
|
(738
|
)
|
|
|
1,419
|
|
Restricted investment securities
|
|
|
104
|
|
|
|
21
|
|
|
|
83
|
|
Gross loans/leases receivable (2) (3) (4)
|
|
|
6,780
|
|
|
|
(2,266
|
)
|
|
|
9,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in interest income
|
|
$
|
7,604
|
|
|
$
|
(2,475
|
)
|
|
$
|
10,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
1,879
|
|
|
$
|
1,459
|
|
|
$
|
420
|
|
Time deposits
|
|
|
769
|
|
|
|
512
|
|
|
|
257
|
|
Short-term borrowings
|
|
|
9
|
|
|
|
54
|
|
|
|
(45
|
)
|
Federal Home Loan Bank advances
|
|
|
661
|
|
|
|
135
|
|
|
|
526
|
|
Other borrowings
|
|
|
35
|
|
|
|
481
|
|
|
|
(446
|
)
|
Junior subordinated debentures
|
|
|
114
|
|
|
|
71
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in interest expense
|
|
$
|
3,467
|
|
|
$
|
2,712
|
|
|
$
|
755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in net interest income
|
|
$
|
4,137
|
|
|
$
|
(5,187
|
)
|
|
$
|
9,324
|
|
(1)
|
The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
|
(2)
|
Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate for periods prior to March 31, 2018 and 21% for periods including and after March 31, 2018.
|
(3)
|
Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
|
(4)
|
Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
|
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Certain critical accounting policies are described below.
ALLOWANCE FOR LOAN AND LEASE LOSSES
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified its most critical accounting policy to be that related to the allowance for loan and lease losses.
The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in NPLs, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.
Qualitative factors include management’s view regarding the general economic environment in the Company’s markets, including economic conditions throughout the Midwest and, in particular, the state of certain industries. Size and 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%, comparing the first quarter of 2018 to the same period of 2017. This increase was primarily the result of strong organic loan growth and the acquisition of Guaranty Bank.
Overall, the Company’s average earning assets increased 22%, comparing the first quarter of 2018 to the first quarter of 2017. During the same time period, average gross loans and leases increased 26%, while average investment securities increased 16% with a portion being private placement tax-exempt municipal securities. These increases were also the result of the acquisition of Guaranty Bank.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
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 2018 increased 94% from the first quarter of 2017. The acquisition of Guaranty Bank contributed to this increase. Additionally, the Company has rate sensitive deposits with select major customers that have repriced with the increase in certain market interest rates. With strong loan growth outpacing deposit growth in the first quarter of 2018, short-term borrowings increased and the cost of these funds have increased with the rising rate environment.
The Company’s management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company’s franchise value, reduce funding costs, and increase fee income opportunities through deposit service charges.
PROVISION FOR LOAN/LEASE LOSSES
The provision is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company’s provision totaled $2.5 million for the first quarter of 2018, which was an increase of $435 thousand or 21% from the same quarter of the prior year. The increase from the first quarter of 2017 to the first quarter of 2018 was primarily attributable to loan growth and the accounting for the loans acquired through the acquisitions of CSB and Guaranty Bank. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of $363 thousand for the first three months of 2018, increased the Company’s allowance to $36.5 million at March 31, 2018. As of March 31, 2018, the Company’s allowance to total loans/leases was 1.20%, which has increased from 1.16% at December 31, 2017 and decreased from 1.32% 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. Management continues to evaluate the allowance needed on 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.
