UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to________
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
42-1397595 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices, including zip code)
(309) 736-3580
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, $1.00 Par Value |
QCRH |
The Nasdaq Global Market |
Indicate 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 1, 2021, the Registrant had outstanding 15,846,918 shares of common stock, $1.00 par value per share.
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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Part I |
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FINANCIAL INFORMATION |
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Item 1 |
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Consolidated Financial Statements (Unaudited) |
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Consolidated Balance Sheets
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4 |
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Consolidated Statements of Income
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5 |
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Consolidated Statements of Comprehensive Income
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7 |
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Consolidated Statements of Cash Flows
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8 |
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10 |
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34 |
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38 |
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40 |
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41 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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43 |
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43 |
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46 |
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48 |
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49 |
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52 |
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54 |
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54 |
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55 |
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55 |
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55 |
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55 |
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56 |
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57 |
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59 |
2
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60 |
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61 |
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61 |
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62 |
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Allowance for Credit Losses on Loans/Leases and OBS Exposures |
64 |
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66 |
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67 |
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67 |
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69 |
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69 |
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71 |
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72 |
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74 |
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75 |
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75 |
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75 |
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75 |
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75 |
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75 |
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75 |
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76 |
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77 |
Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of March 31, 2021 and December 31, 2020
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March 31, |
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December 31, |
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2021 |
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2020 |
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(dollars in thousands) |
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Assets |
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Cash and due from banks |
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$ |
78,814 |
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$ |
61,329 |
Federal funds sold |
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1,350 |
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9,080 |
Interest-bearing deposits at financial institutions |
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53,706 |
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86,596 |
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Securities held to maturity, at amortized cost, net of allowance for credit losses |
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452,952 |
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476,165 |
Securities available for sale, at fair value |
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346,873 |
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361,966 |
Total securities |
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799,825 |
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838,131 |
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Loans receivable held for sale |
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5,664 |
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3,758 |
Loans/leases receivable held for investment |
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4,355,387 |
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4,247,371 |
Gross loans/leases receivable |
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4,361,051 |
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4,251,129 |
Less allowance for credit losses |
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(81,831) |
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(84,376) |
Net loans/leases receivable |
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4,279,220 |
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4,166,753 |
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Bank-owned life insurance |
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61,057 |
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60,586 |
Premises and equipment, net |
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73,162 |
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72,693 |
Restricted investment securities |
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19,724 |
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18,103 |
Other real estate owned, net |
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173 |
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20 |
Goodwill |
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74,066 |
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74,066 |
Intangibles |
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10,873 |
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11,381 |
Derivatives |
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122,668 |
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222,757 |
Other assets |
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70,509 |
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61,302 |
Total assets |
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$ |
5,645,147 |
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$ |
5,682,797 |
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Liabilities and Stockholders' Equity |
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Liabilities: |
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Deposits: |
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Noninterest-bearing |
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$ |
1,269,578 |
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$ |
1,145,378 |
Interest-bearing |
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3,362,204 |
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3,453,759 |
Total deposits |
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4,631,782 |
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4,599,137 |
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Short-term borrowings |
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6,840 |
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5,430 |
Federal Home Loan Bank advances |
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25,000 |
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15,000 |
Subordinated notes |
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118,731 |
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118,691 |
Junior subordinated debentures |
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38,030 |
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37,993 |
Derivatives |
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125,863 |
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229,270 |
Other liabilities |
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90,182 |
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83,483 |
Total liabilities |
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5,036,428 |
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5,089,004 |
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Stockholders' Equity: |
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Preferred stock, $1 par value; shares authorized 250,000 March 2021 and December 2020 - no shares issued or outstanding |
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— |
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— |
Common stock, $1 par value; shares authorized 20,000,000 March 2021 - 15,843,732 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding |
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15,844 |
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15,806 |
Additional paid-in capital |
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276,350 |
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275,807 |
Retained earnings |
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316,900 |
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300,804 |
Accumulated other comprehensive income (loss): |
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Securities available for sale |
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4,583 |
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9,008 |
Derivatives |
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(4,958) |
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(7,632) |
Total stockholders' equity |
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608,719 |
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593,793 |
Total liabilities and stockholders' equity |
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$ |
5,645,147 |
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$ |
5,682,797 |
See Notes to Consolidated Financial Statements (Unaudited)
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 2021 and 2020
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2021 |
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2020 |
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(dollars in thousands, except share data) |
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Interest and dividend income: |
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Loans/leases, including fees |
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$ |
41,333 |
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$ |
43,159 |
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Securities: |
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Taxable |
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2,042 |
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1,727 |
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Nontaxable |
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3,934 |
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3,459 |
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Interest-bearing deposits at financial institutions |
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37 |
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361 |
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Restricted investment securities |
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219 |
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258 |
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Federal funds sold |
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— |
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18 |
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Total interest and dividend income |
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47,565 |
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48,982 |
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Interest expense: |
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Deposits |
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3,427 |
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9,206 |
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Short-term borrowings |
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1 |
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64 |
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Federal Home Loan Bank advances |
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9 |
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449 |
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Subordinated notes |
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1,594 |
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994 |
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Junior subordinated debentures |
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559 |
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571 |
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Total interest expense |
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5,590 |
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11,284 |
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Net interest income |
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41,975 |
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37,698 |
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Provision for credit losses |
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6,713 |
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8,367 |
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Net interest income after provision for loan/lease losses |
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35,262 |
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29,331 |
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Noninterest income: |
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Trust department fees |
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2,801 |
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2,312 |
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Investment advisory and management fees |
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940 |
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1,727 |
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Deposit service fees |
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1,408 |
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1,477 |
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Gains on sales of residential real estate loans, net |
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1,337 |
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652 |
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Swap fee income |
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13,557 |
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6,804 |
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Earnings on bank-owned life insurance |
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471 |
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329 |
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Debit card fees |
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975 |
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758 |
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Correspondent banking fees |
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314 |
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215 |
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Other |
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1,686 |
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922 |
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Total noninterest income |
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23,489 |
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15,196 |
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Noninterest expense: |
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Salaries and employee benefits |
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24,847 |
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18,519 |
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Occupancy and equipment expense |
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4,108 |
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4,032 |
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Professional and data processing fees |
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3,443 |
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3,369 |
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Post-acquisition compensation, transition and integration costs |
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— |
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151 |
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Disposition costs |
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8 |
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517 |
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FDIC insurance, other insurance and regulatory fees |
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1,065 |
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683 |
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Loan/lease expense |
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300 |
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228 |
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Net cost of (income from) and gains/losses on operations of other real estate |
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39 |
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13 |
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Advertising and marketing |
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627 |
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682 |
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Bank service charges |
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523 |
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504 |
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Losses on liability extinguishment |
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— |
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147 |
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Correspondent banking expense |
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200 |
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216 |
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Intangibles amortization |
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508 |
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549 |
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Goodwill impairment |
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— |
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500 |
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Other |
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1,560 |
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1,305 |
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Total noninterest expense |
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37,228 |
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31,415 |
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Net income before income taxes |
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21,523 |
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13,112 |
