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QCR HOLDINGS INC - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

[    ] 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)

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

Yes [ X ]      No [    ]

Indicate by check mark whether the registrant has submitted electronically 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 [ X ]      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 [ X ]

Non-accelerated filer  [   ]

Smaller reporting company [   ]

Emerging growth company [   ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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

Yes [    ]      No [ X ]

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 Par Value

QCRH

The Nasdaq Global Market

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2019, the Registrant had outstanding 15,794,839 shares of common stock, $1.00 par value per share.

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

Page
Number(s)

Part I

    

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1

    

Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets
As of September 30, 2019 and December 31, 2018

 

4

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income
For the Three Months Ended September 30, 2019 and 2018

5

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income
For the Nine Months Ended September 30, 2019 and 2018

6

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2019 and 2018

7

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity
For the Three and Nine Months Ended September 30, 2019 and 2018

8

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2019 and 2018

10

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

12

 

 

 

 

 

 

 

 

 

 

Note 1. Summary of Significant Accounting Policies

12

 

 

 

 

Note 2. Assets and Liabilities Held for Sale

14

 

 

 

 

Note 3. Investment Securities

15

 

 

 

 

Note 4. Loans/Leases Receivable

19

 

 

 

 

Note 5. Derivatives

29

 

 

 

 

Note 6. Borrowings

29

 

 

 

 

Note 7. Earnings Per Share

30

 

 

 

 

Note 8. Fair Value

31

 

 

 

 

Note 9. Business Segment Information

34

 

 

 

 

Note 10. Regulatory Capital Requirements

35

 

 

 

 

 

 

 

 

Item 2

 

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

 

 

 

 

 

 

 

 

 

 

 

Introduction

37

 

 

 

 

General

37

 

 

 

 

Executive Overview

38

 

 

 

 

Long-Term Financial Goals

40

 

 

 

 

Strategic Developments

41

 

 

 

 

GAAP to Non-GAAP Reconciliations

42

 

 

 

 

Net Interest Income - (Tax Equivalent Basis)

43

 

 

 

 

Critical Accounting Policies

48

 

 

 

 

        Goodwill

48

 

 

 

 

        Allowance for Loan and Lease Losses

49

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations

49

 

 

 

 

Interest Income

49

 

 

 

 

Interest Expense

 

 

 

 

 

Provision for Loan/Lease Losses

49

 

 

 

 

Noninterest Income

50

 

 

 

 

Noninterest Expense

53

 

 

 

 

Income Taxes

55

 

 

 

 

Financial Condition

56

 

 

 

 

Investment Securities

57

 

 

 

 

Loans/Leases

58

 

 

 

 

Allowance for Estimated Losses on Loans/Leases

59

 

 

 

 

Nonperforming Assets

61

 

 

 

 

Deposits

62

 

 

 

 

Borrowings

62

 

 

 

 

Stockholders' Equity

64

 

 

 

 

Liquidity and Capital Resources

64

 

 

 

 

Special Note Concerning Forward-Looking Statements

66

 

 

 

 

 

 

 

 

Item 3

    

Quantitative and Qualitative Disclosures About Market Risk

67

 

 

 

 

 

 

 

 

Item 4

 

Controls and Procedures

69

 

 

 

 

 

 

Part II 

    

OTHER INFORMATION

70

 

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

70

 

 

 

 

 

 

 

 

Item 1A

 

Risk Factors

70

 

 

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

70

 

 

 

 

 

 

 

 

Item 3

 

Defaults upon Senior Securities

70

 

 

 

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

70

 

 

 

 

 

 

 

 

Item 5

 

Other Information

70

 

 

 

 

 

 

 

 

Item 6

 

Exhibits

71

 

 

 

 

 

 

Signatures 

72

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 September 30, 2019 and December 31, 2018

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(dollars in thousands)

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

91,671

 

$

85,523

Federal funds sold

 

 

9,300

 

 

26,398

Interest-bearing deposits at financial institutions

 

 

187,963

 

 

133,198

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost

 

 

343,477

 

 

401,913

Securities available for sale, at fair value

 

 

211,932

 

 

261,056

Total securities

 

 

555,409

 

 

662,969

 

 

 

  

 

 

  

Loans receivable held for sale

 

 

8,890

 

 

1,295

Loans/leases receivable held for investment

 

 

3,601,380

 

 

3,731,459

Gross loans/leases receivable

 

 

3,610,270

 

 

3,732,754

Less allowance for estimated losses on loans/leases

 

 

(36,116)

 

 

(39,847)

Net loans/leases receivable

 

 

3,574,154

 

 

3,692,907

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

58,367

 

 

67,783

Premises and equipment, net

 

 

74,486

 

 

75,582

Restricted investment securities

 

 

24,562

 

 

25,689

Other real estate owned, net

 

 

4,248

 

 

9,378

Goodwill

 

 

77,748

 

 

77,832

Intangibles

 

 

15,529

 

 

17,450

Assets held for sale

 

 

465,547

 

 

 —

Other assets

 

 

153,398

 

 

75,001

Total assets

 

$

5,292,382

 

$

4,949,710

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

782,232

 

$

791,102

Interest-bearing

 

 

3,020,009

 

 

3,185,929

Total deposits

 

 

3,802,241

 

 

3,977,031

 

 

 

  

 

 

  

Short-term borrowings

 

 

18,526

 

 

28,774

Federal Home Loan Bank advances

 

 

195,800

 

 

266,492

Other borrowings

 

 

 —

 

 

67,250

Subordinated notes

 

 

68,334

 

 

4,782

Junior subordinated debentures

 

 

37,797

 

 

37,670

Liabilities held for sale

 

 

470,530

 

 

 —

Other liabilities

 

 

179,411

 

 

94,573

Total liabilities

 

 

4,772,639

 

 

4,476,572

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

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

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 September 2019 - 15,790,462 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding

 

 

15,790

 

 

15,718

Additional paid-in capital

 

 

273,475

 

 

270,761

Retained earnings

 

 

230,892

 

 

192,203

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Securities available for sale

 

 

3,832

 

 

(4,268)

Derivatives

 

 

(4,246)

 

 

(1,276)

Total stockholders' equity

 

 

519,743

 

 

473,138

Total liabilities and stockholders' equity

 

$

5,292,382

 

$

4,949,710

 

See Notes to Consolidated Financial Statements (Unaudited)

4

 

 

 

 

 

 

 

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands, except share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

50,406

 

$

44,034

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,682

 

 

1,522

 

Nontaxable

 

 

3,443

 

 

3,517

 

Interest-bearing deposits at financial institutions

 

 

951

 

 

324

 

Restricted investment securities

 

 

293

 

 

329

 

Federal funds sold

 

 

42

 

 

105

 

Total interest and dividend income

 

 

56,817

 

 

49,831

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

13,394

 

 

8,723

 

Short-term borrowings

 

 

97

 

 

78

 

Federal Home Loan Bank advances

 

 

1,023

 

 

1,422

 

Other borrowings

 

 

 —

 

 

705

 

Subordinated notes

 

 

1,003

 

 

70

 

Junior subordinated debentures

 

 

581

 

 

519

 

Total interest expense

 

 

16,098

 

 

11,517

 

Net interest income

 

 

40,719

 

 

38,314

 

Provision for loan/lease losses

 

 

2,012

 

 

6,206

 

Net interest income after provision for loan/lease losses

 

 

38,707

 

 

32,108

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

2,340

 

 

2,196

 

Investment advisory and management fees

 

 

1,782

 

 

1,059

 

Deposit service fees

 

 

1,813

 

 

1,656

 

Gains on sales of residential real estate loans, net

 

 

890

 

 

337

 

Gains on sales of government guaranteed portions of loans, net

 

 

519

 

 

46

 

Swap fee income

 

 

9,797

 

 

1,110

 

Securities losses, net

 

 

(3)

 

 

 —

 

Earnings on bank-owned life insurance

 

 

489

 

 

474

 

Debit card fees

 

 

886

 

 

846

 

Correspondent banking fees

 

 

189

 

 

195

 

Other

 

 

1,204

 

 

890

 

Total noninterest income

 

 

19,906

 

 

8,809

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

24,215

 

 

17,433

 

Occupancy and equipment expense

 

 

3,860

 

 

3,318

 

Professional and data processing fees

 

 

4,030

 

 

2,396

 

Acquisition costs

 

 

 —

 

 

1,292

 

Post-acquisition compensation, transition and integration costs

 

 

884

 

 

494

 

FDIC insurance, other insurance and regulatory fees

 

 

542

 

 

933

 

Loan/lease expense

 

 

221

 

 

369

 

Net cost of (income from) and gains/losses on operations of other real estate

 

 

2,078

 

 

(50)

 

Advertising and marketing

 

 

1,056

 

 

984

 

Bank service charges

 

 

502

 

 

462

 

Losses on debt extinguishment, net

 

 

148

 

 

 —

 

Correspondent banking expense

 

 

209

 

 

205

 

Intangibles amortization

 

 

560

 

 

542

 

Other

 

 

1,640

 

 

2,122

 

Total noninterest expense

 

 

39,945

 

 

30,500

 

Net income before income taxes

 

 

18,668

 

 

10,417

 

Federal and state income tax expense

 

 

3,573

 

 

1,608

 

Net income

 

$

15,095

 

$

8,809

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.96

 

$

0.56

 

Diluted earnings per common share

 

$

0.94

 

$

0.55

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,739,430

 

 

15,625,123

 

Weighted average common and common equivalent shares outstanding

 

 

15,976,742

 

 

15,922,324

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

0.06

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

5

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

 

 

(dollars in thousands, except share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

143,488

 

$

113,655

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

5,026

 

 

4,671

 

Nontaxable

 

 

10,461

 

 

10,101

 

Interest-bearing deposits at financial institutions

 

 

3,042

 

 

749

 

Restricted investment securities

 

 

891

 

 

776

 

Federal funds sold

 

 

191

 

 

223

 

Total interest and dividend income

 

 

163,099

 

 

130,175

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

39,697

 

 

20,132

 

Short-term borrowings

 

 

275

 

 

186

 

Federal Home Loan Bank advances

 

 

2,685

 

 

3,637

 

Other borrowings

 

 

512

 

 

1,875

 

Subordinated notes

 

 

2,561

 

 

70

 

Junior subordinated debentures

 

 

1,729

 

 

1,474

 

Total interest expense

 

 

47,459

 

 

27,374

 

Net interest income

 

 

115,640

 

 

102,801

 

Provision for loan/lease losses

 

 

6,087

 

 

11,046

 

Net interest income after provision for loan/lease losses

 

 

109,553

 

 

91,755

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

7,194

 

 

6,491

 

Investment advisory and management fees

 

 

5,406

 

 

3,069

 

Deposit service fees

 

 

5,025

 

 

4,797

 

Gains on sales of residential real estate loans, net

 

 

1,748

 

 

539

 

Gains on sales of government guaranteed portions of loans, net

 

 

589

 

 

405

 

Swap fee income

 

 

20,886

 

 

3,718

 

Securities losses, net

 

 

(56)

 

 

 —

 

Earnings on bank-owned life insurance

 

 

1,441

 

 

1,292

 

Debit card fees

 

 

2,591

 

 

2,456

 

Correspondent banking fees

 

 

578

 

 

673

 

Other

 

 

3,562

 

 

2,822

 

Total noninterest income

 

 

48,964

 

 

26,262

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

67,843

 

 

49,215

 

Occupancy and equipment expense

 

 

11,087

 

 

9,517

 

Professional and data processing fees

 

 

9,811

 

 

8,016

 

Acquisition costs

 

 

 —

 

 

1,799

 

Post-acquisition compensation, transition and integration costs

 

 

1,727

 

 

659

 

FDIC insurance, other insurance and regulatory fees

 

 

2,432

 

 

2,529

 

Loan/lease expense

 

 

748

 

 

920

 

Net cost of (income from) and gains/losses on operations of other real estate

 

 

3,557

 

 

11

 

Advertising and marketing

 

 

2,878

 

 

2,430

 

Bank service charges

 

 

1,494

 

 

1,368

 

Losses on debt extinguishment, net

 

 

148

 

 

 —

 

Correspondent banking expense

 

 

619

 

 

614

 

CDI amortization

 

 

1,706

 

 

1,151

 

Other

 

 

4,891

 

 

4,504

 

Total noninterest expenses

 

 

108,941

 

 

82,733

 

Net income before income taxes

 

 

49,576

 

 

35,284

 

Federal and state income tax expense

 

 

8,059

 

 

5,480

 

Net income 

 

$

41,517

 

$

29,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

2.64

 

$

2.06

 

Diluted earnings per common share

 

$

2.60

 

$

2.02

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,715,788

 

 

14,477,783

 

Weighted average common and common equivalent shares outstanding

 

 

15,946,020

 

 

14,786,777

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.18

 

$

0.18

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

6

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

    

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Net income

 

$

15,095

 

$

8,809

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

1,827

 

 

(1,652)

 

Less reclassification adjustment for losses included in net income before tax

 

 

(3)

 

 

 —

 

 

 

 

1,830

 

 

(1,652)

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period before tax

 

 

(1,159)

 

 

577

 

Less reclassification adjustment for caplet amortization before tax

 

 

 —

 

 

(187)

 

 

 

 

(1,159)

 

 

764

 

Unrealized gains (losses) on assets held for sale:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period before tax on securities held for sale

 

 

48

 

 

 —

 

Unrealized holding losses arising during the period before tax on derivatives held for sale

 

 

(31)

 

 

 —

 

Less reclassification adjustment for caplet amortization before tax

 

 

(80)

 

 

 —

 

 

 

 

97

 

 

 —

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

768

 

 

(888)

 

Tax expense (benefit)

 

 

224

 

 

(276)

 

Other comprehensive income (loss), net of tax

 

 

544

 

 

(612)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

15,639

 

$

8,197

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Net income

 

$

41,517

 

$

29,804

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

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

 

 

10,639

 

 

(8,531)

 

Less reclassification adjustment for losses included in net income before tax

 

 

(56)

 

 

 —

 

Less reclassification adjustment for adoption of ASU 2016-01

 

 

 —

 

 

855

 

 

 

 

10,695

 

 

(7,676)

 

Unrealized losses on derivatives:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period before tax

 

 

(4,101)

 

 

404

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

(291)

 

 

(90)

 

 

 

 

(3,810)

 

 

494

 

Unrealized gains (losses) on assets held for sale:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period before tax on securities held for sale

 

 

48

 

 

 —

 

Unrealized holding losses arising during the period before tax on derivatives held for sale

 

 

(31)

 

 

 —

 

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

 

 

(80)

 

 

 —

 

 

 

 

97

 

 

 —

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

6,982

 

 

(7,182)

 

Tax expense (benefit)

 

 

1,852

 

 

(2,034)

 

Other comprehensive income (loss), net of tax

 

 

5,130

 

 

(5,148)

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

46,647

 

$

24,656

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

7

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2018

 

$

15,718

 

$

270,761

 

$

192,203

 

$

(5,544)

 

$

473,138

Net income

 

 

 —

 

 

 —

 

 

12,918

 

 

 —

 

 

12,918

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

2,344

 

 

2,344

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(942)

 

 

 —

 

 

(942)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 4

 

 

124

 

 

 —

 

 

 —

 

 

128

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

25

 

 

263

 

 

 —

 

 

 —

 

 

288

Stock-based compensation expense

 

 

 —

 

 

722

 

 

 —

 

 

 —

 

 

722

Restricted stock awards and restricted stock units - 12,719 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  shares of common stock, net of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  withheld for payment of taxes

 

 

13

 

 

(50)

 

 

 —

 

 

 —

 

 

(37)

Exchange of 5,169 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(5)

 

 

(147)

 

 

 —

 

 

 —

 

 

(152)

Balance, March 31, 2019

 

$

15,755

 

$

271,673

 

$

204,179

 

$

(3,200)

 

$

488,407

Net income

 

 

 —

 

 

 —

 

 

13,504

 

 

 —

 

 

13,504

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

2,242

 

 

2,242

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(942)

 

 

 —

 

 

(942)

Issuance of 11,346 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

11

 

 

323

 

 

 —

 

 

 —

 

 

334

Issuance of 2,414 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

 3

 

 

41

 

 

 —

 

 

 —

 

 

44

Stock-based compensation expense

 

 

 —

 

 

719

 

 

 —

 

 

 —

 

 

719

Restricted stock awards and restricted stock units- 4,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  shares of common stock, net of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  withheld for payment of taxes

 

 

 5

 

 

(5)

 

 

 —

 

 

 —

 

 

 —

Exchange of 1,032 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(1)

 

 

(7)

 

 

 —

 

 

 —

 

 

(8)

Balance, June 30, 2019

 

$

15,773

 

$

272,744

 

$

216,741

 

$

(958)

 

$

504,300

Net income

 

 

 —

 

 

 —

 

 

15,095

 

 

 —

 

 

15,095

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

544

 

 

544

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(944)

 

 

 —

 

 

(944)

Issuance of 5,674 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 6

 

 

187

 

 

 —

 

 

 —

 

 

193

Issuance of 12,438 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

12

 

 

144

 

 

 —

 

 

 —

 

 

156

Stock-based compensation expense

 

 

 —

 

 

428

 

 

 —

 

 

 —

 

 

428

Exchange of 589 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock and in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with stock options exercised

 

 

(1)

 

 

(28)

 

 

 —

 

 

 —

 

 

(29)

Balance September 30, 2019

 

$

15,790

 

$

273,475

 

$

230,892

 

$

(414)

 

$

519,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

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

Three and Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2017

 

$

13,918

 

$

189,077

 

$

151,963

 

$

(1,671)

 

$

353,287

Net income

 

 

 —

 

 

 —

 

 

10,550

 

 

 —

 

 

10,550

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(3,202)

 

 

(3,202)

Impact of adoption of ASU 2016-01

 

 

 —

 

 

 

 

 

667

 

 

(667)

 

 

 —

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(834)

 

 

 —

 

 

(834)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 3

 

 

100

 

 

 —

 

 

 —

 

 

103

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  options exercised

 

 

13

 

 

193

 

 

 —

 

 

 —

 

 

206

Stock-based compensation expense

 

 

 —

 

 

496

 

 

 —

 

 

 —

 

 

496

Restricted stock awards - 6,860 shares of common stock

 

 

 7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

Exchange of 3,814 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(4)

 

 

(174)

 

 

 —

 

 

 —

 

 

(178)

Balance, March 31, 2018

 

$

13,937

 

$

189,685

 

$

162,346

 

$

(5,540)

 

$

360,428

Net income

 

 

 —

 

 

 —

 

 

10,445

 

 

 —

 

 

10,445

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(1,334)

 

 

(1,334)

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(836)

 

 

 —

 

 

(836)

Issuance of 5,728 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 6

 

 

215

 

 

 —

 

 

 —

 

 

221

Issuance of 26,641 shares of common stock as a result of stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  options exercised

 

 

26

 

 

362

 

 

 —

 

 

 —

 

 

388

Stock-based compensation expense

 

 

 —

 

 

292

 

 

 —

 

 

 —

 

 

292

Restricted stock awards - 3,972 shares of common stock

 

 

 4

 

 

(4)

 

 

 —

 

 

 —

 

 

 —

Exchange of 642 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

 1

 

 

(17)

 

 

 —

 

 

 —

 

 

(16)

Balance, June 30, 2018

 

$

13,974

 

$

190,533

 

$

171,955

 

$

(6,874)

 

$

369,588

Net income

 

 

 —

 

 

 —

 

 

8,809

 

 

 —

 

 

8,809

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(612)

 

 

(612)

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(938)

 

 

 —

 

 

(938)

Issuance of 1,699,414 shares of common stock as a result

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   of merger with Springfield Bancshares, net of issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   costs of $106,237

 

 

1,699

 

 

78,832

 

 

 —

 

 

 —

 

 

80,531

Issuance of 3,205 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 4

 

 

120

 

 

 —

 

 

 —

 

 

124

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  options exercised

 

 

 2

 

 

32

 

 

 —

 

 

 —

 

 

34

Stock-based compensation expense

 

 

 —

 

 

319

 

 

 —

 

 

 —

 

 

319

Restricted stock awards - 5,300 shares of common stock

 

 

 5

 

 

(5)

 

 

 —

 

 

 —

 

