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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2016

 

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

For the transition period from           to________

 

Commission file number 0-22208

 

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

42-1397595

(State or other jurisdiction of incorporation or organization)

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

                                                             

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

 

(309) 743-7724

(Registrant’s telephone number, including area code)

 

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

Yes      [ X ]          No [ ]

 

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

Yes      [ X ]          No [ ]

 

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

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

 

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

Yes [ ]          No [ X ]   

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: As of August 1, 2016, the Registrant had outstanding 13,062,382 shares of common stock, $1.00 par value per share.

 

 
 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

       

Page

Number(s)

Part I

FINANCIAL INFORMATION

 
         
 

Item 1

Consolidated Financial Statements (Unaudited)

 
         
   

Consolidated Balance Sheets As of June 30, 2016 and December 31, 2015

3

     

 

 
   

Consolidated Statements of Income (Loss) For the Three Months Ended June 30, 2016 and 2015

                   4

     

 

 
   

Consolidated Statements of Income For the Six Months Ended June 30, 2016 and 2015

                   5

     

 

 
   

Consolidated Statements of Comprehensive Income (Loss) For the Three and Six Months Ended June 30, 2016 and 2015

                   6

     

 

 
   

Consolidated Statements of Changes in Stockholders' Equity For the Three and Six Months Ended June 30, 2016 and 2015

                   7

     

 

 
   

Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2016 and 2015

                   8

         
   

Notes to Consolidated Financial Statements

 
         
    Note 1.

Summary of Significant Accounting Policies

                 10

    Note 2.

Investment Securities

                 12

    Note 3.

Loans/Leases Receivable

                 17

    Note 4.

Borrowings

                 27

    Note 5.

Earnings Per Share

                 27

    Note 6.

Fair Value

                 28

    Note 7.

Business Segment Information

                 31

    Note 8.

Regulatory Capital Requirements

                 33

    Note 9.

Acquisition of Community State Bank and Common Stock Offering

                 35

         
 

Item 2

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

 
         
   

Introduction

                 36

   

General

                 36

   

Executive Overview

                 36

   

Long-Term Financial Goals

                 38

   

Strategic Developments

                 39

   

GAAP to Non-GAAP Reconciliations

                 41

   

Net Interest Income (Tax Equivalent Basis)

                 43

   

Critical Accounting Policies

                 48

 

 

 
1

 

 

 

   

Results of Operations

 
   

Interest Income

                 49

   

Interest Expense

                 49

   

Provision for Loan/Lease Losses

                 50

   

Noninterest Income

                 51

   

Noninterest Expense

                 54

   

Income Taxes

                 56

   

Financial Condition

                 57

   

Investment Securities

                 57

   

Loans/Leases

                 59

   

Allowance for Estimated Losses on Loans/Leases

                 61

   

Nonperforming Assets

                 63

   

Deposits

                 64

   

Borrowings

                 64

   

Stockholders' Equity

                 66

   

Liquidity and Capital Resources

                 66

   

Special Note Concerning Forward-Looking Statements

                 69

       
 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

                 70

       
 

Item 4

Controls and Procedures

                 72

       

Part II

OTHER INFORMATION

 
       
 

Item 1

Legal Proceedings

                 73

       
 

Item 1A

Risk Factors

                 73

       
 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

                 73

       
 

Item 3

Defaults upon Senior Securities

                 73

       
 

Item 4

Mine Safety Disclosures

                 73

       
 

Item 5

Other Information

                 73

       
 

Item 6

Exhibits

                 74

       

Signatures

 

 

                 75

 

Throughout the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, we use certain acronyms and abbreviations, as defined in Note 1.