A more detailed discussion of the Company’s allowance can be found in the “Financial Condition” section of this report.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the three months ended March 31, 2018 and 2017.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust department fees
|
|
$
|
2,237,081
|
|
|
$
|
1,740,207
|
|
|
$
|
496,874
|
|
|
|
28.6
|
%
|
Investment advisory and management fees
|
|
|
952,344
|
|
|
|
961,599
|
|
|
|
(9,255
|
)
|
|
|
(1.0
|
)
|
Deposit service fees
|
|
|
1,531,453
|
|
|
|
1,316,390
|
|
|
|
215,063
|
|
|
|
16.3
|
|
Gains on sales of residential real estate loans, net
|
|
|
100,815
|
|
|
|
96,323
|
|
|
|
4,492
|
|
|
|
4.7
|
|
Gains on sales of government guaranteed portions of loans, net
|
|
|
358,434
|
|
|
|
950,641
|
|
|
|
(592,207
|
)
|
|
|
(62.3
|
)
|
Swap fee income
|
|
|
958,694
|
|
|
|
113,520
|
|
|
|
845,174
|
|
|
|
744.5
|
|
Earnings on bank-owned life insurance
|
|
|
417,987
|
|
|
|
469,687
|
|
|
|
(51,700
|
)
|
|
|
(11.0
|
)
|
Debit card fees
|
|
|
766,108
|
|
|
|
702,801
|
|
|
|
63,307
|
|
|
|
9.0
|
|
Correspondent banking fees
|
|
|
264,827
|
|
|
|
245,189
|
|
|
|
19,638
|
|
|
|
8.0
|
|
Other
|
|
|
953,706
|
|
|
|
687,397
|
|
|
|
266,309
|
|
|
|
38.7
|
|
Total noninterest income
|
|
$
|
8,541,449
|
|
|
$
|
7,283,754
|
|
|
$
|
1,257,695
|
|
|
|
17.3
|
%
|
In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions in early 2018 coupled with strong growth in assets under management, trust department fees increased 29%, comparing the first quarter of 2018 to the same period of the prior year. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Additionally, the Company started offering trust operations services to correspondent banks. Investment advisory and management fees decreased 1%, comparing the first quarter of 2018 to the same period of the prior year.
Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, these fees are largely determined based on the value of the investments managed. The Company announced in March 2018 the signing of definitive agreements to acquire and merge the Bates Companies into RB&T. The acquisition and subsequent merger of the Bates Companies into RB&T will add approximately $700 million of assets under management.
Deposit service fees expanded 16% comparing the first quarter of 2018 to the same period of the prior year. This increase was primarily the result of the growth in deposits due to the acquisition of Guaranty Bank. Additionally, the Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Part I
Item 2
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’s existing and prospective customers have already executed a refinancing. Therefore, this area has generally become a smaller contributor to overall noninterest income.
The Company’s gains on the sale of government-guaranteed portions of loans for the first quarter of 2018 decreased 62% compared to the first quarter of 2017. Given the nature of these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In the past several years, the Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Lastly, a strategy for improved pricing is packaging loans together for sale. From time to time, the Company may execute on this strategy, which may delay the gains on sales of some loans to achieve better pricing.
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. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled $959 thousand for the first quarter of 2018, compared to $114 thousand for the first quarter of 2017. Future levels of swap fee income are also dependent upon prevailing interest rates.
Earnings on BOLI decreased 11% comparing the first quarter of 2018 to the first quarter of 2017. There were no purchases of BOLI within the last 12 months. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Equity market performance accounted for the majority of the volatility. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.
Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 9% comparing the first quarter of 2018 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. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity, which has been taken advantage of by the Company's customers.
Correspondent banking fees increased 8% comparing the first quarter of 2018 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 192 banks in Iowa, Illinois and Wisconsin.
Part I
Item 2
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, 2018 and 2017.
|
|
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
|
%
|
Management places a strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. One-time charges relating to the acquisition of Springfield Bancshares are expected to impact expense in later periods of 2018.
Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2017 to the first quarter of 2018 by 20%. This increase was primarily related to new hires, merit increases and the addition of the Guaranty Bank employees. New hires throughout 2017 included roles in Information Technology, Accounting, Internal Audit, Trust and Commercial Banking.
Occupancy and equipment expense increased 23%, comparing the first quarter of 2018 to the same period of the prior year. The increased expense was mostly due to the addition of Guaranty Bank.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Professional and data processing fees increased 30%, comparing the first quarter of 2018 to the same period in 2017. This increased expense was partially due to the addition of Guaranty Bank. Additionally, legal expense was also elevated due to a legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue to increase until the court proceedings are completed, which the Company expects to be in late 2018. Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing one-time costs and driving recurring costs down through contract renegotiation or managed reduction in activity where costs are determined on a usage basis.
Acquisition costs totaled $93 thousand and $6 thousand for the first quarter of 2018 and 2017, respectively.
FDIC insurance, other insurance and regulatory fee expense increased 22%, comparing the first quarter of 2018 to the first quarter of 2017. The increase in expense was due to the acquisition of Guaranty Bank.
Loan/lease expense decreased 1%, comparing the first quarter of 2018 to the same quarter of 2017. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of 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 from operations of other real estate totaled $132 thousand for the first quarter of 2018, compared to net costs of operations of $14 thousand for the first quarter of 2017.