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Federal and state income tax expense |
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3,541 |
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1,884 |
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Net income |
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$ |
17,982 |
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$ |
11,228 |
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Basic earnings per common share |
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$ |
1.14 |
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$ |
0.71 |
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Diluted earnings per common share |
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$ |
1.12 |
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$ |
0.70 |
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Weighted average common shares outstanding |
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15,803,643 |
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15,796,796 |
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Weighted average common and common equivalent shares outstanding |
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16,025,548 |
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16,011,456 |
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Cash dividends declared per common share |
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$ |
0.06 |
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$ |
0.06 |
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See Notes to Consolidated Financial Statements (Unaudited)
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31, 2021 and 2020
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Three Months Ended March 31, |
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2021 |
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2020 |
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(dollars in thousands) |
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Net income |
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$ |
17,982 |
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$ |
11,228 |
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Other comprehensive income (loss): |
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Unrealized gains (losses) on securities available for sale: |
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Unrealized holding gains (losses) arising during the period before tax |
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(5,759) |
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2,481 |
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Unrealized gains (losses) on derivatives: |
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Unrealized holding gains (losses) arising during the period before tax |
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3,153 |
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(7,161) |
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Less reclassification adjustment for caplet amortization before tax |
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(151) |
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(110) |
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3,304 |
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(7,051) |
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Other comprehensive loss, before tax |
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(2,455) |
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(4,570) |
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Tax benefit |
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(704) |
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(879) |
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Other comprehensive loss, net of tax |
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(1,751) |
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(3,691) |
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Comprehensive income |
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$ |
16,231 |
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$ |
7,537 |
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See Notes to Consolidated Financial Statements (Unaudited)
6
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended March 31, 2021 and 2020
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Accumulated |
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Additional |
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Other |
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Common |
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Paid-In |
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Retained |
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Comprehensive |
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Stock |
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Capital |
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Earnings |
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(Loss) Income |
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Total |
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(dollars in thousands) |
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Balance December 31, 2020 |
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$ |
15,806 |
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$ |
275,807 |
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$ |
300,804 |
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$ |
1,376 |
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$ |
593,793 |
Net income |
|
|
— |
|
|
— |
|
|
17,982 |
|
|
— |
|
|
17,982 |
Other comprehensive loss, net of tax |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,751) |
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|
(1,751) |
Impact of adoption of ASU 2016-13 |
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|
— |
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|
— |
|
|
(937) |
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|
— |
|
|
(937) |
Common cash dividends declared, $0.06 per share |
|
|
— |
|
|
— |
|
|
(949) |
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— |
|
|
(949) |
Stock-based compensation expense |
|
|
— |
|
|
841 |
|
|
— |
|
|
— |
|
|
841 |
Issuance of common stock under employee benefit plans |
|
|
38 |
|
|
(298) |
|
|
— |
|
|
— |
|
|
(260) |
Balance, March 31, 2021 |
|
$ |
15,844 |
|
$ |
276,350 |
|
$ |
316,900 |
|
$ |
(375) |
|
$ |
608,719 |
See Notes to Consolidated Financial Statements (Unaudited)
7
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2021 and 2020
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|
|
|
|
|
|
2021 |
|
2020 |
|
||
|
|
(dollars in thousands) |
|
||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income |
|
$ |
17,982 |
|
$ |
11,228 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
1,331 |
|
|
1,338 |
|
Provision for credit losses |
|
|
6,713 |
|
|
8,367 |
|
Stock-based compensation expense |
|
|
841 |
|
|
641 |
|
Deferred compensation expense accrued |
|
|
1,289 |
|
|
913 |
|
Losses (gains) on other real estate owned, net |
|
|
(1) |
|
|
4 |
|
Amortization of premiums on securities, net |
|
|
597 |
|
|
159 |
|
Caplet amortization |
|
|
151 |
|
|
110 |
|
Mark to market gains on unhedged derivatives, net |
|
|
(164) |
|
|
— |
|
Loans originated for sale |
|
|
(59,785) |
|
|
(34,459) |
|
Proceeds on sales of loans |
|
|
59,216 |
|
|
34,790 |
|
Gains on sales of residential real estate loans |
|
|
(1,337) |
|
|
(652) |
|
Loss on liability extinguishment, net |
|
|
— |
|
|
147 |
|
Gains on sales of premises and equipment |
|
|
(21) |
|
|
(8) |
|
Amortization of intangibles |
|
|
508 |
|
|
549 |
|
Accretion of acquisition fair value adjustments, net |
|
|
(504) |
|
|
(625) |
|
Increase in cash value of bank-owned life insurance |
|
|
(471) |
|
|
(329) |
|
Goodwill impairment |
|
|
— |
|
|
500 |
|
Decrease (increase) in other assets |
|
|
(8,243) |
|
|
5,917 |
|
Decrease in other liabilities |
|
|
(6,959) |
|
|
(21,998) |
|
Net cash provided by operating activities |
|
$ |
11,143 |
|
$ |
6,592 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Net decrease in federal funds sold |
|
|
7,730 |
|
|
5,105 |
|
Net decrease (increase) in interest-bearing deposits at financial institutions |
|
|
32,890 |
|
|
(54,122) |
|
Proceeds from sales of other real estate owned |
|
|
1 |
|
|
827 |
|
Activity in securities portfolio: |
|
|
|
|
|
|
|
Purchases |
|
|
(53,567) |
|
|
(83,987) |
|
Calls, maturities and redemptions |
|
|
48,988 |
|
|
3,872 |
|
Paydowns |
|
|
19,308 |
|
|
9,182 |
|
Sales |
|
|
19,540 |
|
|
— |
|
Activity in restricted investment securities: |
|
|
|
|
|
|
|
Purchases |
|
|
(1,680) |
|
|
(1,874) |
|
Redemptions |
|
|
59 |
|
|
3,917 |
|
Net increase in loans/leases originated and held for investment |
|
|
(107,996) |
|
|
(15,596) |
|
Purchase of premises and equipment |
|
|
(1,800) |
|
|
(798) |
|
Proceeds from sales of premises and equipment |
|
|
21 |
|
|
8 |
|
Net cash (used in) investing activities |
|
$ |
(36,506) |
|
$ |
(133,466) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Net increase in deposit accounts |
|
|
32,645 |
|
|
259,310 |
|
Net increase in short-term borrowings |
|
|
1,410 |
|
|
29,644 |
|
Activity in Federal Home Loan Bank advances: |
|
|
|
|
|
|
|
Term advances |
|
|
— |
|
|
45,000 |
|
Net change in short-term and overnight advances |
|
|
10,000 |
|
|
(109,300) |
|
Payment of cash dividends on common stock |
|
|
(947) |
|
|
(947) |
|
Proceeds (payment) from issuance of common stock, net |
|
|
(260) |
|
|
520 |
|
Repurchase and cancellation of shares |
|
|
— |
|
|
(3,780) |
|
Net cash provided by financing activities |
|
$ |
42,848 |
|
$ |
220,447 |
|
|
|
|
|
|
|
|
|
Net increase in cash and due from banks |
|
|
17,485 |
|
|
93,573 |
|
|
|
|
|
|
|
|
|
Cash and due from banks, beginning |
|
|
61,329 |
|
|
76,254 |
|
Cash and due from banks, ending |
|
$ |
78,814 |
|
$ |
169,827 |
|
8
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
Three Months Ended March 31, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information, cash payments for: |
|
|
|
|
|
|
|
Interest |
|
$ |
7,674 |
|
$ |
11,534 |
|
Income/franchise taxes |
|
|
35 |
|
|
(2,134) |
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing activities: |
|
|
|
|
|
|
|
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net |
|
|
(1,751) |
|
|
(3,691) |
|
Change in retained earnings from adoption of ASU 2016-13 |
|
|
(937) |
|
|
— |
|
Transfers of loans to other real estate owned |
|
|
153 |
|
|
— |
|
Due to broker for purchases of securities |
|
|
2,568 |
|
|
— |
|
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities |
|
|
(100,886) |
|
|
110,545 |
|
Dividends payable |
|
|
949 |
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements (Unaudited)
9
Part I
Item 1
QCR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021
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, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.
The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, 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.
10
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.
Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). Under the standard, assets measured at amortized cost (including loans, leases and HTM 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 became effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020. The Company elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act.
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021. The Company has developed a CECL allowance model which calculates allowances over the life of a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given the default framework. The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.
Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, an established ACL on held to maturity debt securities of $183 thousand and the established ACL on OBS credit exposures of $9.1 million. The company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.
The company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-Q.
The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.
11
The following table illustrates the impact of ASU 2016-13 as of January 1, 2021:
* Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, wheras pre ASU 2016-13 segments were borrower driven.
Further discussion contained in this quarterly report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discission in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $19 million at March 31, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 3.
The Company’s portfolio segments and class of loans receivable are as follows:
● | C&I – revolving |
● | C&I – other |
● | CRE – owner occupied |
● | CRE – non-owner occupied |
12
● | Construction and land development |
● | Multi-family |
● | 1-4 family real estate |
● | Consumer |
The Company’s classes of loans receivable are as follows:
● | C&I – revolving |
● | C&I – other |
● | CRE – owner occupied |
● | CRE – non-owner occupied |
● | Construction and land development |
● | Multi-family |
● | Direct financing leases |
● | 1-4 family real estate |
● | Consumer |
Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.
Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.
For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:
● | It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan; |
● | When full repayment of principal and interest is not expected; |
● | When the loan is graded “doubtful”; |
● | When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or |
● | When foreclosure action is initiated. |
When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.
For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:
● | The loan is current, and all principal and interest amounts contractually due have been made; |
● | All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and |
● | There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms: |
o | Six months of repayment performance for contractual monthly payments, or |
o | One year of repayment performance for contractual quarterly or semi-annual payments. |
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are
13
recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.
Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at the lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.
TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.
The following criteria, related to granting a concession, together or separately, create a TDR:
● | A modification of terms of a debt such as one or a combination of: |
o | The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk. |
o | The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk. |
o | The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement. |
o | The reduction of accrued interest. |
● | A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan. |
● | The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position. |
Allowance:
Allowance for Credit Losses on Loans and Leases
The ACL on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the eight portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectibility of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information -- adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable -- to the identified pools of
14
financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.
A discussion of the risk characteristics and the allowance by each loan portfolio segment follows:
For C&I loans, both revolving lines of credit and other C&I, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:
● | Ability and stability of current management of the borrower; |
● | Stable earnings with positive financial trends; |
● | Sufficient cash flow to support debt repayment; |
● | Earnings projections based on reasonable assumptions; |
● | Financial strength of the industry and business; and |
● | Value and marketability of collateral. |
Collateral for C&I loans generally includes accounts receivable, inventory, equipment and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.
The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally 7 years with average terms ranging from 3 to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.
In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.
Multi-family loans provide a source of repayment from rental income.
The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.
Construction loans include any loans to finance the construction of any new residential property, CRE property or major rehabilitation or expansion of existing commercial structures. Construction lending carries a high degree of risk because of the difficulty of protecting the bank against a myriad of pitfalls. The following factors are evaluated when underwriting these types of loans:
● | Borrowers/contractors experience and ability is analyzed with the type and size of project being considered. |
● | Financial ability to cover cost overruns. |
● | Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits. |
● | Reliability of the estimate of time to complete the project. |
15
The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the Bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.
For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.
Quantitative Factors:
The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.
Qualitative Factors:
The Company’s allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.
The Company utilizes the following qualitative factors:
● | National and local economy |
● | Loan volume and trend |
● | Loan quality |
● | Loan policies and procedures |
● | Management and staff experience |
● | Concentrations |
● | Collateral |
● | Loan review system |
● | Regulatory environment and oversight |
The qualitative adjustments are based on the current condition and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.
Economic Forecasting:
The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity. This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.
16
Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectibility based on current information and events. Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating. Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell. However if the repayment is dependent on the operations of the company the fair market value less estimated cost to sell cannot be used. Thus the net present value of the cash-flow will be utilized.
For non-homogenous loans, the Company utilizes the following internal risk rating scale:
1. | Highest Quality (Pass) – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities. |
2. | Superior Quality (Pass) – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees. |
3. | Satisfactory Quality (Pass) – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate. |
4. | Fair Quality (Pass) – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peers, or borrowers operating in highly cyclical or declining industries. |
5. | Early Warning (Pass) – loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing. |
6. | Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left |
17
uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year. |
7. | Substandard – loans which are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets. |
8. | Doubtful – loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction. |
For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.
The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.
The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I – Other segment and allowance is established in the same manner as C&I loans.
Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.
The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.
For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.
TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.
18
Allowance for Credit Losses on Off-Balance Sheet Exposures
The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on unfunded commitments is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases. The allowance for OBS exposures is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheet.
Allowance for Credit Losses on Held to Maturity Debt Securities
The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions.
Allowance for Credit Losses on Available for Sale Debt Securities
ASU 2016-13 modifies the impairment model for available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.
The Company did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13.
Risks and Uncertainties:
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic will have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, have impacted and are expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.