 

 
2

 

  

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of June 30, 2016 and December 31, 2015

 

   

June 30,

   

December 31,

 
   

2016

   

2015

 

ASSETS

               

Cash and due from banks

  $ 49,581,154     $ 41,742,321  

Federal funds sold

    20,825,000       19,850,000  

Interest-bearing deposits at financial institutions

    47,607,304       36,313,965  
                 

Securities held to maturity, at amortized cost

    280,345,532       253,674,159  

Securities available for sale, at fair value

    230,613,784       323,434,982  

Total securities

    510,959,316       577,109,141  
                 

Loans receivable held for sale

    1,558,500       565,850  

Loans/leases receivable held for investment

    1,921,214,897       1,797,456,825  

Gross loans/leases receivable

    1,922,773,397       1,798,022,675  

Less allowance for estimated losses on loans/leases

    (28,097,490 )     (26,140,906 )

Net loans/leases receivable

    1,894,675,907       1,771,881,769  
                 

Bank-owned life insurance

    56,359,784       55,485,655  

Premises and equipment, net

    38,751,532       37,350,352  

Restricted investment securities

    16,693,125       14,835,925  

Other real estate owned, net

    6,179,102       7,150,658  

Goodwill

    3,222,688       3,222,688  

Core deposit intangible

    1,371,653       1,471,409  

Other assets

    37,207,723       26,784,392  

Total assets

  $ 2,683,434,288     $ 2,593,198,275  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

LIABILITIES

               

Deposits:

               

Noninterest-bearing

  $ 615,764,311     $ 615,292,211  

Interest-bearing

    1,357,829,473       1,265,373,973  

Total deposits

    1,973,593,784       1,880,666,184  
                 

Short-term borrowings

    51,561,748       144,662,716  

Federal Home Loan Bank advances

    196,900,000       151,000,000  

Other borrowings

    100,000,000       110,000,000  

Junior subordinated debentures

    33,412,643       38,499,052  

Other liabilities

    52,848,722       42,484,573  

Total liabilities

    2,408,316,897       2,367,312,525  
                 

STOCKHOLDERS' EQUITY

               

Preferred stock, $1 par value; shares authorized 250,000

    -       -  
June 2016 and December 2015 - No shares issued or outstanding                

Common stock, $1 par value; shares authorized 20,000,000

    13,057,368       11,761,083  
June 2016 - 13,057,368 shares issued and outstanding                
December 2015 - 11,761,083 shares issued and outstanding                

Additional paid-in capital

    155,453,781       123,282,851  

Retained earnings

    105,024,027       92,965,645  

Accumulated other comprehensive income (loss):

               

Securities available for sale

    2,730,155       (1,324,408 )

Interest rate cap derivatives

    (1,147,940 )     (799,421 )

Total stockholders' equity

    275,117,391       225,885,750  

Total liabilities and stockholders' equity

  $ 2,683,434,288     $ 2,593,198,275  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
3

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

Three Months Ended June 30,

 

   

2016

   

2015

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 20,238,179     $ 18,245,724  

Securities:

               

Taxable

    1,192,541       1,735,495  

Nontaxable

    2,276,203       1,890,320  

Interest-bearing deposits at financial institutions

    62,242       64,665  

Restricted investment securities

    133,546       108,161  

Federal funds sold

    10,573       6,247  

Total interest and dividend income

    23,913,284       22,050,612  
                 

Interest expense:

               

Deposits

    1,344,398       1,083,487  

Short-term borrowings

    18,065       53,244  

Federal Home Loan Bank advances

    415,933       1,001,646  

Other borrowings

    824,437       1,108,442  

Junior subordinated debentures

    301,638       312,957  

Total interest expense

    2,904,471       3,559,776  
                 

Net interest income

    21,008,813       18,490,836  
                 

Provision for loan/lease losses

    1,197,850       2,348,665  

Net interest income after provision for loan/lease losses

    19,810,963       16,142,171  
                 

Noninterest income:

               

Trust department fees

    1,512,083       1,511,176  

Investment advisory and management fees

    692,738       758,433  

Deposit service fees

    946,810       924,642  

Gains on sales of residential real estate loans, net

    84,413       95,535  

Gains on sales of government guaranteed portions of loans, net

    1,603,890       69,346  

Swap fee income

    167,582       393,723  

Securities gains, net

    18,030       -  

Earnings on bank-owned life insurance

    480,520       433,152  

Debit card fees

    343,748       255,000  

Correspondent banking fees

    244,939       285,379  

Participation service fees on commercial loan participations

    246,010       223,827  

Fee income from early termination of leases

    66,043       76,722  

Credit card issuing fees

    139,073       135,649  

Other

    216,522       298,650  

Total noninterest income

    6,762,401       5,461,234  
                 

Noninterest expense:

               

Salaries and employee benefits

    10,917,473       11,091,952  

Occupancy and equipment expense

    1,884,556       1,865,552  

Professional and data processing fees

    1,542,322       1,470,695  

Acquisition costs

    354,969       -  

FDIC insurance, other insurance and regulatory fees

    649,604       730,563  

Loan/lease expense

    154,349       208,552  

Net cost of operations of other real estate

    277,911       (47,876 )

Advertising and marketing

    433,451       489,504  

Postage and communications

    256,567       214,142  

Stationery and supplies

    157,924       136,808  

Bank service charges

    415,350       358,996  

Losses on debt extinguishment, net

    -       6,894,185  

Correspondent banking expense

    181,776       165,091  

Other

    517,501       523,470  

Total noninterest expense

    17,743,753       24,101,634  
                 

Net income (loss) before income taxes

    8,829,611       (2,498,229 )

Federal and state income tax expense (benefit)

    2,153,144       (1,974,411 )
                 

Net income (loss)

  $ 6,676,467     $ (523,818 )
                 

Basic earnings (loss) per common share

  $ 0.54     $ (0.05 )

Diluted earnings (loss) per common share

  $ 0.53     $ (0.05 )
                 

Weighted average common shares outstanding

    12,335,077       9,946,744  

Weighted average common and common equivalent shares outstanding

    12,516,474       9,946,744  
                 

Cash dividends declared per common share

  $ 0.04     $ 0.04  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
4

 

  

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Six Months Ended June 30,

 

   

2016

   

2015

 

Interest and dividend income:

               

Loans/leases, including fees

  $ 39,938,549     $ 36,250,243  

Securities:

               

Taxable

    2,548,744       3,678,260  

Nontaxable

    4,518,218       3,620,888  

Interest-bearing deposits at financial institutions

    122,559       141,719  

Restricted investment securities

    264,110       250,479  

Federal funds sold

    23,163       10,753  

Total interest and dividend income

    47,415,343       43,952,342  
                 

Interest expense:

               

Deposits

    2,634,196       2,155,932  

Short-term borrowings

    61,131       117,269  

Federal Home Loan Bank advances

    857,637       2,445,361  

Other borrowings

    1,649,520       2,340,328  

Junior subordinated debentures

    606,524       620,399  

Total interest expense

    5,809,008       7,679,289  
                 

Net interest income

    41,606,335       36,273,053  
                 

Provision for loan/lease losses

    3,270,835       4,059,121  

Net interest income after provision for loan/lease losses

    38,335,500       32,213,932  
                 

Noninterest income:

               

Trust department fees

    3,087,990       3,144,571  

Investment advisory and management fees

    1,351,123       1,468,476  

Deposit service fees

    1,877,889       1,825,998  

Gains on sales of residential real estate loans, net

    144,799       181,675  

Gains on sales of government guaranteed portions of loans, net

    2,482,418       140,319  

Swap fee income

    1,024,540       1,119,930  

Securities gains, net

    376,510       416,933  

Earnings on bank-owned life insurance

    874,129       911,891  

Debit card fees

    651,399       493,000  

Correspondent banking fees

    547,069       605,000  

Participation service fees on commercial loan participations

    456,719       445,776  

Fee income from early termination of leases

    77,793       161,560  

Credit card issuing fees

    275,728       269,810  

Other

    356,768       498,073  

Total noninterest income

    13,584,874       11,683,012  
                 

Noninterest expense:

               