 

 —

Exchange of 9,853 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(10)

 

 

(458)

 

 

 —

 

 

 —

 

 

(468)

Balance, September 30, 2018

 

$

15,674

 

$

269,373

 

$

179,826

 

$

(7,486)

 

$

457,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

9

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net income

 

$

41,517

 

$

29,804

 

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

 

 

  

 

 

  

 

Depreciation

 

 

3,889

 

 

3,257

 

Provision for loan/lease losses

 

 

6,087

 

 

11,046

 

Stock-based compensation expense

 

 

1,869

 

 

1,106

 

Deferred compensation expense accrued

 

 

2,087

 

 

1,453

 

Losses on other real estate owned, net

 

 

3,205

 

 

49

 

Amortization of premiums on securities, net

 

 

1,339

 

 

1,201

 

Securities losses, net

 

 

56

 

 

 —

 

Loans originated for sale

 

 

(104,824)

 

 

(39,923)

 

Proceeds on sales of loans

 

 

97,916

 

 

38,954

 

Gains on sales of residential real estate loans

 

 

(1,748)

 

 

(539)

 

Gains on sales of government guaranteed portions of loans

 

 

(589)

 

 

(405)

 

Loss on debt extinguishment, net

 

 

148

 

 

 —

 

Gains on sales of premises and equipment

 

 

(67)

 

 

 —

 

Amortization of intangibles

 

 

1,706

 

 

1,151

 

Accretion of acquisition fair value adjustments, net

 

 

(3,413)

 

 

(2,951)

 

Increase in cash value of bank-owned life insurance

 

 

(1,441)

 

 

(1,292)

 

Increase in other assets

 

 

(1,953)

 

 

(8,293)

 

Increase  in other liabilities

 

 

336

 

 

2,254

 

Net cash provided by operating activities

 

$

46,120

 

$

36,872

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Net decrease (increase) in federal funds sold

 

 

17,098

 

 

(2,873)

 

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

 

 

(57,180)

 

 

22,099

 

Proceeds from sales of other real estate owned

 

 

840

 

 

1,288

 

Activity in securities portfolio:

 

 

 

 

 

 

 

Purchases

 

 

(28,119)

 

 

(66,420)

 

Calls, maturities and redemptions

 

 

9,074

 

 

22,915

 

Paydowns

 

 

36,649

 

 

36,279

 

Sales

 

 

33,128

 

 

1,938

 

Activity in restricted investment securities:

 

 

  

 

 

 

 

Purchases

 

 

(5,682)

 

 

(5,352)

 

Redemptions

 

 

5,006

 

 

109

 

Net increase in loans/leases originated and held for investment

 

 

(237,286)

 

 

(208,738)

 

Purchase of premises and equipment

 

 

(8,755)

 

 

(7,112)

 

Proceeds from sales of premises and equipment

 

 

146

 

 

 —

 

Net cash paid for acquisition

 

 

 —

 

 

(3,747)

 

Net cash (used in) investing activities

 

$

(235,081)

 

$

(209,614)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

 

Net increase in deposit accounts

 

 

276,960

 

 

82,309

 

Net decrease in short-term borrowings

 

 

(9,091)

 

 

(2,207)

 

Activity in Federal Home Loan Bank advances:

 

 

  

 

 

 

 

Term advances

 

 

25,000

 

 

 —

 

Calls and maturities

 

 

(35,000)

 

 

(27,000)

 

Net change in short-term and overnight advances

 

 

(15,965)

 

 

120,330

 

Prepayments

 

 

(30,228)

 

 

 —

 

Activity in other borrowings:

 

 

  

 

 

 

 

Proceeds from other borrowings

 

 

 —

 

 

9,000

 

Calls, maturities and scheduled principal payments

 

 

(11,937)

 

 

(10,613)

 

Prepayments

 

 

(46,313)

 

 

 —

 

Paydown of revolving line of credit

 

 

(9,000)

 

 

 —

 

Proceeds from subordinated notes

 

 

63,393

 

 

 —

 

Payment of cash dividends on common stock

 

 

(2,822)

 

 

(2,362)

 

Net proceeds from common stock offering

 

 

 —

 

 

 —

 

Proceeds from issuance of common stock, net

 

 

1,143

 

 

970

 

Net cash provided by financing activities

 

$

206,140

 

$

170,427

 

10

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Nine months ended September 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

2019

    

2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and due from banks

 

 

17,179

 

 

(2,315)

 

 

 

 

 

 

 

 

 

Cash and due from banks, beginning

 

 

85,523

 

 

75,722

 

Cash and due from banks, ending

 

$

102,702

 

$

73,407

 

 

 

 

 

 

 

 

 

Reconciliation of cash and due from banks:

 

 

 

 

 

 

 

Cash and due from banks

 

 

91,671

 

 

73,407

 

Cash included in assets held for sale

 

 

11,031

 

 

 —

 

Cash and due from banks at end of period

 

$

102,702

 

$

73,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

 

  

 

Interest

 

$

45,826

 

$

23,102

 

Income/franchise taxes

 

 

(769)

 

 

(1,100)

 

 

 

 

  

 

 

 

 

Supplemental schedule of noncash investing activities:

 

 

  

 

 

 

 

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

 

 

5,130

 

 

(5,148)

 

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

 

 

(189)

 

 

(662)

 

Transfers of loans to other real estate owned

 

 

1,049

 

 

46

 

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

 

 

80,760

 

 

(2,441)

 

Dividends payable

 

 

944

 

 

938

 

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

 

 

 —

 

 

2,614

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information for acquisitions:

 

 

  

 

 

  

 

Fair value of assets acquired:

 

 

  

 

 

  

 

Cash and due from banks

 

$

 —

 

$

4,587

 

Interest-bearing deposits at financial institutions

 

 

 —

 

 

62,925

 

Securities

 

 

 —

 

 

4,845

 

Loans receivable, net

 

 

 —

 

 

477,337

 

Bank-owned life insurance

 

 

 —

 

 

7,092

 

Premises and equipment, net

 

 

 —

 

 

6,092

 

Restricted investment securities

 

 

 —

 

 

3,654

 

Intangibles

 

 

 —

 

 

8,209

 

Other assets

 

 

 —

 

 

988

 

Total assets acquired

 

$

 —

 

$

575,729

 

 

 

 

  

 

 

  

 

Fair value of liabilities assumed:

 

 

  

 

 

  

 

Deposits

 

$

 —

 

$

439,580

 

Short-term borrowings

 

 

 —

 

 

1,144

 

FHLB advances

 

 

 —

 

 

73,610

 

Other borrowings

 

 

 —

 

 

9,544

 

Other liabilities

 

 

 —

 

 

8,408

 

Total liabilities assumed

 

 

 —

 

 

532,286

 

Net assets acquired

 

$

 —

 

$

43,443

 

Consideration paid:

 

 

  

 

 

  

 

Cash paid *

 

$

 —

 

$

8,334

 

Common stock

 

 

 —

 

 

80,637

 

Total consideration paid

 

 

 —

 

 

88,971

 

Goodwill

 

$

 —

 

$

45,528

 

 

 

 

 

 

 

 

 

* Net cash paid at closing totaled $3,747 for acquisition of SFC Bank in 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  See Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

11

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Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2019

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, 2018, included in the Company's Annual Report on Form 10‑K filed with the SEC on March 15, 2019. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited consolidated financial statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10‑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 September 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019, or for any other period.

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

 

 

 

 

Allowance: Allowance for estimated losses on loans/leases

Guaranty: Guaranty Bankshares, Ltd.

AOCI: Accumulated other comprehensive income (loss)

Guaranty Bank: Guaranty Bank and Trust Company

AFS: Available for sale

HTM: Held to maturity

ASC: Accounting Standards Codification

IB&T: Illinois Bank & Trust

ASU: Accounting Standards Update

m2: m2 Lease Funds, LLC

Bates Companies: Bates Financial Advisors, Inc., Bates

NIM: Net interest margin

     Financial Services, Inc., Bates Securities, Inc. and

NPA: Nonperforming asset

Bates Financial Group, Inc.

NPL: Nonperforming loan

BOLI: Bank-owned life insurance

OREO: Other real estate owned

Caps: Interest rate cap derivatives

OTTI: Other-than-temporary impairment

CDI: Core deposit intangible

PCI: Purchased credit impaired

Community National: Community National Bancorporation

Provision: Provision for loan/lease losses

CRBT: Cedar Rapids Bank & Trust Company

QCBT: Quad City Bank & Trust Company

CRE: Commercial real estate

RB&T: Rockford Bank & Trust Company

CSB: Community State Bank

ROAA: Return on Average Assets

C&I: Commercial and industrial

SBA: U.S. Small Business Administration

EPS: Earnings per share

SEC: Securities and Exchange Commission

Exchange Act: Securities Exchange Act of 1934, as

SFC Bank: Springfield First Community Bank

amended

Springfield Bancshares: Springfield Bancshares, Inc.

FASB: Financial Accounting Standards Board

TA: Tangible assets

FDIC: Federal Deposit Insurance Corporation

TCE: Tangible common equity

FHLB: Federal Home Loan Bank

TDRs: Troubled debt restructurings

FRB: Federal Reserve Bank of Chicago

TEY: Tax equivalent yield

GAAP: Generally Accepted Accounting Principles

The Company: QCR Holdings, Inc.

 

USDA: U.S. Department of Agriculture

 

 

 

12

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

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

On August 13, 2019, the Company entered into a definitive agreement to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the agreement, IB&T will acquire certain assets and assume certain liabilities for a cash payment. The transaction is subject to approval by federal and state bank regulators and to customary closing conditions.  The transaction is expected to close in the fourth quarter of 2019. The assets and liabilities that will be sold are classified as held for sale on the Consolidated Balance Sheet and corresponding footnotes. See Note 2 to the Company’s Consolidated Financial Statements for additional information about the sale.

Recent accounting developments:  In February 2016, the FASB issued ASU 2016‑02, Leases. Under ASU 2016‑02, lessees will be required to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases (with the exception of short-term leases). Lessor accounting is largely unchanged under ASU 2016‑02. However, the definition of initial direct costs was updated to include only initial direct costs that are considered incremental. This change in definition will change the manner in which the Company recognizes the costs associated with originating leases. ASU 2016‑02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The standard was adopted on January 1, 2019 and did not have a significant impact on the Company’s Consolidated Financial Statements.

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis. ASU 2017-04 requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect this guidance to have a significant impact on its Consolidated Financial Statements.

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

 

13

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 2 – ASSETS AND LIABILITIES HELD FOR SALE

On August 13, 2019, the Company and RB&T entered into a Purchase and Assumption Agreement (the Agreement) to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the Agreement, IB&T will acquire certain assets and assume certain liabilities of RB&T for a cash payment. The actual cash payment amount will be determined substantially by the following formula: (i) the “Purchase Price Premium”, plus (ii) the aggregate net book value of the acquired assets, minus (iii) the aggregate book value of the assumed liabilities.  The Purchase Price Premium is equal to: (a) 8% of RB&T’s tangible assets, multiplied by (b) 0.345.  Based on RB&T’s balance sheet as of September 30, 2019, the Purchase Price Premium would be $14.2 million and the total payment by IB&T to the Company would be $59.7 million.  The transaction is subject to approval by federal and state bank regulators and to customary closing conditions.  The transaction is expected to close in the fourth quarter of 2019.

Assets and liabilities of RB&T classified as held for sale are summarized as follows as of September 30, 2019:

 

 

 

 

 

 

 

As of

 

 

    

September 30, 2019

    

 

 

(dollars in thousands)

 

 

 

 

 

ASSETS

 

 

 

 

Cash and cash equivalents

 

$

13,446

 

Securities

 

 

66,009

 

Loans, net

 

 

362,011

 

Other assets

 

 

24,081

 

Assets held for sale

 

$

465,547

 

 

 

 

  

 

LIABILIITES

 

 

 

 

Deposits

 

$

451,546

 

Borrowings

 

 

16,157

 

Other liabilities

 

 

2,827

 

Liabilities held for sale

 

$

470,530

 

 

 

 

 

14

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 3 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

September 30, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

342,427

 

$

20,122

 

$

(119)

 

$

362,430

Other securities

 

 

1,050

 

 

 —

 

 

(6)

 

 

1,044

 

 

$

343,477

 

$

20,122

 

$

(125)

 

$

363,474

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

20,861

 

$

470

 

$

(63)

 

$

21,268

Residential mortgage-backed and related securities

 

 

121,118

 

 

2,962

 

 

(200)

 

 

123,880

Municipal securities

 

 

47,259

 

 

1,653

 

 

(10)

 

 

48,902

Other securities

 

 

17,711

 

 

172

 

 

(1)

 

 

17,882

 

 

$

206,949

 

$

5,257

 

$

(274)

 

$

211,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

400,863

 

$

5,661

 

$

(6,803)

 

$

399,721

Other securities

 

 

1,050

 

 

 —

 

 

(1)

 

 

1,049

 

 

$

401,913

 

$

5,661

 

$

(6,804)

 

$

400,770

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

37,150

 

$

39

 

$

(778)

 

$

36,411

Residential mortgage-backed and related securities

 

 

163,698

 

 

182

 

 

(4,631)

 

 

159,249

Municipal securities

 

 

59,069

 

 

180

 

 

(703)

 

 

58,546

Other securities

 

 

6,754

 

 

100

 

 

(4)

 

 

6,850

 

 

$

266,671

 

$

501

 

$

(6,116)

 

$

261,056

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.

15

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2019 and December 31, 2018, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(dollars in thousands)

September 30, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

1,037

 

$

(1)

 

$

7,839

 

$

(118)

 

$

8,876

 

$

(119)

Other securities

 

 

1,044

 

 

(6)

 

 

 —

 

 

 —

 

 

1,044

 

 

(6)

 

 

$

2,081

 

$

(7)

 

$

7,839

 

$

(118)

 

$

9,920

 

$

(125)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

1,618

 

$

(1)

 

$

2,318

 

$

(62)

 

$

3,936

 

$

(63)

Residential mortgage-backed and related securities

 

 

1,194

 

 

(1)

 

 

20,376

 

 

(199)

 

 

21,570

 

 

(200)

Municipal securities

 

 

1,686

 

 

(3)

 

 

723

 

 

(7)

 

 

2,409

 

 

(10)

Other securities

 

 

248

 

 

(1)

 

 

 —

 

 

 —

 

 

248

 

 

(1)

 

 

$

4,746

 

$

(6)

 

$

23,417

 

$

(268)

 

$

28,163

 

$

(274)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

114,201

 

$

(2,187)

 

$

69,412

 

$

(4,616)

 

$

183,613

 

$

(6,803)

Other securities

 

 

549

 

 

(1)

 

 

 —

 

 

 —

 

 

549

 

 

(1)

 

 

$

114,750

 

$

(2,188)

 

$

69,412

 

$

(4,616)

 

$

184,162

 

$

(6,804)

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

1,565

 

$

(34)

 

$

29,605

 

$

(744)

 

$

31,170

 

$

(778)

Residential mortgage-backed and related securities

 

 

12,810

 

 

(148)

 

 

133,535

 

 

(4,483)

 

 

146,345

 

 

(4,631)

Municipal securities

 

 

28,356

 

 

(394)

 

 

15,932

 

 

(309)

 

 

44,288

 

 

(703)

Other securities

 

 

4,249

 

 

(4)

 

 

 —

 

 

 —

 

 

4,249

 

 

(4)

 

 

$

46,980

 

$

(580)

 

$

179,072

 

$

(5,536)

 

$

226,052

 

$

(6,116)

At September 30, 2019, the investment portfolio included 510 securities. Of this number, 31 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.1% of the total amortized cost of the portfolio. Of these 31 securities, 21 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or nine months ended September 30, 2019 and 2018.

 

 

16

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

All sales of securities for the three and nine months ended September 30, 2019 and September 30, 2018 were securities identified as AFS.    Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

    

Nine Months Ended

    

 

 

 

 

 

September 30, 2019

 

September 30, 2018

 

September 30, 2019

 

September 30, 2018

 

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of securities

 

 

 

 

$

23,364

 

$

1,938

 

$

28,025

 

$

1,938

 

Gross gains from sales of securities

 

 

 

 

 

143

 

 

 —

 

 

150

 

 

 —

 

Gross losses from sales of securities

 

 

 

 

 

(146)

 

 

 —

 

 

(206)

 

 

 —

 

 

The amortized cost and fair value of securities as of September 30, 2019 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

 

(dollars in thousands)

Securities HTM:

 

 

  

 

 

  

Due in one year or less

 

$

2,946

 

$

2,954

Due after one year through five years

 

 

31,055

 

 

31,689

Due after five years

 

 

309,476

 

 

328,831

 

 

$

343,477

 

$

363,474

Securities AFS:

 

 

  

 

 

  

Due in one year or less

 

$

1,084

 

$

1,088

Due after one year through five years

 

 

17,157

 

 

17,384

Due after five years

 

 

67,590

 

 

69,580

 

 

 

85,831

 

 

88,052

Residential mortgage-backed and related securities

 

 

121,118

 

 

123,880

 

 

$

206,949

 

$

211,932

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

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

 

(dollars in thousands)

Securities HTM:

 

 

  

 

 

  

Municipal securities

 

$

176,339

 

$

181,785

 

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

Municipal securities

 

 

40,262

 

 

41,646

Other securities

 

 

6,504

 

 

6,677

 

 

$

46,766

 

$

48,323

 

As of September 30, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 91 issuers with fair values totaling $76.1 million and revenue bonds issued by 148 issuers, primarily consisting

17

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

of states, counties, towns, villages and school districts with fair values totaling $335.2 million. The Company held investments in general obligation bonds in 23 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 17 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 110 issuers with fair values totaling $86.4 million and revenue bonds issued by 160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $371.9 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 19 states, including seven states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of  September 30, 2019 and December 31, 2018 the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company'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 each of the four held for investment charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of September 30, 2019, all were well 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 September 30, 2019, 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.

18

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 4 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of September 30, 2019 and December 31, 2018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

As of December 31, 

 

    

2019

    

2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

C&I loans *

 

$

1,469,978

 

$

1,429,410

CRE loans

 

 

  

 

 

 

Owner-occupied CRE

 

 

441,122

 

 

500,654

Commercial construction, land development, and other land

 

 

369,123

 

 

236,787

Other non owner-occupied CRE

 

 

877,677

 

 

1,028,670

 

 

 

1,687,922

 

 

1,766,111

 

 

 

 

 

 

 

Direct financing leases **

 

 

92,307

 

 

117,969

Residential real estate loans ***

 

 

245,667

 

 

290,759

Installment and other consumer loans

 

 

106,540

 

 

119,381

 

 

 

3,602,414

 

 

3,723,630

Plus deferred loan/lease origination costs, net of fees

 

 

7,856

 

 

9,124

 

 

 

3,610,270

 

 

3,732,754

Less allowance

 

 

(36,116)

 

 

(39,847)

 

 

$

3,574,154

 

$

3,692,907

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 

$

101,869

 

$

130,371

Estimated unguaranteed residual values of leased assets

 

 

547

 

 

828

Unearned lease/residual income

 

 

(10,109)

 

 

(13,230)

 

 

 

92,307

 

 

117,969

Plus deferred lease origination costs, net of fees

 

 

2,153

 

 

3,642

 

 

 

94,460

 

 

121,611

Less allowance

 

 

(1,302)

 

 

(1,792)

 

 

$

93,158

 

$

119,819

 

 

 

 

 

 

 

 

*     Includes equipment financing agreements outstanding at m2, totaling $131.0 million and $103.4 million as of September 30, 2019 and December 31, 2018, respectively.

**   Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal. There were no losses related to residual values for the three and nine months ended September 30, 2019 and 2018.

*** Includes residential real estate loans held for sale totaling $8.9 million and $1.3 million as of September 30, 2019 and December 31, 2018, respectively.