In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Management is currently assessing the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
19
NOTE 2– INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31, 2021 and December 31, 2020 are summarized as follows:
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Gross |
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Gross |
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Amortized |
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Unrealized |
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Unrealized |
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Fair |
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Cost* |
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Gains |
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(Losses) |
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Value |
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(dollars in thousands) |
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March 31, 2021: |
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Securities HTM: |
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|
Municipal securities |
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$ |
452,076 |
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$ |
38,312 |
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$ |
(91) |
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$ |
490,297 |
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Other securities |
|
|
1,050 |
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|
— |
|
|
— |
|
|
1,050 |
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|
|
$ |
453,126 |
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$ |
38,312 |
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$ |
(91) |
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$ |
491,347 |
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Securities AFS: |
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U.S. govt. sponsored agency securities |
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$ |
14,494 |
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$ |
352 |
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$ |
(265) |
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$ |
14,581 |
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Residential mortgage-backed and related securities |
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115,230 |
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3,742 |
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(920) |
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|
118,052 |
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Municipal securities |
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160,703 |
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3,492 |
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|
(1,622) |
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|
162,573 |
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Asset-backed securities |
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|
38,620 |
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|
1,197 |
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(2) |
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|
39,815 |
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Other securities |
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11,679 |
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173 |
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|
— |
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11,852 |
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|
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$ |
340,726 |
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$ |
8,956 |
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$ |
(2,809) |
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$ |
346,873 |
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* HTM securities are shown on the balance sheet at amortized cost, net of allowance for credit losses of $174 thousand as of March 31, 2021.
The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.
The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.
20
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2021 and December 31, 2020, are summarized as follows:
At March 31, 2021, the investment portfolio included 644 securities. Of this number, 101 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.4% of the total amortized cost of the portfolio. Of these 101 securities, there were eight securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At March 31, 2021, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.
On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment (“OTTI”) model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three months ended March 31, 2021.
21
The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.
There were proceeds of $19.5 million from sales of securities, that resulted in no gains or losses, for the three months ended March 31, 2021. There were no sales of securities for the three months ended March 31, 2020.
The amortized cost and fair value of securities as of March 31, 2021 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.
Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:
As of March 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $117.6 million and revenue bonds issued by 192 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $535.3 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 13 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.
Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2021 and as of December 31, 2020, the Company held revenue bonds of two issuers, located in Ohio, of which the aggregate book or market value
22
exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.
The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of March 31, 2021, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.
As of March 31, 2021, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.
23
NOTE 3 – LOANS/LEASES RECEIVABLE
The composition of the loan/lease portfolio as of March 31, 2021 and December 31, 2020 is presented as follows:
* Includes equipment financing agreements outstanding at m2, totaling $189.3 million and $171.5 million as of March 31, 2021 and December 31, 2020, respectively and PPP loans totaling $243.9 million and $273.1 million as of March 31, 2021 and December 31, 2020, respectively
** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.
*** Includes residential real estate loans held for sale totaling $5.7 million and $3.8 million as of March 31, 2021 and December 31, 2020, respectively.
24
Changes in accretable yield for acquired loans were as follows:
The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2021 and December 31, 2020 is presented as follows:
25
NPLs by classes of loans/leases as of March 31, 2021 and December 31, 2020 are presented as follows:
The Company did not recognize any interest income on nonaccrual loans during the quarter ended March 31, 2021.
** Nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, $48 thousand in installment loans.
26
Changes in the ACL-loans/leases by portfolio segment for the three months ended March 31, 2021 and 2020, respectively, are presented as follows:
* Included within the C&I – Other column are leases with adoption impact of $685 thousand, provision of $135 thousand ,charge-offs of $198 thousand and recoveries of $76 thousand. ACL on leases was $2.2 million as of March 31, 2021.
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The composition of the ACL-loans/leases by portfolio segment based on evaluation method are as follows:
* Included within the C&I – Other category are leases individually evaluated of $320 thousand with a related allowance for credit losses of $59 thousand and leases collectively evaluated of $59.8 million with a related allowance for credit losses of $2.1 million.
27
Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2020 are presented as follows:
28
Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2020 are presented as
follows:
Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.
29
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:
* Included within the C&I – Other category are leases individually evaluated of $320 thousand with primary collateral of equipment.
For commercial loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.w
For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans. Delinquency status is updated daily by the Company’s loan system.
30
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of March 31, 2021:
31
* Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual and accruing loans/leases that are greater than or equal to 90 days past due.
For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of December 31, 2020:
* Prior to Adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.
32
As of March 31, 2021 and December 31, 2020, TDRs totaled $1.5 million and $1.7 million, respectively.
There were no TDRs restructured during the first three months of 2021. For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three months ended March 31, 2020. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.
Of the loans restructured during the three months ended March 31, 2020, none were on nonaccrual.
For the three months ended March 31, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.
For the three months ended March 31, 2020, one of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. This TDR was related to one customer whose leases were restructured in the fourth quarter of 2019 with pre-modification balances totaling $55 thousand.
Not included in the table above are four TDRs that were restructured and charged off for the three months ended March 31, 2020, totaling $296 thousand.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators clarified that this guidance may continue to be applied in 2021.
In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be (1) related to COVID-19, (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the National Emergency or (B) December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.
The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of March 31, 2021, there was one bank modification totaling $96 thousand and 68 m2 modifications of loans and leases totaling $6.9 million for a combined 69 modifications totaling $6.9 million, representing 0.16% of the total loan and lease portfolio, that were on deferral as of such date.
33
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended the debt relief program to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
The adoption of ASU 2016-13 required an allowance for OBS exposures, specifically on unfunded commitments. Changes in the ACL for OBS exposures for the three months ended March 31, 2021 and 2020 are presented as follows:
NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES
Derivatives are summarized as follows as of March 31, 2021 and December 31, 2020:
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March 31, 2021 |
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December 31, 2020 |
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(dollars in thousands) |
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Assets: |
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Interest rate caps - hedged |
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$ |
892 |
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$ |
259 |
Interest rate caps |
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|
231 |
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|
67 |
Interest rate swaps |
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|
121,545 |
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222,431 |
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$ |
122,668 |
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$ |
222,757 |
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Liabilities: |
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Interest rate swaps - hedged |
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$ |
(4,318) |
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$ |
(6,839) |
Interest rate swaps |
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(121,545) |
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(222,431) |
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$ |
(125,863) |
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$ |
(229,270) |
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The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.
The Company entered into interest rate caps to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps executed. The details of the interest rate caps are as follows:
34
In December 2020, the Company redesignated three of its interest rate caps, which had been purchased in 2019 for $800 thousand. The caps, which were designated as cash flow hedges at the time of purchase, were redesignated as unhedged. For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows:
The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.
The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution counterparty. Additionally, the Company receives an upfront fee from the financial institution counterparty, dependent upon the pricing that is recognized upon receipt from the financial institution counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.
Interest rate swaps that are not designated as hedging instruments are summarized as follows:
35
Swap fee income totaled $13.6 million and $6.8 million for the three months ended March 31, 2021 and 2020, respectively.
The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. For the majority of the Company’s swapped loan portfolio, the loan-to-value including the potential swap exposure is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
NOTE 5 – INCOME TAXES
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three months ended March 31, 2021 and March 31, 2020:
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|
|
For the Three Months Ended March 31, |
|
||||||||
|
|
2021 |
|
2020 |
|
||||||
|
|
|
|
|
% of |
|
|
|
|
% of |
|
|
|
|
|
|
Pretax |
|
|
|
|
Pretax |
|
|
|
Amount |
|
Income |
|
Amount |
|
Income |
|
||
|
|
(dollars in thousands) |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" tax expense |
|
$ |
4,520 |
|
21.0 |
% |
$ |
2,754 |
|
21.0 |
% |
Tax exempt income, net |
|
|
(1,719) |
|
(8.0) |
|
|
(1,225) |
|
(9.3) |
|
Bank-owned life insurance |
|
|
(99) |
|
(0.5) |
|
|
(55) |
|
(0.4) |
|
State income taxes, net of federal benefit, current year |
|
|
1,024 |
|
4.8 |
|
|
677 |
|
5.2 |
|
Tax credits |
|
|
(57) |
|
(0.3) |
|
|
(116) |
|
(0.9) |
|
Excess tax benefit on stock options exercised and restricted stock awards vested |
|
|
(164) |
|
(0.8) |
|
|
(264) |
|
(2.0) |
|
Other |
|
|
36 |
|
0.2 |
|
|
113 |
|
0.8 |
|
Federal and state income tax expense |
|
$ |
3,541 |
|
16.4 |
% |
$ |
1,884 |
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
36
NOTE 6 - EARNINGS PER SHARE
The following information was used in the computation of EPS on a basic and diluted basis:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|||
|
|
|
March 31, |
|
|
|||
|
|
|
2021 |
|
|
2020 |
|
|
|
|
(dollars in thousands, except share data) |
|
|||||
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,982 |
|
$ |
11,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
1.14 |
|
$ |
0.71 |
|
|
Diluted EPS |
|
$ |
1.12 |
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
15,803,643 |
|
|
15,796,796 |
|
|
Weighted average common shares issuable upon exercise of stock options |
|
|
|
|
|
|
|
|
and under the employee stock purchase plan |
|
|
221,905 |
|
|
214,660 |
|
|
Weighted average common and common equivalent shares outstanding |
|
|
16,025,548 |
|
|
16,011,456 |
|
|
|
|
|
|
|
|
|
|
|
37
NOTE 7 – FAIR VALUE
Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
● | Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets; |
● | Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and |
● | Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Assets and liabilities measured at fair value on a recurring basis comprise the following at March 31, 2021 and December 31, 2020:
The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).
Interest rate swaps are used for the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The
38
fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Interest rate swaps are also executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).
Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2021 and December 31, 2020:
The increase in loans/leases evaluated individually is due to the change in ACL methodology with the adoption of ASU 2016-13 as well as the downgrading of one large relationship.
Loans/leases evaluated individually are valued at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.
OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.
39
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
For the loans/leases evaluated individually and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, 2021 and 2020.
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
*See previous table in Note 2.
NOTE 8 – BUSINESS SEGMENT INFORMATION
Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company's internal organization, focusing on the financial information that the Company's operating decision-makers routinely use to make decisions about operating matters.
The Company's Commercial Banking business, is geographically divided by markets into the operating segments which are the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFCB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
40
The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.
Selected financial information on the Company's business segments is presented as follows as of and for the three months ended March 31, 2021 and 2020.
NOTE 9 – REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of March 31, 2021 and December 31, 2020, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.
Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2021 and
41
December 31, 2020 are presented in the following tables (dollars in thousands). As of March 31, 2021 and December 31, 2020, each of the subsidiary banks met the requirements to be “well capitalized”.
42
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending March 31, 2021. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to in this discussion are presented in the table of contents.
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.
GENERAL
The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of March 31, 2021, the Company had $5.6 billion in consolidated assets, including $4.4 billion in total loans/leases, and $4.6 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three months ended March 31, 2021, and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on the Company’s Market Areas
The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois. Each of these three states has taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
● | The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%. |
● | On March 27, 2020, former President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provided for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to limitations and |
43
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
eligibility criteria. In December 2020, former President Trump signed into law a $900 billion pandemic relief bill to extend several aid programs in the CARES Act that were set to expire on December 31, 2020. The SBA reopened the PPP in January 2021 to allow certain eligible borrowers that previously received a PPP loan to apply for a second draw PPP loan. At least $25 billion has been set aside from second draw PPP loans. On March 11, 2021, President Biden signed into law the American Rescue Plan Act, which allocated an additional $7.25 billion in funds to the PPP. The subsidiary banks have participated as lenders in the PPP. |
● | In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, the existing loan could not be more than 30 days past due as of December 31, 2019 and the modification must be executed between March 1, 2020 and the earlier of 60 days after the termination of the National Emergency or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the FASB criteria discussed in Note 3 of the Consolidated Financial Statements. |
● | On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19 and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs. The agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. The regulators have clarified that this guidance may continue to be applied in 2021. See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs. |
● | On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: the MSNLF and the MSELF. The combined size of the program will be up to $600 billion. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. As of March 31, 2021, the Company is only participating in the PPP and not the Main Street Business Lending Program. |
Effects on the Company’s Business
The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries could continue to endure significant economic distress, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. In addition, the Company’s loan and lease growth, exclusive of PPP loans, could slow while deposit growth could accelerate as businesses and consumers navigate
44
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
the continuing impact. As a result, the Company anticipates that its asset quality and results of operations could be adversely affected, as described in further detail below.
The Company’s Response
The Company has taken numerous steps in response to the COVID-19 pandemic, including the following:
● | The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of March 31, 2021 there was one bank modification totaling $96 thousand and 68 m2 modifications of loans and leases totaling $6.9 million for a combined 69 modifications totaling $6.9 million, representing 0.16% of the total loan and lease portfolio, that were currently on deferral. |
● | As the Company moved to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical. These applications have enabled customers to engage with the Company virtually to meet their community banking needs. The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit features. The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel. |
● | The Company implemented its Public Emergency Preparedness Plan (“PEP”). The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions. The goals were to maximize the continuity of the essential services to our customers, protect the health and safety of employees and customers, and minimize adverse financial impact to our institutions. The following strategies were executed: |
o | Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic; |
o | increased cash reserves at all charters were established and the charters began monitoring cash outflows; |
o | IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home; |
o | adopted alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for our workforce; and |
o | communication sites were activated in case emergency information needed to be communicated to employees. |
● | The Company has processed 2,394 loans for a total of $451 million as of March 31, 2021 under the PPP. The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding. PPP loans are included in the C&I - other category of loans in Note 3 of the Consolidated Financial Statements. |
● | On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic. The Company continues to |
45
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
evaluate economic conditions along with capital needs and will continue to consider the resumption of the repurchase of shares under this program in the future. |
EXECUTIVE OVERVIEW
The Company reported net income of $18.0 million and diluted EPS of $1.12 for the quarter ended March 31, 2021. By comparison, for the quarter ended December 31, 2020, the Company reported net income of $18.3 million and diluted EPS of $1.14. For the quarter ended March 31, 2020, the Company reported net income of $11.2 million, and diluted EPS of $0.70.
The first quarter of 2021 was also highlighted by the following results and events:
● | Net income of $18.0 million, or $1.12 per diluted share; |
● | Adjusted net income (non-GAAP) of $18.6 million, or $1.16 per diluted share; |
● | Noninterest income continues to be strong at $23.5 million; |
● | NIM increased one basis point and Adjusted NIM (TEY)(non-GAAP) increased by 3 basis points to 3.26% and 3.40%, respectively; |
● | Annualized core loan and lease growth (non-GAAP) of 14.0% for the quarter, excluding SBA PPP loans; |
● | Annualized core deposit growth of 3.2% for the quarter; |
● | Provision for credit losses of $6.7 million for the quarter and ACL for loans/leases to total loans/leases of 1.99%, excluding PPP loans (non-GAAP); and |
● | Nonperforming assets remained stable for the quarter and represent 0.25% of total assets. |
Following is a table that represents various income measurements for the Company.
The Company reported adjusted net income (non-GAAP) of $18.6 million, with adjusted diluted EPS of $1.16. See section titled “GAAP to Non-GAAP Reconciliations” for additional information.
Following is a table that represents the major income and expense categories for the Company:
46
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Following are some noteworthy changes in the Company's financial results:
● | Net interest income in the first quarter of 2021 was down 4% compared to the fourth quarter of 2020. Excluding the impact of acquisition-related net accretion and PPP income (non-GAAP), net interest income was stable on a linked quarter basis. Net interest income increased 11% compared to the first quarter of 2020. The increase was due to strong loan growth funded by even stronger core deposit growth allowing for improved mix in funding driving modest NIM expansion. |
● | Provision expense in the first quarter of 2021 decreased $367 thousand compared to the fourth quarter of 2020. Provision expense decreased $1.7 million compared to the first quarter of 2020. The decrease was primarily due to continued strong credit quality and improving economic conditions. In addition, the provision amounts for each year were calculated under different accounting standards due to the CECL adoption on January 1, 2021. See the Provision for Credit Losses section of this report for additional details. |
● | Noninterest income in the first quarter of 2021 decreased $8.5 million or 27% compared to the fourth quarter of 2020. This decrease was primarily due to a reduction in swap fee income from the strong fourth quarter. Noninterest income increased $8.3 million or 55% compared to the first quarter of 2020. This increase was primarily attributable to higher swap fee income. |
● | Noninterest expense decreased $9.1 million or 20% in the first quarter of 2021 compared to the fourth quarter of 2020. This decrease was due to several factors, but was primarily the result of lower salary and benefits expense of $5.6 million, driven by lower commission and incentive compensation expense in the quarter due to lower swap fee income and lower incentive compensation accruals. In addition, there was a $1.5 million decline in losses on liability extinguishment in the first quarter of 2021. Noninterest expense increased $5.8 million or 18% compared to the first quarter of 2020. The increase was primarily due to an increase in salary and benefits expense of $6.3 million due to higher incentive compensation as a result of higher swap fee income. |
STRATEGIC FINANCIAL METRICS
The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The Company's long-term strategic financial metrics are as follows:
● | Organic loan and lease growth of 9% per year, funded by core deposits; |
● | Grow fee-based income by at least 6% per year; and |
● | Limit our annual operating expense growth to 5% per year. |
47
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The following table shows the evaluation of the Company’s strategic financial metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date* |
|
|||||||||||
Strategic Financial Metric* |
|
Key Metric |
|
Target |
31-Mar-21 |
|
December 31, 2020 |
|
March 31, 2020 |
|
|||||||
Loan and lease growth organically ** |
|
Loans and leases growth |
|
> 9% annually |
|
|
14.0 |
% |
|
|
7.8 |
% |
|
|
1.6 |
% |
|
Fee income growth |
|
Fee income growth |
|
> 6% annually |
|
|
(15.9) |
% |
|
|
67.8 |
% |
|
|
(8.3) |
% |
|
Improve operational efficiencies and hold noninterest expense growth |
|
Noninterest expense growth |
|
< 5% annually |
|
|
1.2 |
% |
|
|
1.5 |
% |
|
|
(13.7) |
% |
|
* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison. The calculations provided exclude non-core noninterest income and noninterest expense.
** Loan and lease growth excludes PPP loans.
It should be noted that these initiatives are long-term targets. Due to the impact of the COVID-19 pandemic, among other factors, the Company may not be able to achieve these goals for the full year 2021.
STRATEGIC DEVELOPMENTS
The Company has taken the following actions during the first quarter of 2021 to support its corporate strategy:
● | The Company grew loans and leases organically in the first quarter of 2021 by 14.0% on an annualized basis, excluding PPP loans (non-GAAP), reflecting healthy demand across all markets. |
● | Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Wisconsin, Missouri and Illinois. The Company acted as the correspondent bank for 188 downstream banks with average total noninterest bearing deposits of $327.0 million and average total interest bearing deposits of $398.2 million during the first quarter of 2021. By comparison, the Company acted as the correspondent bank for 195 downstream banks with average total noninterest bearing deposits of $185.6 million and average total interest bearing deposits of $355.4 million during the first quarter of 2020. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. |
● | As a result of the relatively low interest rate environment including a stable yield curve, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. |
● | Noninterest expense for the first three months of 2021 totaled $37.2 million as compared to $31.4 million in the first three months of 2020. Salaries and employee benefits for the first three months of 2021 were up 34.2% from the same period of the prior year primarily due to the higher commission and incentive compensation due to higher fee income. |
● | In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $456.7 million in the first quarter of 2021. There were 82 new relationships added in the first quarter of 2021 totaling $80.5 million of new assets under management. 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. |
48
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations. |
GAAP TO NON-GAAP RECONCILIATIONS
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “TCE/TA ratio excluding PPP loans”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “pre-provision/pre-tax adjusted income”, “pre-provision/pre-tax adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”, “ALLL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
● | TCE/TA ratio (non-GAAP) is reconciled to stockholders' equity and total assets; |
● | TCE/TA ratio excluding PPP loans (non-GAAP) is reconciled to stockholders’ equity and total assets; |
● | Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income; |
● | Pre-provision/Pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA (all non-GAAP measures) are reconciled to net income; |
● | NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; |
● | Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and |
● | ACL to total loans and leases excluding PPP loans and loan growth annualized excluding PPP loans are reconciled to ACL and total loans and leases. |
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 TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarter ended March 31, 2021 and December 31, 2020 were materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
The pre-provision/pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA are measurements of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items. The Company’s management believes this financial measure is important to investors as the provision for the quarters ended March 31, 2021 and December 31, 2020 was materially higher due to the impact of COVID-19. By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.