Advertising and marketing expense increased 14%, comparing the first quarter of 2018 to the first quarter of 2017. The increase in expense was primarily due to the addition of Guaranty Bank.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 4% from the first quarter of 2017 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. 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% when comparing the first quarter of 2018 to the first quarter of 2017 due to both increases in volume and in the number of correspondent banking clients. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services.
CDI amortization expense increased 32% when comparing the first quarter of 2018 to the first quarter of 2017. The increase was due to the acquisition of Guaranty Bank.
Other noninterest expense was up 22% when comparing the first quarter of 2018 to the first quarter of 2017. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to the addition of Guaranty Bank.
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, the Company incurred income tax expense of $2.0 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, 2018 and 2017.
|
|
For the Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
|
Pretax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" tax expense
|
|
$
|
2,633,669
|
|
|
|
21.0
|
%
|
|
$
|
4,051,044
|
|
|
|
35.0
|
%
|
Tax exempt income, net
|
|
|
(943,101
|
)
|
|
|
(7.5
|
)
|
|
|
(1,305,427
|
)
|
|
|
(11.3
|
)
|
Bank-owned life insurance
|
|
|
(87,777
|
)
|
|
|
(0.7
|
)
|
|
|
(164,391
|
)
|
|
|
(1.4
|
)
|
State income taxes, net of federal benefit, current year
|
|
|
551,468
|
|
|
|
4.4
|
|
|
|
408,325
|
|
|
|
3.5
|
|
Excess tax benefit on stock options exercised and restricted stock awards vested
|
|
|
(132,361
|
)
|
|
|
(1.1
|
)
|
|
|
(533,322
|
)
|
|
|
(4.6
|
)
|
Other
|
|
|
(30,828
|
)
|
|
|
(0.2
|
)
|
|
|
(66,783
|
)
|
|
|
(0.6
|
)
|
Federal and state income tax expense
|
|
$
|
1,991,070
|
|
|
|
15.9
|
%
|
|
$
|
2,389,446
|
|
|
|
20.6
|
%
|
The effective tax rate for the quarter ended March 31, 2018 was 15.9% which was a 4.7% decrease from the effective tax rate of 20.6% 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 of the Company’s balance sheet.
|
|
As of
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
March 31, 2017
|
|
|
|
(dollars in thousands)
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Cash and due from banks
|
|
$
|
61,846
|
|
|
|
2
|
%
|
|
$
|
75,722
|
|
|
|
2
|
%
|
|
$
|
56,326
|
|
|
|
2
|
%
|
Federal funds sold and interest-bearing deposits
|
|
|
59,557
|
|
|
|
1
|
%
|
|
|
85,962
|
|
|
|
2
|
%
|
|
|
173,219
|
|
|
|
5
|
%
|
Securities
|
|
|
638,229
|
|
|
|
16
|
%
|
|
|
652,382
|
|
|
|
16
|
%
|
|
|
557,646
|
|
|
|
16
|
%
|
Net loans/leases
|
|
|
3,018,370
|
|
|
|
75
|
%
|
|
|
2,930,130
|
|
|
|
74
|
%
|
|
|
2,403,791
|
|
|
|
71
|
%
|
Other assets
|
|
|
248,312
|
|
|
|
6
|
%
|
|
|
238,469
|
|
|
|
6
|
%
|
|
|
190,031
|
|
|
|
6
|
%
|
Total assets
|
|
$
|
4,026,314
|
|
|
|
100
|
%
|
|
$
|
3,982,665
|
|
|
|
100
|
%
|
|
$
|
3,381,013
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
3,280,001
|
|
|
|
82
|
%
|
|
$
|
3,266,655
|
|
|
|
82
|
%
|
|
$
|
2,805,931
|
|
|
|
83
|
%
|
Total borrowings
|
|
|
334,802
|
|
|
|
8
|
%
|
|
|
309,480
|
|
|
|
8
|
%
|
|
|
231,534
|
|
|
|
7
|
%
|
Other liabilities
|
|
|
51,083
|
|
|
|
1
|
%
|
|
|
53,243
|
|
|
|
1
|
%
|
|
|
47,708
|
|
|
|
1
|
%
|
Total stockholders' equity
|
|
|
360,428
|
|
|
|
9
|
%
|
|
|
353,287
|
|
|
|
9
|
%
|
|
|
295,840
|
|
|
|
9
|
%
|
Total liabilities and stockholders' equity
|
|
$
|
4,026,314
|
|
|
|
100
|
%
|
|
$
|
3,982,665
|
|
|
|
100
|
%
|
|
$
|
3,381,013
|
|
|
|
100
|
%
|
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
INVESTMENT SECURITIES
The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk and maximizing return, while minimizing credit risk. Over the past five years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities, while increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company’s existing markets) and require a thorough underwriting process before investment.