 

 

19

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in accretable yield for acquired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2019

 

Nine months ended September 30, 2019

 

 

    

PCI

    

Performing

    

 

 

 

PCI

    

Performing

    

 

 

 

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(151)

 

$

(8,489)

 

$

(8,640)

 

$

(667)

 

$

(10,127)

 

$

(10,794)

 

Reclassification of nonaccretable discount to accretable

 

 

 —

 

 

 —

 

 

 —

 

 

(159)

 

 

 —

 

 

(159)

 

Accretion recognized

 

 

94

 

 

1,344

 

 

1,438

 

 

769

 

 

2,982

 

 

3,751

 

Balance at the end of the period

 

$

(57)

 

$

(7,145)

 

$

(7,202)

 

$

(57)

 

$

(7,145)

 

$

(7,202)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2018

 

Nine months ended September 30, 2018

 

 

    

PCI

    

Performing

    

 

 

PCI

    

Performing

    

 

 

 

 

Loans

 

Loans

 

Total

    

Loans

    

Loans

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(142)

 

$

(5,051)

 

$

(5,193)

 

$

(191)

 

$

(6,280)

 

$

(6,471)

 

Discount added at acquisition

 

 

(293)

 

 

(7,800)

 

 

(8,093)

 

 

(293)

 

 

(7,800)

 

 

(8,093)

 

Reclassification of nonaccretable discount to accretable

 

 

(892)

 

 

 —

 

 

(892)

 

 

(892)

 

 

 —

 

 

(892)

 

Accretion recognized

 

 

269

 

 

1,579

 

 

1,848

 

 

318

 

 

2,808

 

 

3,126

 

Balance at the end of the period

 

$

(1,058)

 

$

(11,272)

 

$

(12,330)

 

$

(1,058)

 

$

(11,272)

 

$

(12,330)

 

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2019 and December 31, 2018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

1,466,347

 

$

2,067

 

$

246

 

$

 —

 

$

1,318

 

$

1,469,978

 

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

440,668

 

 

276

 

 

 —

 

 

 —

 

 

178

 

 

441,122

 

Commercial Construction, Land Development, and Other Land

 

 

368,422

 

 

701

 

 

 —

 

 

 —

 

 

 —

 

 

369,123

 

Other Non Owner-Occupied CRE

 

 

872,591

 

 

1,491

 

 

 —

 

 

 —

 

 

3,595

 

 

877,677

 

Direct Financing Leases

 

 

89,776

 

 

816

 

 

318

 

 

 —

 

 

1,397

 

 

92,307

 

Residential Real Estate

 

 

243,785

 

 

58

 

 

704

 

 

 —

 

 

1,120

 

 

245,667

 

Installment and Other Consumer

 

 

105,580

 

 

337

 

 

 —

 

 

 —

 

 

623

 

 

106,540

 

 

 

$

3,587,169

 

$

5,746

 

$

1,268

 

$

 —

 

$

8,231

 

$

3,602,414

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

 

 

99.58

%  

 

0.16

%  

 

0.04

%  

 

 —

%  

 

0.22

%  

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

1,423,406

 

$

930

 

$

597

 

$

389

 

$

4,088

 

$

1,429,410

 

CRE

 

 

  

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

 

Owner-Occupied CRE

 

 

500,138

 

 

 —

 

 

193

 

 

107

 

 

216

 

 

500,654

 

Commercial Construction, Land Development, and Other Land

 

 

234,704

 

 

1,764

 

 

 —

 

 

 —

 

 

319

 

 

236,787

 

Other Non Owner-Occupied CRE

 

 

1,022,664

 

 

484

 

 

 —

 

 

 —

 

 

5,522

 

 

1,028,670

 

Direct Financing Leases

 

 

114,078

 

 

1,642

 

 

488

 

 

 —

 

 

1,761

 

 

117,969

 

Residential Real Estate

 

 

284,844

 

 

3,877

 

 

206

 

 

89

 

 

1,743

 

 

290,759

 

Installment and Other Consumer

 

 

118,343

 

 

356

 

 

24

 

 

47

 

 

611

 

 

119,381

 

 

 

$

3,698,177

 

$

9,053

 

$

1,508

 

$

632

 

$

14,260

 

$

3,723,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of total loan/lease portfolio

 

 

99.32

%  

 

0.24

%  

 

0.04

%  

 

0.02

%  

 

0.38

%  

 

100.00

%

20

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NPLs by classes of loans/leases as of September 30, 2019 and December 31, 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

    

More*

    

Loans/Leases*

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

 —

 

$

1,318

 

$

565

 

$

1,883

 

20.94

%

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

178

 

 

 —

 

 

178

 

1.98

%

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 -

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

3,595

 

 

 —

 

 

3,595

 

39.97

%

Direct Financing Leases

 

 

 —

 

 

1,397

 

 

198

 

 

1,595

 

17.73

%

Residential Real Estate

 

 

 —

 

 

1,120

 

 

 —

 

 

1,120

 

12.45

%

Installment and Other Consumer

 

 

 —

 

 

623

 

 

 —

 

 

623

 

6.93

%

 

 

$

 —

 

$

8,231

 

$

763

 

$

8,994

 

100.00

%

 

*     Nonaccrual loans/leases included $932 thousand of TDRs, including $26 thousand in C&I loans, $513 thousand in CRE loans, $304 thousand in direct financing leases, $32 thousand in residential real estate loans, and $57 thousand in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

    

More*

    

Loans/Leases **

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 

$

389

 

$

4,088

 

$

454

 

$

4,931

 

26.58

%

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

 

 

107

 

 

216

 

 

 —

 

 

323

 

1.74

%

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

319

 

 

 —

 

 

319

 

1.72

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

5,522

 

 

2,984

 

 

8,506

 

45.86

%

Direct Financing Leases

 

 

 —

 

 

1,761

 

 

111

 

 

1,872

 

10.09

%

Residential Real Estate

 

 

89

 

 

1,743

 

 

100

 

 

1,932

 

10.41

%

Installment and Other Consumer

 

 

47

 

 

611

 

 

 9

 

 

667

 

3.60

%

 

 

$

632

 

$

14,260

 

$

3,658

 

$

18,550

 

100.00

%

 

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

thousand in CRE loans.

**   Nonaccrual loans/leases included $2.3 million of TDRs, including $265 thousand in C&I loans, $1.4 million in CRE loans, $321 thousand in direct financing leases, $344 thousand in residential real estate loans, and $3 thousand in installment loans.

21

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in the allowance by portfolio segment for the three and nine months ended September 30, 2019 and 2018, respectively, are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

18,248

 

$

17,363

 

$

1,459

 

$

2,582

 

$

1,452

 

$

41,104

Reclassification of allowance related to held for sale assets

 

 

(2,814)

 

 

(2,392)

 

 

 —

 

 

(628)

 

 

(288)

 

 

(6,122)

Provisions (credits) charged to expense *

 

 

998

 

 

220

 

 

80

 

 

241

 

 

45

 

 

1,584

Loans/leases charged off

 

 

(349)

 

 

 —

 

 

(351)

 

 

(37)

 

 

(4)

 

 

(741)

Recoveries on loans/leases previously charged off

 

 

68

 

 

100

 

 

114

 

 

 —

 

 

 9

 

 

291

Balance, ending

 

$

16,151

 

$

15,291

 

$

1,302

 

$

2,158

 

$

1,214

 

$

36,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

15,234

 

$

15,819

 

$

2,724

 

$

2,433

 

$

1,335

 

$

37,545

Provisions (credits) charged to expense

 

 

3,699

 

 

2,254

 

 

125

 

 

132

 

 

(4)

 

 

6,206

Loans/leases charged off

 

 

(87)

 

 

(387)

 

 

(428)

 

 

(58)

 

 

(31)

 

 

(991)

Recoveries on loans/leases previously charged off

 

 

71

 

 

30

 

 

211

 

 

 —

 

 

 5

 

 

317

Balance, ending

 

$

18,917

 

$

17,716

 

$

2,632

 

$

2,507

 

$

1,305

 

$

43,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

Reclassification of allowance related to held for sale assets

 

 

(2,814)

 

 

(2,392)

 

 

 —

 

 

(628)

 

 

(288)

 

 

(6,122)

 

Provisions charged to expense *

 

 

3,120

 

 

1,168

 

 

856

 

 

309

 

 

206

 

 

5,659

 

Loans/leases charged off

 

 

(876)

 

 

(1,369)

 

 

(1,501)

 

 

(109)

 

 

(99)

 

 

(3,953)

 

Recoveries on loans/leases previously charged off

 

 

300

 

 

164

 

 

155

 

 

31

 

 

36

 

 

685

 

Balance, ending

 

$

16,151

 

$

15,291

 

$

1,302

 

$

2,158

 

$

1,214

 

$

36,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

14,323

 

$

13,963

 

$

2,382

 

$

2,466

 

$

1,221

 

$

34,355

 

Provisions charged to expense

 

 

5,284

 

 

4,091

 

 

1,418

 

 

150

 

 

104

 

 

11,046

 

Loans/leases charged off

 

 

(911)

 

 

(388)

 

 

(1,506)

 

 

(110)

 

 

(36)

 

 

(2,951)

 

Recoveries on loans/leases previously charged off

 

 

221

 

 

50

 

 

338

 

 

 1

 

 

16

 

 

626

 

Balance, ending

 

$

18,917

 

$

17,716

 

$

2,632

 

$

2,507

 

$

1,305

 

$

43,077

 

 

*Excludes provision related to loans included in assets held for sale of $428 thousand for the three and nine months ended September 30, 2019.

22

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The allowance by impairment evaluation and by portfolio segment as of September 30, 2019 and December 31, 2018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 

$

160

 

$

374

 

$

59

 

$

27

 

$

84

 

$

704

 

Allowance for nonimpaired loans/leases

 

 

15,991

 

 

14,917

 

 

1,243

 

 

2,131

 

 

1,130

 

 

35,412

 

 

 

$

16,151

 

$

15,291

 

$

1,302

 

$

2,158

 

$

1,214

 

$

36,116

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

1,764

 

$

4,148

 

$

1,581

 

$

1,062

 

$

623

 

$

9,178

 

Nonimpaired loans/leases

 

 

1,468,214

 

 

1,683,774

 

 

90,726

 

 

244,605

 

 

105,917

 

 

3,593,236

 

 

 

$

1,469,978

 

$

1,687,922

 

$

92,307

 

$

245,667

 

$

106,540

 

$

3,602,414

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

9.07

%  

 

9.02

%  

 

3.73

%  

 

2.54

%  

 

13.48

%  

 

7.67

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.09

%  

 

0.89

%  

 

1.37

%  

 

0.87

%  

 

1.07

%  

 

0.99

%

Total allowance as a percentage of total loans/leases

 

 

1.10

%  

 

0.91

%  

 

1.41

%  

 

0.88

%  

 

1.14

%  

 

1.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 

$

973

 

$

2,124

 

$

194

 

$

257

 

$

111

 

$

3,659

 

Allowance for nonimpaired loans/leases

 

 

15,447

 

 

15,595

 

 

1,598

 

 

2,300

 

 

1,248

 

 

36,188

 

 

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

4,499

 

$

10,447

 

$

2,249

 

$

2,110

 

$

898

 

$

20,203

 

Nonimpaired loans/leases

 

 

1,424,911

 

 

1,755,664

 

 

115,720

 

 

288,649

 

 

118,483

 

 

3,703,427

 

 

 

$

1,429,410

 

$

1,766,111

 

$

117,969

 

$

290,759

 

$

119,381

 

$

3,723,630

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

21.62

%  

 

20.33

%  

 

8.63

%  

 

12.18

%  

 

12.38

%  

 

18.11

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.08

%  

 

0.89

%  

 

1.38

%  

 

0.80

%  

 

1.05

%  

 

0.98

%

Total allowance as a percentage of total loans/leases

 

 

1.15

%  

 

1.00

%  

 

1.52

%  

 

0.88

%  

 

1.14

%  

 

1.07

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

23

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the nine months ended September 30, 2019 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,545

 

$

1,585

 

$

 —

 

$

1,026

 

$

18

 

$

18

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

40

 

 

56

 

 

 —

 

 

21

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

733

 

 

733

 

 

 —

 

 

751

 

 

22

 

 

22

Direct Financing Leases

 

 

1,440

 

 

1,440

 

 

 —

 

 

1,246

 

 

19

 

 

19

Residential Real Estate

 

 

648

 

 

764

 

 

 —

 

 

522

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

539

 

 

539

 

 

 —

 

 

510

 

 

 —

 

 

 —

 

 

$

4,945

 

$

5,117

 

$

 —

 

$

4,076

 

$

59

 

$

59

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

219

 

$

219

 

$

160

 

$

102

 

$

 —

 

$

 —

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

121

 

 

121

 

 

18

 

 

127

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

3,254

 

 

3,254

 

 

356

 

 

1,995

 

 

 —

 

 

 —

Direct Financing Leases

 

 

141

 

 

141

 

 

59

 

 

108

 

 

 2

 

 

 2

Residential Real Estate

 

 

414

 

 

414

 

 

27

 

 

381

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

84

 

 

84

 

 

84

 

 

57

 

 

 —

 

 

 —

 

 

$

4,233

 

$

4,233

 

$

704

 

$

2,770

 

$

 2

 

$

 2

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,764

 

$

1,804

 

$

160

 

$

1,128

 

$

18

 

$

18

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

161

 

 

177

 

 

18

 

 

148

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

3,987

 

 

3,987

 

 

356

 

 

2,746

 

 

22

 

 

22

Direct Financing Leases

 

 

1,581

 

 

1,581

 

 

59

 

 

1,354

 

 

21

 

 

21

Residential Real Estate

 

 

1,062

 

 

1,178

 

 

27

 

 

903

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

623

 

 

623

 

 

84

 

 

567

 

 

 —

 

 

 —

 

 

$

9,178

 

$

9,350

 

$

704

 

$

6,846

 

$

61

 

$

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended September 30, 2019 and 2018, respectively are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

Three Months Ended September 30, 2018

 

    

 

 

 

 

Interest Income

 

 

 

 

 

Interest Income

 

 

Average

 

 

 

 

Recognized for

 

Average

 

 

 

 

Recognized for

 

 

Recorded

 

Interest Income

 

Cash Payments

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

 

Investment

    

Recognized

    

Received

 

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,433

 

$

 6

 

$

 6

 

$

2,795

 

$

17

 

$

17

CRE

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

42

 

 

 —

 

 

 —

 

 

289

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

739

 

 

 7

 

 

 7

 

 

1,009

 

 

 9

 

 

 9

Direct Financing Leases

 

 

1,359

 

 

 6

 

 

 6

 

 

1,780

 

 

 3

 

 

 3

Residential Real Estate

 

 

540

 

 

 —

 

 

 —

 

 

666

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

543

 

 

 —

 

 

 —

 

 

115

 

 

 —

 

 

 —

 

 

$

4,656

 

$

19

 

$

19

 

$

6,654

 

$

29

 

$

29

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

141

 

$

 —

 

$

 —

 

$

3,401

 

$

 2

 

$

 2

CRE

 

 

 

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

123

 

 

 —

 

 

 —

 

 

141

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

5,484

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

3,254

 

 

 —

 

 

 —

 

 

3,848

 

 

 8

 

 

 8

Direct Financing Leases

 

 

120

 

 

 —

 

 

 —

 

 

558

 

 

 —

 

 

 —

Residential Real Estate

 

 

390

 

 

 —

 

 

 —

 

 

461

 

 

 3

 

 

 3

Installment and Other Consumer

 

 

84

 

 

 —

 

 

 —

 

 

113

 

 

 —

 

 

 —

 

 

$

4,112

 

$

 —

 

$

 —

 

$

14,006

 

$

13

 

$

13

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,574

 

$

 6

 

$

 6

 

$

6,196

 

$

19

 

$

19

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

165

 

 

 —

 

 

 —

 

 

430

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

5,484

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

3,993

 

 

 7

 

 

 7

 

 

4,857

 

 

17

 

 

17

Direct Financing Leases

 

 

1,479

 

 

 6

 

 

 6

 

 

2,338

 

 

 3

 

 

 3

Residential Real Estate

 

 

930

 

 

 —

 

 

 —

 

 

1,127

 

 

 3

 

 

 3

Installment and Other Consumer

 

 

627

 

 

 —

 

 

 —

 

 

228

 

 

 —

 

 

 —

 

 

$

8,768

 

$

19

 

$

19

 

$

20,660

 

$

42

 

$

42

25

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

 

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid 

 

 

 

 

 

Recorded

 

Principal

 

Related

 

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

 

 

 

(dollars in thousands)

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

C&I

 

$

1,846

 

$

4,540

 

$

 —

 

CRE

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

106

 

 

106

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

507

 

 

507

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

1,804

 

 

1,804

 

 

 —

 

Direct Financing Leases

 

 

1,929

 

 

1,929

 

 

 —

 

Residential Real Estate

 

 

984

 

 

1,058

 

 

 —

 

Installment and Other Consumer

 

 

762

 

 

762

 

 

 —

 

 

 

$

7,938

 

$

10,706

 

$

 —

 

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

C&I

 

$

2,653

 

$

2,653

 

$

973

 

CRE

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

304

 

 

660

 

 

39

 

Commercial Construction, Land Development, and Other Land

 

 

149

 

 

149

 

 

33

 

Other Non Owner-Occupied CRE

 

 

7,577

 

 

7,577

 

 

2,052

 

Direct Financing Leases

 

 

320

 

 

320

 

 

194

 

Residential Real Estate

 

 

1,126

 

 

1,126

 

 

257

 

Installment and Other Consumer

 

 

136

 

 

136

 

 

111

 

 

 

$

12,265

 

$

12,621

 

$

3,659

 

 

 

 

  

 

 

  

 

 

  

 

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

 

 

C&I

 

$

4,499

 

$

7,193

 

$

973

 

CRE

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

410

 

 

766

 

 

39

 

Commercial Construction, Land Development, and Other Land

 

 

656

 

 

656

 

 

33

 

Other Non Owner-Occupied CRE

 

 

9,381

 

 

9,381

 

 

2,052

 

Direct Financing Leases

 

 

2,249

 

 

2,249

 

 

194

 

Residential Real Estate

 

 

2,110

 

 

2,184

 

 

257

 

Installment and Other Consumer

 

 

898

 

 

898

 

 

111

 

 

 

$

20,203

 

$

23,327

 

$

3,659

 

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

For C&I and CRE loans, the Company's credit quality indicator consists of internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (equipment financing agreements), direct financing leases, residential real estate loans, and installment and other consumer loans, the Company's credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company's loan system.

26

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 

$

1,306,314

 

$

435,761

 

$

368,659

 

$

861,561

 

$

2,972,295

 

98.19

%

Special Mention (Rating 6)

 

 

14,043

 

 

2,888

 

 

40

 

 

6,224

 

 

23,195

 

0.77

%

Substandard (Rating 7)

 

 

18,597

 

 

2,473

 

 

424

 

 

9,892

 

 

31,386

 

1.04

%

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 

 

$

1,338,954

 

$

441,122

 

$

369,123

 

$

877,677

 

$

3,026,876

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2019

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

130,291

 

$

90,712

 

$

244,547

 

$

105,917

 

$

571,467

 

99.29

%

Nonperforming

 

 

733

 

 

1,595

 

 

1,120

 

 

623

 

 

4,071

 

0.71

%

 

 

$

131,024

 

$

92,307

 

$

245,667

 

$

106,540

 

$

575,538

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 

$

1,294,418

 

$

487,949

 

$

230,473

 

$

1,008,626

 

$

3,021,466

 

97.72

%

Special Mention (Rating 6)

 

 

23,302

 

 

9,599

 

 

3,848

 

 

5,309

 

 

42,058

 

1.36

%

Substandard (Rating 7)

 

 

8,286

 

 

3,106

 

 

2,466

 

 

14,735

 

 

28,593

 

0.92

%

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 

 

$

1,326,006

 

$

500,654

 

$

236,787

 

$

1,028,670

 

$

3,092,117

 

100.00

%

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

102,713

 

$

116,097

 

$

288,827

 

$

118,714

 

$

626,351

 

99.18

%

Nonperforming

 

 

691

 

 

1,872

 

 

1,932

 

 

667

 

 

5,162

 

0.82

%

 

 

$

103,404

 

$

117,969

 

$

290,759

 

$

119,381

 

$

631,513

 

100.00

%

 

*     Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.

27

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of September 30, 2019 and December 31, 2018, TDRs totaled $1.7 million and $6.5 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and nine months ended September 30, 2019 and 2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2019

 

For the three months ended September 30, 2018

 

 

   

 

   

Pre-

    

Post-

    

 

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

 

 

(dollars in thousands)

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 1

 

$

274

 

$

274

 

$

274

 

Other Non Owner-Occupied CRE

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 2

 

 

981

 

 

981

 

 

60

 

Direct Financing Leases

 

 3

 

 

116

 

 

116

 

 

 —

 

 2

 

 

44

 

 

44

 

 

 —

 

 

 

 3

 

$

116

 

$

116

 

$

 —

 

 5

 

$

1,299

 

$

1,299

 

$

334

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment and Other Consumer

 

 1

 

 

56

 

 

56

 

 

56

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 1

 

$

56

 

$

56

 

$

56

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL

 

 4

 

$

172

 

$

172

 

$

56

 

 5

 

$

1,299

 

$

1,299

 

$

334

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2019

 

For the nine months ended September 30, 2018

 

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Number of

 

Recorded

 

Recorded

 

Specific

 

Classes of Loans/Leases

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

 

 

(dollars in thousands)

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

 

 1

 

$

19

 

$

19

 

$

 —

 

 1

 

$

274

 

$

274

 

$

274

 

Other Non Owner-Occupied CRE

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 2

 

 

981

 

 

981

 

 

60

 

Residential Real Estate

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 1

 

 

46

 

 

46

 

 

 —

 

Direct Financing Leases

 

 6

 

 

219

 

 

219

 

 

20

 

 4

 

 

92

 

 

92

 

 

 —

 

 

 

 7

 

$

238

 

$

238

 

$

20

 

 8

 

$

1,393

 

$

1,393

 

$

334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Forgiveness of Principal

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

C&I

 

 1

 

$

587

 

$

537

 

$

 —

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 1

 

$

587

 

$

537

 

$

 —

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

Other Non Owner-Occupied CRE

 

 —

 

$

 —

 

$

 —

 

$

 —

 

 2

 

$

2,976

 

$

2,976

 

$

816

 

Installment and Other Consumer

 

 1

 

 

56

 

 

56

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

Direct Financing Leases

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 1

 

 

35

 

 

35

 

 

 —

 

 

 

 1

 

$

56

 

$

56

 

$

56

 

 3

 

$

3,011

 

$

3,011

 

$

816

 

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

 

  

 

TOTAL

 

 9

 

$

881

 

$

831

 

$

76

 

11

 

$

4,404

 

$

4,404

 

$

1,150

 

Of the loans restructured during the nine months ended September 30, 2019, three with post-modification recorded balances of $121 thousand were on nonaccrual. Of the loans restructured during the nine months ended September 30, 2018, four with a post-modification recorded balance of $1.3 million was on nonaccrual.

For the nine months ended September 30, 2019, two of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs were related to one customer whose leases were restructured in the first quarter of 2019 with pre-modification balances totaling $66 thousand. 

For the three and nine months ended September 30, 2018, two of the Company's TDRs redefaulted within 12 months subsequent to restructure where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs were related to customers whose loans were restructured in the third quarter of 2018 with pre-modification balances totaling $774 thousand.  

28

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Not included in the table above, the Company had three TDRs that were restructured and charged off for the nine months ended September 30, 2019, totaling $108 thousand.  The Company had nine TDRs that were restructured and charged off for the nine months ended September 30, 2018, totaling $577 thousand.

NOTE 5 – DERIVATIVES

The Company uses interest rate swap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.  On June 21, 2018, the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The floating rate trust preferred securities are tied to three-month LIBOR, and the interest rate swaps utilize three-month LIBOR, so the hedge is effective.  The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815.  The details of the interest rate swaps are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of

Hedged Instrument

 

Effective Date

 

Maturity Date

 

Location

 

Notional Amount

 

Receive Rate

 

 

Pay Rate

 

September 30, 2019

 

December 31, 2018

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

$

10,000

 

4.95

%  

 

 

5.85

%  

 

$

(1,265)

 

$

(298)

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

 

8,000

 

4.95

%  

 

 

5.85

%  

 

 

(1,012)

 

 

(239)

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Other Liabilities

 

 

10,000

 

3.85

%  

 

 

4.54

%  

 

 

(1,229)

 

 

(288)

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Other Liabilities

 

 

3,000

 

4.33

%  

 

 

5.17

%  

 

 

(378)

 

 

(89)

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Other Liabilities

 

 

3,500

 

3.87

%  

 

 

4.75

%  

 

 

(441)

 

 

(104)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Other Liabilities

 

 

4,500

 

3.87

%  

 

 

4.75

%  

 

 

(566)

 

 

(133)

 

 

  

 

 

 

 

 

$

39,000

 

4.40

%  

 

 

5.24

%  

 

$

(4,891)

 

$

(1,151)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair values of derivatives designated as cash flow hedges are recorded in OCI to the extent the hedge is effective, and reclassified to earnings as the hedged transaction (interest payments on debt) impact earnings.

The swaps are valued by the transaction counterparty on a monthly basis and corroborated by a third party annually.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

Notional Amount

 

Estimated Fair Value

 

Notional Amount

 

Estimated Fair Value

 

 

 

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

694,928

 

$

102,956

 

$

445,022

 

$

22,196

Non-Hedging Interest Rate Derivatives Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

694,928

 

$

102,956

 

$

445,022

 

$

22,196

Swap fee income totaled $20.9 million and $3.7 million for the nine months ended September 30, 2019 and 2018, respectively.  Swap fee income totaled $10.6 million for the year ended December 31, 2018.

NOTE 6 –BORROWINGS

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

29

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.  Unamortized debt issuance costs related to the subordinated notes totaled $1.5 million at September 30, 2019.

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

In the second quarter of 2019, the Company renewed its revolving line of credit. At renewal, the line amount was increased from $10.0 million to $20.0 million. The interest on the revolving line of credit is calculated at the effective LIBOR rate plus 2.25% per annum (4.34% at September 30, 2019).  Prior to the renewal, the interest on the revolving line of credit was calculated at the effective LIBOR rate plus 2.50% per annum. The collateral on the revolving line of credit is 100% of the outstanding capital stock of the Company’s bank subsidiaries.  The outstanding balance on the revolving line of credit was $0 and $9.0 million at September 30, 2019 and December 31, 2018, respectively.

The Company prepaid $30.2 million of FHLB term advances in the third quarter of 2019 using excess funds generated by strong deposit growth.  The term advances had original maturities from February 2020 to October 2021 with rates ranging from 1.50% to 2.97%. 

The Company prepaid two wholesale structured repurchase agreements in the second quarter of 2019 using excess funds generated by strong deposit growth.  The first wholesale structured repurchase agreement totaled $5.0 million and had original maturity date of March 13, 2020 with a rate of 2.58%.  The second wholesale structured repurchase agreement totaled $20.0 million and had an original maturity of June 13, 2020 with a rate of 2.46%.  In addition, wholesale structured repurchase agreements totaling $10.0 million matured in the second quarter of 2019. The wholesale structured repurchase agreements were utilized as an alternative funding source to FHLB advances and customer deposits. Wholesale structured repurchase agreements were collateralized by certain U.S. government agency securities and residential mortgage backed and related securities.

NOTE 7 - EARNINGS PER SHARE

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

2019

    

 

2018

    

 

2019

    

 

2018

 

 

 

(dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,095

 

$

8,809

 

$

41,517

 

$

29,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic EPS

 

$

0.96

 

$

0.56

 

$

2.64

 

$

2.06

 

  Diluted EPS

 

$

0.94

 

$

0.55

 

$

2.60

 

$

2.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,739,430

 

 

15,625,123

 

 

15,715,788

 

 

14,477,783

 

Weighted average common shares issuable upon exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

    and under the employee stock purchase plan

 

 

237,312

 

 

297,201

 

 

230,232

 

 

308,994

 

Weighted average common and common equivalent shares outstanding

 

 

15,976,742

 

 

15,922,324

 

 

15,946,020

 

 

14,786,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 8 – 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 September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

(dollars in thousands)

September 30, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

21,268

 

$

 —

 

$

21,268

 

$

 —

Residential mortgage-backed and related securities

 

 

123,880

 

 

 —

 

 

123,880

 

 

 —

Municipal securities

 

 

48,902

 

 

 —

 

 

48,902

 

 

 —

Other securities

 

 

17,882

 

 

 —

 

 

17,882

 

 

 —

Interest rate swaps - assets

 

 

102,956

 

 

 —

 

 

102,956

 

 

 —

Total assets measured at fair value

 

$

314,888

 

$

 —

 

$

314,888

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

107,847

 

$

 —

 

$

107,847

 

$

 —

Total liabilities measured at fair value

 

$

107,847

 

$

 —

 

$

107,847

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

36,411

 

$

 —

 

$

36,411

 

$

 —

Residential mortgage-backed and related securities

 

 

159,249

 

 

 —

 

 

159,249

 

 

 —

Municipal securities

 

 

58,546

 

 

 —

 

 

58,546

 

 

 —

Other securities

 

 

6,850

 

 

 —

 

 

6,850

 

 

 —

Interest rate swaps - assets

 

 

22,196

 

 

 —

 

 

22,196

 

 

 —

Total assets measured at fair value

 

$

283,252

 

$

 —

 

$

283,252

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

Total liabilities measured at fair value

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and nine months ended September 30, 2019 or 2018.

The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

31

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 5 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).

Interest rate swaps are also used for the purpose of hedging interest rate risk on junior subordinated debt. The interest rate swaps are further described in Note 5 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices

 

Significant

 

 

 

 

 

 

 

 

in Active

 

Other

 

Significant

 

 

 

 

 

Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

 

 

(dollars in thousands)

September 30, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

3,839

 

$

 —

 

$

 —

 

$

3,839

OREO

 

 

4,588

 

 

 —

 

 

 —

 

 

4,588

 

 

$

8,427

 

$

 —

 

$

 —

 

$

8,427

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

9,657

 

$

 —

 

$

 —

 

$

9,657

OREO

 

 

10,128

 

 

 —

 

 

 —

 

 

10,128

 

 

$

19,785

 

$

 —

 

$

 —

 

$

19,785

Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management'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.

32

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

Valuation Technique

    

Unobservable Input

    

Range

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans/leases

 

$

3,839

 

$

9,657

 

Appraisal of collateral

 

Appraisal adjustments

 

(10.00)

%  

to

 

(30.00)

%

OREO

 

 

4,588

 

 

10,128

 

Appraisal of collateral

 

Appraisal adjustments

 

0.00

%  

to

 

(35.00)

%

For the impaired loans/leases and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and nine months ended September 30, 2019 and 2018.

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

As of September 30, 2019

 

As of December 31, 2018

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

Level 1

 

$

91,671

 

$

91,671

 

$

85,523

 

$

85,523

Federal funds sold

 

Level 2

 

 

9,300

 

 

9,300

 

 

26,398

 

 

26,398

Interest-bearing deposits at financial institutions

 

Level 2

 

 

187,963

 

 

187,963

 

 

133,198

 

 

133,198

Investment securities:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

HTM

 

Level 2

 

 

343,477

 

 

363,474

 

 

401,913

 

 

400,770

AFS

 

*

 

 

211,932

 

 

211,932

 

 

261,056

 

 

261,056

Loans/leases receivable, net

 

Level 3

 

 

3,555

 

 

3,839

 

 

8,942

 

 

9,657

Loans/leases receivable, net

 

Level 2

 

 

3,570,599

 

 

3,495,905

 

 

3,683,965

 

 

3,639,329

Interest rate caps

 

Level 2

 

 

 —

 

 

 —

 

 

459

 

 

459

Interest rate swaps - assets

 

Level 2

 

 

102,956

 

 

102,956

 

 

22,196

 

 

22,196

Assets held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Cash and cash equivalents

 

Level 2

 

 

13,446

 

 

13,446

 

 

 —

 

 

 —

  Securities

 

Level 2

 

 

66,009

 

 

68,389

 

 

 —

 

 

 —

  Loans, net

 

Level 2

 

 

362,011

 

 

354,438

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Nonmaturity deposits

 

Level 2

 

 

3,050,033

 

 

3,050,033

 

 

3,002,327

 

 

3,002,327

Time deposits

 

Level 2

 

 

752,208

 

 

748,305

 

 

974,704

 

 

968,906

Short-term borrowings

 

Level 2

 

 

18,526

 

 

18,526

 

 

28,774

 

 

28,774

FHLB advances

 

Level 2

 

 

195,800

 

 

195,697

 

 

266,492

 

 

265,926

Other borrowings

 

Level 2

 

 

 —

 

 

 —

 

 

67,250

 

 

67,770

Subordinated notes

 

Level 2

 

 

68,334

 

 

68,521

 

 

4,782

 

 

4,933

Junior subordinated debentures

 

Level 2

 

 

37,797

 

 

30,494

 

 

37,670

 

 

29,992

Interest rate swaps - liabilities

 

Level 2

 

 

107,847

 

 

107,847

 

 

23,347

 

 

23,347

Liabilities hed for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Deposits

 

Level 2

 

 

451,546

 

 

447,869

 

 

 —

 

 

 —

  Borrowings

 

Level 2

 

 

16,157

 

 

16,149

 

 

 —

 

 

 —

 

*See previous table in Note 8.

 

 

33

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 9 – 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 primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the four held for investment subsidiary banks wholly owned by the Company:  QCBT, CRBT, CSB, and SFC Bank. Each of these secondary segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

The Company's Wealth Management segment represents the trust, asset management, investment management and advisory services offered at the Company's four subsidiary banks and the Bates Companies in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed. No assets of the subsidiary banks have been allocated to the Wealth Management segment.

The Company's All Other segment includes the operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds as well as the corporate operations of the parent company. This segment also includes the results of segments classified as held for sale.

Selected financial information on the Company's business segments is presented as follows as of and for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Banking

 

Wealth

 

 

 

 

Intercompany

 

Consolidated

 

QCBT

    

CRBT

    

CSB

    

SFC Bank

    

Management

    

All other

    

Eliminations

    

Total

 

(dollars in thousands)

Three Months Ended September 30, 2019

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

21,230

 

$

25,707

 

$

11,596

 

$

8,351

 

$

4,122

 

$

27,753

 

$

(22,036)

 

$

76,723

Net interest income

 

13,357

 

 

11,478

 

 

8,894

 

 

5,056

 

 

 —

 

 

1,934

 

 

 —

 

 

40,719

Provision

 

948

 

 

150

 

 

150

 

 

276

 

 

 —

 

 

488

 

 

 —

 

 

2,012

Net income  (loss)

 

4,870

 

 

7,900

 

 

3,482

 

 

2,116

 

 

926

 

 

15,081

 

 

(19,280)

 

 

15,095

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

3,682

 

 

 —

 

 

77,748

Intangibles

 

 —

 

 

2,810

 

 

4,154

 

 

7,034

 

 

 —

 

 

1,531

 

 

 —

 

 

15,529

Total assets

 

1,642,950

 

 

1,592,896

 

 

801,596

 

 

693,898

 

 

 —

 

 

1,180,872

 

 

(619,830)

 

 

5,292,382

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended September 30, 2018

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

17,322

 

$

16,800

 

$

8,889

 

$

7,360

 

$

3,255

 

$

17,721

 

$

(12,707)

 

$

58,640

Net interest income

 

12,218

 

 

10,833

 

 

7,101

 

 

5,701

 

 

 —

 

 

2,456

 

 

 5

 

 

38,314

Provision

 

409

 

 

453

 

 

20

 

 

475

 

 

 —

 

 

4,849

 

 

 —

 

 

6,206

Net income (loss) from continuing operations

 

4,827

 

 

4,869

 

 

2,533

 

 

2,198

 

 

768

 

 

6,081

 

 

(12,467)

 

 

8,809

Goodwill

 

3,223

 

 

14,979

 

 

9,888

 

 

45,528

 

 

 —

 

 

 —

 

 

 —

 

 

73,618

Intangibles

 

 —

 

 

3,313

 

 

4,852

 

 

7,972

 

 

 —

 

 

 —

 

 

 —

 

 

16,137

Total assets

 

1,579,327

 

 

1,354,293

 

 

734,536

 

 

623,520

 

 

 —

 

 

1,038,405

 

 

(537,349)

 

 

4,792,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

60,148

 

$

68,526

 

$

30,596

 

$

23,396

 

$

12,599

 

$

71,361

 

$

(54,563)

 

$

212,063

Net interest income

 

38,129

 

 

32,671

 

 

23,154

 

 

15,707

 

 

 —

 

 

5,979

 

 

 —

 

 

115,640

Provision for loan/lease losses

 

2,941

 

 

875

 

 

451

 

 

1,261

 

 

 —

 

 

559

 

 

 —

 

 

6,087

Net income (loss)

 

13,560

 

 

19,928

 

 

7,845

 

 

5,848

 

 

2,667

 

 

42,566

 

 

(50,897)

 

 

41,517

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

3,682

 

 

 —

 

 

77,748

Intangibles

 

 —

 

 

2,810

 

 

4,154

 

 

7,034

 

 

 —

 

 

1,531

 

 

 —

 

 

15,529

Total assets

 

1,642,950

 

 

1,592,896

 

 

801,596

 

 

693,898

 

 

 —

 

 

1,180,872

 

 

(619,830)

 

 

5,292,382

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Nine Months Ended September 30, 2018

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

49,812

 

$

49,301

 

$

25,459

 

$

7,360

 

$

9,560

 

$

53,395

 

$

(38,450)

 

$

156,437

Net interest income

 

36,629

 

 

32,149

 

 

20,579

 

 

5,701

 

 

 —

 

 

7,738

 

 

 5

 

 

102,801

Provision for loan/lease losses

 

2,784

 

 

1,682

 

 

817

 

 

475

 

 

 —

 

 

5,288

 

 

 —

 

 

11,046

Net income (loss) from continuing operations

 

13,796

 

 

14,191

 

 

6,560

 

 

2,197

 

 

2,336

 

 

28,556

 

 

(37,832)

 

 

29,804

Goodwill

 

3,223

 

 

14,979

 

 

9,888

 

 

45,528

 

 

 —

 

 

 —

 

 

 —

 

 

73,618

Intangibles

 

 —

 

 

3,313

 

 

4,852

 

 

7,972

 

 

 —

 

 

 —

 

 

 —

 

 

16,137

Total assets

 

1,579,327

 

 

1,354,293

 

 

734,536

 

 

623,520

 

 

 —

 

 

1,038,405

 

 

(537,349)

 

 

4,792,732

 

 

34

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 10 – 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 off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation.  Management believes, as of September 30, 2019 and December 31, 2018, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks' actual capital amounts and ratios as of September 30, 2019 and December 31, 2018 are presented in the following table (dollars in thousands). As of September 30, 2019 and December 31, 2018, each of the subsidiary banks met the requirements to be “well capitalized”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

567,977

 

12.22

%  

$

371,904

> 

8.00

%  

$

488,124

> 

10.50

%  

$

464,880

> 

10.00

%

Tier 1 risk-based capital

 

 

461,899

 

9.94

 

 

278,928

> 

6.00

 

 

395,148

> 

8.50

 

 

371,904

> 

8.00

 

Tier 1 leverage

 

 

461,899

 

9.02

 

 

204,868

> 

4.00

 

 

204,868

> 

4.00

 

 

256,085

> 

5.00

 

Common equity Tier 1

 

 

424,102

 

9.12

 

 

209,196

> 

4.50

 

 

325,416

> 

7.00

 

 

302,172

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

177,834

 

11.72

%  

$

121,345

> 

8.00

%  

$

159,265

> 

10.50

%  

$

151,681

> 

10.00

%

Tier 1 risk-based capital

 

 

163,998

 

10.81

 

 

91,009

> 

6.00

 

 

128,929

> 

8.50

 

 

121,345

> 

8.00

 

Tier 1 leverage

 

 

163,998

 

9.85

 

 

66,604

> 

4.00

 

 

66,604

> 

4.00

 

 

83,255

> 

5.00

 

Common equity Tier 1

 

 

163,998

 

10.81

 

 

68,257

> 

4.50

 

 

106,177

> 

7.00

 

 

98,593

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

168,158

 

11.64

%  

$

115,524

> 

8.00

%  

$

151,625

> 

10.50

%  

$

144,405

> 

10.00

%

Tier 1 risk-based capital

 

 

154,769

 

10.72

 

 

86,643

> 

6.00

 

 

122,744

> 

8.50

 

 

115,524

> 

8.00

 

Tier 1 leverage

 

 

154,769

 

9.99

 

 

61,993

> 

4.00

 

 

61,993

> 

4.00

 

 

77,491

> 

5.00

 

Common equity Tier 1

 

 

154,769

 

10.72

 

 

64,982

> 

4.50

 

 

101,083

> 

7.00

 

 

93,863

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

89,088

 

12.92

%  

$

55,147

> 

8.00

%  

$

72,380

> 

10.50

%  

$

68,933

> 

10.00

%

Tier 1 risk-based capital

 

 

82,399

 

11.95

 

 

41,360

> 

6.00

 

 

58,593

> 

8.50

 

 

55,147

> 

8.00

 

Tier 1 leverage

 

 

82,399

 

10.35

 

 

31,846

> 

4.00

 

 

31,846

> 

4.00

 

 

39,808

> 

5.00

 

Common equity Tier 1

 

 

82,399

 

11.95

 

 

31,020

> 

4.50

 

 

48,253

> 

7.00

 

 

44,807

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

68,371

 

13.16

%  

$

41,561

> 

8.00

%  

$

54,549

> 

10.50

%  

$

51,951

> 

10.00

%

Tier 1 risk-based capital

 

 

61,328

 

11.80

 

 

31,171

> 

6.00

 

 

44,159

> 

8.50

 

 

41,561

> 

8.00

 

Tier 1 leverage

 

 

61,328

 

9.67

 

 

25,375

> 

4.00

 

 

25,375

> 

4.00

 

 

31,719

> 

5.00

 

Common equity Tier 1

 

 

61,328

 

11.80

 

 

23,378

> 

4.50

 

 

36,366

> 

7.00

 

 

33,768

> 

6.50

 

 

*    September 30, 2019 minimums reflect the fully phased-in ratios (including the capital conservation buffer).

35

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

460,416

 

10.69

%  

$

344,551

> 

8.00

%  

$

425,305

> 

9.875

%  

$

430,689

> 

10.00

%

Tier 1 risk-based capital

 

 

420,569

 

9.77

 

 

258,413

> 

6.00

 

 

339,168

> 

7.875

 

 

344,551

> 

8.00

 

Tier 1 leverage

 

 

420,569

 

8.87

 

 

189,858

> 

4.00

 

 

189,858

> 

4.000

 

 

237,322

> 

5.00

 

Common equity Tier 1

 

 

382,899

 

8.89

 

 

193,810

> 

4.50

 

 

274,564

> 

6.375

 

 

279,948

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

162,009

 

11.38

%  

$

113,900

> 

8.00

%  

$

140,596

> 

9.875

%  

$

142,376

> 

10.00

%

Tier 1 risk-based capital

 

 

148,529

 

10.43

 

 

85,425

> 

6.00

 

 

112,121

> 

7.875

 

 

113,900

> 

8.00

 

Tier 1 leverage

 

 

148,529

 

9.04

 

 

65,744

> 

4.00

 

 

65,744

> 

4.000

 

 

82,180

> 

5.00

 

Common equity Tier 1

 

 

148,529

 

10.43

 

 

64,069

> 

4.50

 

 

90,764

> 

6.375

 

 

92,544

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

146,292

 

11.55

%  

$

101,310

> 

8.00

%  

$

125,054

> 

9.875

%  

$

126,637

> 

10.00

%

Tier 1 risk-based capital

 

 

133,982

 

10.58

 

 

75,982

> 

6.00

 

 

99,727

> 

7.875

 

 

101,310

> 

8.00

 

Tier 1 leverage

 

 

133,982

 

9.98

 

 

53,682

> 

4.00

 

 

53,682

> 

4.000

 

 

67,103

> 

5.00

 

Common equity Tier 1

 

 

133,982

 

10.58

 

 

56,987

> 

4.50

 

 

80,731

> 

6.375

 

 

82,314

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

75,233

 

11.24

%  

$

53,567

> 

8.00

%  

$

66,122

> 

9.875

%  

$

66,959

> 

10.00

%

Tier 1 risk-based capital

 

 

69,101

 

10.32

 

 

40,175

> 

6.00

 

 

52,730

> 

7.875

 

 

53,567

> 

8.00

 

Tier 1 leverage

 

 

69,101

 

9.19

 

 

30,070

> 

4.00

 

 

30,070

> 

4.000

 

 

37,588

> 

5.00

 

Common equity Tier 1

 

 

69,101

 

10.32

 

 

30,131

> 

4.50

 

 

42,686

> 

6.375

 

 

43,523

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

57,051

 

12.24

%  

$

37,278

> 

8.00

%  

$

46,016

> 

9.875

%  

$

46,598

> 

10.00

%

Tier 1 risk-based capital

 

 

51,279

 

11.00

 

 

27,959

> 

6.00

 

 

36,696

> 

7.875

 

 

37,278

> 

8.00

 

Tier 1 leverage

 

 

51,279

 

9.39

 

 

21,849

> 

4.00

 

 

21,849

> 

4.000

 

 

27,312

> 

5.00

 

Common equity Tier 1

 

 

51,279

 

11.00

 

 

20,969

> 

4.50

 

 

29,706

> 

6.375

 

 

30,289

> 

6.50

 

Rockford Bank & Trust

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

50,648

 

10.89

%  

$

37,208

> 

8.00

%  

$

45,929

> 

9.875

%  

$

46,511

> 

10.00

%

Tier 1 risk-based capital

 

 

44,821

 

9.64

 

 

27,906

> 

6.00

 

 

36,627

> 

7.875

 

 

37,208

> 

8.00

 

Tier 1 leverage

 

 

44,821

 

8.93

 

 

20,081

> 

4.00

 

 

20,081

> 

4.000

 

 

25,101

> 

5.00

 

Common equity Tier 1

 

 

44,821

 

9.64

 

 

20,930

> 

4.50

 

 

29,650

> 

6.375

 

 

30,232

> 

6.50

 

 

 

 

 

 

 

36

Table of Contents

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 and nine months ending September 30, 2019. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to 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

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

·

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

·

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

·

CSB was acquired by the Company in 2016 and provides full-service commercial and consumer banking services to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa.

·

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

·

RB&T commenced operations in January 2005 and provides full-service commercial and consumer banking, and trust and asset management services to Rockford, Illinois and adjacent communities through its main office located on Guilford Road in Rockford and its branch facility in downtown Rockford. On August 13, 2019, the Company entered into a definitive agreement to sell certain assets and liabilities of RB&T, a wholly-owned subsidiary headquartered in Rockford, Illinois, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc. Under the terms of the agreement, IB&T will acquire certain assets and assume certain liabilities for a cash payment. The transaction is subject to approval by federal and state bank regulators and to customary closing conditions.  The transaction is expected to close in the fourth quarter of 2019. The assets and liabilities that will be sold are classified as held for sale on the Consolidated Balance Sheet and corresponding footnotes.  See Note 2 to the Company’s Consolidated Financial Statements for additional information about the sale.

37

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

EXECUTIVE OVERVIEW

The Company reported net income of $15.1 million and diluted EPS of $0.94 for the quarter ended September 30, 2019. By comparison, for the quarter ended June 30, 2019, the Company reported net income of $13.5 million and diluted EPS of $0.85.  For the quarter ended September 30, 2018, the Company reported net income of $8.8 million, and diluted EPS of $0.55. 

For the nine months ended September 30, 2019, the Company reported net income of $41.5 million, and diluted EPS of $2.60.  By comparison, for the nine months ended September 30, 2018, the Company reported net income of $29.8 million, and diluted EPS of $2.02.

The third quarter of 2019 was also highlighted by ther following results and events:

·

Adjusted net income (non-GAAP) of $15.9 million, or $1.00 per diluted share;

·

Expanded NIM and NIM(TEY)(non-GAAP) each by 12 basis points, to 3.37% and 3.52%, respectively;

·

Record noninterest income of $19.9 million for the quarter and $49.0 million year-to-date;

·

Entered a definitive agreement to sell certain assets and liabilities of RB&T;

·

Excluding RB&T’s held for sale assets and liabilities:

·

Annualized loan and lease growth of 9.1% for the quarter and 9.4% year-to-date;

·

Deposits were down 1.7% on a linked quarter basis and up 9.6% annualized year-to-date; and

·

Nonperforming assets were down $2.5 million, or 15.6%, from the prior quarter.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 2019

 

June 30, 2019

 

September 30, 2018

 

September 30, 2019

 

September 30, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,095

 

$

13,504

 

$

8,809

 

$

41,517

 

$

29,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.94

 

$

0.85

 

$

0.55

 

$

2.60

 

$

2.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

 

15,976,742

 

 

15,938,377

 

 

15,922,324

 

 

15,946,020

 

 

14,786,777

 

 

 

 

 

 

38

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the nine months ended

 

 

    

September 30, 2019

    

June 30, 2019

    

September 30, 2018

    

September 30, 2019

    

September 30, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

40,719

 

$

38,013

 

$

38,314

 

$

115,640

 

$

102,801

 

Provision expense

 

 

2,012

 

 

1,941

 

 

6,206

 

 

6,087

 

 

11,046

 

Noninterest income

 

 

19,906

 

 

17,065

 

 

8,809

 

 

48,964

 

 

26,262

 

Noninterest expense

 

 

39,945

 

 

36,560

 

 

30,500

 

 

108,941

 

 

82,733

 

Federal and state income tax expense

 

 

3,573

 

 

3,073

 

 

1,608

 

 

8,059

 

 

5,480

 

Net income

 

$

15,095

 

$

13,504

 

$

8,809

 

$

41,517

 

$

29,804

 

 

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

·

Net interest income in the third quarter of 2019 was up 7% compared to the second quarter of 2019. The increase was primarily due to a $93.2 million increase in average interest earning assets combined with a 12 basis point increase in reported net interest margin.  Net interest income increased 6% compared to the third quarter of 2018 and 12% when comparing the first nine months of 2019 to the same period in the prior year.  These increases were primarily due to strong loan growth and the addition of SFC Bank.

·

Provision expense in the third quarter of 2019 increased 4% compared to the second quarter of 2019.  Provision expense decreased 68% compared to the third quarter of 2018 and 45% when comparing the first nine months of 2019 to the same period in the prior year. The increase in the third quarter was primarily due to $493 thousand of provision related to a nonperforming loan included in assets held for sale. The decreases in provision when comparing to the prior periods of 2018 were primarily due to continued asset quality improvements. See the Provision for Loan Lease Losses section of this report for additional details.

·

Noninterest income in the third quarter of 2019 increased 17% compared to the second quarter of 2019 primarily due to higher swap fee income. Noninterest income increased 126% compared to the third quarter of 2018 and 86% when comparing the first nine months of 2019 to the same period in the prior year.  These increases were primarily attributable to higher swap fee income as well as solid growth in wealth management fee income and the addition of SFC Bank and the Bates Companies.

·

Noninterest expense increased 9% in the third quarter of 2019 compared to the second quarter of 2019. Net cost and gains/losses on operations of other real estate was $2.1 million in the third quarter of 2019 as compared to $1.1 million in the second quarter of 2019 primarily due to a write down of one OREO property of $2 million in the third quarter. Additionally, the Company incurred approximately $1.5 million in additional bonus and commission expense during the third quarter due to strong year-to-date results and higher than expected fee income. Professional and data processing fees increased $999 thousand comparing the third quarter of 2019 to the second quarter of 2019. This increased expense was primarily due to recent mergers/acquisitions. Noninterest expense increased 31% compared to the third quarter of 2018 and 32% when comparing the first nine months of 2019 to the same period in the prior year primarily due to the addition of SFC Bank.

·

Federal and state income tax expense in the third quarter of 2019 increased 16% compared to the second quarter of 2019. Federal and state income tax expense increased 122% compared to the third quarter of 2018 and 47% when comparing the first nine months of 2019 to the same period in the prior year. See the “Income Taxes” section of this report for additional details on these increases.

39

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LONG-TERM FINANCIAL GOALS

As previously stated, the Company has established certain financial goals by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company's ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2018. The Company's long-term financial goals are as follows:

·

Generate strong organic loan and lease growth in order to maintain a gross loans and leases to total assets ratio in the range of 73 – 78%;

·

Improve profitability (measured by NIM and ROAA);

·

Support strong asset quality by maintaining NPAs to total assets to below 0.75% and maintaining charge-offs as a percentage of average loans/leases of under 0.25% annually;

·

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

·

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

·

Grow wealth management net income by 10% annually.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ending

 

Goal

Key Metric

Target **

September 30, 2019

 

June 30, 2019

 

September 30, 2018

 

Balance sheet efficiency

Gross loans and leases to total assets

73% - 78%

 

 

75

%  

 

 

75

%

 

 

76

%

 

 

NIM TEY (non-GAAP)*

> 3.35%

 

 

3.52

%  

 

 

3.40

%

 

 

3.60

%

 

Profitability

ROAA

> 1.10%

 

 

1.16

%  

 

 

1.06

%

 

 

0.75

%

 

 

Adjusted ROAA (non-GAAP)*

> 1.10%

 

 

1.22

%  

 

 

1.11

%

 

 

0.89

%

 

Asset quality

NPAs to total assets

< 0.75%

 

 

0.27

%  

 

 

0.45

%

 

 

0.87

%

 

 

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

< 0.25% annually

 

 

0.11

%  

 

 

0.15

%

 

 

0.09

%

 

Reliance on wholesale funding

Wholesale funding to total assets****

< 15%

 

 

11

%  

 

 

10

%

 

 

16

%

 

Consistent, high quality noninterest income revenue streams

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

$8-12 million annually

 

$

28.6

million  

 

$

22.3

million  

 

$

5.5

million

 

 

Grow wealth management net income***

> 10% annually

 

 

20

%  

 

 

18

%

 

 

39

%

 

 

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

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

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

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

40

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the third quarter of 2019 to support its corporate strategy and the long-term financial goals shown above:

·

Excluding the impact of loans classified as held for sale, the Company grew loans and leases in the third quarter of 2019 by 9.1% on an annualized basis and 10.3% year-to-date. Strong loan and lease growth for the remainder of the year is anticipated to keep the Company's loans and leases to assets ratio within the targeted range of 73‑78%.

·

Excluding RB&T’s loans/leases, which are classified as held for sale, the Company has continued to focus on lowering the NPAs to total assets ratio. This ratio decreased by 18 basis points to 0.27% compared to the second quarter 2019. The Company remains committed to maintaining strong asset quality ratios in 2019 and beyond.

·

Management has continued to focus on reducing the Company's reliance on wholesale funding. Wholesale funding as a percentage of total assets remained stable in the third quarter of 2019 at 11%. Management continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.

·

Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Illinois,Wisconsin and Missouri. The Company acts as the correspondent bank for 195 downstream banks with average total noninterest bearing deposits of $170.5 million and average total interest bearing deposits of $330.5 million during the first nine months of 2019. By comparison, the Company acted as the correspondent bank for 191 downstream banks with average total noninterest bearing deposits of $197.5 million and average total interest bearing deposits of $221.1 million during the first nine months of 2018. 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 flat to inverted yield curve, the Company has 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. 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. Swap fee income totaled $20.9 million for the nine months ended September 30, 2019 as compared to $3.7 million for the nine months ended September 30, 2018.  

·

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of September 30, 2019, the Company had $2.97 billion of total financial assets in trust (and related) accounts and $1.51 billion of total financial assets in brokerage (and related) accounts. Continued growth in assets under management are expected to drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management continues to focus on growing wealth management fee income, expanding market share will continue to be a primary strategy, both through organic growth as well as through the acquisition of managed assets.

41

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

GAAP TO NON-GAAP RECONCILIATIONS

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

·

TCE/TA ratio (non-GAAP) is reconciled to stockholders' equity and total assets;

·

Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;

·

NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; and

·

Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income.

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets.

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.

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 comparions difficult.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

GAAP TO NON-GAAP

    

September 30, 

    

June 30, 

    

September 30, 

 

RECONCILIATIONS

 

2019

 

2019

 

2018

 

 

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

 

 

 

 

 

  

 

 

  

 

Stockholders' equity (GAAP)

 

$

519,743

 

$

504,300

 

$

457,387

 

Less: Intangible assets

 

 

93,277

 

 

93,837

 

 

89,755

 

TCE (non-GAAP)

 

$

426,466

 

$

410,463

 

$

367,632

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (GAAP)

 

$

5,292,382

 

$

5,194,852

 

$

4,792,732

 

Less: Intangible assets

 

 

93,277

 

 

93,837

 

 

89,755

 

TA (non-GAAP)

 

$

5,199,105

 

$

5,101,015

 

$

4,702,977

 

 

 

 

 

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

 

 

8.20

%  

 

8.05

%

 

7.82

%

 

42

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

For the Nine Months Ended

 

 

 

September 30, 

    

June 30, 

    

September 30, 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2019

    

2018

    

 

2019

 

2018

 

 

 

(dollars in thousands, except per share data)

 

ADJUSTED NET INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

15,095

 

$

13,504

 

$

8,809

 

 

$

41,517

 

$

29,804

 

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

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

 

 

Income:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

   Securities losses, net

 

$

(2)

 

$

(41)

 

$

 —

 

 

$

(43)

 

$

 —

 

Total nonrecurring income (non-GAAP)

 

$

(2)

 

$

(41)

 

$

 —

 

 

$

(43)

 

$

 —

 

Expense:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

     Losses on debt extinguishment

 

$

117

 

$

 —

 

$

 —

 

 

$

117

 

$

 —

 

Acquisition costs

 

$

 —

 

$

 —

 

$

1,216

 

 

$

 —

 

$

1,616

 

Post-acquisition compensation, transition and integration costs

 

 

698

 

 

559

 

 

390

 

 

 

1,363

 

 

520

 

Total nonrecurring expense (non-GAAP)

 

$

815

 

$

559

 

$

1,606

 

 

$

1,480

 

$

2,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

15,913

 

$

14,104

 

$

10,415

 

 

$

43,041

 

$

31,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED EPS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

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

 

$

15,913

 

$

14,104

 

$

10,415

 

 

$

43,041

 

$

31,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,739,430

 

 

15,714,588

 

 

15,625,123

 

 

 

15,715,788

 

 

14,477,783

 

Weighted average common and common equivalent shares outstanding

 

 

15,976,742

 

 

15,938,377

 

 

15,922,324

 

 

 

15,946,020

 

 

14,786,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EPS (non-GAAP):

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Basic

 

$

1.01

 

$

0.90

 

$

0.67

 

 

$

2.74

 

$

2.21

 

Diluted

 

$

1.00

 

$

0.88

 

$

0.65

 

 

$

2.70

 

$

2.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED ROAA

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

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

 

$

15,913

 

$

14,104

 

$

10,415

 

 

$

43,041

 

$

31,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

5,217,763

 

$

5,077,900

 

$

4,677,875

 

 

$

5,088,055

 

$

4,242,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted ROAA (annualized) (non-GAAP)

 

 

1.22

%  

 

1.11

%  

 

0.89

%  

 

 

1.13

%  

 

1.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED NIM (TEY)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

40,719

 

$

38,013

 

$

38,314

 

 

$

115,640

 

$

102,801

 

Plus: Tax equivalent adjustment

 

 

1,763

 

 

1,808

 

 

1,548

 

 

 

4,944

 

 

4,329

 

Net interest income - tax equivalent (non-GAAP)

 

$

42,482

 

$

39,821

 

$

39,862

 

 

$

120,584

 

$

107,130

 

    Less: Accquisition accounting net accretion

 

 

1,268

 

 

1,076

 

 

1,677

 

 

 

3,413

 

 

2,921

 

Adjusted net interest income

 

 

41,214

 

 

38,745

 

 

38,185

 

 

 

117,171

 

 

104,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

4,791,274

 

$

4,698,021

 

$

4,387,487

 

 

$

4,700,617

 

$

3,989,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.37

%  

 

3.25

%  

 

3.46

%  

 

 

3.29

%  

 

3.45

%

NIM (TEY) (non-GAAP)

 

 

3.52

%  

 

3.40

%  

 

3.60

%  

 

 

3.43

%  

 

3.59

%

Adjusted NIM (TEY) (non-GAAP)

 

 

3.41

%  

 

3.31

%  

 

3.45

%  

 

 

3.33

%  

 

3.49

%

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

 

 

 

 

 

  

 

 

  

 

Noninterest expense (GAAP)

 

$

39,945

 

$

36,560

 

$

30,500

 

 

$

108,941

 

$

82,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

40,719

 

$

38,013

 

$

38,314

 

 

$

115,640

 

$

102,801

 

Noninterest income (GAAP)

 

 

19,906

 

 

17,065

 

 

8,809

 

 

 

48,964

 

 

26,262

 

Total income

 

$

60,625

 

$

55,078

 

$

47,123

 

 

$

164,604

 

$

129,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

65.89

%  

 

66.38

%  

 

64.72

%  

 

 

66.18

%  

 

64.10

%

 

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

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)   

Net interest income, on a tax equivalent basis, increased 7% to $42.5 million for the quarter ended September 30, 2019 compared to the same quarter of the prior year, and increased 13% to $120.6 million for the nine months ended September 30, 2019 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased 6% for the quarter ended September 30, 2019 compared to the same quarter of the prior year, and increased 12% for the nine months ended September 30, 2019 compared to the same period of the prior year. Net interest income improved due to two main factors:

·

The addition of SFC Bank in the third quarter of 2018; and

·

Strong organic loan and deposit growth over the past 12 months.

43

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

GAAP

 

 

 

For the Quarter Ended

 

For the Quarter Ended

 

 

 

September 30, 

 

 

June 30, 

 

 

September 30, 

 

 

September 30, 

 

 

June 30, 

 

 

September 30, 

 

 

 

 

2019

    

 

2019

    

 

2018

 

 

2019

    

 

2019

    

 

2018

 

 

Average Yield on Interest-Earning Assets

 

4.85

%  

 

4.78

%  

 

4.65

%  

 

4.70

%  

 

4.63

%  

 

4.51

%

 

Average Cost of Interest-Bearing Liabilities

 

1.71

%  

 

1.76

%  

 

1.35

%  

 

1.71

%  

 

1.76

%  

 

1.35

%

 

Net Interest Spread

 

3.14

%  

 

3.02

%  

 

3.30

%  

 

2.99

%  

 

2.87

%  

 

3.16

%

 

NIM

 

3.52

%  

 

3.40

%  

 

3.60

%  

 

3.37

%  

 

3.25

%  

 

3.46

%

 

NIM Excluding Acquisition Accounting Net Accretion

 

3.41

%  

 

3.31

%  

 

3.44

%  

 

3.27

%  

 

3.15

%  

 

3.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

GAAP

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

For the Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

September 30, 

 

 

September 30, 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

2019

 

 

2018

 

 

 

 

 

 

 

 

Average Yield on Interest-Earning Assets

 

4.78

%  

 

4.51

%  

 

4.64

%  

 

4.36

%

 

 

 

 

 

 

 

Average Cost of Interest-Bearing Liabilities

 

1.73

%  

 

1.21

%  

 

1.73

%  

 

1.21

%

 

 

 

 

 

 

 

Net Interest Spread

 

3.05

%  

 

3.30

%  

 

2.91

%  

 

3.15

%

 

 

 

 

 

 

 

NIM

 

3.43

%  

 

3.59

%  

 

3.29

%  

 

3.45

%

 

 

 

 

 

 

 

NIM Excluding Acquisition Accounting Net Accretion

 

3.33

%  

 

3.49

%  

 

3.19

%  

 

3.29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 table above reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons.  A comparison of acquisition accounting net accretion included in NIM is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

For the Nine Months Ended

 

 

 

 

 

September 30, 

 

 

June 30, 

 

 

September 30, 

 

 

September 30, 

 

 

September 30, 

 

 

 

 

    

2019

    

 

2019

    

 

2018

 

 

2019

 

 

2018

    

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Accounting Net Accretion in NIM

$

1,268

 

$

1,076

 

$

1,677

 

$

3,413

 

$

2,921

 

 

 

NIM on a tax equivalent basis was up 12 basis points on a linked quarter basis.  Excluding acquisition accounting net accretion, NIM was up 10 basis points on a linked quarter basis.  The increase in net interest margin during the quarter was due to a seven basis point increase in the yield on interest earning assets and a five basis point decrease in the total cost of funds (due to both mix and rate).

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

44

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

management strategies which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage NIM through derivatives.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30,

 

 

 

2019 (4)

 

 

2018

 

 

 

 

 

 

Interest

 

Average

 

 

 

 

 

Interest

 

Average

 

 

 

Average

 

Earned

 

Yield or

 

 

Average

 

Earned

 

Yield or

 

 

    

Balance

    

or Paid

    

Cost

    

 

Balance

    

or Paid

    

Cost

 

 

 

(dollars in thousands)

 

ASSETS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

7,234

 

$

42

 

 

2.30

%  

 

$

23,199

 

$

105

 

 

1.80

%

Interest-bearing deposits at financial institutions

 

 

172,386

 

 

951

 

 

2.19

%  

 

 

61,815

 

 

323

 

 

2.07

%

Investment securities (1)

 

 

626,471

 

 

6,080

 

 

3.85

%  

 

 

667,142

 

 

5,973

 

 

3.55

%

Restricted investment securities

 

 

22,719

 

 

293

 

 

5.12

%  

 

 

22,683

 

 

330

 

 

5.77

%

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

 

 

3,962,464

 

 

51,214

 

 

5.13

%  

 

 

3,612,648

 

 

44,648

 

 

4.90

%

Total interest earning assets

 

 

4,791,274

 

 

58,580

 

 

4.85

%  

 

 

4,387,487

 

 

51,379

 

 

4.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

85,262

 

 

 

 

 

 

 

 

 

78,103

 

 

 

 

 

 

 

Premises and equipment

 

 

79,646

 

 

 

 

 

 

 

 

 

72,489

 

 

 

 

 

 

 

Less allowance

 

 

(41,673)

 

 

 

 

 

 

 

 

 

(38,083)

 

 

 

 

 

 

 

Other

 

 

303,254

 

 

 

 

 

 

 

 

 

177,879

 

 

 

 

 

 

 

Total assets

 

$

5,217,763

 

 

 

 

 

 

 

 

$

4,677,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

2,505,383

 

 

7,907

 

 

1.25

%  

 

$

2,214,480

 

 

5,432

 

 

0.97

%

Time deposits

 

 

975,736

 

 

5,486

 

 

2.23

%  

 

 

825,020

 

 

3,290

 

 

1.58

%

Short-term borrowings

 

 

17,333

 

 

98

 

 

2.24

%  

 

 

21,407

 

 

78

 

 

1.45

%

FHLB advances

 

 

123,107

 

 

1,023

 

 

3.30

%  

 

 

209,111

 

 

1,422

 

 

2.70

%

Other borrowings

 

 

 —

 

 

 —

 

 

 —

%  

 

 

74,503

 

 

776

 

 

4.13

%

Subordinated notes

 

 

68,299

 

 

1,003

 

 

5.83

%  

 

 

 —

 

 

 —

 

 

 —

%

Junior subordinated debentures

 

 

37,774

 

 

581

 

 

6.10

%  

 

 

37,600

 

 

519

 

 

5.48

%

Total interest-bearing liabilities

 

 

3,727,632

 

 

16,098

 

 

1.71

%  

 

 

3,382,121

 

 

11,517

 

 

1.35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

821,876

 

 

 

 

 

 

 

 

 

800,577

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

152,060

 

 

 

 

 

 

 

 

 

59,112

 

 

 

 

 

 

 

Total liabilities

 

 

4,701,568

 

 

 

 

 

 

 

 

 

4,241,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

516,195

 

 

 

 

 

 

 

 

 

436,065

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

5,217,763

 

 

 

 

 

 

 

 

$

4,677,875

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

42,482

 

 

 

 

 

 

 

 

$

39,862

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.14

%  

 

 

 

 

 

 

 

 

3.30

%

Net interest margin

 

 

 

 

 

 

 

 

3.37

%  

 

 

 

 

 

 

 

 

3.46

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

 

3.52

%  

 

 

 

 

 

 

 

 

3.60

%

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

 

 

 

 

 

 

 

 

3.41

%  

 

 

 

 

 

 

 

 

3.45

%

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

 

 

128.53

%  

 

 

 

 

 

 

 

 

129.73

%  

 

 

 

 

 

 

 

(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.

(4)

Interest earning assets and interest bearing liabilities classified as held for sale as of September 30, 2019 are included in the calculations above.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

 

from

 

of Change (1)

 

 

    

Prior Period (1)

    

Rate

    

Volume

 

 

 

2019 vs. 2018

 

 

 

(dollars in thousands)

 

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

(63)

 

$

149

 

$

(212)

 

Interest-bearing deposits at financial institutions

 

 

628

 

 

19

 

 

609

 

Investment securities (2)

 

 

107

 

 

1,737

 

 

(1,630)

 

Restricted investment securities

 

 

(37)

 

 

(40)

 

 

 3

 

Gross loans/leases receivable (2) (3)

 

 

6,566

 

 

2,108

 

 

4,458

 

Total change in interest income

 

 

7,201

 

 

3,973

 

 

3,228

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

 

2,475

 

 

1,697

 

 

778

 

Time deposits

 

 

2,196

 

 

1,519

 

 

677

 

Short-term borrowings

 

 

20

 

 

103

 

 

(83)

 

Federal Home Loan Bank advances

 

 

(399)

 

 

1,486

 

 

(1,885)

 

Other borrowings

 

 

(776)

 

 

(388)

 

 

(388)

 

Subordinated notes

 

 

1,003

 

 

 —

 

 

1,003

 

Junior subordinated debentures

 

 

62

 

 

59

 

 

 3

 

Total change in interest expense

 

 

4,581

 

 

4,476

 

 

105

 

 

 

 

 

 

 

 

 

 

 

 

Total change in net interest income

 

$

2,620

 

$

(503)

 

$

3,123

 

 

(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.

46

Table of Contents

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

 

2019 (4)

 

 

2018

 

 

 

 

 

 

Interest

 

Average

 

 

 

 

 

Interest

 

Average

 

 

 

Average

 

Earned

 

Yield or

 

 

Average

 

Earned

 

Yield or

 

 

    

Balance

    

or Paid

    

Cost

    

 

Balance

    

or Paid

    

Cost

    

 

 

(dollars in thousands)

 

ASSETS

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

10,887

 

$

191

 

 

2.35

%  

 

$

20,488

 

$

223

 

 

1.46

%  

Interest-bearing deposits at financial institutions

 

 

170,167

 

 

3,042

 

 

2.39

%  

 

 

55,408

 

 

749

 

 

1.81

%  

Investment securities (1)

 

 

643,975

 

 

18,237

 

 

3.79

%  

 

 

654,818

 

 

17,391

 

 

3.55

%  

Restricted investment securities

 

 

21,670

 

 

891

 

 

5.50

%  

 

 

21,871

 

 

776

 

 

4.74

%  

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

 

 

3,853,918

 

 

145,682

 

 

5.05

%  

 

 

3,236,514

 

 

115,365

 

 

4.77

%  

Total interest earning assets

 

 

4,700,617

 

 

168,043

 

 

4.78

%  

 

 

3,989,099

 

 

134,504

 

 

4.51

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

82,096

 

 

 

 

 

 

 

 

 

71,198

 

 

 

 

 

 

 

Premises and equipment, net

 

 

78,059

 

 

 

 

 

 

 

 

 

66,516

 

 

 

 

 

 

 

Less allowance for estimated losses on loans/leases

 

 

(41,119)

 

 

 

 

 

 

 

 

 

(36,726)

 

 

 

 

 

 

 

Other

 

 

268,403

 

 

 

 

 

 

 

 

 

151,996

 

 

 

 

 

 

 

Total assets

 

$

5,088,055

 

 

 

 

 

 

 

 

$

4,242,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing demand deposits

 

$

2,418,420

 

 

23,351

 

 

1.29

%  

 

$

1,987,371

 

 

12,541

 

 

0.84

%  

Time deposits

 

 

1,000,529

 

 

16,346

 

 

2.18

%  

 

 

702,441

 

 

7,591

 

 

1.44

%  

Short-term borrowings

 

 

15,952

 

 

275

 

 

2.30

%  

 

 

19,234

 

 

186

 

 

1.29

%  

Federal Home Loan Bank advances

 

 

115,539

 

 

2,685

 

 

3.11

%  

 

 

206,875

 

 

3,267

 

 

2.11

%  

Other borrowings

 

 

18,084

 

 

512

 

 

3.79

%  

 

 

68,742

 

 

2,315

 

 

4.50

%  

Subordinated notes

 

 

58,392

 

 

2,561

 

 

5.86

%  

 

 

 —

 

 

 —

 

 

 —

 

Junior subordinated debentures

 

 

37,730

 

 

1,729

 

 

6.13

%  

 

 

37,556

 

 

1,474

 

 

5.25

%  

Total interest-bearing liabilities

 

 

3,664,646

 

 

47,459

 

 

1.73

%  

 

 

3,022,219

 

 

27,374

 

 

1.21

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

809,469

 

 

 

 

 

 

 

 

 

784,401

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

114,980

 

 

 

 

 

 

 

 

 

49,589

 

 

 

 

 

 

 

Total liabilities

 

 

4,589,095

 

 

 

 

 

 

 

 

 

3,856,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

498,960

 

 

 

 

 

 

 

 

 

385,874

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

5,088,055

 

 

 

 

 

 

 

 

$

4,242,083

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

120,584

 

 

 

 

 

 

 

 

$

107,130

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.05

%  

 

 

 

 

 

 

 

 

3.30

%  

Net interest margin

 

 

 

 

 

 

 

 

3.29

%  

 

 

 

 

 

 

 

 

3.45

%  

Net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

 

3.43

%  

 

 

 

 

 

 

 

 

3.59

%  

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

 

 

 

 

 

 

 

 

3.33

%  

 

 

 

 

 

 

 

 

3.49

%

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

 

 

128.27

%  

 

 

 

 

 

 

 

 

131.99

%  

 

 

 

 

 

 

 

(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.

(4)

Interest earning assets and interest bearing liabilities classified as held for sale as of September 30, 2019 are included in the calculations above.

 

47

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analysis of Changes of Interest Income/Interest Expense

For the nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

from

 

of Change (1)

 

    

Prior Period (1)

    

Rate

    

Volume

 

 

2019 vs. 2018

 

 

(dollars in thousands)

INTEREST INCOME

 

 

  

 

 

  

 

 

  

Federal funds sold

 

$

(32)

 

$

140

 

$

(172)

Interest-bearing deposits at other financial institutions

 

 

2,293

 

 

309

 

 

1,984

Investment securities (2)

 

 

846

 

 

1,293

 

 

(447)

Restricted investment securities

 

 

115

 

 

127

 

 

(12)

Gross loans/leases receivable (2) (3)

 

 

30,317

 

 

7,299

 

 

23,018

Total change in interest income

 

 

33,539

 

 

9,168

 

 

24,371

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

Interest-bearing demand deposits

 

 

10,810

 

 

7,671

 

 

3,139

Time deposits

 

 

8,755

 

 

4,786

 

 

3,969

Short-term borrowings

 

 

89

 

 

142

 

 

(53)

Federal Home Loan Bank advances

 

 

(582)

 

 

1,691

 

 

(2,273)

Other borrowings

 

 

(1,803)

 

 

(320)

 

 

(1,483)

Subordinated notes

 

 

2,561

 

 

 —

 

 

2,561

Junior subordinated debentures

 

 

255

 

 

 —

 

 

255

Total change in interest expense

 

 

20,085

 

 

13,970

 

 

6,115

Total change in net interest income

 

$

13,454

 

$

(4,802)

 

$

18,256

 

(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.

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.  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, 2018.

48

Table of Contents

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. 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, 2018.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased 14%, comparing the third quarter of 2019 to the same period of 2018, and increased 25% comparing the first nine months of 2019 to the same period of 2018. This increase was primarily the result of the addition of SFC Bank, strong organic loan and deposit growth. 

Overall, the Company's average earning assets increased 9%, comparing the third quarter of 2019 to the third quarter of 2018. During the same time period, average gross loans and leases increased 10%, while average investment securities decreased 6%. Average earning assets increased 18%, comparing the first nine months of 2019 to the same period of 2018.  Average gross loans and leases increased 19% and average investment securities decreased 2%, comparing the first nine months of 2019 to the same period of 2018. The increases in average earning assets and average gross loans and leases were the result of the addition of SFC Bank and strong organic loan growth.

The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSE

Interest expense for the third quarter of 2019 increased 40% from the third quarter of 2018 and increased 73%, comparing the first nine months of 2019 to the same period of 2018.  The addition of SFC Bank primarily contributed to this increase as the Company added over $439 million in deposits.  The Company has grown organically at a significant pace over the past several years and the loan growth has been funded in large part by larger depositor relationships with higher rate sensitivity, many of which have pricing tied to a certain index.  As a result, the cost of these funds is higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest rates rise.  The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on relationships with pricing tied to a certain index.  Additionally, the cost of funds on the Company’s short-term wholesale funds has increased with the rising rate environment.  During the third quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate 50 basis points. As a direct result, the Company’s interest expense declined modestly on a linked-quarter basis.

The Company's management intends to continue to shift the mix of funding from wholesale funds to well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.

PROVISION FOR LOAN/LEASE LOSSES

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

49

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company's provision totaled $2.0 million for the third quarter of 2019, which was a decrease of 68% from the same quarter of the prior year.  Provision for the first nine months of 2019 totaled $6.1 million, which was down 45% compared to the first nine months of 2018.  These decreases were primarily attributable to improved asset quality.

In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of $3.3 million for the first nine months of 2019, increased the Company's allowance to $36.1 million at September 30, 2019. As of September 30, 2019, the Company's allowance to total loans/leases was 1.00%, which was down from 1.07% at December 31, 2018 and 1.18% at September 30, 2018. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($7.7 million and $14.4 million at September 30, 2019 and September 30, 2018, respectively).

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

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust department fees

 

$

2,340

 

$

2,196

 

$

144

 

6.6

%

 

Investment advisory and management fees

 

 

1,782

 

 

1,059

 

 

723

 

68.3

 

 

Deposit service fees

 

 

1,813

 

 

1,656

 

 

157

 

9.5

 

 

Gains on sales of residential real estate loans, net

 

 

890

 

 

337

 

 

553

 

164.1

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

519

 

 

46

 

 

473

 

1,028.3

 

 

Swap fee income

 

 

9,797

 

 

1,110

 

 

8,687

 

782.6

 

 

Securities losses, net

 

 

(3)

 

 

 —

 

 

(3)

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

489

 

 

474

 

 

15

 

3.2

 

 

Debit card fees

 

 

886

 

 

846

 

 

40

 

4.7

 

 

Correspondent banking fees

 

 

189

 

 

195

 

 

(6)

 

(3.1)

 

 

Other

 

 

1,204

 

 

890

 

 

314

 

35.3

 

 

Total noninterest income

 

$

19,906

 

$

8,809

 

$

11,097

 

126.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

 

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust department fees

 

$

7,194

 

$

6,491

 

$

703

 

10.8

%

 

Investment advisory and management fees

 

 

5,406

 

 

3,069

 

 

2,337

 

76.1

 

 

Deposit service fees

 

 

5,025

 

 

4,797

 

 

228

 

4.8

 

 

Gains on sales of residential real estate loans, net

 

 

1,748

 

 

539

 

 

1,209

 

224.3

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

589

 

 

405

 

 

184

 

45.4

 

 

Swap fee income

 

 

20,886

 

 

3,718

 

 

17,168

 

461.8

 

 

Securities losses, net

 

 

(56)

 

 

 —

 

 

(56)

 

(100.0)

 

 

Earnings on bank-owned life insurance

 

 

1,441

 

 

1,292

 

 

149

 

11.5

 

 

Debit card fees

 

 

2,591

 

 

2,456

 

 

135

 

5.5

 

 

Correspondent banking fees

 

 

578

 

 

673

 

 

(95)

 

(14.1)

 

 

Other

 

 

3,562

 

 

2,822

 

 

740

 

26.2

 

 

Total noninterest income

 

$

48,964

 

$

26,262

 

$

22,702

 

86.4

%

 

 

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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 $286.2 million in the first nine months of 2019 with 238 new client relationships. With strong growth in assets under management, trust department fees increased 7%, comparing the third quarter of 2019 to the same period of the prior year.  Trust department fees increased 11%, when comparing the first nine months of 2019 to the same period of the prior year.  Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts.

Investment advisory and management fees increased 68%, comparing the third quarter of 2019 to the same period of the prior year, and they increased 76% when comparing the first nine months of 2019 to the first nine months of 2018.  In October 2018, the Company acquired the Bates Companies which increased assets under management by approximately $704 million.  Management has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructure the Company's Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as the leverage of and collaboration among existing resources (including the aforementioned trust department). Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed.

Deposit service fees expanded 10% comparing the third quarter of 2019 to the same period of the prior year, and expanded 5% when comparing the first nine months of 2019 to the same period of the prior year. The Company continues its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased 164% when comparing the third quarter of 2019 to the same period of the prior year and increased 224% when comparing the first nine months of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank which recognized gains on sales of residential real estate of $597 thousand in the third quarter of 2019 and $1.2 million in the first nine months of 2019.

The Company's gains on the sale of government-guaranteed portions of loans for the third quarter of 2019 increased 1028% compared to the third quarter of 2018 and increased 45% when comparing the first nine months of 2019 to the same period of the prior year. As reflected by these gains, large fluctuations can occur from quarter-to-quarter and year-to-year. The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary.  Recently, competitors have been offering SBA loan candidates traditional financing without a guarantee and the Company is not willing to relax its structure for those lending opportunities.

As a result of the relatively 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 $9.8 million for the third quarter of 2019, compared to $1.1 million for the third quarter of 2018.  Swap fee income totaled $20.9 million for the first nine months of 2019, compared to $3.7 million in the first nine months of 2018.  The increase in swap fee income for the first three and nine months of 2019, as compared to all prior periods, was due to both the volume and the size of the transactions executed.  Future levels of swap fee income are somewhat dependent upon prevailing interest rates.

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Securities losses totaled $3 thousand and $56 thousand for the three and nine months ended September 30, 2019, respectively.  By comparison, there were no securities losses for the three and nine months ended September 30, 2018.

Earnings on BOLI increased 3% comparing the third quarter of 2019 to the third quarter of 2018, and increased 12% comparing the first nine months of 2019 to the first nine months of 2018.  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 market and can lead to volatility in earnings. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 5% comparing the third quarter of 2019 to the third quarter of the prior year, and increased 6% comparing the first nine months of 2019 to the first nine months of 2018. This increase was primarily related to recent acquisitions. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 3% comparing the third quarter of 2019 to the third quarter of the prior year and decreased 14% for the first nine months of 2019 as compared to the first nine months of 2018. 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 ccorrespondent 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 195 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased 35% comparing the third quarter of 2019 to the third quarter of the prior year, and increased 26% comparing the first nine months of 2019 to the first nine months of 2018.  This increase was primarily due to fee income, equity investment income and gain on disposal of leased assets.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

24,215

 

$

17,433

 

$

6,782

 

38.9

%

 

Occupancy and equipment expense

 

 

3,860

 

 

3,318

 

 

542

 

16.3

 

 

Professional and data processing fees

 

 

4,030

 

 

2,396

 

 

1,634

 

68.2

 

 

Acquisition costs

 

 

 —

 

 

1,292

 

 

(1,292)

 

(100.0)

 

 

Post-acquisition compensation, transition and integration costs

 

 

884

 

 

494

 

 

390

 

78.9

 

 

FDIC insurance, other insurance and regulatory fees

 

 

542

 

 

933

 

 

(391)

 

(41.9)

 

 

Loan/lease expense

 

 

221

 

 

369

 

 

(148)

 

(40.1)

 

 

Net cost of (income from) and gains/losses on operations of other real estate

 

 

2,078

 

 

(50)

 

 

2,128

 

(4,256.0)

 

 

Advertising and marketing

 

 

1,056

 

 

984

 

 

72

 

7.3

 

 

Bank service charges

 

 

502

 

 

462

 

 

40

 

8.7

 

 

Loss on debt extinguishment, net

 

 

148

 

 

 —

 

 

148

 

100.0

 

 

Correspondent banking expense

 

 

209

 

 

205

 

 

 4

 

2.0

 

 

Intangibles amortization

 

 

560

 

 

542

 

 

18

 

3.3

 

 

Other

 

 

1,640

 

 

2,122

 

 

(482)

 

(22.7)

 

 

Total noninterest expense

 

$

39,945

 

$

30,500

 

$

9,445

 

31.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30, 

 

September 30, 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

67,843

 

$

49,215

 

$

18,628

 

37.9

%

 

Occupancy and equipment expense

 

 

11,087

 

 

9,517

 

 

1,570

 

16.5

 

 

Professional and data processing fees

 

 

9,811

 

 

8,016

 

 

1,795

 

22.4

 

 

Acquisition costs

 

 

 —

 

 

1,799

 

 

(1,799)

 

(100.0)

 

 

Post-acquisition compensation, transition and integration costs

 

 

1,727

 

 

659

 

 

1,068

 

162.1

 

 

FDIC insurance, other insurance and regulatory fees

 

 

2,432

 

 

2,529

 

 

(97)

 

(3.8)

 

 

Loan/lease expense

 

 

748

 

 

920

 

 

(172)

 

(18.7)

 

 

Net cost of (income from) and gains/losses on operations of other real estate

 

 

3,557

 

 

11

 

 

3,546

 

32,236.4

 

 

Advertising and marketing

 

 

2,878

 

 

2,430

 

 

448

 

18.4

 

 

Bank service charges

 

 

1,494

 

 

1,368

 

 

126

 

9.2

 

 

Losses on debt extinguishment, net

 

 

148

 

 

 —

 

 

148

 

100.0

 

 

Correspondent banking expense

 

 

619

 

 

614

 

 

 5

 

0.8

 

 

Intangibles amortization

 

 

1,706

 

 

1,151

 

 

555

 

48.2

 

 

Other

 

 

4,891

 

 

4,504

 

 

387

 

8.6

 

 

Total noninterest expense

 

$

108,941

 

$

82,733

 

$

26,208

 

31.7

%

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges for post-acquisition transition and integration costs related to the core system conversion of SFC Bank are expected to impact expense throughout 2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2019 to the third quarter of 2018 by 39%.  This line item also increased 38% when comparing the first nine months of 2019 to the first nine months of 2018. This increase was primarily related to:

·

Bonuses and commissions on elevated swap fee income;

·

Improved financial results and the related incentives;

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·

The addition of SFC Bank employees, new hires and merit increases;

·

The addition of  several producers to bolster growth prospects; and

·

The addition to operational infrastructure and investing in additional staffing both at the corporate level and at some of the bank charters. Some of these hires are opportunistic, as the Company takes advantage of talent availability in the marketplace as a result of ongoing industry consolidation.

Occupancy and equipment expense increased 16% comparing the third quarter of 2019 to the same period of the prior year, and increased 17% comparing the first nine months of 2019 to the same period of the prior year. The increased expense was due to higher information technology service contract costs, increases in repairs and maintenance costs and the additions of SFC Bank and the Bates Companies.

Professional and data processing fees increased 68% comparing the third quarter of 2019 to the same period in 2018, and increased 22% comparing the first nine months of 2019 to the same period of the prior year. This increased expense was mostly due to recent mergers/acquisitions. Additionally, legal expense was also elevated in the third quarter 2019 due to the continued legal matter at RB&T where two employees have been charged with wrongdoing in connection with an SBA loan application.  Neither RB&T nor the Company have been charged in the case. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs.

There were no acquisition costs in the first nine months of 2019.  Acquisition costs totaled $1.2 million and $1.8 million for the third quarter of 2018 and first nine months of 2018, respectively. These costs were comprised primarily of legal, accounting and investment banking costs related to mergers/acquisitions.

Post-acquisition costs totaled $884 thousand for the third quarter of 2019 as compared to $494 thousand for the same period of the prior year.  Post-acquisition costs totaled $1.7 thousand for the first nine months of 2019 as compared to $659 thousand for the same period of the prior year.  These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to mergers/acquisitions.

FDIC insurance, other insurance and regulatory fee expense decreased 42%, comparing the third quarter of 2019 to the third quarter of 2018, and decreased 4% comparing the first nine months of 2019 to the same period of the prior year. The decrease in expense was due to the award of assessment credits by the FDIC in September 2019.

Loan/lease expense decreased 40% when comparing the third quarter of 2019 to the same quarter of 2018, and decreased 19% comparing the first nine months of 2019 to the same period of prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost 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 of (income from) and gains/losses on operations of other real estate totaled $2.1 million for the third quarter of 2019, compared to $50 thousand of net income for the third quarter of 2018.  Net cost of (income from) and gains/losses on operations of other real estate totaled $3.6 million for the first nine months of 2019 compared to $11 thousand for the same period of the prior year.  In the third quarter of 2019, the Company wrote down an OREO property by $2.0 million. Writedowns on OREO totaled $3.0 million for the nine months ended September 30, 2019.

Advertising and marketing expense increased 7% comparing the third quarter of 2019 to the third quarter of 2018, and increased18% comparing the first nine months of 2019 to the same period of the prior year. The increase in expense was primarily due to the addition of SFC Bank.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 9% from the third quarter of 2018 to the third quarter of 2019, as well as comparing

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the first nine months of 2019 to the same period of the prior year.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Losses on debt extinguishment, net were $148 thousand for the three and nine months ended September 30, 2019.  These losses relate to the prepayment of certain FHLB advances.  There were no losses on debt extinguishment for the three and nine months ended September 30, 2018.

Correspondent banking expense increased 2% when comparing the third quarter of 2019 to the third quarter of 2018 and increased 1% when comparing the first nine months of 2019 to the same period of the prior year.   These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense increased 3% when comparing the third quarter of 2019 to the third quarter of 2018, and increased 48% when comparing the first nine months of 2019 to the same period of the prior year. The increase was due to the addition of SFC Bank and the Bates Companies.

Other noninterest expense was down 23% when comparing the third quarter of 2019 to the third quarter of 2018, and increased 9% when comparing the first nine months of 2019 to the same period of the prior year. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portion of this increase is related to the addition of SFC Bank.

INCOME TAXES

In the third quarter of 2019, the Company incurred income tax expense of $3.6 million.  During the first nine months of the year, the Company incurred income tax expense of $8.1 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 

 

 

For the Nine Months Ended September 30, 

 

 

 

 

2019

 

2018

 

 

2019

 

2018

 

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

    

Amount

    

Income

    

Amount

    

Income

    

 

Amount

    

Income

    

Amount

    

Income

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computed "expected" tax expense

 

$

3,920

 

21.0

%  

$

2,188

 

21.0

%  

 

$

10,411

 

21.0

%  

$

7,410

 

21.0

%

 

Tax exempt income, net

 

 

(1,169)

 

(6.3)

 

 

(1,047)

 

(10.0)

 

 

 

(3,344)

 

(6.7)

 

 

(2,946)

 

(8.3)

 

 

Bank-owned life insurance

 

 

(103)

 

(0.6)

 

 

(89)

 

(0.9)

 

 

 

(303)

 

(0.6)

 

 

(261)

 

(0.7)

 

 

State income taxes, net of federal benefit, current year

 

 

964

 

5.2

 

 

393

 

3.8

 

 

 

2,384

 

4.8

 

 

1,502

 

4.3

 

 

Tax credits

 

 

(39)

 

(0.2)

 

 

 —

 

 —

 

 

 

(116)

 

(0.2)

 

 

 —

 

 —

 

 

True-up adjustment to year-end provision

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 

(715)

 

(1.4)

 

 

 —

 

 —

 

 

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

 

 

(54)

 

(0.3)

 

 

(9)

 

(0.1)

 

 

 

(208)

 

(0.4)

 

 

(342)

 

(1.0)

 

 

Other

 

 

54

 

0.3

 

 

172

 

1.6

 

 

 

(50)

 

(0.2)

 

 

117

 

0.2

 

 

Federal and state income tax expense

 

$

3,573

 

19.1

%  

$

1,608

 

15.4

%  

 

$

8,059

 

16.3

%  

$

5,480

 

15.5

%

 

 

The effective tax rate for the quarter ended September 30, 2019 was 19.1%, which was an increase from the effective tax rate of 15.4% for the quarter ended September 30, 2018.   The Company’s effective tax rate increased year over year as the Company’s growth in taxable income significantly outpaced the modest growth in tax exempt income. The effective tax rate for the nine months ended September 30, 2019 was 16.3%, which was an increase over the effective tax rate of 15.5% for the nine months ended September 30, 2018.  During the first quarter of 2019 and in conjunction with the Company’s year-end tax preparation process, the Company identified a one-time true-up adjustment of $715 thousand.  Excluding this, the Company’s effective tax rate was approximately 14.9% for the nine months ended September 30, 2019.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet.  On August 13, 2019 the Company and RB&T entered into a definitive agreement with IB&T, a wholly owned subsidiary of Heartland Financial USA, Inc., pursuant to which IB&T will acquire certain assets and assume certain liabilities of RB&T for a cash payment. The transaction is expected to close in the fourth quarter of 2019.  As a result, certain assets and liabilities of RB&T are classified as held for sale as of September 30, 2019, which impacts balance sheet comparisons to prior periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

December 31, 2018

 

 

September 30, 2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

    

%

    

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Cash, federal funds sold, and interest-bearing deposits

 

$

288,934

 

5

%  

 

$

293,416

 

 6

%  

 

$

245,119

 

 5

%  

 

$

203,067

 

 4

%

 

Securities

 

 

555,409

 

10

%  

 

 

643,803

 

12

%  

 

 

662,969

 

13

%  

 

 

650,745

 

14

%

 

Net loans/leases

 

 

3,574,154

 

68

%  

 

 

3,869,415

 

75

%  

 

 

3,692,907

 

75

%  

 

 

3,610,309

 

75

%

 

Other assets

 

 

408,338

 

8

%  

 

 

388,218

 

 7

%  

 

 

348,715

 

 7

%  

 

 

328,611

 

 7

%

 

Assets held for sale

 

 

465,547

 

9

%  

 

 

 —

 

 -

%  

 

 

 —

 

 -

%  

 

 

 —

 

 -

%

 

Total assets

 

$

5,292,382

 

100

%  

 

$

5,194,852

 

100

%  

 

$

4,949,710

 

100

%  

 

$

4,792,732

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,802,241

 

72

%  

 

$

4,322,510

 

83

%  

 

$

3,977,031

 

81

%  

 

$

3,788,277

 

79

%

 

Total borrowings

 

 

320,457

 

6

%  

 

 

230,953

 

 4

%  

 

 

404,968

 

 8

%  

 

 

483,635

 

10

%

 

Other liabilities

 

 

179,411

 

3

%  

 

 

137,089

 

 3

%  

 

 

94,573

 

 2

%  

 

 

63,433

 

 1

%

 

Liabilities held for sale

 

 

470,530

 

9

%  

 

 

 —

 

 -

%  

 

 

 —

 

 -

%  

 

 

 —

 

 -

%

 

Total stockholders' equity

 

 

519,743

 

10

%  

 

 

504,300

 

10

%  

 

 

473,138

 

 9

%  

 

 

457,387

 

10

%

 

Total liabilities and stockholders' equity

 

$

5,292,382

 

100

%  

 

$

5,194,852

 

100

%  

 

$

4,949,710

 

100

%  

 

$

4,792,732

 

100

%

 

 

Assets and liabilities held for sale are summarized as follows as of September 30, 2019:

The assets and liabilities of RB&T were reclassified to assets/liabilities held for sale on such date and are summarized as follo

 

 

 

 

 

 

As of

 

 

    

September 30, 2019

    

 

 

(dollars in thousands)

 

 

 

 

 

ASSETS

 

 

 

 

Cash and cash equivalents

 

$

13,446

 

Securities

 

 

66,009

 

Loans, net

 

 

362,011

 

Other assets

 

 

24,081

 

Assets held for sale

 

$

465,547

 

 

 

 

  

 

LIABILIITES

 

 

 

 

Deposits

 

$

451,546

 

Borrowings

 

 

16,157

 

Other liabilities

 

 

2,827

 

Liabilities held for sale

 

$

470,530

 

 

During the third quarter of 2019, the Company's total assets increased $97.5 million, or 2%, to a total of $5.3 billion. The Company’s net loan/lease portfolio decreased $295.3 million, which was entirely the result of classifying RB&T’s assets as held for sale.  Deposits decreased $520.3 million in the third quarter of 2019, mainly as a result of classifying RB&T’s liabilities as held for sale, which included deposits of $451.5 million as of September 30, 2019.  The remaining net decline in deposits of $69.0 million was driven primarily by a decline in higher cost public funds and brokered CDs, as the Company intentionally did not renew certain deposits as they matured.  Borrowings increased $89.5 million in the third quarter of 2019 which consisted primarily of short-term FHLB advances to offset the decline in deposits.

56

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INVESTMENT SECURITIES

The composition of the Company's securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, 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 on the total portfolio, and the portfolio duration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

 

December 31, 2018

 

 

September 30, 2018

 

 

    

Amount

    

%  

    

 

Amount

    

%  

    

 

 

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 

$

21,268

 

 4

%  

 

$

35,762

 

 6

%  

 

 

$

36,411

 

 5

%  

 

$

36,492

 

 5

%

Municipal securities

 

 

391,329

 

71

%  

 

 

440,852

 

68

%  

 

 

 

459,409

 

70

%  

 

 

453,275

 

70

%

Residential mortgage-backed and related securities

 

 

123,880

 

22

%  

 

 

159,228

 

25

%  

 

 

 

159,249

 

24

%  

 

 

155,733

 

24

%

Other securities

 

 

18,932

 

 3

%  

 

 

7,961

 

 1

%  

 

 

 

7,900

 

 1

%  

 

 

5,245

 

 1

%

 

 

$

555,409

 

100

%  

 

$

643,803

 

100

%  

 

 

$

662,969

 

100

%  

 

$

650,745

 

100

%

 

 

 

  

 

  

 

 

 

  

 

  

 

 

 

 

  

 

  

 

 

 

  

 

  

 

Securities as a % of Total Assets

 

 

11.51

%  

  

 

 

 

12.39

%  

  

 

 

 

 

13.39

%  

  

 

 

 

13.58

%  

  

 

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

 

 

4.54

%  

  

 

 

 

3.23

%  

  

 

 

 

 

(1.01)

%  

  

 

 

 

(1.47)

%  

  

 

Duration (in years)

 

 

6.5

 

  

 

 

 

6.4

 

  

 

 

 

 

6.8

 

  

 

 

 

7.0

 

  

 

Quarterly Yield on investment securities (tax equivalent)

 

 

3.85

%  

 

 

 

 

3.77

%  

 

 

 

 

 

3.58

%  

 

 

 

 

3.55

%  

 

 

Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in any of the periods presented.

The duration of the securities portfolio lengthened modestly with the TEY on the portfolio increasing 27 basis points in the first nine months of 2019.

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.

57

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

LOANS/LEASES

Excluding RB&T loans classified as held for sale, total loans/leases grew 9.1% on an annualized basis during the third quarter of 2019 and 9.4% year-to-date. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

December 31, 2018

 

 

September 30, 2018

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 

$

1,469,978

 

41

%  

 

$

1,548,657

 

40

%  

 

$

1,429,410

 

38

%  

 

$

1,380,543

 

39

%

 

CRE loans

 

 

1,687,922

 

46

%  

 

 

1,837,473

 

46

%  

 

 

1,766,111

 

48

%  

 

 

1,727,326

 

47

%

 

Direct financing leases

 

 

92,307

 

3

%  

 

 

101,180

 

3

%  

 

 

117,969

 

 3

%  

 

 

126,752

 

 3

%

 

Residential real estate loans

 

 

245,667

 

7

%  

 

 

293,479

 

8

%  

 

 

290,759

 

 8

%  

 

 

309,288

 

 8

%

 

Installment and other consumer loans

 

 

106,540

 

3

%  

 

 

120,947

 

3

%  

 

 

119,381

 

 3

%  

 

 

100,191

 

 3

%

 

Total loans/leases

 

$

3,602,414

 

100

%  

 

$

3,901,736

 

100

%  

 

$

3,723,630

 

100

%  

 

$

3,644,100

 

100

%

 

Plus deferred loan/lease origination costs, net of fees

 

 

7,856

 

 

 

 

 

8,783

 

 

 

 

 

9,124

 

  

 

 

 

9,286

 

  

 

 

Less allowance

 

 

(36,116)

 

 

 

 

 

(41,104)

 

 

 

 

 

(39,847)

 

  

 

 

 

(43,077)

 

  

 

 

Net loans/leases

 

$

3,574,154

 

 

 

 

$

3,869,415

 

 

 

 

$

3,692,907

 

  

 

 

$

3,610,309

 

  

 

 

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of September 30, 2019 and December 31, 2018, respectively, approximately 26% and 28% of the CRE loan portfolio was owner-occupied.

Over the past several quarters, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans decreased $78.7 million during the current quarter, however, excluding the impact of RB&T loans reclassified to held for sale, C&I loans grew $47.4 million during the current quarter.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

As of June 30, 

 

 

As of December 31, 

 

 

As of September 30, 

 

 

 

 

2019

 

2019

 

 

2018

 

 

2018

 

 

 

    

Amount

    

%

    

Amount

    

%

 

    

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

 

$

544,337

 

32

%  

$

612,526

 

33

%

 

$

612,327

 

34

%  

 

$

605,517

 

35

%

 

Lessors of Residential Buildings

 

 

403,766

 

24

%  

 

394,235

 

21

%

 

 

346,270

 

19

%  

 

 

321,357

 

19

%

 

Hotels

 

 

61,199

 

4

%  

 

82,180

 

5

%

 

 

81,345

 

5

%  

 

 

87,850

 

5

%

 

Nonresidential Property Managers

 

 

53,581

 

3

%  

 

58,207

 

3

%

 

 

69,885

 

4

%  

 

 

56,600

 

3

%

 

Land Subdivision

 

 

46,144

 

3

%  

 

45,847

 

3

%

 

 

48,378

 

3

%  

 

 

50,252

 

3

%

 

New Housing For-Sale Builders

 

 

45,419

 

3

%  

 

43,520

 

2

%

 

 

47,598

 

3

%  

 

 

37,911

 

2

%

 

Other Activities Related to Real Estate

 

 

36,212

 

2

%  

 

32,652

 

2

%

 

 

25,345

 

2

%

 

 

27,802

 

2

%

 

Other *

 

 

497,264

 

29

%  

 

568,306

 

31

%

 

 

534,963

 

30

%  

 

 

540,037

 

31

%

 

Total CRE Loans

 

$

1,687,922

 

100

%  

$

1,837,473

 

100

%

 

$

1,766,111

 

100

%  

 

$

1,727,326

 

100

%

 

 

*     “Other” consists of all other industries. None of these had concentrations greater than $33.8 million, or approximately 2.0% of total CRE loans in the most recent period presented.

The Company's residential real estate loan portfolio includes the following:

·

Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid long-term interest rate risk.

·

A limited amount of 15‑year and 20‑year fixed rate residential real estate loans that meet certain credit guidelines.

58

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The remaining residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

 

As of June 30, 

 

 

As of December 31, 

 

 

As of September 30, 

 

 

 

2019

 

 

2019

 

 

2018

 

 

2018

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trucks, Vans and Vocational Vehicles

 

$

43,489

 

19

%  

 

$

46,650

 

20

%

 

$

40,588

 

18

%  

 

$

37,942

 

16

%

Manufacturing - General

 

 

16,952

 

 7

%  

 

 

17,879

 

 8

%

 

 

16,760

 

 7

%  

 

 

16,666

 

 7

%

Construction - General

 

 

16,295

 

 7

%  

 

 

16,026

 

 7

%

 

 

17,236

 

 8

%  

 

 

17,201

 

 7

%

Food Processing Equipment

 

 

15,622

 

 7

%  

 

 

15,863

 

 7

%

 

 

15,334

 

 7

%  

 

 

15,490

 

 7

%

Marine - Travelifts

 

 

11,819

 

 5

%  

 

 

11,659

 

 5

%

 

 

12,370

 

 5

%  

 

 

12,729

 

 5

%

Trailers

 

 

9,603

 

 4

%  

 

 

9,303

 

 4

%

 

 

9,842

 

 4

%  

 

 

10,016

 

 4

%

Computer Hardware

 

 

8,350

 

 4

%  

 

 

6,282

 

 3

%

 

 

9,166

 

 4

%  

 

 

9,656

 

 4

%

Manufacturing - CNC

 

 

6,432

 

 3

%  

 

 

6,832

 

 3

%

 

 

6,616

 

 3

%  

 

 

6,990

 

 3

%

Other *

 

 

101,499

 

44

%  

 

 

100,182

 

43

%

 

 

100,734

 

44

%  

 

 

106,156

 

47

%

Total m2 loans and leases

 

$

230,061

 

100

%  

 

$

230,676

 

100

%

 

$

228,646

 

100

%  

 

$

232,846

 

100

%

 

*     “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three and nine months ended September 30, 2019 and 2018 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2019

    

September 30, 2018

    

September 30, 2019

    

September 30, 2018

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

$

41,104

 

$

37,545

 

$

39,847

 

$

34,355

Reclassification of allowance related to held for sale loans

 

(6,122)

 

 

 —

 

 

(6,122)

 

 

 —

Provisions charged to expense

 

1,584

 

 

6,206

 

 

5,659

 

 

11,046

Loans/leases charged off

 

(741)

 

 

(991)

 

 

(3,953)

 

 

(2,951)

Recoveries on loans/leases previously charged off

 

291

 

 

317

 

 

685

 

 

626

Balance, ending

$

36,116

 

$

43,077

 

$

36,116

 

$

43,077

The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, 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 allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed 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, 2018, 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.

59

Table of Contents

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 *

    

September 30, 2019

    

June 30, 2019

    

December 31, 2018

    

September 30, 2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Rating 6)

 

$

23,195

 

$

19,913

 

$

42,058

 

$

49,230

 

 

Substandard (Rating 7)

 

 

31,386

 

 

40,935

 

 

28,593

 

 

45,676

 

 

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 3

 

 

 

 

$

54,581

 

$

60,848

 

$

70,651

 

$

94,909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans **

 

$

54,581

 

$

60,848

 

$

70,651

 

$

94,909

 

 

Classified Loans ***

 

$

31,386

 

$

40,935

 

$

28,593

 

$

45,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

 

1.51

%

 

1.56

%

 

1.89

%

 

2.60

%

 

Classified Loans as a % of Total Loans/Leases

 

 

0.87

%

 

1.05

%

 

0.77

%

 

1.25

%

 

 

*      Amounts above include the government guaranteed portion, if any. For the calculation of allowance, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.

**    Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

***  Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.

The Company’s classified and criticized loans are at some of the lowest levels for the Company’s history.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

September 30, 2019

    

June 30, 2019

    

December 31, 2018

    

 

September 30, 2018

 

 

Allowance / Gross Loans/Leases

 

1.00

%  

1.05

%  

1.07

%  

 

1.18

%

 

Allowance / NPLs

 

401.56

%  

283.10

%  

214.80

%  

 

147.39

%

 

Although management believes that the allowance at September 30, 2019 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company's allowance.

60

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONPERFORMING ASSETS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 

 

As of June 30, 

 

As of December 31, 

 

As of September 30, 

 

 

 

    

2019

    

2019

    

2018

    

2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

8,231

 

$

13,148

 

$

14,260

 

$

23,576

 

 

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

 

 

 —

 

 

58

 

 

632

 

 

1,410

 

 

TDRs - accruing

 

 

763

 

 

1,313

 

 

3,659

 

 

4,240

 

 

Total NPLs

 

 

8,994

 

 

14,519

 

 

18,551

 

 

29,226

 

 

OREO

 

 

4,248

 

 

8,637

 

 

9,378

 

 

12,204

 

 

Other repossessed assets

 

 

 —

 

 

 —

 

 

 8

 

 

150

 

 

Total NPAs

 

$

13,242

 

$

23,156

 

$

27,937

 

$

41,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

    

 

0.25

%  

 

0.37

%  

 

0.50

%  

 

0.80

%

 

NPAs to total loans/leases plus repossessed property

 

 

0.37

%  

 

0.59

%  

 

0.75

%  

 

1.13

%

 

NPAs to total assets

 

 

0.27

%  

 

0.45

%  

 

0.56

%  

 

0.87

%

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $933 thousand at September 30, 2019, $902 thousand at June 30, 2019, $1.9 million at December 31, 2018, and $1.6 million at September 30, 2018.

(3)

Includes TDRs of $0 at September 30, 2019, $0 at June 30, 2019, $496 thousand at December 31, 2018, and $0 at September 30, 2018.

NPAs at September 30, 2019 were $13.2 million, down $9.9 million from June 30, 2019 and down $28.3 million from September 30, 2018. Excluding RB&T’s NPAs, the Company’s NPAs were down $2.5 million on a linked-quarter basis.  The improvement was primarily attributed to the $2.0 million writedown of an OREO property.

The ratio of NPAs to total assets was 0.27% at September 30, 2019, down from 0.45% at June 30, 2019 and down from 0.87% at September 30, 2018. 

The large majority of the NPAs consist of nonaccrual loans/leases, accruing TDRs, and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.

OREO is carried at the lower of carrying amount or fair value less costs to sell.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

DEPOSITS

Excluding the impact of RB&T deposits reclassified to held for sale, deposits decreased $68.7 million during the third quarter of 2019, primarily due to the maturity and intentional nonreplacement of higher cost public funds and brokered CDs. The table below presents the composition of the Company's deposit portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

September 30, 2019

    

 

June 30, 2019

    

 

December 31, 2018

 

 

September 30, 2018

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

$

782,232

 

21

%  

 

$

795,951

 

18

%  

 

$

791,101

 

20

%  

 

$

802,090

 

21

%

 

Interest bearing demand deposits

 

 

2,245,557

 

59

%  

 

 

2,505,956

 

58

%  

 

 

2,204,206

 

55

%  

 

 

2,094,814

 

56

%

 

Time deposits

 

 

536,352

 

14

%  

 

 

733,135

 

17

%  

 

 

704,903

 

18

%  

 

 

615,323

 

16

%

 

Brokered deposits

 

 

238,100

 

 6

%  

 

 

287,468

 

 7

%  

 

 

276,821

 

 7

%  

 

 

276,050

 

 7

%

 

 

 

$

3,802,241

 

100

%  

 

$

4,322,510

 

100

%  

 

$

3,977,031

 

100

%  

 

$

3,788,277

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industy concentrations and large accounts are monitored by the internal asset liability management 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

 

 

    

September 30, 2019

    

June 30, 2019

    

December 31, 2018

    

September 30, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overnight repurchase agreements

 

$

2,421

 

$

2,181

 

$

2,084

 

$

3,049

 

Federal funds purchased

 

 

16,105

 

 

17,010

 

 

26,690

 

 

8,670

 

 

 

$

18,526

 

$

19,191

 

$

28,774

 

$

11,719

 

The Company's federal funds purchased fluctuates based on the short-term funding needs of the Company's subsidiary banks.

As a result of their memberships in 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.

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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

 

    

September 30, 2019

 

June 30, 2019

    

December 31, 2018

    

September 30, 2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Term FHLB advances

 

$

60,000

 

$

46,433

 

$

76,327

 

$

63,399

Overnight FHLB advances

 

 

135,800

 

 

59,300

 

 

190,165

 

 

295,730

 

 

$

195,800

 

$

105,733

 

$

266,492

 

$

359,129

FHLB advances increased $90.1 million in the current quarter, as compared to the prior quarter due to the intentional runoff of non-core deposits.

The Company had subordinated notes totaling $68.3 million as of September 30, 2019. See Note 6 to the Company’s Consolidated Financial Statements for additional information regarding our subordinated notes.

The Company renewed its revolving credit note in the second quarter of 2019.  See Note 6 to the Consolidated Financial Statements for additional details regarding this renewal. 

It is management's intention to reduce its reliance on wholesale funding, including FHLB advances, wholesale structured repurchase agreements, and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or 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, brokered deposits and wholesale structured repurchase agreements).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

December 31, 2018

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

Maturity:

    

Amount Due

    

Interest Rate

    

 

 

Amount Due

    

Interest Rate

 

 

 

(dollars in thousands)

Year ending December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

$

284,189

 

2.19

%  

 

 

$

510,736

 

2.35

%

2020

 

 

81,895

 

2.05

 

 

 

 

48,557

 

2.31

 

2021

 

 

18,476

 

1.88

 

 

 

 

15,050

 

2.31

 

2022

 

 

29,340

 

1.80

 

 

 

 

3,970

 

2.00

 

2023

 

 

20,000

 

1.84

 

 

 

 

 —

 

 —

 

Total Wholesale Funding

 

$

433,900

 

2.10

%  

 

 

$

578,313

 

2.35

%

During the first nine months of 2019, wholesale funding decreased $144.4 million. Excluding the impact of RB&T wholesale funding reclassified to held for sale, wholesale funding decreased $79.3 million during the first nine months of 2019.

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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

 

 

 

    

September 30, 2019

    

June 30, 2019

    

December 31, 2018

    

 

September 30, 2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

$

15,790

 

$

15,773

 

$

15,718

 

 

$

15,674

 

 

Additional paid in capital

 

 

273,475

 

 

272,744

 

 

270,761

 

 

 

269,373

 

 

Retained earnings

 

 

230,892

 

 

216,741

 

 

192,203

 

 

 

179,826

 

 

AOCI (loss)

 

 

(414)

 

 

(958)

 

 

(5,544)

 

 

 

(7,486)

 

 

Total stockholders' equity

 

$

519,743

 

$

504,300

 

$

473,138

 

 

$

457,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE / TA ratio (non-GAAP)

 

 

8.20

%  

 

8.05

%  

 

7.78

%  

 

 

7.82

%

 

 

*     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.

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 $264.9 million during the third quarter of 2019 and $263.2 million during the full year of 2019. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.

At September 30, 2019, the subsidiary banks had 34 lines of credit totaling $419.1 million, of which $47.8 million was secured and $371.3 million was unsecured. At September 30, 2019, the full $419.1 million was available.

At December 31, 2018, the subsidiary banks had 33 lines of credit totaling $327.7 million, of which $1.7 million was secured and $326.0 million was unsecured. At December 31, 2018, $307.7 million of the $327.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $20.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2020. At September 30, 2019, the full $20.0 million was available.

As of September 30, 2019, the Company had $501.0 million in average correspondent banking deposits spread over 195 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Investing activities used cash of $235.1 million during the first nine months of 2019, compared to $209.6 million for the same period of 2018. The net decrease in federal funds sold was $17.1 million for the first nine months of 2019, compared to a net increase of $2.9 million for the same period of 2018. The net increase in interest-bearing deposits at financial institutions was $57.2 million for the first nine months of 2019, compared to a net increase of $22.1million for the same period of 2018. Proceeds from calls, maturities, and paydowns of securities were $45.7 million for the first nine months of 2019, compared to $59.2 million for the same period of 2018. Purchases of securities used cash of $28.1 million for the first nine months of 2019, compared to $66.4 million for the same period of 2018. Proceeds from sales of securities were $33.1 million for the first nine months of 2019, compared to $1.9 million for the same period of 2018. The net increase in loans/leases used cash of $237.3 million for the first nine months of 2019 compared to $208.7 million for the same period of 2018.

Financing activities provided cash of $206.1 million for the first nine months of 2019, compared to $170.4 million for same period of 2018. Net increases in deposits totaled $277.0 million for the first nine months of 2019, compared to $82.3 million for the same period of 2018. During the first nine months of 2019, the Company's short-term borrowings decreased $9.1 million, compared to $2.2 million for the same period of 2018. In the first nine months of 2019, the Company decreased short-term and overnight FHLB advances by $16.0 million.  Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled $20.9 million in the first nine months of 2019. Prepayments on FHLB term advances totaled $33.2 million and on other borrowings totaled $46.3 million in the first nine months of 2019.  During the first nine months of 2019, proceeds from subordinated notes were $63.4 million. In the first nine months of 2018, the Company increased short-term and overnight FHLB advances by $120.3 million and increased other borrowings by $9.0 million.  Maturities and principal payments on borrowings totaled $10.6 million in the first nine months of 2018.

Total cash provided by operating activities was $46.1 million for the first nine months of 2019, compared to $36.9 million for the same period of 2018.

Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities and, most recently, subordinated notes.

The following table presents the details of the trust preferred securities outstanding as of September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Amount

    

 

    

 

  

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

Interest Rate as of

 

Interest Rate as of

 

Name

Date Issued

 

2019

 

2018

 

Interest Rate

 

September 30, 2019

 

December 31, 2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II

February 2004

 

$

10,310

 

$

10,310

 

2.85% over 3-month LIBOR

 

4.95

%  

5.65

%

QCR Holdings Statutory Trust III

February 2004

 

 

8,248

 

 

8,248

 

2.85% over 3-month LIBOR

 

4.95

%  

5.65

%

QCR Holdings Statutory Trust V

February 2006

 

 

10,310

 

 

10,310

 

1.55% over 3-month LIBOR

 

3.85

%  

3.99

%

Community National Statutory Trust II

September 2004

 

 

3,093

 

 

3,093

 

2.17% over 3-month LIBOR

 

4.33

%  

4.96

%

Community National Statutory Trust III

March 2007

 

 

3,609

 

 

3,609

 

1.75% over 3-month LIBOR

 

3.87

%  

4.54

%

Guaranty Bankshares Statutory Trust I

May 2005

 

 

4,640

 

 

4,640

 

1.75% over 3-month LIBOR

 

3.87

%  

4.54

%

 

  

 

$

40,210

 

$

40,210

 

Weighted Average Rate

 

4.40

%  

4.94

%

As described in Note 5 to the Consolidated Financial Statements, on June 21, 2018 the Company entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The floating rate trust preferred securities are tied to three-month LIBOR, and the interest rate swaps utilize three-month LIBOR, so the hedge is effective.  The interest rate swaps are designated as a cash flow hedge in accordance with ASC 815.  See Note 5 for the notional amount swapped and the related effective fixed rates.

The Company (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 10 of the Consolidated Financial Statements for additional information regarding regulatory capital.

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

·

Changes in the interest rate environment.

·

The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

·

The impact of cybersecurity risks.

·

The costs, effects and outcomes of existing or future litigation.

·

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB.

·

Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.

·

The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.

·

The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

·

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2018.

 

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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.

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

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME EXPOSURE in YEAR 1

 

 

    

 

    

As of September 30, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2019

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.4

%  

0.7

%  

0.3

%

200 basis point upward shift

 

(10.0)

%  

(1.7)

%  

(2.7)

%  

(3.7)

%

300 basis point upward shock

 

(25.0)

%  

(4.0)

%  

(9.0)

%  

(8.4)

%

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at September 30, 2019 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.

 

 

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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 September 30, 2019. 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.

 

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1           Legal Proceedings

There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

Item 1A        Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A. “Risk Factors,” in the Company's  Annual Report on Form 10‑K for the year ended December 31, 2018. Please refer to that section of the Company's Form 10‑K for disclosures regarding the risks and uncertainties related to the Company's business.

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3           Defaults Upon Senior Securities

None

Item 4           Mine Safety Disclosures

Not applicable

Item 5           Other Information

None

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6           Exhibits

 

 

2.1

Purchase and Assumptin Agreement by and among Illinois Bank & Trust, Rockford Bank and Trust Company and QCR Holdings, Inc. (solely for the purposes of the sections defined therein), dated August 13, 2019 (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K filed with the SEC on August 13, 2019.

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2019 and September 30, 2018; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and September 30, 2018; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2019 and September 30, 2018; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 2018; and (vi) Notes to the Consolidated Financial Statements.

 

 

 

 

 

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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)

 

 

 

Date

 November 8, 2019

 

/s/ Larry J. Helling

 

 

Larry J. Helling

 

 

Chief Executive Officer

 

 

 

 

 

 

Date

 November 8, 2019

 

/s/ Todd A. Gipple

 

 

Todd A. Gipple, President

 

 

Chief Operating Officer

 

 

Chief Financial Officer

 

 

 

 

 

 

Date

November 8, 2019

 

/s/ Nick W. Anderson

 

 

Nick W. Anderson

 

 

Chief Accounting Officer

 

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