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. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.
49
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The efficiency ratio is a ratio that management utilizes to compare the Company to its peers. It is a standard ratio used to calculate overhead as a percentage of revenue in the banking industry and is widely utilized by investors.
ACL to total loans and leases, excluding PPP loans, and loan growth annualized, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarters ended March 31, 2021 and December 31, 2020 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ACL. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.
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.
50
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, |
|
March 31, |
|
|||
|
|
2021 |
|
2020 |
|
2020 |
|
|||
|
|
(dollars in thousands, except per share data) |
||||||||
ADJUSTED NET INCOME |
|
|
|
|
|
|
|
|
|
|
Net income (GAAP) |
|
$ |
17,982 |
|
$ |
18,271 |
|
$ |
11,228 |
|
Less non-core items (post-tax) (*): |
|
|
|
|
|
|
|
|
|
|
Income: |
|
|
|
|
|
|
|
|
|
|
Securities gains (losses), net |
|
$ |
— |
|
$ |
487 |
|
$ |
— |
|
Mark to market gains (losses) on unhedged derivatives, net |
|
|
129 |
|
|
— |
|
|
— |
|
Loss on syndicated loan |
|
|
— |
|
|
(210) |
|
|
— |
|
Total non-core income (non-GAAP) |
|
$ |
129 |
|
$ |
277 |
|
$ |
— |
|
Expense: |
|
|
|
|
|
|
|
|
|
|
Losses on liability extinguishment |
|
$ |
— |
|
$ |
1,151 |
|
$ |
116 |
|
Goodwill impairment |
|
|
— |
|
|
— |
|
|
500 |
|
Disposition costs |
|
|
7 |
|
|
51 |
|
|
408 |
|
Post-acquisition compensation, transition and integration costs |
|
|
— |
|
|
20 |
|
|
119 |
|
Separation agreement |
|
|
734 |
|
|
— |
|
|
— |
|
Loss on sale of subsidiary |
|
|
— |
|
|
(102) |
|
|
— |
|
Total non-core expense (non-GAAP) |
|
$ |
741 |
|
$ |
1,119 |
|
$ |
1,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP) |
|
$ |
18,594 |
|
$ |
19,113 |
|
$ |
12,372 |
|
|
|
|
|
|
|
|
|
|
|
|
PRE-PROVISION/PRE-TAX ADJUSTED INCOME |
|
|
|
|
|
|
|
|
|
|
Net income (GAAP) |
|
$ |
17,982 |
|
$ |
18,271 |
|
|
11,228 |
|
Less: Non-core income not tax-effected |
|
|
164 |
|
|
351 |
|
|
— |
|
Plus: Non-core expense not tax-effected |
|
|
937 |
|
|
1,399 |
|
|
1,315 |
|
Provision for credit losses |
|
|
6,713 |
|
|
7,080 |
|
|
8,367 |
|
Federal and state income tax expense |
|
|
3,541 |
|
|
4,009 |
|
|
1,884 |
|
Pre-provision/pre-tax adjusted income (non-GAAP) |
|
$ |
29,009 |
|
$ |
30,408 |
|
$ |
22,794 |
|
|
|
|
|
|
|
|
|
|
|
|
PRE-PROVISION/PRE-TAX ADJUSTED RETURN ON AVERAGE ASSETS (NON-GAAP) |
|
|
|
|
|
|
|
|
|
|
Pre-provision/pre-tax adjusted income (non-GAAP) |
|
$ |
29,009 |
|
$ |
30,408 |
|
$ |
12,372 |
|
|
|
|
|
|
|
|
|
|
|
|
Average assets |
|
|
5,668,850 |
|
|
5,842,299 |
|
$ |
4,948,311 |
|
|
|
|
|
|
|
|
|
|
|
|
Pre-provision/pre-tax adjusted return on average assets (non-GAAP) |
|
|
2.05 |
% |
|
2.08 |
% |
|
1.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED EPS |
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP) (from above) |
|
$ |
18,594 |
|
$ |
19,113 |
|
$ |
12,372 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
15,803,643 |
|
|
15,775,596 |
|
|
15,796,796 |
|
Weighted average common and common equivalent shares outstanding |
|
|
16,025,548 |
|
|
15,973,054 |
|
|
16,011,456 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EPS (non-GAAP): |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.18 |
|
$ |
1.21 |
|
$ |
0.78 |
|
Diluted |
|
$ |
1.16 |
|
$ |
1.20 |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED ROAA |
|
|
|
|
|
|
|
|
|
|
Adjusted net income (non-GAAP) (from above) |
|
$ |
18,594 |
|
$ |
19,113 |
|
$ |
12,372 |
|
|
|
|
|
|
|
|
|
|
|
|
Average Assets |
|
$ |
5,668,850 |
|
$ |
5,842,299 |
|
$ |
4,948,311 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted ROAA (annualized) (non-GAAP) |
|
|
1.31 |
% |
|
1.31 |
% |
|
1.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED NIM (TEY)* |
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP) |
|
$ |
41,975 |
|
$ |
43,707 |
|
$ |
37,698 |
|
Plus: Tax equivalent adjustment |
|
|
2,267 |
|
|
2,631 |
|
|
1,790 |
|
Net interest income - tax equivalent (non-GAAP) |
|
$ |
44,242 |
|
$ |
46,338 |
|
$ |
39,488 |
|
Less: Acquisition accounting net accretion |
|
|
504 |
|
|
1,077 |
|
|
625 |
|
Adjusted net interest income |
|
|
43,738 |
|
|
45,261 |
|
|
38,863 |
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets |
|
$ |
5,218,198 |
|
$ |
5,345,677 |
|
$ |
4,461,018 |
|
|
|
|
|
|
|
|
|
|
|
|
NIM (GAAP) |
|
|
3.26 |
% |
|
3.25 |
% |
|
3.40 |
% |
NIM (TEY) (non-GAAP) |
|
|
3.43 |
% |
|
3.45 |
% |
|
3.56 |
% |
Adjusted NIM (TEY) (non-GAAP) |
|
|
3.40 |
% |
|
3.37 |
% |
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
EFFICIENCY RATIO |
|
|
|
|
|
|
|
|
|
|
Noninterest expense (GAAP) |
|
$ |
37,228 |
|
$ |
46,364 |
|
$ |
31,415 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP) |
|
$ |
41,975 |
|
$ |
43,707 |
|
$ |
37,698 |
|
Noninterest income (GAAP) |
|
|
23,489 |
|
|
32,017 |
|
|
15,196 |
|
Total income |
|
$ |
65,464 |
|
$ |
75,724 |
|
$ |
52,894 |
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio (noninterest expense/total income) (non-GAAP) |
|
|
56.87 |
% |
|
61.23 |
% |
|
59.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS |
|
|
|
|
|
|
|
|
|
|
ACL |
|
$ |
81,831 |
|
$ |
84,376 |
|
$ |
42,233 |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
4,361,051 |
|
$ |
4,251,129 |
|
$ |
3,704,668 |
|
Less: PPP loans |
|
|
243,860 |
|
|
273,146 |
|
|
- |
|
Total loans and leases, excluding PPP loans |
|
$ |
4,117,191 |
|
$ |
3,977,983 |
|
$ |
3,704,668 |
|
|
|
|
|
|
|
|
|
|
|
|
ACL to total loans and leases, excluding PPP loans |
|
|
1.99 |
% |
|
2.12 |
% |
|
1.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS |
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
4,361,051 |
|
$ |
4,251,129 |
|
$ |
3,704,668 |
|
Less: PPP loans |
|
|
243,860 |
|
|
273,146 |
|
|
— |
|
Total loans and leases, excluding PPP loans |
|
$ |
4,117,191 |
|
$ |
3,977,983 |
|
$ |
3,704,668 |
|
|
|
|
|
|
|
|
|
|
|
|
Loan growth annualized, excluding PPP loans |
|
|
14.00 |
% |
|
9.00 |
% |
|
1.57 |
% |
* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain/loss on sale of subsidiary which has an estimated effective tax rate of 30.5%.
51
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NET INTEREST INCOME - (TAX EQUIVALENT BASIS)
Net interest income, on a tax equivalent basis, increased 12% to $44.2 million for the quarter ended March 31, 2021 compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased 11% for the quarter ended March 31, 2021 compared to the same quarter of the prior year. Net interest income improved due to the following factors:
● | Continued organic loan and deposit growth; |
● | Significant growth in PPP loans in 2020; |
● | Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and |
● | Significant reduction in cost of funds. |
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet strategies
52
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage NIM through derivatives.
In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2021 and 2020.
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:
(1) | Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate. |
(2) | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance. |
(3) | Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance. |
53
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, 2021
(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 21% tax rate. |
(3) | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance. |
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
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.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment
54
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
As of November 30, 2020 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurrent loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology.
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. A more detailed discussion of this critical accounting policy can be found in Note 1 to the Consolidated Financial Statements for March 31, 2021.
The Company believes that COVID-19 pandemic losses have been incurred that are not yet known and this could have an adverse effect on the Company’s ACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL.
Although management believes the level of the ACL as of March 31, 2021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, 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 decreased 3%, comparing the first quarter of 2021 to the same period of 2020. This decrease was primarily due to a decline in the yield of average loans/leases of 77 basis points which was driven mostly by the downward rate adjustment of 150 bps in late March 2020. Partially offsetting the yield decline, the Company’s average earning assets increased 17%, comparing the first quarter of 2021 to the first quarter of 2020. Average gross loans and leases increased 16%, while average investment securities increased 31% during the same time period.
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 2021 decreased 50% from the first quarter of 2020. The Company has grown organically at a significant pace over the past several years. Outsized core deposit growth has funded loan growth and has allowed the Company to prepay higher cost brokered deposits and FHLB advances. The cost of funds on the Company’s average interest-bearing liabilities declined in conjunction with the declining rate environment. The Company’s cost of funds was 0.63% at March 31, 2021, which was down from 1.33% at March 31, 2020.
55
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The Company's management intends to continue to minimize its level of wholesale funds with a focus on well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
PROVISION FOR CREDIT LOSSES
The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||
|
|
March 31, |
|
March 31, |
||
|
|
2021 |
|
2020 |
||
|
|
(dollars in thousands) |
||||
|
|
|
|
|
|
|
Provision for credit losses - loans and leases (1) |
|
$ |
5,993 |
|
$ |
8,367 |
Provision for credit losses - off-balance sheet exposures (2) |
|
|
729 |
|
|
N/A |
Provision for credit losses - held to maturity securities (3) |
|
|
(9) |
|
|
N/A |
Total provision for credit losses |
|
$ |
6,713 |
|
$ |
8,367 |
(1) | 2021 and years forward are evaluated using ASU 2016-13 and years prior to 2021 were calculated under an incurred loss model. |
(2) | Prior to adoption of ASU 2016-13, there were no requirements to record provision for off-balance sheet exposures. |
(3) | Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity securities. |
The Company’s provision for credit losses totaled $6.7 million for the first quarter of 2021, which is down from $8.4 million for the first quarter of 2020. The adoption of ASU 2016-13 now requires an allowance on held to maturity debt securities and OBS exposures, specifically unfunded commitments. The provision related to HTM debt securities was negative due to the decrease in the balance of those HTM debt securities. Unfunded commitments required an additional provision of $729 thousand and loans/leases saw a decrease in provision from the first quarter of 2020. The decrease in provision on loans and leases was substantially driven by the change in methodology as related to ASU 2016-13. There were also decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19.
The ACL for loans and leases is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economies and risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an ACL of 1.88% of total gross loans/leases at March 31, 2021, compared to 1.98% of total gross loans/leases at December 31, 2020. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $2.5 million and $3.1 million at March 31, 2021 and December 31, 2020, respectively.
The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19:
Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.
56
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, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
March 31, |
|
March 31, |
|
|
|
|
|
|
||
|
|
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust department fees |
|
$ |
2,801 |
|
$ |
2,312 |
|
$ |
489 |
|
21.2 |
% |
Investment advisory and management fees |
|
|
940 |
|
|
1,727 |
|
|
(787) |
|
(45.6) |
|
Deposit service fees |
|
|
1,408 |
|
|
1,477 |
|
|
(69) |
|
(4.7) |
|
Gains on sales of residential real estate loans, net |
|
|
1,337 |
|
|
652 |
|
|
685 |
|
105.1 |
|
Swap fee income |
|
|
13,557 |
|
|
6,804 |
|
|
6,753 |
|
99.3 |
|
Earnings on bank-owned life insurance |
|
|
471 |
|
|
329 |
|
|
142 |
|
43.2 |
|
Debit card fees |
|
|
975 |
|
|
758 |
|
|
217 |
|
28.6 |
|
Correspondent banking fees |
|
|
314 |
|
|
215 |
|
|
99 |
|
46.0 |
|
Other |
|
|
1,686 |
|
|
922 |
|
|
764 |
|
82.9 |
|
Total noninterest income |
|
$ |
23,489 |
|
$ |
15,196 |
|
$ |
8,293 |
|
54.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $456.7 million in the first quarter of 2021. 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. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations.
Investment advisory and management fees decreased 46%, comparing the first quarter of 2021 to the same period of the prior year. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of trust and brokerage assets under management were negatively impacted by the decline in the market in 2020 as a result of COVID-19 as well as the sale of the Bates Companies in August 2020.
Deposit service fees decreased 5% comparing the first quarter of 2021 to the same period of the prior year. This decrease was primarily due to lower transactional volume due to recent economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, increased 105% when comparing the first quarter of 2021 to the same period of the prior year. The increase was primarily due to the refinancing of residential real estate loans with lower interest rates in the first three months of 2021.
As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow 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 will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers 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 $13.6 million for the first quarter of 2021, compared to $6.8 million for the first quarter of 2020. The increase in swap fee income for the first three months of 2021, as compared to all prior periods, was due to
57
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
both the volume and the size of the transactions executed. Future levels of swap fee income are somewhat dependent upon prevailing interest rates.
There were no realized securities gains or losses for the three months ended March 31, 2021 or March 31, 2020.
Earnings on BOLI increased 43% comparing the first quarter of 2021 to the first quarter of 2020. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets. 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 29% comparing the first quarter of 2021 to the first quarter of the prior year. 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 deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 46% comparing the first quarter of 2021 to the first quarter of the prior year. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. 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 188 banks in Iowa, Illinois, Missouri and Wisconsin.
Other noninterest income increased 83% comparing the first quarter of 2021 to the first quarter of the prior year. The increase in the first quarter of 2021 was primarily due to equity investment income and mark to market gains on derivatives.
58
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NONINTEREST EXPENSE
The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
||||
|
|
March 31, |
|
March 31, |
|
|
|
|
|
|
|
||
|
|
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
|
|||
|
|
(dollars in thousands) |
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
24,847 |
|
$ |
18,519 |
|
$ |
6,328 |
|
34.2 |
% |
|
Occupancy and equipment expense |
|
|
4,108 |
|
|
4,032 |
|
|
76 |
|
1.9 |
|
|
Professional and data processing fees |
|
|
3,443 |
|
|
3,369 |
|
|
74 |
|
2.2 |
|
|
Post-acquisition compensation, transition and integration costs |
|
|
— |
|
|
151 |
|
|
(151) |
|
(100.0) |
|
|
Disposition costs |
|
|
8 |
|
|
517 |
|
|
(509) |
|
(98.5) |
|
|
FDIC insurance, other insurance and regulatory fees |
|
|
1,065 |
|
|
683 |
|
|
382 |
|
55.9 |
|
|
Loan/lease expense |
|
|
300 |
|
|
228 |
|
|
72 |
|
31.6 |
|
|
Net cost of (income from) and gains/losses on operations of other real estate |
|
|
39 |
|
|
13 |
|
|
26 |
|
200.0 |
|
|
Advertising and marketing |
|
|
627 |
|
|
682 |
|
|
(55) |
|
(8.1) |
|
|
Bank service charges |
|
|
523 |
|
|
504 |
|
|
19 |
|
3.8 |
|
|
Loss on liability extinguishment |
|
|
— |
|
|
147 |
|
|
(147) |
|
(100.0) |
|
|
Correspondent banking expense |
|
|
200 |
|
|
216 |
|
|
(16) |
|
(7.4) |
|
|
Intangibles amortization |
|
|
508 |
|
|
549 |
|
|
(41) |
|
(7.5) |
|
|
Goodwill impairment |
|
|
— |
|
|
500 |
|
|
(500) |
|
(100.0) |
|
|
Other |
|
|
1,560 |
|
|
1,305 |
|
|
255 |
|
19.5 |
|
|
Total noninterest expense |
|
$ |
37,228 |
|
$ |
31,415 |
|
$ |
5,813 |
|
18.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2021 and 2020.
Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2020 to the first quarter of 2021 by 34%. The increased expense was primarily related to increased incentive compensation driven by strong financial results and higher swap fee income.
Occupancy and equipment expense increased 2% comparing the first quarter of 2021 to the same period of the prior year. The increase was due to higher investments for information technology and repair and maintenance costs.
Professional and data processing fees increased 2% comparing the first quarter of 2021 to the same period in 2020. The decrease was primarily due to accounting and audit fees. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.
There were no post-acquisition costs incurred in the first quarter of 2021. There were $151 thousand of post-acquisition costs incurred in the first quarter of 2020. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.
Disposition costs totaled $8 thousand for the first quarter of 2021 and $517 thousand for the first quarter of 2020. The costs were comprised primarily of legal, accounting, personnel costs and IT deconversion costs related to the sale of Bates Companies in the third quarter of 2020 and the sale of RB&T in the fourth quarter of 2019.
FDIC insurance, other insurance and regulatory fee expense increased 56%, comparing the first quarter of 2021 to the first quarter of 2020. The increase in expense was due to an increase in the asset size of the Company in 2020.
59
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Loan/lease expense increased 32% when comparing the first quarter of 2021 to the same quarter of 2020. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost from and gains/losses on operations of other real estate totaled $39 thousand for the first quarter of 2021, compared to net cost of and gains/losses on operations of other real estate of $13 thousand for the first quarter of 2020.
Advertising and marketing expense decreased 8% comparing the first quarter of 2021 to the first quarter of 2020. The decrease in expense was primarily due to the change in general environment due to COVID-19.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 4% when comparing the first quarter of 2021 to the same quarter of 2020. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.
There were no losses on liability extinguishment during the first quarter of 2021. Losses on liability extinguishment were $147 thousand for the first quarter of 2020. These losses relate to the prepayment of certain FHLB advances.
Correspondent banking expense decreased 7% when comparing the first quarter of 2021 to the first quarter of 2020. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.
Intangibles amortization expense decreased 8% when comparing the first quarter of 2021 to the same quarter of 2020.
There was no goodwill impairment expense in the first three months of 2021. Goodwill impairment expense totaled $500 thousand in the first three months of 2020 related to the sale of the Bates Companies.
Other noninterest expense increased 20% when comparing the first quarter of 2021 to the first quarter of 2020. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.
INCOME TAXES
In the first quarter of 2021, the Company incurred income tax expense of $3.5 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
||||||||
|
|
2021 |
|
2020 |
|
||||||
|
|
|
|
|
% of |
|
|
|
|
% of |
|
|
|
|
|
|
Pretax |
|
|
|
|
Pretax |
|
|
|
Amount |
|
Income |
|
Amount |
|
Income |
|
||
|
|
(dollars in thousands) |
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Computed "expected" tax expense |
|
$ |
4,520 |
|
21.0 |
% |
$ |
2,754 |
|
21.0 |
% |
Tax exempt income, net |
|
|
(1,719) |
|
(8.0) |
|
|
(1,225) |
|
(9.3) |
|
Bank-owned life insurance |
|
|
(99) |
|
(0.5) |
|
|
(55) |
|
(0.4) |
|
State income taxes, net of federal benefit, current year |
|
|
1,024 |
|
4.8 |
|
|
677 |
|
5.2 |
|
Tax credits |
|
|
(57) |
|
(0.3) |
|
|
(116) |
|
(0.9) |
|
Excess tax benefit on stock options exercised and restricted stock awards vested |
|
|
(164) |
|
(0.8) |
|
|
(264) |
|
(2.0) |
|
Other |
|
|
36 |
|
0.2 |
|
|
113 |
|
0.8 |
|
Federal and state income tax expense |
|
$ |
3,541 |
|
16.4 |
% |
$ |
1,884 |
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rate for the quarter ended March 31, 2021 was 16.4%, which was a modest increase from the effective tax rate of 14.4% for the quarter ended March 31, 2020.
60
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
FINANCIAL CONDITION
Following is a table that represents the major categories of the Company’s balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
||||||||||||||||
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
|
March 31, 2020 |
|
|||||||||
|
|
(dollars in thousands) |
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
|||
Cash, federal funds sold, and interest-bearing deposits |
|
$ |
133,870 |
|
2 |
% |
|
$ |
157,005 |
|
3 |
% |
|
$ |
376,535 |
|
7 |
% |
Securities |
|
|
799,825 |
|
14 |
% |
|
|
838,131 |
|
15 |
% |
|
|
684,571 |
|
13 |
% |
Net loans/leases |
|
|
4,279,220 |
|
77 |
% |
|
|
4,166,753 |
|
73 |
% |
|
|
3,662,435 |
|
70 |
% |
Derivatives |
|
|
122,668 |
|
2 |
% |
|
|
222,757 |
|
4 |
% |
|
|
195,973 |
|
4 |
% |
Other assets |
|
|
309,564 |
|
5 |
% |
|
|
298,151 |
|
5 |
% |
|
|
301,803 |
|
6 |
% |
Assets held for sale |
|
|
— |
|
- |
% |
|
|
— |
|
- |
% |
|
|
10,758 |
|
- |
% |
Total assets |
|
$ |
5,645,147 |
|
100 |
% |
|
$ |
5,682,797 |
|
100 |
% |
|
$ |
5,232,075 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
4,631,782 |
|
82 |
% |
|
$ |
4,599,137 |
|
82 |
% |
|
$ |
4,170,478 |
|
80 |
% |
Total borrowings |
|
|
188,601 |
|
3 |
% |
|
|
177,114 |
|
3 |
% |
|
|
244,399 |
|
5 |
% |
Derivatives |
|
|
125,863 |
|
2 |
% |
|
|
229,270 |
|
4 |
% |
|
|
203,744 |
|
4 |
% |
Other liabilities |
|
|
90,182 |
|
2 |
% |
|
|
83,483 |
|
1 |
% |
|
|
71,185 |
|
1 |
% |
Liabilities held for sale |
|
|
— |
|
- |
% |
|
|
— |
|
- |
% |
|
|
3,130 |
|
- |
% |
Total stockholders' equity |
|
|
608,719 |
|
11 |
% |
|
|
593,793 |
|
10 |
% |
|
|
539,139 |
|
10 |
% |
Total liabilities and stockholders' equity |
|
$ |
5,645,147 |
|
100 |
% |
|
$ |
5,682,797 |
|
100 |
% |
|
$ |
5,232,075 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2021, the Company's total assets decreased $37.7 million, or 1% from December 31, 2020, to a total of $5.6 billion. The Company’s net loans/leases increased $112.5 million in the first quarter of 2021. Total deposits increased $32.6 million in the first quarter of 2021 primarily due to an increase in noninterest-bearing demand deposits. Borrowings increased $11.5 million in the first quarter of 2021 which consisted primarily of an increase in FHLB overnight borrowings of $10.0 million.
INVESTMENT SECURITIES
The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and 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, net of allowance for credit losses, on the total portfolio, and the portfolio duration:
61
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
At January 1, 2021, the Company adopted ASU 2016-13, which requies an allowance for credit losses related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP other-than-temporary-impairment (“OTTI”) model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.
See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 14.0% on an annualized basis during the first quarter of 2021. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for years prior to 2021 are shown in a separate table.
|
|
|
|
|
|
|
|
|
As of |
||||
|
|
March 31, 2021 |
|
|||
|
|
Amount |
|
% |
|
|
|
|
(dollars in thousands) |
||||
|
|
|
|
|
|
|
C&I - revolving |
|
$ |
168,842 |
|
4 |
% |
C&I - other * |
|
|
1,616,144 |
|
37 |
% |
CRE - owner occupied |
|
|
461,272 |
|
11 |
% |
CRE - non-owner occupied |
|
|
610,582 |
|
14 |
% |
Construction and land development |
|
|
607,798 |
|
14 |
% |
Multi-family |
|
|
396,272 |
|
9 |
% |
Direct financing leases |
|
|
60,134 |
|
1 |
% |
1-4 family real estate |
|
|
368,927 |
|
8 |
% |
Consumer |
|
|
71,080 |
|
2 |
% |
Total loans/leases |
|
$ |
4,361,051 |
|
100 |
% |
Less allowance |
|
|
(81,831) |
|
|
|
Net loans/leases |
|
$ |
4,279,220 |
|
|
|
|
|
|
|
|
|
|
*Includes PPP loans totaling $243.9 million and $273.1 million as of March 31, 2021 and December 31, 2020, respectively.
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-
62
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of March 31, 2021 and December 31, 2020, approximately 28% and 24% of the CRE loan portfolio was owner-occupied, respectively.
Following is a listing of significant industries within the Company's CRE loan portfolio. These include loans in the following portfolio segments as of March 31, 2021: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.
* “Other” consists of all other industries. None of these had concentrations greater than $33.1 million, or approximately 1.5% of total CRE loans in the most recent period presented.
The Company's 1-4 family 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 long-term interest rate risk. |
● | A limited amount of 15-year, 20-year and 30-year fixed rate residential real estate loans that meet certain credit guidelines. |
The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
Following is a listing of significant equipment types within the m2 loan and lease portfolio:
* “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.
63
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
ALLOWANCE FOR CREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a current expected credit loss methodology.
The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL 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 quarterly with specific detailed reviews completed on all credits risk-rated less 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, 2020, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.
Changes in the ACL for loans/leases for the three months ended March 31, 2021 and 2020 are presented as follows:
Changes in the ACL for OBS exposures for the three months ended March 31, 2021 and 2020 are presented as follows:
(1) Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table.
The ACL for OBS exposures totaled $9.1 million after the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded $729 thousand of provision for credit losses related to OBS exposures, specifically unfunded commitments, in the first quarter of 2021. At March 31, 2021, the allowance for OBS exposures was $9.8 million.
64
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, 2021 |
|
December 31, 2020 |
|
March 31, 2020 |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention (Rating 6) |
|
$ |
53,466 |
|
$ |
71,482 |
|
$ |
34,738 |
|
|
Substandard (Rating 7) |
|
|
84,982 |
|
|
66,081 |
|
|
36,612 |
|
|
Doubtful (Rating 8) |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
$ |
138,448 |
|
$ |
137,563 |
|
$ |
71,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Criticized Loans ** |
|
$ |
138,448 |
|
$ |
137,563 |
|
$ |
71,350 |
|
|
Classified Loans *** |
|
$ |
84,982 |
|
$ |
66,081 |
|
$ |
36,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Criticized Loans as a % of Total Loans/Leases |
|
|
3.17 |
% |
|
3.24 |
% |
|
1.93 |
% |
|
Classified Loans as a % of Total Loans/Leases |
|
|
1.95 |
% |
|
1.55 |
% |
|
0.99 |
% |
|
* Amounts above include the government guaranteed portion, if any. For the calculation of ACL, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.
** Criticized loans are defined as non homogeneous loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as non homogeneous loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans remained steady and classified loans increased 29% from December 31, 2020 to March 31, 2021. The increase in classified loans was primarily due to one borrower. The Company continues its strong focus on improving credit quality in an effort to limit NPLs. See further discussion on industries impacted by COVID-19 in the “Provision for Loan/Lease Losses” section of this report.
Although management believes that the ACL at March 31, 2021 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. Based on current economic indicators, the Company increased the economic allocations within the ACL calculation. The Company anticipates that the ACL as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's ACL.
65
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NONPERFORMING ASSETS
The table below presents the amount of NPAs and related ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
As of December 31, |
|
As of March 31, |
|
|
|||
|
|
2021 |
|
2020 |
|
2020 |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans/leases (1) (2) |
|
$ |
13,863 |
|
$ |
13,940 |
|
$ |
11,628 |
|
|
Accruing loans/leases past due 90 days or more |
|
|
— |
|
|
3 |
|
|
1,419 |
|
|
Total NPLs |
|
|
13,863 |
|
|
13,943 |
|
|
13,047 |
|
|
OREO |
|
|
173 |
|
|
20 |
|
|
3,298 |
|
|
Other repossessed assets |
|
|
50 |
|
|
135 |
|
|
45 |
|
|
Total NPAs |
|
$ |
14,086 |
|
$ |
14,098 |
|
$ |
16,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs to total loans/leases |
|
|
0.32 |
% |
|
0.35 |
% |
|
0.37 |
% |
|
NPAs to total loans/leases plus repossessed property |
|
|
0.32 |
% |
|
0.35 |
% |
|
0.46 |
% |
|
NPAs to total assets |
|
|
0.25 |
% |
|
0.26 |
% |
|
0.32 |
% |
|
(1) | Includes government guaranteed portion of loans, as applicable. |
(2) | Includes TDRs of $1.5 million at March 31, 2021, $984 thousand at December 31, 2020 and $298 thousand at March 31, 2020. |
NPAs at March 31, 2021 were $14.1 million, down $12 thousand from December 31, 2020 and down $2.3 million from March 31, 2020. The ratio of NPAs to total assets was 0.25% at March 31, 2021, down from 0.26% at December 31, 2020 and up from 0.32% at March 31, 2020.
The large majority of the NPAs consist of nonaccrual loans/leases. For nonaccrual loans/leases, 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.
Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of March 31, 2021 there was one Bank modification totaling $96 thousand and 68 m2 modifications of loans and leases totaling $6.9 million for a combined 69 modifications totaling $6.9 million and representing 0.16% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers,
66
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.
DEPOSITS
Deposits increased $32.6 million during the first quarter of 2021, primarily due to an increase in non-interest bearing deposits. The table below presents the composition of the Company's deposit portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|||||||||||||||
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
|
March 31, 2020 |
|
|
|||||||||
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
|
Amount |
|
% |
|
|
|||
|
|
(dollars in thousands) |
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing demand deposits |
|
$ |
1,269,578 |
|
27 |
% |
|
$ |
1,145,378 |
|
25 |
% |
|
$ |
829,782 |
|
20 |
% |
|
Interest bearing demand deposits |
|
|
2,916,054 |
|
63 |
% |
|
|
2,987,469 |
|
65 |
% |
|
|
2,440,907 |
|
58 |
% |
|
Time deposits |
|
|
445,067 |
|
10 |
% |
|
|
460,659 |
|
10 |
% |
|
|
617,979 |
|
15 |
% |
|
Brokered deposits |
|
|
1,084 |
|
0 |
% |
|
|
5,631 |
|
0 |
% |
|
|
281,810 |
|
7 |
% |
|
|
|
$ |
4,631,782 |
|
100 |
% |
|
$ |
4,599,137 |
|
100 |
% |
|
$ |
4,170,478 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had core deposit growth mostly from its non-interest bearing demand deposits. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committees.
BORROWINGS
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, 2021 |
|
December 31, 2020 |
|
March 31, 2020 |
|
|||
|
|
(dollars in thousands) |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Overnight repurchase agreements |
|
$ |
— |
|
$ |
— |
|
$ |
10,690 |
|
Federal funds purchased |
|
|
6,840 |
|
|
5,430 |
|
|
2,377 |
|
Overnight federal reserve borrowings |
|
|
— |
|
|
— |
|
|
30,000 |
|
|
|
$ |
6,840 |
|
$ |
5,430 |
|
$ |
43,067 |
|
|
|
|
|
|
|
|
|
|
|
|
The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks.
As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.
67
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The table below presents the Company's term and overnight FHLB advances.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
||||||||
|
|
March 31, 2021 |
|
|
December 31, 2020 |
|
March 31, 2020 |
|||
|
|
(dollars in thousands) |
||||||||
|
|
|
|
|
|
|
|
|
|
|
Term FHLB advances |
|
$ |
— |
|
|
$ |
— |
|
$ |
55,000 |
Overnight FHLB advances |
|
|
25,000 |
|
|
|
15,000 |
|
|
40,000 |
|
|
$ |
25,000 |
|
|
$ |
15,000 |
|
$ |
95,000 |
|
|
|
|
|
|
|
|
|
|
|
FHLB advances increased $10.0 million in the current quarter compared to the prior quarter due to temporary changes in liquidity.
The Company renewed its revolving credit note in the second quarter of 2020. At renewal, the line amount was increased from $20.0 million to $25.0 million. Interest on the revolving line of credit was calculated at the effective Prime Rate plus 2.25% per annum (5.50% at March 31, 2021). The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at March 31, 2021.
The Company had subordinated notes totaling $118.7 million as of March 31, 2021 and December 31, 2020.
It is management's intention to reduce its reliance on wholesale funding, including FHLB advances 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 (defined as FHLB advances and brokered deposits).
During the first three months of 2021, wholesale funding increased $5.5 million due to temporary changes in liquidity.
68
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
STOCKHOLDERS' EQUITY
The table below presents the composition of the Company's stockholders' equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
||||||||
|
|
March 31, 2021 |
|
December 31, 2020 |
|
|
March 31, 2020 |
|
|
|||
|
|
(dollars in thousands) |
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
15,844 |
|
$ |
15,806 |
|
|
$ |
15,774 |
|
|
Additional paid in capital |
|
|
276,350 |
|
|
275,807 |
|
|
|
273,867 |
|
|
Retained earnings |
|
|
316,900 |
|
|
300,804 |
|
|
|
254,287 |
|
|
AOCI (loss) |
|
|
(375) |
|
|
1,376 |
|
|
|
(4,789) |
|
|
Total stockholders' equity |
|
$ |
608,719 |
|
$ |
593,793 |
|
|
$ |
539,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE / TA ratio (non-GAAP) |
|
|
9.42 |
% |
|
9.08 |
% |
|
|
8.76 |
% |
|
* 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.
Excluding the impact of PPP loans, the adjusted TCE/TA at March 31, 2021 was 9.67% (non-GAAP).
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 $184.9 million during the first quarter of 2021. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The Company has been able to access available funding sources to address liquidity needs during the COVID-19 pandemic. In addition, the Company has been able to pledge the PPP loans to the Federal Reserve as part of its operational line of credit.
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.
At March 31, 2021, the subsidiary banks had 28 lines of credit totaling $697.1 million, of which $241.1 million was secured and $456.0 million was unsecured. At March 31, 2021, the Company had $697.1 million of the $697.1 million available.
At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1 million was secured and $456.0 million was unsecured. At December 31, 2020, the full $743.1 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 $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2021. At March 31, 2021, the full $25.0 million was available.
69
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
As of March 31, 2021, the Company had $725.2 million in average correspondent banking deposits spread over 188 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 $36.5 million during the first three months of 2021, compared to $133.5 million for the same period of 2020. The net decrease in federal funds sold was $7.7 million for the first three months of 2021, compared to a net decrease of $5.1 million for the same period of 2020. The net decrease in interest-bearing deposits at financial institutions was $32.9 million for the first three months of 2021, compared to a net increase of $54.1 million for the same period of 2020. Proceeds from calls, maturities, and paydowns of securities were $68.3 million for the first three months of 2021, compared to $13.1 million for the same period of 2020. Purchases of securities used cash of $53.6 million for the first three months of 2021, compared to $83.4 million for the same period of 2020. Proceeds from sales of securities were $19.5 million for the first three months of 2021. There were no proceeds from sales of securities for the first three months of 2020. The net increase in loans/leases used cash of $108.0 million for the first three months of 2021 compared to $15.6 million for the same period of 2020.
Financing activities provided cash of $42.8 million for the first three months of 2021, compared to $220.4 million for same period of 2020. Net increases in deposits totaled $32.6 million for the first three months of 2021, compared to $259.3 million for the same period of 2020. During the first three months of 2021, the Company's short-term borrowings increased $1.4 million, compared to an increase in short-term borrowings of $29.6 million for the same period of 2020. There were no long-term FHLB advances during the first three months of 2021. There were no maturities and principal payments on FHLB term advances in the first three months of 2021. Net increase in overnight advances totaled $10.0 million for the first three months of 2021. In the first three months of 2020, the Company decreased short-term and overnight FHLB advances by $109.3 million. There were no maturities and principal payments on FHLB term advances in the first three months of 2020.
Total cash provided by operating activities was $11.1 million for the first three months of 2021, compared to $6.6 million for the same period of 2020.
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 and, most recently, subordinated notes.
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 9 of the Consolidated Financial Statements for additional information regarding regulatory capital.
70
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. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
● | The strength of the local, state, and national and international economies (including the impact of the new presidential administration). |
● | The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), acts of war or threats thereof and other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse events. |
● | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB, including FASB’s CECL impairment standards. |
● | Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business. |
● | Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out. |
● | Increased competition in the financial services sector and the inability to attract new customers. |
● | Changes in technology and the ability to develop and maintain secure and reliable electronic systems. |
● | Unexpected results of acquisitions which may include failure to realize the anticipated benefits of acquisition. |
● | The loss of key executives or employees. |
● | The costs, effects and outcomes of existing or future litigation. |
● | The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards. |
● | The ability of the Company to manage the risks associated with the foregoing as well as anticipated. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
71
Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.
Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the board of directors and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.
The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.
Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.
The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.
72
Part I
Item 3
Application of the simulation model analysis for select interest rate scenarios at the most recent quarter-end available is presented in the following table:
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NET INTEREST INCOME EXPOSURE in YEAR 1 |
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As of March 31, |
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As of December 31, |
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As of December 31, |
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INTEREST RATE SCENARIO |
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POLICY LIMIT |
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2021 |
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2020 |
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2019 |
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100 basis point downward shift |
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(10.0) |
% |
(0.2) |
% |
— |
% |
0.5 |
% |
200 basis point upward shift |
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(10.0) |
% |
2.7 |
% |
2.5 |
% |
1.2 |
% |
300 basis point upward shock |
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(30.0) |
% |
10.5 |
% |
10.3 |
% |
4.9 |
% |
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, 2021 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
73
Part I
Item 4
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of March 31, 2021. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
74
Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A Risk Factors
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic. It is undecided whether or when the Company will resume the repurchase of shares under this program in the future. All shares repurchased under the share repurchase program were retired.
Item 3 Defaults Upon Senior Securities
None
Item 4 Mine Safety Disclosures
Not applicable
Item 5 Other Information
None
75
Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6 Exhibits
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31.1 |
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2 |
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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32.1 |
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32.2 |
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101 |
Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three months ended March 31, 2021 and March 31, 2020; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and March 31, 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2021 and March 31, 2020; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and March 31, 2020; and (vi) Notes to the Consolidated Financial Statements. |
104 |
Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101. |
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76
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
QCR HOLDINGS, INC.
(Registrant)
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Date |
May 7, 2021 |
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/s/ Larry J. Helling |
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Larry J. Helling |
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Chief Executive Officer |
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Date |
May 7, 2021 |
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/s/ Todd A. Gipple |
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Todd A. Gipple, President |
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Chief Operating Officer |
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Chief Financial Officer |
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Date |
May 7, 2021 |
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/s/ Nick W. Anderson |
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Nick W. Anderson |
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Chief Accounting Officer |
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(Principal Accounting Officer) |
77
Exhibit 31.1
I, Larry J. Helling, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: May 7, 2021 |
/s/ Larry J. Helling |
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Larry J. Helling |
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Chief Executive Officer |
Exhibit 31.2
I, Todd A. Gipple, certify that:
1. I have reviewed this quarterly report on Form 10-Q of QCR Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2021 |
/s/ Todd A. Gipple |
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Todd A. Gipple |
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President |
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Chief Operating Officer |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of QCR Holdings, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Larry J. Helling, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
ugust 8 |
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/s/ Larry J. Helling |
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Larry J. Helling |
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Chief Executive Officer |
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May 7, 2021 |
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of QCR Holdings, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Todd A. Gipple, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
ugsut |
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/s/ Todd A. Gipple |
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Todd A. Gipple |
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President |
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Chief Operating Officer |
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Chief Financial Officer |
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May 7, 2021 |
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