Salaries and employee benefits

    21,718,380       22,126,404  

Occupancy and equipment expense

    3,711,544       3,659,723  

Professional and data processing fees

    2,989,735       2,941,212  

Acquisition costs

    354,969       -  

FDIC insurance, other insurance and regulatory fees

    1,283,969       1,449,620  

Loan/lease expense

    317,168       511,475  

Net cost of operations of other real estate

    380,094       28,975  

Advertising and marketing

    819,710       907,741  

Postage and communications

    473,657       463,098  

Stationery and supplies

    322,795       279,363  

Bank service charges

    831,281       696,454  

Losses on debt extinguishment, net

    83,197       6,894,185  

Correspondent banking expense

    358,765       340,794  

Other

    1,052,987       1,006,751  

Total noninterest expense

    34,698,251       41,305,795  
                 

Net income before income taxes

    17,222,123       2,591,149  

Federal and state income tax expense (benefit)

    4,172,167       (1,062,922 )
                 

Net income

  $ 13,049,956     $ 3,654,071  
                 

Basic earnings per common share

  $ 1.08     $ 0.41  

Diluted earnings per common share

  $ 1.07     $ 0.40  
                 

Weighted average common shares outstanding

    12,064,349       8,961,327  

Weighted average common and common equivalent shares outstanding

    12,235,212       9,098,697  
                 

Cash dividends declared per common share

  $ 0.08     $ 0.04  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
5

 

  

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

Three and Six Months Ended June 30, 2016 and 2015

 

   

Three Months Ended June 30,

 
   

2016

   

2015

 

Net income (loss)

  $ 6,676,467     $ (523,818 )
                 

Other comprehensive income (loss):

               
                 

Unrealized gains (losses) on securities available for sale:

               

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

    2,081,800       (3,954,857 )

Less reclassification adjustment for gains included in net income before tax

    18,030       -  
      2,063,770       (3,954,857 )

Unrealized gains (losses) on interest rate cap derivatives:

               

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

    (159,691 )     119,433  

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

    20,154       9,561  
      (179,845 )     109,872  
                 

Other comprehensive income (loss), before tax

    1,883,925       (3,844,985 )

Tax expense (benefit)

    703,292       (1,466,064 )

Other comprehensive income (loss), net of tax

    1,180,633       (2,378,921 )
                 

Comprehensive income (loss)

  $ 7,857,100     $ (2,902,739 )

 

   

Six Months Ended June 30,

 
    2016     2015  

Net income

  $ 13,049,956     $ 3,654,071  
                 

Other comprehensive income (loss):

               
                 

Unrealized gains on securities available for sale:

               

Unrealized holding gains arising during the period before tax

    6,945,518       443,347  

Less reclassification adjustment for gains included in net income before tax

    376,510       416,933  
      6,569,008       26,414  

Unrealized losses on interest rate cap derivatives:

               

Unrealized holding losses arising during the period before tax

    (549,627 )     (252,950 )

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

    35,591       10,463  
      (585,218 )     (263,413 )
                 

Other comprehensive income (loss), before tax

    5,983,790       (236,999 )

Tax expense (benefit)

    2,277,746       (78,943 )

Other comprehensive income (loss), net of tax

    3,706,044       (158,056 )
                 

Comprehensive income

  $ 16,756,000     $ 3,496,015  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
6

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Six Months Ended June 30, 2016 and 2015

 

                           

Accumulated

                 
           

Additional

           

Other

                 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury

         
   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Stock

   

Total

 

Balance December 31, 2015

  $ 11,761,083     $ 123,282,851     $ 92,965,645     $ (2,123,829 )   $ -     $ 225,885,750  

Net income

    -       -       6,373,489       -       -       6,373,489  

Other comprehensive income, net of tax

    -       -       -       2,525,411       -       2,525,411  

Common cash dividends declared, $0.04 per share

    -       -       (470,873 )     -       -       (470,873 )

Proceeds from issuance of 5,054 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    5,054       94,560       -       -       -       99,614  

Proceeds from issuance of 30,331 shares of common stock as a result of stock options exercised

    30,331       382,639       -       -       -       412,970  

Stock compensation expense

    -       382,761                               382,761  

Tax benefit of nonqualified stock options exercised

    -       22,508       -       -       -       22,508  

Restricted stock awards

    22,382       (22,382 )     -       -       -       -  

Exchange of 3,939 shares of common stock in connection with restricted stock vested, net

    (3,939 )     (84,972 )     -       -       -       (88,911 )

Balance March 31, 2016

  $ 11,814,911     $ 124,057,965     $ 98,868,261     $ 401,582     $ -     $ 235,142,719  

Net income

    -       -       6,676,467       -       -       6,676,467  

Other comprehensive income, net of tax

    -       -       -       1,180,633       -       1,180,633  

Common cash dividends declared, $0.04 per share

    -       -       (520,701 )     -       -       (520,701 )

Proceeds from the issuance of 1,215,000 shares of common stock, net of issuance costs

    1,215,000       28,613,916       -       -       -       29,828,916  

Proceeds from issuance of 6,982 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    6,982       142,887       -       -       -       149,869  

Proceeds from issuance of 20,975 shares of common stock as a result of stock options exercised

    20,975       230,671       -       -       -       251,646  

Tax basis adjustment related to the acquistion of noncontrolling interest in m2 Lease Funds

    -       2,132,415       -       -       -       2,132,415  

Stock compensation expense

    -       187,569                               187,569  

Tax benefit of nonqualified stock options exercised

    -       87,858       -       -       -       87,858  

Restricted stock awards

    (500 )     500       -       -       -       -  

Balance June 30, 2016

  $ 13,057,368     $ 155,453,781     $ 105,024,027     $ 1,582,215     $ -     $ 275,117,391  

 

                           

Accumulated

                 
                   

Additional

   

Other

                 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury

         
   

Stock

   

Capital

   

Earnings

   

Income (Loss)

   

Stock

   

Total

 

Balance December 31, 2014

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

Net income

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

Other comprehensive income, net of tax

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

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

    5,679       82,641       -       -       -      

-

88,320

 

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

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

Stock compensation expense

    -       367,775       -       -       -       367,775  

Tax benefit of nonqualified stock options exercised

    -       15,651       -       -       -       15,651  

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

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

Restricted stock awards

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

Balance March 31, 2015

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

Net loss

    -       -       (523,818 )     -       -       (523,818 )

Other comprehensive loss, net of tax

    -       -       -       (2,378,921 )     -       (2,378,921 )

Common cash dividends declared, $0.04 per share

    -       -       (464,706 )     -       -       (464,706 )

Proceeds from issuance of 3,680,000 shares of common stock, net of issuance costs

    3,680,000       59,804,123       -       -       -       63,484,123  

Proceeds from issuance of 8,558 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

    8,558       128,927       -       -       -       137,485  

Proceeds from issuance of 17,240 shares of common stock as a result of stock options exercised

    17,240       238,717       -       -       -       255,957  

Tax benefit of nonqualified stock options exercised

    -       15,827       -       -       -       15,827  

Exchange of 630 shares of common stock in connection with stock options exercised

    (630 )     (10,616 )     -       -       -       (11,246 )

Stock compensation expense

    -       186,751       -       -       -       186,751  

Restricted stock awards

    1,616       (1,616 )     -       -       -       -  

Balance June 30, 2015

  $ 11,819,824     $ 122,511,186     $ 81,066,189     $ (2,093,272 )   $ (1,606,510 )   $ 211,697,417  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
7

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 2016 and 2015

 

   

2016

   

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 13,049,956     $ 3,654,071  

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

               

Depreciation

    1,552,176       1,520,380  

Provision for loan/lease losses

    3,270,835       4,059,121  

Stock-based compensation expense

    570,330       554,526  

Deferred compensation expense accrued

    623,831       767,292  

Losses (gains) on other real estate owned, net

    157,739       (69,923 )

Amortization of premiums on securities, net

    611,900       485,085  

Securities gains, net

    (376,510 )     (416,933 )

Loans originated for sale

    (43,526,263 )     (15,205,967 )

Proceeds on sales of loans

    45,160,830       14,532,761  

Gains on sales of residential real estate loans

    (144,799 )     (181,675 )

Gains on sales of government guaranteed portions of loans

    (2,482,418 )     (140,319 )

Losses on debt extinguishment, net

    83,197       6,894,185  

Amortization of core deposit intangible

    99,756       99,756  

Accretion of acquisition fair value adjustments, net

    (61,065 )     (267,414 )

Increase in cash value of bank-owned life insurance

    (874,129 )     (911,891 )

Increase in other assets

    (4,330,548 )     (4,767,394 )

Increase (decrease) in other liabilities

    1,386,323       (1,722,759 )

Net cash provided by operating activities

  $ 14,771,141     $ 8,882,902  
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net decrease (increase) in federal funds sold

    (975,000 )     24,225,000  

Net increase in interest-bearing deposits at financial institutions

    (11,293,339 )     (12,348,141 )

Proceeds from sales of other real estate owned

    864,817       1,723,317  

Activity in securities portfolio:

               

Purchases

    (97,132,279 )     (181,272,218 )

Calls, maturities and redemptions

    96,704,276       177,366,721  

Paydowns

    13,321,512       8,003,250  

Sales

    61,075,145       54,966,923  

Activity in restricted investment securities:

               

Purchases

    (1,857,200 )     (1,338,650 )

Redemptions

    -       3,431,700  

Net increase in loans/leases originated and held for investment

    (124,972,098 )     (85,814,353 )

Purchase of premises and equipment

    (2,953,356 )     (3,927,981 )

Net cash used in investing activities

  $ (67,217,522 )   $ (14,984,432 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in deposit accounts

    92,920,820       157,102,985  

Net decrease in short-term borrowings

    (93,100,968 )     (99,776,818 )

Activity in Federal Home Loan Bank advances:

               

Term advances

    -       5,000,000  

Maturities

    (9,000,000 )     (22,000,000 )

Net change in short-term and overnight advances

    64,900,000       21,500,000  

Prepayments

    (10,524,197 )     (81,192,185 )

Activity in other borrowings:

               

Maturities and scheduled principal payments

    -       (7,350,000 )

Prepayments

    (10,759,000 )     (29,177,000 )

Retirement of junior subordinated debentures

    (3,955,000 )     -  

Payment of cash dividends on common stock

    (939,456 )     (315,954 )

Net proceeds from the common stock offering, 3,680,000 shares issued

    -       63,484,123  

Net proceeds from the common stock offering, 1,215,000 shares issued

    29,828,916       -  

Proceeds from issuance of common stock, net

    914,099       586,178  

Net cash provided by financing activities

  $ 60,285,214     $ 7,861,329  
                 

Net increase in cash and due from banks

    7,838,833       1,759,799  

Cash and due from banks, beginning

    41,742,321       38,235,019  

Cash and due from banks, ending

  $ 49,581,154     $ 39,994,818  

 

(Continued)

 

 
8

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Six Months Ended June 30, 2016 and 2015

 

   

2016

   

2015

 

Supplemental disclosure of cash flow information, cash payments for:

               

Interest

  $ 5,852,789     $ 7,903,945  
                 

Income/franchise taxes

  $ 4,869,300     $ 1,940,275  
                 

Supplemental schedule of noncash investing activities:

               

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

  $ 3,706,044     $ (158,056 )
                 

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

  $ (88,911 )   $ (68,706 )
                 

Tax benefit of nonqualified stock options exercised

  $ 110,366     $ 31,478  
                 

Transfers of loans to other real estate owned

  $ 51,000     $ 837,782  
                 

Due to broker for purchases of securities

  $ (1,500,000 )   $ -  
                 

Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds

  $ 2,132,415     $ -  

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 
9

 

 

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2016

 

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, 2015, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 11, 2016. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

 

The financial information of the Company included herein has been prepared in accordance with U.S. GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management’s discussion and analysis are due to rounding. The results of the interim period ended June 30, 2016, are not necessarily indicative of the results expected for the year ending December 31, 2016, or for any other period.

 

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

 

Allowance: Allowance for estimated losses on loans/leases

GAAP: Generally Accepted Accounting Principles

AOCI: Accumulated other comprehensive income (loss)

HTM: Held to maturity

AFS: Available for sale

m2: m2 Lease Funds, LLC

ASU: Accounting Standards Update

MD&A: Management's Discussion & Analysis

BOLI: Bank-owned life insurance

NIM: Net interest margin

Caps: Interest rate cap derivatives

NPA: Nonperforming asset

Community National: Community National Bancorporation

NPL: Nonperforming loan

CNB: Community National Bank

OREO: Other real estate owned

CRBT: Cedar Rapids Bank & Trust Company

OTTI: Other-than-temporary impairment

CRE: Commercial real estate

Provision: Provision for loan/lease losses

CSB: Community State Bank

QCBT: Quad City Bank & Trust Company

C&I: Commercial and industrial

RB&T: Rockford Bank & Trust Company

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

ROAA: Return on Average Assets

     Consumer Protection Act

SBA: U.S. Small Business Administration

EPS: Earnings per share

SEC: Securities and Exchange Commission

Exchange Act: Securities Exchange Act of 1934, as amended

TA: Tangible assets

FASB: Financial Accounting Standards Board

TCE: Tangible common equity

FDIC: Federal Deposit Insurance Corporation

TDRs: Troubled debt restructurings

FHLB: Federal Home Loan Bank

The Company: QCR Holdings, Inc.

FRB: Federal Reserve Bank of Chicago

USDA: U.S. Department of Agriculture

 

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

 

On May 23, 2016, the Company announced the signing of a definitive agreement to acquire CSB, headquartered in Ankeny, Iowa, from Van Diest Investment Company. The transaction is expected to close during the third quarter of 2016, subject to certain customary closing conditions. The financial results of CSB are not recognized in this Report. See Note 9 to the Consolidated Financial Statements for additional information about the planned acquisition.

 

 
10

 

 

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 will now be effective for the Company on January 1, 2018 and it is not expected to 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. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption.

 

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

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation. ASU 2016-09 aims to simplify the accounting for companies that issue share-based payment awards to their employees. Simplification includes the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows of share-based payment awards. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is in the process of analyzing the impact of adoption on the Company’s consolidated financial statements.

 

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

 

 
11

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

NOTE 2 – INVESTMENT SECURITIES

 

The amortized cost and fair value of investment securities as of June 30, 2016 and December 31, 2015 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

(Losses)

   

Value

 

June 30, 2016:

                               

Securities HTM:

                               

Municipal securities

  $ 279,295,532     $ 6,194,753     $ (731,170 )   $ 284,759,115  

Other securities

    1,050,000       -       -       1,050,000  
    $ 280,345,532     $ 6,194,753     $ (731,170 )   $ 285,809,115  
                                 

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 87,068,743     $ 1,332,981     $ (80,276 )   $ 88,321,448  

Residential mortgage-backed and related securities

    114,990,076       1,855,710       (80,276 )     116,765,510  

Municipal securities

    22,463,188       945,994       (16,365 )     23,392,817  

Other securities

    1,684,787       449,222       -       2,134,009  
    $ 226,206,794     $ 4,583,907     $ (176,917 )   $ 230,613,784  
                                 

December 31, 2015:

                               

Securities HTM:

                               

Municipal securities

  $ 252,624,159     $ 3,190,558     $ (1,173,432 )   $ 254,641,285  

Other securities

    1,050,000       -       -       1,050,000  
    $ 253,674,159     $ 3,190,558     $ (1,173,432 )   $ 255,691,285  
                                 

Securities AFS:

                               

U.S. govt. sponsored agency securities

  $ 216,281,416     $ 104,524     $ (2,848,561 )   $ 213,537,379  

Residential mortgage-backed and related securities

    81,442,479       511,095       (1,283,439 )     80,670,135  

Municipal securities

    26,764,981       872,985       (59,378 )     27,578,588  

Other securities

    1,108,124       540,919       (163 )     1,648,880  
    $ 325,597,000     $ 2,029,523     $ (4,191,541 )   $ 323,434,982  

 

 
12

 

 

Part I

Item 1

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-continued

 

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

 

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

 

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2016 and December 31, 2015, are summarized as follows:

 

   

Less than 12 Months

   

12 Months or More