Following is a breakdown of the Company’s securities portfolio by type, the percentage of unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration:
|
|
As of
|
|
|
|
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
|
%
|
|
|
|
|
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 17 bps in the first quarter of 2018; however, excluding the tax benefit and the related variance due to the lower tax rate, the portfolio yield expanded 26 basis points.
The Company has not invested in private mortgage-backed securities or pooled trust preferred securities. Additionally, the Company has not invested in the types of securities subject to the Volcker Rule (a provision of the Dodd-Frank Act).
See Note 2 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
LOANS/LEASES
Total loans/leases grew 12.2% on an annualized basis during the first quarter of 2018. The mix of the loan/lease types within the Company’s loan/lease portfolio is presented in the following table.
|
|
As of
|
|
|
|
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 CRE loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of March 31, 2018 and December 31, 2017, approximately 26% of the CRE loan portfolio was owner-occupied.
Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $66.6 million in the current quarter.
A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully funded, highly liquid term loans for which there is a liquid secondary market. As of March 31, 2018 and December 31, 2017, the amount of nationally syndicated loans totaled $39.9 million and $51.2 million, respectively.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Following is a listing of significant industries within the Company’s CRE loan portfolio:
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
As of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Lessors of Nonresidential Buildings
|
|
$
|
435,919
|
|
|
|
32
|
%
|
|
$
|
388,648
|
|
|
|
30
|
%
|
|
$
|
327,077
|
|
|
|
30
|
%
|
Lessors of Residential Buildings
|
|
|
221,978
|
|
|
|
16
|
%
|
|
|
199,047
|
|
|
|
15
|
%
|
|
|
147,335
|
|
|
|
13
|
%
|
Hotels
|
|
|
70,887
|
|
|
|
5
|
%
|
|
|
70,447
|
|
|
|
5
|
%
|
|
|
37,998
|
|
|
|
4
|
%
|
Nonresidential Property Managers
|
|
|
56,572
|
|
|
|
4
|
%
|
|
|
51,621
|
|
|
|
4
|
%
|
|
|
57,112
|
|
|
|
5
|
%
|
New Housing For-Sale Builders
|
|
|
52,951
|
|
|
|
4
|
%
|
|
|
61,480
|
|
|
|
5
|
%
|
|
|
57,733
|
|
|
|
5
|
%
|
Land Subdivision
|
|
|
45,356
|
|
|
|
3
|
%
|
|
|
44,192
|
|
|
|
3
|
%
|
|
|
47,254
|
|
|
|
4
|
%
|
Nursing Care Facilities
|
|
|
38,830
|
|
|
|
3
|
%
|
|
|
47,008
|
|
|
|
4
|
%
|
|
|
34,611
|
|
|
|
3
|
%
|
Lessors of Other Real Estate Property
|
|
|
31,121
|
|
|
|
2
|
%
|
|
|
29,078
|
|
|
|
2
|
%
|
|
|
20,989
|
|
|
|
2
|
%
|
Other *
|
|
|
404,089
|
|
|
|
30
|
%
|
|
|
411,971
|
|
|
|
32
|
%
|
|
|
376,733
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CRE Loans
|
|
$
|
1,357,703
|
|
|
|
100
|
%
|
|
$
|
1,303,492
|
|
|
|
100
|
%
|
|
$
|
1,106,842
|
|
|
|
100
|
%
|
* “Other” consists of all other industries. None of these had concentrations greater than $27.2 million, or approximately 2% of total CRE loans in the most recent period presented.
The Company’s residential real estate loan portfolio includes the following:
|
●
|
Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid the long-term interest rate risk.
|
|
●
|
A limited amount of 15-year and 20-year fixed rate residential real estate loans that meet certain credit guidelines.
|
The remaining residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(dollars in thousands)
|
|
Trucks, Vans and Vocational Vehicles
|
|
$
|
28,219
|
|
|
|
13
|
%
|
|
$
|
19,927
|
|
|
|
9
|
%
|
|
$
|
14,657
|
|
|
|
7
|
%
|
Construction - General
|
|
|
18,067
|
|
|
|
8
|
%
|
|
|
18,705
|
|
|
|
9
|
%
|
|
|
17,914
|
|
|
|
9
|
%
|
Manufacturing - General
|
|
|
16,624
|
|
|
|
7
|
%
|
|
|
16,571
|
|
|
|
8
|
%
|
|
|
18,067
|
|
|
|
9
|
%
|
Food Processing Equipment
|
|
|
13,270
|
|
|
|
6
|
%
|
|
|
12,965
|
|
|
|
6
|
%
|
|
|
14,102
|
|
|
|
7
|
%
|
Marine - Travelifts
|
|
|
12,843
|
|
|
|
6
|
%
|
|
|
10,802
|
|
|
|
5
|
%
|
|
|
8,132
|
|
|
|
4
|
%
|
Computer Hardware
|
|
|
10,694
|
|
|
|
5
|
%
|
|
|
11,340
|
|
|
|
5
|
%
|
|
|
10,094
|
|
|
|
5
|
%
|
Trailers
|
|
|
9,161
|
|
|
|
4
|
%
|
|
|
8,983
|
|
|
|
4
|
%
|
|
|
9,465
|
|
|
|
5
|
%
|
Manufacturing - CNC
|
|
|
7,239
|
|
|
|
3
|
%
|
|
|
6,742
|
|
|
|
3
|
%
|
|
|
6,812
|
|
|
|
3
|
%
|
Restaurant
|
|
|
6,844
|
|
|
|
3
|
%
|
|
|
7,107
|
|
|
|
3
|
%
|
|
|
7,841
|
|
|
|
4
|
%
|
Other *
|
|
|
100,693
|
|
|
|
45
|
%
|
|
|
102,094
|
|
|
|
47
|
%
|
|
|
101,375
|
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total m2 loans and leases
|
|
$
|
223,654
|
|
|
|
100
|
%
|
|
$
|
215,236
|
|
|
|
100
|
%
|
|
$
|
208,459
|
|
|
|
100
|
%
|
* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s loan and lease portfolio.
ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES
Changes in the allowance for the three months ended March 31, 2018 and 2017 are presented as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
(dollars in thousands)
|
|
Balance, beginning
|
|
$
|
34,356
|
|
|
$
|
30,757
|
|
Provisions charged to expense
|
|
|
2,540
|
|
|
|
2,105
|
|
Loans/leases charged off
|
|
|
(436
|
)
|
|
|
(893
|
)
|
Recoveries on loans/leases previously charged off
|
|
|
73
|
|
|
|
90
|
|
Balance, ending
|
|
$
|
36,533
|
|
|
$
|
32,059
|
|
The allowance was determined based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, past loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, governmental guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed monthly with specific detailed reviews completed on all loans risk-rated worse than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the loan review staff and reported to management and the board of directors.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The Company’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
|
%
|
* 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 decrease in classified loans during the first three months of 2018. Criticized loans increased 11% during the same period due to one large credit that was added in the third quarter 2017. 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.
Although management believes that the allowance at March 31, 2018 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.
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,
|
|
|
|
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 $2.6 million at March 31, 2018, $2.3 million at December 31, 2017, and $2.4 million at March 31, 2017.
|
.
NPAs at March 31, 2018 were $31.0 million, which was down $1.3 million from December 31, 2017 and up $3.7 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.
The ratio of NPAs to total assets was 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
The large majority of the NPAs consist of nonaccrual loans/leases, accruing TDRs, and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.
OREO is carried at the lower of carrying amount or fair value less costs to sell.
The Company’s lending/leasing practices remain unchanged and asset quality remains a priority for management.
DEPOSITS
Deposits increased $13.3 million during the first quarter of 2018. The table below presents the composition of the Company’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
|
%
|
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.
In an effort to strengthen the relationship and maximize the liquidity potential of its correspondent banking clients, the Company introduced an interest-bearing money market deposit account to its correspondent banking clients and this generated strong deposit growth in 2017.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
BORROWINGS
The subsidiary banks offer short-term repurchase agreements to a few of their significant customers. Also, the subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.
|
|
As of
|
|
|
|
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
|
|
The Company’s federal funds purchased fluctuates based on the short-term funding needs of the Company’s subsidiary banks.
As a result of their memberships in either the FHLB of Des Moines or Chicago, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. Generally, FHLB advances are utilized for loan matching as a hedge against the possibility of rising interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.
The table below presents the Company’s term and overnight FHLB advances.
|
|
As of
|
|
|
|
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
|
|
Term FHLB advances remained the same in the current quarter as in the prior quarter. Overnight FHLB advances have increased by $24.3 million due to the strong loan and lease growth, which outpaced the Company’s deposit growth in the first quarter of 2018.
The table below presents the composition 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 include structured repos which are utilized as an alternative funding source to FHLB advances and customer deposits. Structured repos are collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
As described in Note 11 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company has outstanding term notes and an available revolving line of credit. As of March 31, 2018, the term debt had been paid down to $29.1 million, as scheduled. The term notes and revolving line of credit were used to help fund the CSB and Guaranty Bank acquisitions. As of both 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).
It is management’s intention to reduce its reliance on wholesale funding, including FHLB advances, structured repos, and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.
The table below presents the maturity schedule including weighted average interest cost for the Company’s combined wholesale funding portfolio.
|
|
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
|
%
|
During the first three months of 2018, wholesale funding increased $128.0 million. Year-to-date, the Company has repaid $25.4 million of term borrowings at maturity. However, this was more than offset by growth in short-term borrowings used to temporarily fund strong earning asset growth.
STOCKHOLDERS’ EQUITY
The table below presents the composition of the Company’s stockholders’ equity.
|
|
As of
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
March 31, 2017
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
(dollars in thousands)
|
|
Common stock
|
|
$
|
13,937
|
|
|
$
|
13,918
|
|
|
$
|
13,161
|
|
Additional paid in capital
|
|
|
189,685
|
|
|
|
189,078
|
|
|
|
157,582
|
|
Retained earnings
|
|
|
162,346
|
|
|
|
151,962
|
|
|
|
127,145
|
|
AOCI (loss)
|
|
|
(5,540
|
)
|
|
|
(1,671
|
)
|
|
|
(2,048
|
)
|
Total stockholders' equity
|
|
$
|
360,428
|
|
|
$
|
353,287
|
|
|
$
|
295,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE* / TA
|
|
|
8.10
|
%
|
|
|
8.01
|
%
|
|
|
8.20
|
%
|
*TCE is defined as total common stockholders’ equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $136.5 million during the first quarter of 2018 and $164.0 million during the full year of 2017. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio (both residential mortgage-backed securities and municipal securities).
At March 31, 2018, the subsidiary banks had 33 lines of credit totaling $372.2 million, of which $3.2 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 million was unsecured. At December 31, 2017, the full $375.0 million was available.
The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $10.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2018. At March 31, 2018, the full $10.0 million was available.
As of March 31, 2018, the Company had $417.5 million in correspondent banking deposits spread over 192 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.
Investing activities used cash of $60.0 million during the first three months of 2018, compared to $102.6 million for the same period of 2017. The net decrease in federal funds sold was $15.7 million for the first three months of 2018, compared to a net decrease of $6.5 million for the same period of 2017. The net decrease in interest-bearing deposits at financial institutions was $10.7 million for the first three months of 2018, compared to a net increase of $93.5 million for the same period of 2017. Proceeds from calls, maturities, and paydowns of securities were $13.64 million for the first three months of 2018, compared to $25.9 million for the same period of 2017. Purchases of securities used cash of $7.1 million for the first three months of 2018, compared to $12.1 million for the same period of 2017. The net increase in loans/leases used cash of $90.4 million for the first three months of 2018 compared to $29.2 million for the same period of 2017.
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Financing activities provided cash of $38.3 million for the first three months of 2018, compared to $77.5 million for same period of 2017. Net increases in deposits totaled $13.4 million for the first three months of 2018, compared to $136.7 million for the same period of 2017. During the first three months of 2018, the Company’s short-term borrowings increased $2.9 million, while they decreased $20.5 million for the same period of 2017. 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 of 2017, the Company reduced FHLB advances and borrowings by $39.0 million through a mixture of maturities, prepayments, and debt retirement.
Total cash provided by operating activities was $7.0 million for the first three months of 2018, compared to $10.8 million for the same period of 2017.
Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities.
The following table presents the details of the trust preferred securities outstanding as of March 31, 2018 and December 31, 2017.
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%
|
|
The Company assumed the trust preferred securities originally issued by Community National in connection with its acquisition in May 2013. The Company assumed the trust preferred securities originally issued by Guaranty in connection with 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.
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements. Refer to Note 7 of the Consolidated Financial Statements for additional information regarding regulatory capital.
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’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors 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:
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The strength of the local and national economy.
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Changes in the interest rate environment.
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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.
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The impact of cybersecurity risks.
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The costs, effects and outcomes of existing or future litigation.
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Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB.
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Unexpected results of acquisitions, which may include failure to realize the anticipated benefits of the acquisition.
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The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.
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The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK