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QCR HOLDINGS INC - Quarter Report: 2020 March (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 March 31, 2020

[    ] 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 May 1, 2020, the Registrant had outstanding 15,773,518 shares of common stock, $1.00 par value per share.

 

 

1

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

Page
Number(s)

Part I

    

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

Item 1

    

Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets
As of March 31, 2020 and December 31, 2019

 

4

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Income
For the Three Months Ended March 31, 2020 and 2019

5

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2020 and 2019

6

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2020 and 2019

7

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2020 and 2019

8

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

 

 

 

 

 

 

 

Note 1. Summary of Significant Accounting Policies

10

 

 

 

 

Note 2. Investment Securities

12

 

 

 

 

Note 3. Loans/Leases Receivable

16

 

 

 

 

Note 4. Derivatives and Hedging Activities

25

 

 

 

 

Note 5. Earnings Per Share

26

 

 

 

 

Note 6. Fair Value

27

 

 

 

 

Note 7. Business Segment Information

29

 

 

 

 

Note 8. Regulatory Capital Requirements

30

 

 

 

 

Note 9. Subsequent Event

32

 

 

 

 

 

 

 

 

Item 2

 

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

 

 

 

 

 

 

 

 

 

 

 

Introduction

33

 

 

 

 

General

33

 

 

 

 

Impact of COVID-19

33

 

 

 

 

Executive Overview

37

 

 

 

 

Strategic Financial Metrics

38

 

 

 

 

Strategic Developments

39

 

 

 

 

GAAP to Non-GAAP Reconciliations

40

 

 

 

 

Net Interest Income - (Tax Equivalent Basis)

42

 

 

 

 

Critical Accounting Policies

44

 

 

 

 

        Goodwill

44

 

 

 

 

        Allowance for Loan and Lease Losses

45

2

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Results of Operations

45

 

 

 

 

Interest Income

45

 

 

 

 

Interest Expense

 

 

 

 

 

Provision for Loan/Lease Losses

46

 

 

 

 

Noninterest Income

47

 

 

 

 

Noninterest Expense

49

 

 

 

 

Income Taxes

51

 

 

 

 

Financial Condition

52

 

 

 

 

Investment Securities

52

 

 

 

 

Loans/Leases

53

 

 

 

 

Allowance for Estimated Losses on Loans/Leases

55

 

 

 

 

Nonperforming Assets

56

 

 

 

 

Deposits

57

 

 

 

 

Borrowings

57

 

 

 

 

Stockholders' Equity

58

 

 

 

 

Liquidity and Capital Resources

59

 

 

 

 

Special Note Concerning Forward-Looking Statements

60

 

 

 

 

 

 

 

 

Item 3

    

Quantitative and Qualitative Disclosures About Market Risk

62

 

 

 

 

 

 

 

 

Item 4

 

Controls and Procedures

64

 

 

 

 

 

 

Part II 

    

OTHER INFORMATION

65

 

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

65

 

 

 

 

 

 

 

 

Item 1A

 

Risk Factors

65

 

 

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

 

 

 

 

 

Item 3

 

Defaults Upon Senior Securities

67

 

 

 

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

67

 

 

 

 

 

 

 

 

Item 5

 

Other Information

67

 

 

 

 

 

 

 

 

Item 6

 

Exhibits

68

 

 

 

 

 

 

Signatures 

69

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

Table of Contents

Part I

Item 1

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

 

 

(dollars in thousands)

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

169,827

 

$

76,254

Federal funds sold

 

 

4,695

 

 

9,800

Interest-bearing deposits at financial institutions

 

 

202,013

 

 

147,891

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost

 

 

431,283

 

 

400,646

Securities available for sale, at fair value

 

 

253,288

 

 

210,695

Total securities

 

 

684,571

 

 

611,341

 

 

 

 

 

 

 

Loans receivable held for sale

 

 

3,994

 

 

3,673

Loans/leases receivable held for investment

 

 

3,700,674

 

 

3,686,532

Gross loans/leases receivable

 

 

3,704,668

 

 

3,690,205

Less allowance for estimated losses on loans/leases

 

 

(42,233)

 

 

(36,001)

Net loans/leases receivable

 

 

3,662,435

 

 

3,654,204

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

59,098

 

 

58,834

Premises and equipment, net

 

 

73,319

 

 

73,859

Restricted investment securities

 

 

21,209

 

 

23,252

Other real estate owned, net

 

 

3,298

 

 

4,129

Goodwill

 

 

74,248

 

 

74,748

Intangibles

 

 

14,421

 

 

14,970

Derivatives

 

 

195,973

 

 

87,827

Assets held for sale

 

 

10,758

 

 

11,966

Other assets

 

 

56,210

 

 

59,975

Total assets

 

$

5,232,075

 

$

4,909,050

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

829,782

 

$

777,224

Interest-bearing

 

 

3,340,696

 

 

3,133,827

Total deposits

 

 

4,170,478

 

 

3,911,051

 

 

 

  

 

 

  

Short-term borrowings

 

 

43,067

 

 

13,423

Federal Home Loan Bank advances

 

 

95,000

 

 

159,300

Subordinated notes

 

 

68,455

 

 

68,394

Junior subordinated debentures

 

 

37,877

 

 

37,838

Derivatives

 

 

203,744

 

 

88,437

Liabilities held for sale

 

 

3,130

 

 

5,003

Other liabilities

 

 

71,185

 

 

90,253

Total liabilities

 

 

4,692,936

 

 

4,373,699

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

Preferred stock, $1 par value; shares authorized 250,000 March 2020 and December 2019 - no shares issued or outstanding

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 March 2020 - 15,773,736 shares issued and outstanding December 2019 - 15,828,098 shares issued and outstanding

 

 

15,774

 

 

15,828

Additional paid-in capital

 

 

273,867

 

 

274,785

Retained earnings

 

 

254,287

 

 

245,836

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Securities available for sale

 

 

4,697

 

 

2,817

Derivatives

 

 

(9,486)

 

 

(3,915)

Total stockholders' equity

 

 

539,139

 

 

535,351

Total liabilities and stockholders' equity

 

$

5,232,075

 

$

4,909,050

 

See Notes to Consolidated Financial Statements (Unaudited)

4

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

 

 

 

(dollars in thousands, except share data)

 

Interest and dividend income:

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

43,159

 

$

45,568

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,727

 

 

1,666

 

Nontaxable

 

 

3,459

 

 

3,545

 

Interest-bearing deposits at financial institutions

 

 

361

 

 

923

 

Restricted investment securities

 

 

258

 

 

307

 

Federal funds sold

 

 

18

 

 

93

 

Total interest and dividend income

 

 

48,982

 

 

52,102

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

9,206

 

 

12,479

 

Short-term borrowings

 

 

64

 

 

71

 

Federal Home Loan Bank advances

 

 

449

 

 

903

 

Other borrowings

 

 

 —

 

 

605

 

Subordinated notes

 

 

994

 

 

564

 

Junior subordinated debentures

 

 

571

 

 

572

 

Total interest expense

 

 

11,284

 

 

15,194

 

Net interest income

 

 

37,698

 

 

36,908

 

Provision for loan/lease losses

 

 

8,367

 

 

2,134

 

Net interest income after provision for loan/lease losses

 

 

29,331

 

 

34,774

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Trust department fees

 

 

2,312

 

 

2,493

 

Investment advisory and management fees

 

 

1,727

 

 

1,736

 

Deposit service fees

 

 

1,477

 

 

1,554

 

Gains on sales of residential real estate loans, net

 

 

652

 

 

369

 

Gains on sales of government guaranteed portions of loans, net

 

 

 —

 

 

31

 

Swap fee income

 

 

6,804

 

 

3,198

 

Earnings on bank-owned life insurance

 

 

329

 

 

540

 

Debit card fees

 

 

758

 

 

792

 

Correspondent banking fees

 

 

215

 

 

216

 

Other

 

 

922

 

 

1,064

 

Total noninterest income

 

 

15,196

 

 

11,993

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

18,519

 

 

20,879

 

Occupancy and equipment expense

 

 

4,032

 

 

3,694

 

Professional and data processing fees

 

 

3,369

 

 

2,750

 

Post-acquisition compensation, transition and integration costs

 

 

151

 

 

134

 

Disposition costs

 

 

517

 

 

 —

 

FDIC insurance, other insurance and regulatory fees

 

 

683

 

 

964

 

Loan/lease expense

 

 

228

 

 

214

 

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

 

 

13

 

 

298

 

Advertising and marketing

 

 

682

 

 

785

 

Bank service charges

 

 

504

 

 

483

 

Losses on debt extinguishment

 

 

147

 

 

 —

 

Correspondent banking expense

 

 

216

 

 

204

 

Intangibles amortization

 

 

549

 

 

532

 

Goodwill impairment

 

 

500

 

 

 —

 

Other

 

 

1,305

 

 

1,498

 

Total noninterest expense

 

 

31,415

 

 

32,435

 

Net income before income taxes

 

 

13,112

 

 

14,332

 

Federal and state income tax expense

 

 

1,884

 

 

1,414

 

Net income

 

$

11,228

 

$

12,918

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.71

 

$

0.82

 

Diluted earnings per common share

 

$

0.70

 

$

0.81

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,796,796

 

 

15,693,345

 

Weighted average common and common equivalent shares outstanding

 

 

16,011,456

 

 

15,922,940

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

0.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

5

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three months ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

    

 

    

2020

    

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Net income

 

$

11,228

 

$

12,918

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on securities available for sale:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period before tax

 

 

2,481

 

 

4,144

 

 

 

 

2,481

 

 

4,144

 

Unrealized losses on derivatives:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period before tax

 

 

(7,161)

 

 

(1,162)

 

Less reclassification adjustment for caplet amortization before tax

 

 

(110)

 

 

(157)

 

 

 

 

(7,051)

 

 

(1,005)

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

(4,570)

 

 

3,139

 

Tax expense (benefit)

 

 

(879)

 

 

795

 

Other comprehensive income (loss), net of tax

 

 

(3,691)

 

 

2,344

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

7,537

 

$

15,262

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

6

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three months ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2019

 

$

15,828

 

$

274,785

 

$

245,836

 

$

(1,098)

 

$

535,351

Net income

 

 

 —

 

 

 —

 

 

11,228

 

 

 —

 

 

11,228

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(3,691)

 

 

(3,691)

Common cash dividends declared, $0.06 per share

 

 

 —

 

 

 —

 

 

(942)

 

 

 —

 

 

(942)

Repurchase and cancellation of 100,932 shares of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   as a result of a share repurchase program

 

 

(101)

 

 

(1,844)

 

 

(1,835)

 

 

 —

 

 

(3,780)

Issuance of 5,553 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

 6

 

 

208

 

 

 —

 

 

 —

 

 

214

Issuance of 31,729 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

32

 

 

274

 

 

 —

 

 

 —

 

 

306

Stock-based compensation expense

 

 

 —

 

 

641

 

 

 —

 

 

 —

 

 

641

Restricted stock awards and restricted stock units- 10,300 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   of common stock , net of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   withheld for payment for taxes

 

 

10

 

 

(8)

 

 

 —

 

 

 —

 

 

 2

Exchange of 1,012 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock and in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with stock options exercised

 

 

(1)

 

 

(189)

 

 

 —

 

 

 —

 

 

(190)

Balance, March 31, 2020

 

$

15,774

 

$

273,867

 

$

254,287

 

$

(4,789)

 

$

539,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements (Unaudited)

 

 

7

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three months ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

    

2020

    

2019

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net income

 

$

11,228

 

$

12,918

 

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

 

 

  

 

 

  

 

Depreciation

 

 

1,338

 

 

1,235

 

Provision for loan/lease losses

 

 

8,367

 

 

2,134

 

Stock-based compensation expense

 

 

641

 

 

722

 

Deferred compensation expense accrued

 

 

913

 

 

733

 

Losses on other real estate owned, net

 

 

 4

 

 

224

 

Amortization of premiums on securities, net

 

 

159

 

 

448

 

Caplet amortization

 

 

110

 

 

 —

 

Loans originated for sale

 

 

(34,459)

 

 

(18,034)

 

Proceeds on sales of loans

 

 

34,790

 

 

17,735

 

Gains on sales of residential real estate loans

 

 

(652)

 

 

(369)

 

Gains on sales of government guaranteed portions of loans

 

 

 —

 

 

(31)

 

Loss on debt extinguishment, net

 

 

147

 

 

 —

 

Gains on sales of premises and equipment

 

 

(8)

 

 

(47)

 

Amortization of intangibles

 

 

549

 

 

532

 

Accretion of acquisition fair value adjustments, net

 

 

(625)

 

 

(1,069)

 

Increase in cash value of bank-owned life insurance

 

 

(329)

 

 

(540)

 

Goodwill impairment

 

 

500

 

 

 —

 

Decrease in other assets

 

 

5,917

 

 

1,121

 

Decrease in other liabilities

 

 

(21,998)

 

 

(9,110)

 

Net cash provided by operating activities

 

$

6,592

 

$

8,602

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Net decrease in federal funds sold

 

 

5,105

 

 

24,526

 

Net increase in interest-bearing deposits at financial institutions

 

 

(54,122)

 

 

(80,962)

 

Proceeds from sales of other real estate owned

 

 

827

 

 

202

 

Activity in securities portfolio:

 

 

 

 

 

 

 

Purchases

 

 

(83,987)

 

 

(4,079)

 

Calls, maturities and redemptions

 

 

3,872

 

 

4,510

 

Paydowns

 

 

9,182

 

 

10,426

 

Activity in restricted investment securities:

 

 

  

 

 

  

 

Purchases

 

 

(1,874)

 

 

(3,110)

 

Redemptions

 

 

3,917

 

 

5,895

 

Net increase in loans/leases originated and held for investment

 

 

(15,596)

 

 

(65,777)

 

Purchase of premises and equipment

 

 

(798)

 

 

(3,970)

 

Proceeds from sales of premises and equipment

 

 

 8

 

 

117

 

Net cash (used in) investing activities

 

$

(133,466)

 

$

(112,222)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

 

Net increase in deposit accounts

 

 

259,310

 

 

217,257

 

Net increase (decrease)  in short-term borrowings

 

 

29,644

 

 

(12,888)

 

Activity in Federal Home Loan Bank advances:

 

 

  

 

 

  

 

Term advances

 

 

45,000

 

 

5,000

 

Calls and maturities

 

 

 —

 

 

(15,000)

 

Net change in short-term and overnight advances

 

 

(109,300)

 

 

(130,365)

 

Activity in other borrowings:

 

 

  

 

 

  

 

Calls, maturities and scheduled principal payments

 

 

 —

 

 

(1,937)

 

Prepayments

 

 

 —

 

 

(21,313)

 

Paydown of revolving line of credit

 

 

 —

 

 

(9,000)

 

Proceeds from subordinated notes

 

 

 —

 

 

63,393

 

Payment of cash dividends on common stock

 

 

(947)

 

 

(939)

 

Proceeds from issuance of common stock, net

 

 

520

 

 

416

 

Repurchase and cancellation of shares

 

 

(3,780)

 

 

 —

 

Net cash provided by financing activities

 

$

220,447

 

$

94,624

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and due from banks

 

 

93,573

 

 

(8,996)

 

 

 

 

 

 

 

 

 

Cash and due from banks, beginning

 

 

76,254

 

 

85,523

 

Cash and due from banks, ending

 

$

169,827

 

$

76,527

 

8

Table of Contents

Part I

Item 1

 

 

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Three months ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

 

  

 

Interest

 

$

11,534

 

$

14,146

 

Income/franchise taxes

 

 

(2,134)

 

 

(590)

 

 

 

 

  

 

 

 

 

Supplemental schedule of noncash investing activities:

 

 

  

 

 

 

 

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

 

 

(3,691)

 

 

2,344

 

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

 

 

(190)

 

 

(152)

 

Transfers of loans to other real estate owned

 

 

 —

 

 

158

 

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

 

 

110,545

 

 

13,882

 

Dividends payable

 

 

942

 

 

942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                       See Notes to Consolidated Financial Statements (Unaudited)

 

 

9

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020

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, 2019, included in the Company's Annual Report on Form 10‑K filed with the SEC on March 13, 2020. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10‑Q and Rule 10‑01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended March 31, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020, 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 Bancshares, 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

MSELF: Main Street Expanded Loan Facility

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

MSNLF: Main Street New Loan Facility

Bates Financial Group, Inc.

NIM: Net interest margin

BOLI: Bank-owned life insurance

NPA: Nonperforming asset

Caps: Interest rate cap derivatives

NPL: Nonperforming loan

CARES Act: Coronavirus Aid, Relief and Economy

OREO: Other real estate owned

      Security Act

OTTI: Other-than-temporary impairment

CDI: Core deposit intangible

PCI: Purchased credit impaired

CECL: Current Expected Credit Losses

PPP: Paycheck Protection Program

Community National: Community National Bancorporation

Provision: Provision for loan/lease losses

COVID-19: Coronavirus Disease 2019

QCBT: Quad City Bank & Trust Company

CRBT: Cedar Rapids Bank & Trust Company

RB&T: Rockford Bank & Trust Company

CRE: Commercial real estate

ROAA: Return on Average Assets

CSB: Community State Bank

SBA: U.S. Small Business Administration

C&I: Commercial and industrial

SEC: Securities and Exchange Commission

EPS: Earnings per share

SFC Bank: Springfield First Community Bank

Exchange Act: Securities Exchange Act of 1934, as

Springfield Bancshares: Springfield Bancshares, Inc.

     amended

TA: Tangible assets

FASB: Financial Accounting Standards Board

TCE: Tangible common equity

FDIC: Federal Deposit Insurance Corporation

TDRs: Troubled debt restructurings

FHLB: Federal Home Loan Bank

TEY: Tax equivalent yield

FRB: Federal Reserve Bank of Chicago

The Company: QCR Holdings, Inc.

GAAP: Generally Accepted Accounting Principles

USDA: U.S. Department of Agriculture

10

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks:  QCBT, CRBT, CSB and SFC Bank. 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.

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. The financial results of RB&T prior to its sale are included in this report.  See Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information about the sale.

Recent accounting developments:  In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses.  Under the standard, assets measured at amortized cost (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 items periods within those fiscal years.  On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law.  The CARES Act includes provisions that, if elected,  temporarily delay the required implementation date of ASU 2016-13.  Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of the enactment, March 27, 2020 until the earlier of the two following dates: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.    The Company has elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act.  The Company has developed a CECL allowance model which calculates allowances over the life of the loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions.  Those assumptions are based upon the existing probability of default and loss given default framework.  The Company will utilize economic and other forecasts over a four quarter reasonable and supportable forecast period and then fully revert back to average historical losses.  The Company’s credit administration team will periodically refine the model as needed and is running parallel calculations. The Company anticipates increases in the allowance for credit losses on longer dated portfolios and decreases in the shorter dated portfolios.  The Company estimates a $7 million and  $10 million increase in the allowance for estimated losses on loans/leases upon adoption of CECL at January 1, 2020 and March 31, 2020, respectively. The Company is in the process of finalizing the review of the most recent model run and finalizing assumptions including qualitative adjustments and economic forecasts. 

Risks and Uncertainties: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic.  Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic.  The Company currently expects that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on its business.  In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks.  These developments, together with economic conditions generally, are also expected to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans.  As a result,

11

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

the Company anticipates that its financial condition, capital levels, asset quality and results of operations will be adversely affected, as described in further detail on this report.

 

Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions have led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020.  When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.  Such a charge would have no impact on tangible capital or regulatory capital.  Based upon the results of the interim goodwill assessment, the Company concluded that an impairment did not exist as of the time of the assessment.

 

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2020 and December 31, 2019 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

March 31, 2020:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

430,233

 

$

21,886

 

$

(2,768)

 

$

449,351

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

$

431,283

 

$

21,886

 

$

(2,768)

 

$

450,401

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

18,998

 

$

502

 

$

(43)

 

$

19,457

Residential mortgage-backed and related securities

 

 

116,768

 

 

6,149

 

 

(64)

 

 

122,853

Municipal securities

 

 

61,432

 

 

2,004

 

 

(5)

 

 

63,431

Asset-backed securities

 

 

31,076

 

 

 —

 

 

(2,577)

 

 

28,499

Other securities

 

 

18,800

 

 

252

 

 

(4)

 

 

19,048

 

 

$

247,074

 

$

8,907

 

$

(2,693)

 

$

253,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

 

Value

 

 

(dollars in thousands)

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

399,596

 

$

26,042

 

$

(143)

 

$

425,495

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

$

400,646

 

$

26,042

 

$

(143)

 

$

426,545

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

19,872

 

$

283

 

$

(77)

 

$

20,078

Residential mortgage-backed and related securities

 

 

118,724

 

 

2,045

 

 

(182)

 

 

120,587

Municipal securities

 

 

46,659

 

 

1,602

 

 

(4)

 

 

48,257

Asset-backed securities

 

 

16,958

 

 

 —

 

 

(71)

 

 

16,887

Other securities

 

 

4,749

 

 

138

 

 

(1)

 

 

4,886

 

 

$

206,962

 

$

4,068

 

$

(335)

 

$

210,695

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.

12

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2020 and December 31, 2019, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(dollars in thousands)

March 31, 2020:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

52,609

 

$

(2,762)

 

$

531

 

$

(6)

 

$

53,140

 

$

(2,768)

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

 —

 

 

1,050

 

 

 —

 

 

$

53,659

 

$

(2,762)

 

$

531

 

$

(6)

 

$

54,190

 

$

(2,768)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

1,449

 

$

(2)

 

$

1,920

 

$

(41)

 

$

3,369

 

$

(43)

Residential mortgage-backed and related securities

 

 

2,509

 

 

(14)

 

 

1,875

 

 

(50)

 

 

4,384

 

 

(64)

Municipal securities

 

 

386

 

 

(1)

 

 

336

 

 

(4)

 

 

722

 

 

(5)

Asset-backed securities

 

 

23,752

 

 

(2,577)

 

 

 —

 

 

 —

 

 

23,752

 

 

(2,577)

Other securities

 

 

246

 

 

(4)

 

 

 —

 

 

 —

 

 

246

 

 

(4)

 

 

$

28,342

 

$

(2,598)

 

$

4,131

 

$

(95)

 

$

32,473

 

$

(2,693)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

509

 

$

(1)

 

$

10,047

 

$

(142)

 

$

10,556

 

$

(143)

Other securities

 

 

550

 

 

 —

 

 

 —

 

 

 —

 

 

550

 

 

 —

 

 

$

1,059

 

$

(1)

 

$

10,047

 

$

(142)

 

$

11,106

 

$

(143)

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

1,431

 

$

(21)

 

$

2,117

 

$

(56)

 

$

3,548

 

$

(77)

Residential mortgage-backed and related securities

 

 

2,263

 

 

(17)

 

 

17,862

 

 

(165)

 

 

20,125

 

 

(182)

Municipal securities

 

 

 —

 

 

 —

 

 

724

 

 

(4)

 

 

724

 

 

(4)

Asset-backed securities

 

 

16,886

 

 

(71)

 

 

 —

 

 

 —

 

 

16,886

 

 

(71)

Other securities

 

 

249

 

 

(1)

 

 

 —

 

 

 —

 

 

249

 

 

(1)

 

 

$

20,829

 

$

(110)

 

$

20,703

 

$

(225)

 

$

41,532

 

$

(335)

 

At March 31, 2020, the investment portfolio included 581 securities. Of this number, 53 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.8% of the total amortized cost of the portfolio. Of these 53 securities, five securities had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At March 31, 2020, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

 

The Company did not recognize OTTI on any investment securities for the three months ended March 31, 2020 and 2019.

 

 

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There were no sales of securities for the three months ended March 31, 2020 and March 31, 2019.

The amortized cost and fair value of securities as of March 31, 2020 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and asset-backed securities and related securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

 

(dollars in thousands)

Securities HTM:

 

 

  

 

 

  

Due in one year or less

 

$

3,016

 

$

3,023

Due after one year through five years

 

 

34,967

 

 

35,545

Due after five years

 

 

393,300

 

 

411,833

 

 

$

431,283

 

$

450,401

Securities AFS:

 

 

  

 

 

  

Due in one year or less

 

$

1,370

 

$

1,387

Due after one year through five years

 

 

15,804

 

 

16,131

Due after five years

 

 

82,056

 

 

84,418

 

 

 

99,230

 

 

101,936

Residential mortgage-backed and related securities

 

 

116,768

 

 

122,853

Asset-backed securities

 

 

31,076

 

 

28,499

 

 

$

247,074

 

$

253,288

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

 

$

199,843

 

$

201,706

 

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

Municipal securities

 

 

47,044

 

 

48,483

Other securities

 

 

18,550

 

 

18,802

 

 

$

65,594

 

$

67,285

As of March 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 91 issuers with fair values totaling $74.4 million and revenue bonds issued by 162 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $438.4 million. The Company held investments in general obligation bonds in 21 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 18 states, including seven states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 93 issuers with fair values totaling $77.2 million and revenue bonds issued by 154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $396.6 million. The Company held investments in general obligation bonds in 22 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 nine states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2020 and December 31, 2019, the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value

14

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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 charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of March 31, 2020, 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 March 31, 2020, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31, 2020 and December 31, 2019 is presented as follows:

 

 

 

 

 

 

 

 

    

2020

 

2019

 

 

(dollars in thousands)

 

 

 

 

 

 

 

C&I loans*

 

$

1,484,979

 

$

1,507,825

CRE loans

 

 

  

 

 

  

Owner-occupied CRE

 

 

454,955

 

 

443,989

Commercial construction, land development, and other land

 

 

410,383

 

 

378,797

Other non owner-occupied CRE

 

 

917,748

 

 

913,610

 

 

 

1,783,086

 

 

1,736,396

 

 

 

 

 

 

 

Direct financing leases **

 

 

83,324

 

 

87,869

Residential real estate loans ***

 

 

237,742

 

 

239,904

Installment and other consumer loans

 

 

106,728

 

 

109,352

 

 

 

3,695,859

 

 

3,681,346

Plus deferred loan/lease origination costs, net of fees

 

 

8,809

 

 

8,859

 

 

 

3,704,668

 

 

3,690,205

Less allowance

 

 

(42,233)

 

 

(36,001)

 

 

$

3,662,435

 

$

3,654,204

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 

$

92,139

 

$

97,025

Estimated unguaranteed residual values of leased assets

 

 

616

 

 

547

Unearned lease/residual income

 

 

(9,431)

 

 

(9,703)

 

 

 

83,324

 

 

87,869

Plus deferred lease origination costs, net of fees

 

 

1,649

 

 

1,892

 

 

 

84,973

 

 

89,761

Less allowance

 

 

(1,303)

 

 

(1,464)

 

 

$

83,670

 

$

88,297

 

 

*     Includes equipment financing agreements outstanding at m2, totaling $145.3 million and $142.0 million as of March 31, 2020 and December 31, 2019, 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.

*** Includes residential real estate loans held for sale totaling $4.0 million and $3.7 million as of March 31, 2020 and December 31, 2019, respectively.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in accretable yield for acquired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

 

 

PCI

    

Performing

    

 

 

 

 

    

Loans

    

Loans

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(57)

 

$

(6,378)

 

$

(6,435)

 

Reclassification of nonaccretable discount to accretable

 

 

(30)

 

 

 —

 

 

(30)

 

Accretion recognized

 

 

28

 

 

653

 

 

681

 

Balance at the end of the period

 

$

(59)

 

$

(5,725)

 

$

(5,784)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

 

 

PCI

    

Performing

    

 

 

 

    

Loans

    

Loans

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(667)

 

$

(9,656)

 

$

(10,323)

 

Accretion recognized

 

 

348

 

 

826

 

 

1,174

 

Balance at the end of the period

 

$

(319)

 

$

(8,830)

 

$

(9,149)

 

The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2020 and December 31, 2019 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

 

 

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

 

$

1,479,395

 

$

3,445

 

$

612

 

$

 —

 

$

1,527

 

$

1,484,979

 

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

454,670

 

 

 —

 

 

186

 

 

 —

 

 

99

 

 

454,955

 

Commercial Construction, Land Development, and Other Land

 

 

408,392

 

 

767

 

 

 —

 

 

1,224

 

 

 —

 

 

410,383

 

Other Non Owner-Occupied CRE

 

 

905,607

 

 

4,577

 

 

 —

 

 

 —

 

 

7,564

 

 

917,748

 

Direct Financing Leases

 

 

81,459

 

 

487

 

 

213

 

 

 —

 

 

1,165

 

 

83,324

 

Residential Real Estate

 

 

231,288

 

 

5,047

 

 

667

 

 

82

 

 

658

 

 

237,742

 

Installment and Other Consumer

 

 

105,677

 

 

319

 

 

 4

 

 

113

 

 

615

 

 

106,728

 

 

 

$

3,666,488

 

$

14,642

 

$

1,682

 

$

1,419

 

$

11,628

 

$

3,695,859

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

 

 

99.20

%  

 

0.40

%  

 

0.05

%  

 

0.04

%  

 

0.31

%  

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 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

 

$

1,499,891

 

$

6,126

 

$

572

 

$

 —

 

$

1,236

 

$

1,507,825

 

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

443,707

 

 

177

 

 

71

 

 

 —

 

 

34

 

 

443,989

 

Commercial Construction, Land Development, and Other Land

 

 

375,940

 

 

2,857

 

 

 —

 

 

 —

 

 

 —

 

 

378,797

 

Other Non Owner-Occupied CRE

 

 

909,684

 

 

73

 

 

 —

 

 

 —

 

 

3,853

 

 

913,610

 

Direct Financing Leases

 

 

85,636

 

 

463

 

 

253

 

 

 —

 

 

1,517

 

 

87,869

 

Residential Real Estate

 

 

235,845

 

 

2,939

 

 

414

 

 

 —

 

 

706

 

 

239,904

 

Installment and Other Consumer

 

 

108,750

 

 

 3

 

 

10

 

 

33

 

 

556

 

 

109,352

 

 

 

$

3,659,453

 

$

12,638

 

$

1,320

 

$

33

 

$

7,902

 

$

3,681,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of total loan/lease portfolio

 

 

99.41

%  

 

0.34

%  

 

0.04

%  

 

0.00

%  

 

0.21

%  

 

100.00

%

17

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

 

NPLs by classes of loans/leases as of March 31, 2020 and December 31, 2019 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

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

 

$

 —

 

$

1,527

 

$

359

 

$

1,886

 

13.88

%

CRE

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

99

 

 

 —

 

 

99

 

0.73

%

Commercial Construction, Land Development, and Other Land

 

 

1,224

 

 

 —

 

 

 —

 

 

1,224

 

9.01

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

7,564

 

 

 —

 

 

7,564

 

55.64

%

Direct Financing Leases

 

 

 —

 

 

1,165

 

 

186

 

 

1,351

 

9.94

%

Residential Real Estate

 

 

82

 

 

658

 

 

 —

 

 

740

 

5.44

%

Installment and Other Consumer

 

 

113

 

 

615

 

 

 —

 

 

728

 

5.36

%

 

 

$

1,419

 

$

11,628

 

$

545

 

$

13,592

 

100.00

%

 

**   Nonaccrual loans/leases included $298 thousand of TDRs, including $50 thousand in commercial and industrial loans, $163 thousand in direct financing leases, $31 thousand in residential real estate loans, and $54 thousand in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 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

 

$

 —

 

$

1,236

 

$

646

 

$

1,882

 

21.12

%

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

34

 

 

 —

 

 

34

 

0.38

%

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 -

%

Other Non Owner-Occupied CRE

 

 

 —

 

 

3,853

 

 

 —

 

 

3,853

 

43.22

%

Direct Financing Leases

 

 

 —

 

 

1,517

 

 

333

 

 

1,850

 

20.75

%

Residential Real Estate

 

 

 —

 

 

706

 

 

 —

 

 

706

 

7.92

%

Installment and Other Consumer

 

 

33

 

 

556

 

 

 —

 

 

589

 

6.61

%

 

 

$

33

 

$

7,902

 

$

979

 

$

8,914

 

100.00

%

 

**   Nonaccrual loans/leases included $747 thousand of TDRs, including $98 thousand in C&I loans, $269 thousand in CRE loans, $294 thousand in direct financing leases, $31 thousand in residential real estate loans, and $55 thousand in installment loans.

18

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Changes in the allowance by portfolio segment for the three months ended March 31, 2020 and 2019, respectively, are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

16,072

 

$

15,379

 

$

1,464

 

$

1,948

 

$

1,138

 

$

36,001

Provisions (credits) charged to expense

 

 

3,697

 

 

3,816

 

 

394

 

 

336

 

 

124

 

 

8,367

Loans/leases charged off

 

 

(1,639)

 

 

 —

 

 

(600)

 

 

 —

 

 

(96)

 

 

(2,335)

Recoveries on loans/leases previously charged off

 

 

21

 

 

74

 

 

45

 

 

29

 

 

31

 

 

200

Balance, ending

 

$

18,151

 

$

19,269

 

$

1,303

 

$

2,313

 

$

1,197

 

$

42,233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 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

Provisions (credits) charged to expense

 

 

1,007

 

 

534

 

 

445

 

 

(18)

 

 

166

 

 

2,134

Loans/leases charged off

 

 

(334)

 

 

 —

 

 

(652)

 

 

 —

 

 

(74)

 

 

(1,060)

Recoveries on loans/leases previously charged off

 

 

166

 

 

50

 

 

21

 

 

 —

 

 

 6

 

 

243

Balance, ending

 

$

17,259

 

$

18,303

 

$

1,606

 

$

2,539

 

$

1,457

 

$

41,164

 

 

The allowance by impairment evaluation and by portfolio segment as of March 31, 2020 and December 31, 2019 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 

$

86

 

$

1,228

 

$

20

 

$

15

 

$

78

 

$

1,427

 

Allowance for nonimpaired loans/leases

 

 

18,065

 

 

18,041

 

 

1,283

 

 

2,298

 

 

1,119

 

 

40,806

 

 

 

$

18,151

 

$

19,269

 

$

1,303

 

$

2,313

 

$

1,197

 

$

42,233

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

2,346

 

$

7,681

 

$

1,574

 

$

603

 

$

615

 

$

12,819

 

Nonimpaired loans/leases

 

 

1,482,633

 

 

1,775,405

 

 

81,750

 

 

237,139

 

 

106,113

 

 

3,683,040

 

 

 

$

1,484,979

 

$

1,783,086

 

$

83,324

 

$

237,742

 

$

106,728

 

$

3,695,859

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

3.67

%  

 

15.99

%  

 

1.27

%  

 

2.49

%  

 

12.68

%  

 

11.13

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.22

%  

 

1.02

%  

 

1.57

%  

 

0.97

%  

 

1.05

%  

 

1.11

%

Total allowance as a percentage of total loans/leases

 

 

1.22

%  

 

1.08

%  

 

1.56

%  

 

0.97

%  

 

1.12

%  

 

1.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 

$

170

 

$

125

 

$

270

 

$

15

 

$

80

 

$

660

 

Allowance for nonimpaired loans/leases

 

 

15,902

 

 

15,254

 

 

1,194

 

 

1,933

 

 

1,058

 

 

35,341

 

 

 

$

16,072

 

$

15,379

 

$

1,464

 

$

1,948

 

$

1,138

 

$

36,001

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 

$

1,846

 

$

3,585

 

$

2,025

 

$

649

 

$

556

 

$

8,661

 

Nonimpaired loans/leases

 

 

1,505,979

 

 

1,732,811

 

 

85,844

 

 

239,255

 

 

108,796

 

 

3,672,685

 

 

 

$

1,507,825

 

$

1,736,396

 

$

87,869

 

$

239,904

 

$

109,352

 

$

3,681,346

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

 

 

9.21

%  

 

3.49

%  

 

13.33

%  

 

2.31

%  

 

14.41

%  

 

7.62

%

Allowance as a percentage of nonimpaired loans/leases

 

 

1.06

%  

 

0.88

%  

 

1.39

%  

 

0.81

%  

 

0.97

%  

 

0.96

%

Total allowance as a percentage of total loans/leases

 

 

1.07

%  

 

0.89

%  

 

1.67

%  

 

0.81

%  

 

1.04

%  

 

0.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

19

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended March 31, 2020 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,260

 

$

2,332

 

$

 —

 

$

1,895

 

$

12

 

$

12

CRE

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

99

 

 

115

 

 

 —

 

 

102

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

1,054

 

 

1,054

 

 

 —

 

 

662

 

 

 7

 

 

 7

Direct Financing Leases

 

 

1,515

 

 

1,515

 

 

 —

 

 

1,440

 

 

 6

 

 

 6

Residential Real Estate

 

 

423

 

 

407

 

 

 —

 

 

399

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

538

 

 

538

 

 

 —

 

 

507

 

 

 —

 

 

 —

 

 

$

5,889

 

$

5,961

 

$

 —

 

$

5,005

 

$

25

 

$

25

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

86

 

$

86

 

$

86

 

$

43

 

$

 —

 

$

 —

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

6,528

 

 

6,528

 

 

1,228

 

 

4,698

 

 

 —

 

 

 —

Direct Financing Leases

 

 

59

 

 

59

 

 

20

 

 

61

 

 

 —

 

 

 —

Residential Real Estate

 

 

180

 

 

180

 

 

15

 

 

180

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

77

 

 

77

 

 

78

 

 

79

 

 

 —

 

 

 —

 

 

$

6,930

 

$

6,930

 

$

1,427

 

$

5,061

 

$

 —

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,346

 

$

2,418

 

$

86

 

$

1,938

 

$

12

 

$

12

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

99

 

 

115

 

 

 —

 

 

102

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

7,582

 

 

7,582

 

 

1,228

 

 

5,360

 

 

 7

 

 

 7

Direct Financing Leases

 

 

1,574

 

 

1,574

 

 

20

 

 

1,501

 

 

 6

 

 

 6

Residential Real Estate

 

 

603

 

 

587

 

 

15

 

 

579

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

615

 

 

615

 

 

78

 

 

586

 

 

 —

 

 

 —

 

 

$

12,819

 

$

12,891

 

$

1,427

 

$

10,066

 

$

25

 

$

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

Average

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,256

 

$

2,300

 

$

 —

 

$

2,124

 

$

23

 

$

23

CRE

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

Owner-Occupied CRE

 

 

104

 

 

104

 

 

 —

 

 

106

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

500

 

 

500

 

 

 —

 

 

503

 

 

 7

 

 

 7

Other Non Owner-Occupied CRE

 

 

1,675

 

 

1,675

 

 

 —

 

 

1,687

 

 

22

 

 

22

Direct Financing Leases

 

 

1,948

 

 

1,948

 

 

 —

 

 

2,011

 

 

11

 

 

11

Residential Real Estate

 

 

705

 

 

779

 

 

 —

 

 

713

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

778

 

 

778

 

 

 —

 

 

770

 

 

 3

 

 

 3

 

 

$

7,966

 

$

8,084

 

$

 —

 

$

7,914

 

$

72

 

$

72

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

2,045

 

$

2,045

 

$

841

 

$

1,946

 

$

 9

 

$

 9

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

289

 

 

646

 

 

33

 

 

297

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

144

 

 

144

 

 

28

 

 

146

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

7,443

 

 

7,443

 

 

2,052

 

 

7,510

 

 

48

 

 

48

Direct Financing Leases

 

 

237

 

 

237

 

 

142

 

 

206

 

 

 —

 

 

 —

Residential Real Estate

 

 

988

 

 

988

 

 

236

 

 

915

 

 

 1

 

 

 1

Installment and Other Consumer

 

 

147

 

 

147

 

 

107

 

 

137

 

 

 —

 

 

 —

 

 

$

11,293

 

$

11,650

 

$

3,439

 

$

11,157

 

$

58

 

$

58

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

4,301

 

$

4,345

 

$

841

 

$

4,070

 

$

32

 

$

32

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

393

 

 

750

 

 

33

 

 

403

 

 

 6

 

 

 6

Commercial Construction, Land Development, and Other Land

 

 

644

 

 

644

 

 

28

 

 

649

 

 

 7

 

 

 7

Other Non Owner-Occupied CRE

 

 

9,118

 

 

9,118

 

 

2,052

 

 

9,197

 

 

70

 

 

70

Direct Financing Leases

 

 

2,185

 

 

2,185

 

 

142

 

 

2,217

 

 

11

 

 

11

Residential Real Estate

 

 

1,693

 

 

1,767

 

 

236

 

 

1,628

 

 

 1

 

 

 1

Installment and Other Consumer

 

 

925

 

 

925

 

 

107

 

 

907

 

 

 3

 

 

 3

 

 

$

19,259

 

$

19,734

 

$

3,439

 

$

19,071

 

$

130

 

$

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

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, 2019 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

 

$

1,607

 

$

1,647

 

$

 —

 

CRE

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

34

 

 

50

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

684

 

 

686

 

 

 —

 

Direct Financing Leases

 

 

1,642

 

 

1,642

 

 

 —

 

Residential Real Estate

 

 

469

 

 

614

 

 

 —

 

Installment and Other Consumer

 

 

476

 

 

476

 

 

 —

 

 

 

$

4,912

 

$

5,115

 

$

 —

 

 

 

 

  

 

 

  

 

 

  

 

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

C&I

 

$

239

 

$

239

 

$

170

 

CRE

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

2,867

 

 

2,867

 

 

125

 

Direct Financing Leases

 

 

383

 

 

383

 

 

270

 

Residential Real Estate

 

 

180

 

 

180

 

 

15

 

Installment and Other Consumer

 

 

80

 

 

80

 

 

80

 

 

 

$

3,749

 

$

3,749

 

$

660

 

 

 

 

  

 

 

  

 

 

  

 

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

 

 

C&I

 

$

1,846

 

$

1,886

 

$

170

 

CRE

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

34

 

 

50

 

 

 —

 

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

Other Non Owner-Occupied CRE

 

 

3,551

 

 

3,553

 

 

125

 

Direct Financing Leases

 

 

2,025

 

 

2,025

 

 

270

 

Residential Real Estate

 

 

649

 

 

794

 

 

15

 

Installment and Other Consumer

 

 

556

 

 

556

 

 

80

 

 

 

$

8,661

 

$

8,864

 

$

660

 

 

 

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.

 

 

 

 

 

 

22

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

 

 

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)

 

$

1,309,540

 

$

449,463

 

$

408,341

 

$

884,112

 

$

3,051,456

 

97.72

%

 

Special Mention (Rating 6)

 

 

11,805

 

 

3,665

 

 

722

 

 

18,546

 

 

34,738

 

1.11

%

 

Substandard (Rating 7)

 

 

18,375

 

 

1,827

 

 

1,320

 

 

15,090

 

 

36,612

 

1.17

%

 

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 

 

 

$

1,339,720

 

$

454,955

 

$

410,383

 

$

917,748

 

$

3,122,806

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2020

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

144,148

 

$

81,973

 

$

237,002

 

$

106,000

 

$

569,123

 

99.31

%

Nonperforming

 

 

1,111

 

 

1,351

 

 

740

 

 

728

 

 

3,930

 

0.69

%

 

 

$

145,259

 

$

83,324

 

$

237,742

 

$

106,728

 

$

573,053

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 

$

1,334,446

 

$

439,418

 

$

378,572

 

$

896,206

 

$

3,048,642

 

98.28

%

Special Mention (Rating 6)

 

 

12,962

 

 

3,044

 

 

41

 

 

3,905

 

 

19,952

 

0.65

%

Substandard (Rating 7)

 

 

18,439

 

 

1,527

 

 

184

 

 

13,499

 

 

33,649

 

1.09

%

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

0.01

%

 

 

$

1,365,847

 

$

443,989

 

$

378,797

 

$

913,610

 

$

3,102,243

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

140,992

 

$

86,019

 

$

239,198

 

$

108,763

 

$

574,972

 

99.29

%

Nonperforming

 

 

986

 

 

1,850

 

 

706

 

 

589

 

 

4,131

 

0.71

%

 

 

$

141,978

 

$

87,869

 

$

239,904

 

$

109,352

 

$

579,103

 

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.

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

As of March 31,2020 and December 31, 2019, TDRs totaled $843 thousand and $1.7 million, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three months ended March 31, 2020 and 2019. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2020

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

Classes of Loans/Leases

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

C&I

 

 2

 

$

111

 

$

111

 

$

 —

Direct Financing Leases

 

 1

 

 

68

 

 

68

 

 

 —

 

 

 3

 

$

179

 

$

179

 

$

 —

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2019

 

    

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

Classes of Loans/Leases

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

Direct Financing Leases

 

 4

 

 

122

 

 

122

 

 

 —

 

 

 4

 

$

122

 

$

122

 

$

 —

Of the loans restructured during the three months ended March 31, 2020 and 2019, none were on nonaccrual.

For the three months ended March 31, 2020, one of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. This TDR was related to one customer whose lease was restructured in the fourth quarter of 2019 with pre-modification balances totaling $55 thousand. 

For the three months ended March 31, 2019, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

Not included in the table above, the Company had four TDRs that were restructured and charged off for the three months ended March 31, 2020, totaling $296 thousand. The Company had two TDRs that were restructured and charged off for the three months ended March 31, 2019, totaling $56 thousand.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

 

 

 

24

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Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.

The Company entered into interest rate caps in December 2019 to hedge against the risk of rising interest rates on liabilities.  The liabilities consist of $375.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and Prime. The interest rate caps are designated as cash flow hedges in accordance with ASC 815.  An initial premium of $4.3 million was paid upfront for the caps executed in 2019.  The details of the interest rate caps are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

Fair Value as of

 

 

Hedged Item

 

Effective Date

 

Maturity Date

 

Location

 

Notional Amount

 

Strike Rate

 

March 31, 2020

 

 

December 31, 2019

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

$

25,000

 

1.75

%  

 

$

18

 

 

$

112

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

50,000

 

1.57

 

 

 

35

 

 

 

218

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

25,000

 

1.90

 

 

 

16

 

 

 

96

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

25,000

 

1.80

 

 

 

17

 

 

 

109

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

25,000

 

1.75

 

 

 

47

 

 

 

214

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

50,000

 

1.57

 

 

 

85

 

 

 

401

 

 

Deposits

 

2/1/2020

 

2/1/2024

 

Other Assets

 

 

25,000

 

1.90

 

 

 

44

 

 

 

202

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

25,000

 

1.80

 

 

 

42

 

 

 

201

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

25,000

 

1.75

 

 

 

94

 

 

 

337

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

50,000

 

1.57

 

 

 

171

 

 

 

617

 

 

Deposits

 

3/1/2020

 

3/1/2025

 

Other Assets

 

 

25,000

 

1.90

 

 

 

94

 

 

 

332

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

25,000

 

1.80

 

 

 

86

 

 

 

309

 

 

 

 

 

 

 

 

 

 

$

375,000

 

 

 

 

$

749

 

 

$

3,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815.  The details of the interest rate swaps are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of

Hedged Item

 

Effective Date

 

Maturity Date

 

Location

 

Notional Amount

 

Receive Rate

 

 

Pay Rate

 

March 31, 2020

 

December 31, 2019

(dollars in thousands)

CRBT - FHLB Advances or Brokered CDs

 

3/16/2020

 

3/16/2023

 

Derivatives - Liabilities

 

$

30,000

 

0.89

%  

 

 

1.12

%  

 

$

(644)

 

$

 -

SFCB - FHLB Advances or Brokered CDs

 

3/16/2020

 

3/16/2023

 

Derivatives - Liabilities

 

 

10,000

 

0.74

%  

 

 

0.95

%  

 

 

(162)

 

$

 -

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Derivatives - Liabilities

 

 

10,000

 

4.30

%  

 

 

5.85

%  

 

 

(1,992)

 

$

(971)

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Derivatives - Liabilities

 

 

8,000

 

4.30

%  

 

 

5.85

%  

 

 

(1,594)

 

 

(777)

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Derivatives - Liabilities

 

 

10,000

 

3.54

%  

 

 

4.54

%  

 

 

(1,935)

 

 

(944)

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Derivatives - Liabilities

 

 

3,000

 

3.29

%  

 

 

5.17

%  

 

 

(597)

 

 

(291)

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Derivatives - Liabilities

 

 

3,500

 

2.49

%  

 

 

4.75

%  

 

 

(698)

 

 

(339)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Derivatives - Liabilities

 

 

4,500

 

2.49

%  

 

 

4.75

%  

 

 

(898)

 

 

(436)

 

 

  

 

 

 

 

 

$

79,000

 

3.66

%  

 

 

5.24

%  

 

$

(8,520)

 

$

(3,758)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.

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

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements.  The Company assesses the credit risk of its financial institution counterparties by monitoring

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Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

publicly available credit rating and financial information.  Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements,  central clearing mechanisms and counterparty limits.  The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.  The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures.  The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

Interest rate swaps that are not designated as hedging instruments are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Notional Amount

 

Estimated Fair Value

 

Notional Amount

 

Estimated Fair Value

 

 

 

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

915,109

 

$

195,224

 

$

787,221

 

$

84,679

Non-Hedging Interest Rate Derivatives Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

915,109

 

$

195,224

 

$

787,221

 

$

84,679

Swap fee income totaled $6.8 million and $3.2 million for the three months ended March 31, 2020 and 2019, respectively.  Swap fee income totaled $28.3 million for the year ended December 31, 2019.

 

NOTE 5 - EARNINGS PER SHARE

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

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31, 

 

 

    

 

2020

    

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,228

 

$

12,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic EPS

 

$

0.71

 

$

0.82

 

  Diluted EPS

 

$

0.70

 

$

0.81

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,796,796

 

 

15,693,345

 

Weighted average common shares issuable upon exercise of stock options

 

 

 

 

 

 

 

    and under the employee stock purchase plan

 

 

214,660

 

 

229,595

 

Weighted average common and common equivalent shares outstanding

 

 

16,011,456

 

 

15,922,940

 

 

 

 

 

 

 

 

 

 

 

 

26

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 6 – FAIR VALUE

Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

·

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

·

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

·

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis comprise the following at March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

March 31, 2020:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

19,457

 

$

 —

 

$

19,457

 

$

 —

Residential mortgage-backed and related securities

 

 

122,853

 

 

 —

 

 

122,853

 

 

 —

Municipal securities

 

 

63,431

 

 

 —

 

 

63,431

 

 

 —

Asset-backed securities

 

 

28,499

 

 

 

 

 

28,499

 

 

 

Other securities

 

 

19,048

 

 

 —

 

 

19,048

 

 

 —

Derivatives

 

 

195,973

 

 

 —

 

 

195,973

 

 

 —

Total assets measured at fair value

 

$

449,261

 

$

 —

 

$

449,261

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Derivatives

 

$

203,744

 

$

 —

 

$

203,744

 

$

 —

Total liabilities measured at fair value

 

$

203,744

 

$

 —

 

$

203,744

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

20,078

 

$

 —

 

$

20,078

 

$

 —

Residential mortgage-backed and related securities

 

 

120,587

 

 

 —

 

 

120,587

 

 

 —

Municipal securities

 

 

48,257

 

 

 —

 

 

48,257

 

 

 —

Asset-backed securities

 

 

16,887

 

 

 

 

 

16,887

 

 

 

Other securities

 

 

4,886

 

 

 —

 

 

4,886

 

 

 —

Derivatives

 

 

87,827

 

 

 —

 

 

87,827

 

 

 —

Total assets measured at fair value

 

$

298,522

 

$

 —

 

$

298,522

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Derivatives

 

$

88,437

 

$

 —

 

$

88,437

 

$

 —

Total liabilities measured at fair value

 

$

88,437

 

$

 —

 

$

88,437

 

$

 —

 

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

Interest rate caps are used for the purpose of hedging interest rate risk.  The interest rate caps are further described in Note 4 to the Consolidated Financial Statements.  The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

27

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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 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Interest rate swaps are also used for the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2020 and December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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)

March 31, 2020:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

6,062

 

$

 —

 

$

 —

 

$

6,062

OREO

 

 

3,562

 

 

 —

 

 

 —

 

 

3,562

 

 

$

9,624

 

$

 —

 

$

 —

 

$

9,624

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

3,394

 

$

 —

 

$

 —

 

$

3,394

OREO

 

 

4,459

 

 

 —

 

 

 —

 

 

4,459

 

 

$

7,853

 

$

 —

 

$

 —

 

$

7,853

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.

28

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

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

    

2020

    

2019

    

Valuation Technique

    

Unobservable Input

    

Range

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans/leases

 

$

6,062

 

$

3,394

 

Appraisal of collateral

 

Appraisal adjustments

 

(10.00)

%  

to

 

(30.00)

%

OREO

 

 

3,562

 

 

4,459

 

Appraisal of collateral

 

Appraisal adjustments

 

0.00

%  

to

 

(35.00)

%

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

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, 2020 and 2019.

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 March 31, 2020

 

As of December 31, 2019

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

Level 1

 

$

169,827

 

$

169,827

 

$

76,254

 

$

76,254

Federal funds sold

 

Level 2

 

 

4,695

 

 

4,695

 

 

9,800

 

 

9,800

Interest-bearing deposits at financial institutions

 

Level 2

 

 

202,013

 

 

202,013

 

 

147,891

 

 

147,891

Investment securities:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

HTM

 

Level 2

 

 

431,283

 

 

450,401

 

 

400,646

 

 

426,545

AFS

 

*

 

 

253,288

 

 

253,288

 

 

210,695

 

 

210,695

Loans/leases receivable, net

 

Level 3

 

 

5,613

 

 

6,062

 

 

3,143

 

 

3,394

Loans/leases receivable, net

 

Level 2

 

 

3,656,822

 

 

3,624,689

 

 

3,651,061

 

 

3,606,520

Derivatives

 

Level 2

 

 

195,973

 

 

195,973

 

 

87,827

 

 

87,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Nonmaturity deposits

 

Level 2

 

 

3,292,795

 

 

3,292,795

 

 

3,184,726

 

 

3,184,726

Time deposits

 

Level 2

 

 

877,683

 

 

887,294

 

 

726,325

 

 

742,444

Short-term borrowings

 

Level 2

 

 

43,067

 

 

43,067

 

 

13,423

 

 

13,423

FHLB advances

 

Level 2

 

 

95,000

 

 

96,515

 

 

159,300

 

 

159,193

Subordinated notes

 

Level 2

 

 

68,455

 

 

68,673

 

 

68,394

 

 

68,563

Junior subordinated debentures

 

Level 2

 

 

37,877

 

 

30,541

 

 

37,838

 

 

30,477

Derivatives

 

Level 2

 

 

203,744

 

 

203,744

 

 

88,437

 

 

88,437

 

*See previous table in Note 2.

 

 

NOTE 7 – 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.

29

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

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 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 corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.  The financial results for RB&T prior to the sale of the majority of its assets and liabilities at November 30, 2019 are also included in the Company’s All Other Segment as are the assets held for sale at March 31, 2020.

Selected financial information on the Company's business segments is presented as follows as of and for the three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Banking

 

Wealth

 

 

 

 

Intercompany

 

Consolidated

 

QCBT

    

CRBT

    

CSB

    

SFC Bank

    

Management

    

All other

    

Eliminations

    

Total

 

(dollars in thousands)

Three Months Ended March 31, 2020

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

19,499

 

$

21,995

 

$

10,051

 

$

8,691

 

$

4,039

 

$

15,618

 

$

(15,715)

 

$

64,178

Net interest income

 

14,428

 

 

11,386

 

 

7,500

 

 

5,642

 

 

 —

 

 

(1,488)

 

 

230

 

 

37,698

Provision

 

3,183

 

 

2,250

 

 

1,964

 

 

970

 

 

 —

 

 

 —

 

 

 —

 

 

8,367

Net income (loss) from continuing operations

 

4,903

 

 

6,377

 

 

1,038

 

 

2,207

 

 

821

 

 

11,137

 

 

(15,255)

 

 

11,228

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

182

 

 

 —

 

 

74,248

Intangibles

 

 —

 

 

2,560

 

 

3,812

 

 

6,573

 

 

 —

 

 

1,476

 

 

 —

 

 

14,421

Total assets

 

1,914,785

 

 

1,719,773

 

 

863,903

 

 

708,735

 

 

 —

 

 

695,511

 

 

(670,632)

 

 

5,232,075

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

18,544

 

$

19,244

 

$

9,270

 

$

7,288

 

$

4,229

 

$

20,178

 

$

(14,658)

 

$

64,095

Net interest income

 

12,139

 

 

10,407

 

 

6,966

 

 

5,227

 

 

 —

 

 

2,169

 

 

 —

 

 

36,908

Credit loss expense

 

1,020

 

 

425

 

 

150

 

 

500

 

 

 —

 

 

39

 

 

 —

 

 

2,134

Net income (loss)

 

4,185

 

 

5,100

 

 

2,157

 

 

1,653

 

 

1,158

 

 

13,115

 

 

(14,450)

 

 

12,918

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

3,806

 

 

 —

 

 

77,872

Intangibles

 

 —

 

 

3,061

 

 

4,501

 

 

7,501

 

 

 —

 

 

1,855

 

 

 —

 

 

16,918

Total assets

 

1,660,374

 

 

1,446,637

 

 

785,076

 

 

638,542

 

 

 —

 

 

1,137,465

 

 

(601,432)

 

 

5,066,662

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

NOTE 8 – 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 March 31, 2020 and December 31, 2019, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

30

Table of Contents

Part I

Item 1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks' actual capital amounts and ratios as of March 31, 2020 and December 31, 2019 are presented in the following table (dollars in thousands). As of March 31, 2020 and December 31, 2019, 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 March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

601,259

 

13.54

%  

$

355,226

> 

8.00

%  

$

466,233

> 

10.50

%  

$

444,032

> 

10.00

%

Tier 1 risk-based capital

 

 

495,455

 

11.16

 

 

266,419

> 

6.00

 

 

377,427

> 

8.50

 

 

355,226

> 

8.00

 

Tier 1 leverage

 

 

495,455

 

10.19

 

 

194,477

> 

4.00

 

 

194,477

> 

4.00

 

 

243,097

> 

5.00

 

Common equity Tier 1

 

 

457,578

 

10.31

 

 

199,814

> 

4.50

 

 

310,822

> 

7.00

 

 

288,621

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

191,590

 

12.03

%  

$

127,429

> 

8.00

%  

$

167,251

> 

10.50

%  

$

159,287

> 

10.00

%

Tier 1 risk-based capital

 

 

175,861

 

11.04

 

 

95,572

> 

6.00

 

 

135,394

> 

8.50

 

 

127,429

> 

8.00

 

Tier 1 leverage

 

 

175,861

 

10.07

 

 

69,825

> 

4.00

 

 

69,825

> 

4.00

 

 

87,282

> 

5.00

 

Common equity Tier 1

 

 

175,861

 

11.04

 

 

71,679

> 

4.50

 

 

111,501

> 

7.00

 

 

103,536

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

184,319

 

12.21

%  

$

120,785

> 

8.00

%  

$

158,531

> 

10.50

%  

$

150,982

> 

10.00

%

Tier 1 risk-based capital

 

 

168,693

 

11.17

 

 

90,589

> 

6.00

 

 

128,334

> 

8.50

 

 

120,785

> 

8.00

 

Tier 1 leverage

 

 

168,693

 

10.53

 

 

64,084

> 

4.00

 

 

64,084

> 

4.00

 

 

80,105

> 

5.00

 

Common equity Tier 1

 

 

168,693

 

11.17

 

 

67,942

> 

4.50

 

 

105,687

> 

7.00

 

 

98,138

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

94,289

 

12.59

%  

$

59,930

> 

8.00

%  

$

78,658

> 

10.50

%  

$

74,912

> 

10.00

%

Tier 1 risk-based capital

 

 

86,636

 

11.57

 

 

44,947

> 

6.00

 

 

63,675

> 

8.50

 

 

59,930

> 

8.00

 

Tier 1 leverage

 

 

86,636

 

10.25

 

 

33,808

> 

4.00

 

 

33,808

> 

4.00

 

 

42,261

> 

5.00

 

Common equity Tier 1

 

 

86,636

 

11.57

 

 

33,710

> 

4.50

 

 

52,439

> 

7.00

 

 

48,693

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

74,501

 

12.49

%  

$

47,723

> 

8.00

%  

$

62,636

> 

10.50

%  

$

59,654

> 

10.00

%

Tier 1 risk-based capital

 

 

66,392

 

11.13

 

 

35,792

> 

6.00

 

 

50,706

> 

8.50

 

 

47,723

> 

8.00

 

Tier 1 leverage

 

 

66,392

 

10.43

 

 

25,470

> 

4.00

 

 

25,470

> 

4.00

 

 

31,838

> 

5.00

 

Common equity Tier 1

 

 

66,392

 

11.13

 

 

26,844

> 

4.50

 

 

41,758

> 

7.00

 

 

38,775

> 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

581,234

 

13.33

%  

$

348,937

> 

8.00

%  

$

457,980

> 

10.500

%  

$

436,171

> 

10.00

%

Tier 1 risk-based capital

 

 

481,702

 

11.04

 

 

261,703

> 

6.00

 

 

370,746

> 

8.500

 

 

348,937

> 

8.00

 

Tier 1 leverage

 

 

481,702

 

9.53

 

 

202,207

> 

4.00

 

 

202,207

> 

4.000

 

 

252,758

> 

5.00

 

Common equity Tier 1

 

 

443,864

 

10.18

 

 

196,277

> 

4.50

 

 

305,320

> 

7.000

 

 

283,511

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

183,855

 

11.83

%  

$

124,362

> 

8.00

%  

$

163,225

> 

10.500

%  

$

155,452

> 

10.00

%

Tier 1 risk-based capital

 

 

170,137

 

10.94

 

 

93,271

> 

6.00

 

 

132,134

> 

8.500

 

 

124,362

> 

8.00

 

Tier 1 leverage

 

 

170,137

 

9.94

 

 

68,479

> 

4.00

 

 

68,479

> 

4.000

 

 

85,598

> 

5.00

 

Common equity Tier 1

 

 

170,137

 

10.94

 

 

69,953

> 

4.50

 

 

108,817

> 

7.000

 

 

101,044

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

175,498

 

11.90

%  

$

117,953

> 

8.00

%  

$

154,813

> 

10.500

%  

$

147,441

> 

10.00

%

Tier 1 risk-based capital

 

 

162,127

 

11.00

 

 

88,465

> 

6.00

 

 

125,325

> 

8.500

 

 

117,953

> 

8.00

 

Tier 1 leverage

 

 

162,127

 

10.41

 

 

62,286

> 

4.00

 

 

62,286

> 

4.000

 

 

77,857

> 

5.00

 

Common equity Tier 1

 

 

162,127

 

11.00

 

 

66,349

> 

4.50

 

 

103,209

> 

7.000

 

 

95,837

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

92,095

 

12.32

%  

$

59,813

> 

8.00

%  

$

78,504

> 

10.500

%  

$

74,766

> 

10.00

%

Tier 1 risk-based capital

 

 

85,437

 

11.43

 

 

44,860

> 

6.00

 

 

63,551

> 

8.500

 

 

59,813

> 

8.00

 

Tier 1 leverage

 

 

85,437

 

10.39

 

 

32,902

> 

4.00

 

 

32,902

> 

4.000

 

 

41,128

> 

5.00

 

Common equity Tier 1

 

 

85,437

 

11.43

 

 

33,645

> 

4.50

 

 

52,336

> 

7.000

 

 

48,598

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

71,074

 

12.72

%  

$

44,704

> 

8.00

%  

$

58,674

> 

10.500

%  

$

55,880

> 

10.00

%

Tier 1 risk-based capital

 

 

63,956

 

11.45

 

 

33,528

> 

6.00

 

 

47,498

> 

8.500

 

 

44,704

> 

8.00

 

Tier 1 leverage

 

 

63,956

 

9.70

 

 

26,379

> 

4.00

 

 

26,379

> 

4.000

 

 

32,974

> 

5.00

 

Common equity Tier 1

 

 

63,956

 

11.45

 

 

25,146

> 

4.50

 

 

39,116

> 

7.000

 

 

36,322

> 

6.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – continued

NOTE 9 – SUBSEQUENT EVENT

 

On April 2, 2020, the Company entered into a stock purchase agreement to sell all the issued and outstanding capital stock of the Bates Companies. The aggregate consideration to be paid to the Company shall be an amount equal to $500,000 plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 with a non-discounted value of approximately $1.6 million at March 31, 2020. 

 

This transaction is subject to regulatory approval and is expected to close late in the second quarter of 2020.

 

Goodwill impairment related to the execution of the agreement to sell the Bates Companies was $500,000 in the first quarter of 2020.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending March 31, 2020. 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 and SFC Bank. QCBT, CRBT and CSB are Iowa-chartered commercial banks and SFC Bank is a Missouri-chartered commercial bank. All four charters 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 and provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an adverse impact on the Company’s financial condition and results of operations as of and for the three months ended March 31, 2020, and is expected to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on the Company’s Market Areas

The Company offers commercial and consumer banking products and services primarily in Illinois, Missouri and Iowa.  In Illinois, Governor J.B Pritzker has ordered individuals to stay at home and non-essential businesses to cease all activities, in each case subject to limited exceptions.  This order went into effect on March 21, 2020 and is currently effective through

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May 30, 2020.  In Missouri, Governor Mike Parson has ordered individuals to stay at home, and imposed limitations on gathering sizes applicable to businesses.  This order went into effect on April 3, 2020 and expired May 3, 2020, with the gradual reopening of certain businesses.  In Iowa, Governor Kim Reynolds recently issued a series of orders, including orders for many retail establishments to close and imposing limitations on gathering sizes in certain parts of the state.  Such orders are generally currently effective through May 15, 2020.  All of the subsidiary banks’ branches have been permitted to remain open under the orders, although the banks have maintained limited lobby access at all branches since March 13, 2020. 

Each state has experienced rapidly increasing unemployment levels as a result of the curtailment of business activities, rising from an average of 4.0% in Illinois in January 2020 to an average of 4.6% in March 2020, according to the Illinois Department of Employment Security. Unemployment rose from an average of 3.5% in Missouri in January 2020 to 4.5% in March 2020, according to the Missouri Department of Labor and Industrial Relations. In Iowa, unemployment rose from an average of 2.8% in January 2020 to 3.7% in March 2020, according to the Iowa Workforce Development.  These levels are expected to rise further.  To date, many of the public health and economic effects of COVID-19 have been concentrated in large cities, but we anticipate that these effects will occur on a more delayed basis in smaller communities, where the Company’s banking operations are focused.

Policy and Regulatory Developments

Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

·

The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%.

·

On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provides for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP.  On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to limitations and eligibility criteria.  The subsidiary banks are participating as lenders in the PPP.

·

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.  See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs.

·

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.  See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs.

·

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: the MSNLF and the MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve has provided additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to such a facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion.

Effects on the Company’s Business

The Company currently expects that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on its business.  In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks.  These developments, together with economic conditions generally, are also expected to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans.  In addition, the Company’s loan and lease growth could slow exclusive of the PPP loans, while deposit growth could accelerate as businesses and consumers navigate the impact.  As a result, the Company anticipates that its financial condition, capital levels, asset quality and results of operations will be adversely affected, as described in further detail below.

The Company’s Response

The Company has taken numerous steps in response to the COVID-19 pandemic, including the following:

·

The Company implemented a loan relief program offering to extend qualifying customers’ payments for 90 days.  The program has provided 2,158 modifications of loans totaling $497.0 million to commercial and consumer clients as of May 1, 2020.

·

As the Company moved to limited lobby access to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical.  The Company is using virtual meetings to stay connected with its clients and customers are leveraging the Company’s mobile banking capabilities.  The Company’s digital communications tool is a modern enterprise video application, with an easy, reliable and secure cloud platform for video and audio conferencing, chat and web conferencing across mobile, desktop and room systems.   It has enabled the Company to continue to collaborate in real-time across the enterprise and to meet face-to-face with our clients while working remotely to adhere to the Center for Disease Control’s physical distancing guidelines.  Clients are using the Company’s existing mobile banking and mobile payment capabilities including: on-line banking, remote deposit, on-line retail loan applications and person-to-person payment applications that are available across multiple form factors.  These applications have enabled customers to engage with the Company virtually to meet their community banking needs.  The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

features.  The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel.

·

The Company began to execute on its Public Emergency Preparedness Plan (“PEP”) mid-February.  The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions.  This program is an important part of the Company’s Business Continuity Program, which specifically addresses rapid recovery from an occurrence that would disable any entity for a period exceeding 48 hours.  The goal of the plan is to protect employees, customers, facilities, systems, property and operations during any public emergency and maintain normal operations, to the extent possible, consistent with those goals. In the event that normal operations cannot be maintained, the goals will be to maximize the continuity of the essential services to our customers, protect the health and safety of employees and customers, and minimize adverse financial impact to our institutions. Finally, the plan will provide for a return to full operations and services as quickly as possible.  The plan was fully implemented during the first two weeks of March and the following strategies were executed:

 

o

Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic;

 

o

increased cash reserves at all charters were established and the charters began monitoring cash outflows;

 

o

IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home;

 

o

reviewed cross training lists for each department in case of staff shortages;

 

o

split specific departments into shifts so not all employees were working together at the same time; and

 

o

communication sites were activated in case emergency information needed to be communicated to employees.

 

·

The PPP was approved as part of the CARES Act and authorized up to $349 billion in forgivable loans to small businesses to pay their employees and for other operating expenses, during the COVID-19 crisis, and an additional $310 billion of loans were authorized to be made under the PPP in a second phase of funding. The Company has processed 1,627 loans for a total of $355.6 million as of May 1, 2020.  The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding.

 

·

The Company has implemented a number of actions to support a healthy workforce, including:

o

adopting alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for approximately half of our workforce;

o

discontinued business travel, large events and meetings; and

o

utilizing online meeting platforms.

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·

On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if the Company does not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic.

EXECUTIVE OVERVIEW

The Company reported net income of $11.2 million and diluted EPS of $0.70 for the quarter ended March 31, 2020. By comparison, for the quarter ended December 31, 2019, the Company reported net income of $15.9 million and diluted EPS of $0.99.  For the quarter ended March 31, 2019, the Company reported net income of $12.9 million, and diluted EPS of $0.81. 

The first quarter of 2020 was also highlighted by the following results and events:

·

Net income of $11.2 million, or $0.70 per diluted share;

·

Adjusted net income (non-GAAP) of $12.4 million, or $0.77 per diluted share;

·

NIM increased by 4 bps and NIM (TEY)(non-GAAP) increased by 5 bps to 3.40% and 3.56%, respectively;

·

Noninterest income of $15.2 million;

·

Annualized loan and lease growth of 1.6% for the quarter;

·

Annualized deposit growth of 26.5% for the quarter; and

·

Provision expense of $8.4 million for the quarter, increasing ALLL by 16 bps to 1.14%.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2020

 

December 31, 2019

 

March 31, 2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,228

 

$

15,891

 

$

12,918

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.70

 

$

0.99

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

 

16,011,456

 

 

16,033,043

 

 

15,922,940

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

    

March 31, 2020

    

December 31, 2019

    

March 31, 2019

    

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

37,698

 

$

39,919

 

$

36,908

 

Provision expense

 

 

8,367

 

 

979

 

 

2,134

 

Noninterest income

 

 

15,196

 

 

29,805

 

 

11,993

 

Noninterest expense

 

 

31,415

 

 

46,294

 

 

32,435

 

Federal and state income tax expense

 

 

1,884

 

 

6,560

 

 

1,414

 

Net income

 

$

11,228

 

$

15,891

 

$

12,918

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

·

Net interest income in the first quarter of 2020 was down 6% compared to the fourth quarter of 2019.  Comparisons of net interest income were impacted by the sale of RB&T on November 30, 2019 and varying levels of acquisition-related net accretion.  While the sale of RB&T reduced average earning assets by 5.3% on a linked-quarter basis, net interest income was nearly static due to a significant increase in net interest margin in the first quarter of 2020. Net interest income increased 2% compared to the first quarter of 2019.  The increase was primarily due to strong loan growth during the full year 2019.

·

Provision expense in the first quarter of 2020 increased $7.4 million compared to the fourth quarter of 2019.  Provision expense increased $6.2 million compared to the first quarter of 2019. The increase was primarily due to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19. See the Provision for Loan Lease Losses section of this report for additional details.

·

Noninterest income in the first quarter of 2020 decreased 49% compared to the fourth quarter of 2019 primarily due to a gain on sale of assets and liabilities of RB&T totaling $12.3 million in the fourth quarter of 2019. Excluding this, noninterest income increased 27% compared to the first quarter of 2019.  This increase was primarily attributable to higher swap fee income.

·

Noninterest expense decreased 32% in the first quarter of 2020 compared to the fourth quarter of 2019. Salaries and employee benefits were $18.5 million in the first quarter of 2020 as compared to $24.2 million in the fourth quarter of 2019 primarily due to reduced bonus and incentive compensation as a result of the impact of COVID-19.  Post-acquisition, compensation, transition and integration costs were $151 thousand in the first quarter of 2020 as compared to $1.9 million in the fourth quarter of 2019 primarily due to data processing conversion costs at SFC Bank in the fourth quarter of 2019.  Disposition costs were $517 thousand in the first quarter of 2020 as compared to $3.3 million in the fourth quarter of 2019 primarily due to the sale of RB&T occurring in the fourth quarter of 2019.  The Company had $3.0 million of goodwill impairment in the fourth quarter related to the Bates Companies due to the exit of the Rockford market with the sale of RB&T.  Noninterest expense decreased 3% compared to the first quarter of 2019.

·

Federal and state income tax expense in the first quarter of 2020 decreased 71% compared to the fourth quarter of 2019. Federal and state income tax expense increased 33% compared to the first quarter of 2019. See the “Income Taxes” section of this report for additional details on these increases.

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2019. The Company's long-term strategic financial metrics are as follows:

·

Organic loan and lease growth of 9% per year, funded by core deposits;

·

Grow fee-based income by at least 6% per year; and

·

Limit our annual operating expense growth to 5% per year.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The following table shows the evaluation of the Company’s strategic financial metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ending

Strategic Financial Metric

    

Key Metric

    

Target

March 31, 2020*

Loans and leases growth organically

 

Loans and leases growth

 

> 9% annually

 

 

1.6

%  

Fee income growth

 

Fee income growth

 

> 6% annually

 

 

(8.3)

%  

Improve operational efficiencies and hold noninterest expense growth

 

Noninterest expense growth

 

< 5% annually

 

 

(13.7)

%  

 

* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for   comparison.  The calculations provided exclude non-core noninterest income and noninterest expense for the quarter ended March 31, 2020.

 

It should be noted that these initiatives are long-term targets.  Due to the impact of the COVID-19 pandemic, the Company may not be able to achieve these goals for the full year 2020.

 

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the first quarter of 2020 to support its corporate strategy:

·

The Company grew loans and leases in the first quarter of 2020 by 1.6% on an annualized basis. Loan and lease growth was adversely impacted by scheduled payoffs early in the quarter and reduced economic activity across all markets as a result of the voluntary or mandatory closures of public venues, businesses, schools and government offices due to the COVID-19 pandemic.

·

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 $185.6 million and average total interest bearing deposits of $355.4 million during the first three months of 2020. By comparison, the Company acted as the correspondent bank for 196 downstream banks with average total noninterest bearing deposits of $170.4 million and average total interest bearing deposits of $286.1 million during the first three months of 2019. 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 $6.8 million for the three months ended March 31, 2020 as compared to $3.2 million for the three months ended March 31, 2019.  

·

Noninterest expense for the first quarter of 2020 totaled $31.4 million as compared to $32.4 million in the first quarter of 2019.  The decrease was primarily due to a decline in salaries and employee benefits as a result of reduced bonus and incentive compensation due to the impact of COVID-19 and the sale of RB&T.

 

 

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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”, “pre-provision/pre-tax adjusted income”, “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;

·

Pre-provision/Pre-tax adjusted income is 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.

The pre-provision/pre-tax adjusted income is a measurement of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items.  The Company’s management believes this financial measure is important to investors as provision for the quarter ended March 31, 2020 was materially higher due to the impact of COVID-19 as well as its impact on income taxes.  By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.

NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.

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

    

March 31, 

    

December 31,

    

March 31, 

 

RECONCILIATIONS

 

2020

 

2019

 

2019

 

 

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

 

 

 

 

 

  

 

 

  

 

Stockholders' equity (GAAP)

 

$

539,139

 

$

535,351

 

$

488,407

 

Less: Intangible assets

 

 

88,669

 

 

89,718

 

 

94,790

 

TCE (non-GAAP)

 

$

450,470

 

$

445,633

 

$

393,617

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (GAAP)

 

$

5,232,075

 

$

4,909,050

 

$

5,066,662

 

Less: Intangible assets

 

 

88,669

 

 

89,718

 

 

94,790

 

TA (non-GAAP)

 

$

5,143,406

 

$

4,819,332

 

$

4,971,872

 

 

 

 

 

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

 

 

8.76

%  

 

9.25

%

 

7.92

%

 

40

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

March 31, 

    

December 31, 

    

March 31, 

 

 

    

2020

    

2019

    

2019

    

 

 

(dollars in thousands, except per share data)

ADJUSTED NET INCOME

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

11,228

 

$

15,891

 

$

12,918

 

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

 

 

  

 

 

  

 

 

  

 

Income:

 

 

  

 

 

  

 

 

  

 

   Securities gains (losses), net

 

 

 —

 

 

21

 

 

 —

 

   Gain on sale of assets and liabilities of subsidiary

 

$

 —

 

$

8,539

 

$

 —

 

Total nonrecurring income (non-GAAP)

 

$

 —

 

$

8,560

 

$

 —

 

Expense:

 

 

  

 

 

  

 

 

  

 

   Losses on debt extinguishment

 

$

116

 

$

228

 

$

 —

 

   Goodwill impairment

 

 

500

 

 

3,000

 

 

 —

 

   Disposition costs

 

 

408

 

 

2,627

 

 

 —

 

   Tax expense on expected liquidation of RB&T BOLI

 

 

 —

 

 

790

 

 

 —

 

   Post-acquisition compensation, transition and integration costs

 

 

119

 

 

1,465

 

 

106

 

Total nonrecurring expense (non-GAAP)

 

$

1,144

 

$

8,110

 

$

106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

12,372

 

$

15,441

 

$

13,024

 

 

 

 

 

 

 

 

 

 

 

 

PRE-PROVISION/PRE-TAX ADJUSTED INCOME

 

 

 

 

 

 

 

 

 

 

Net income (GAAP)

 

$

11,228

 

$

15,891

 

$

12,918

 

Less: Non-core income not tax-effected

 

 

 —

 

 

12,313

 

 

 —

 

Plus: Non-core expense not tax-effected

 

 

1,315

 

 

9,258

 

 

134

 

          Provision expense

 

 

8,367

 

 

979

 

 

2,134

 

          Federal and state income tax expense

 

 

1,884

 

 

6,560

 

 

1,414

 

Pre-provision/pre-tax adjusted income (non-GAAP)

 

$

22,794

 

$

20,375

 

$

16,600

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED EPS

 

 

  

 

 

  

 

 

  

 

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

 

$

12,372

 

$

15,441

 

$

13,024

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,796,796

 

 

15,772,703

 

 

15,693,345

 

Weighted average common and common equivalent shares outstanding

 

 

16,011,456

 

 

16,033,043

 

 

15,922,940

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EPS (non-GAAP):

 

 

  

 

 

  

 

 

  

 

Basic

 

$

0.78

 

$

0.98

 

$

0.83

 

Diluted

 

$

0.77

 

$

0.96

 

$

0.82

 

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED ROAA

 

 

  

 

 

  

 

 

  

 

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

 

$

12,372

 

$

15,441

 

$

13,024

 

 

 

 

 

 

 

 

 

 

 

 

Average Assets

 

$

4,948,311

 

$

5,147,754

 

$

4,968,502

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted ROAA (annualized) (non-GAAP)

 

 

1.00

%  

 

1.20

%  

 

1.05

%  

 

 

 

 

 

 

 

 

 

 

 

ADJUSTED NIM (TEY)*

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

37,698

 

$

39,919

 

$

36,908

 

Plus: Tax equivalent adjustment

 

 

1,790

 

 

1,783

 

 

1,794

 

Net interest income - tax equivalent (non-GAAP)

 

$

39,488

 

$

41,702

 

$

38,702

 

    Less: Acquisition accounting net accretion

 

 

625

 

 

931

 

 

1,069

 

Adjusted net interest income

 

 

38,863

 

 

40,771

 

 

37,633

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

4,461,018

 

$

4,711,310

 

$

4,612,553

 

 

 

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.40

%  

 

3.36

%  

 

3.25

%  

NIM (TEY) (non-GAAP)

 

 

3.56

%  

 

3.51

%  

 

3.40

%  

Adjusted NIM (TEY) (non-GAAP)

 

 

3.50

%  

 

3.43

%  

 

3.31

%  

 

 

 

 

 

 

 

 

 

  

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

 

 

 

Noninterest expense (GAAP)

 

$

31,415

 

$

46,294

 

$

32,435

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

37,698

 

$

39,919

 

$

36,908

 

Noninterest income (GAAP)

 

 

15,196

 

 

29,805

 

 

11,993

 

Total income

 

$

52,894

 

$

69,724

 

$

48,901

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

59.39

%  

 

66.40

%  

 

66.33

%  

 

*     Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain on sale of subsidiary which has an estimated effective tax rate of 30.5%.

41

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)   

Net interest income, on a tax equivalent basis, increased 2% to $39.5 million for the quarter ended March 31, 2020 compared to the same quarter of the prior year. Excluding the tax equivalent adjustments, net interest income increased 2% for the quarter ended March 31, 2020 compared to the same quarter of the prior year. Net interest income improved due to the following factors:

·

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

·

Decreased cost of funds; and

·

Reduced borrowings.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

GAAP

 

 

For the Quarter Ended

 

For the Quarter Ended

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2020

    

 

2019

    

 

2019

 

 

2020

    

 

2019

    

 

2019

 

Average Yield on Interest-Earning Assets

 

4.58

%  

 

4.61

%  

 

4.74

%  

 

4.39

%  

 

4.46

%  

 

4.58

%

Average Cost of Interest-Bearing Liabilities

 

1.33

%  

 

1.44

%  

 

1.72

%  

 

1.33

%  

 

1.44

%  

 

1.72

%

Net Interest Spread

 

3.24

%  

 

3.17

%  

 

3.02

%  

 

3.07

%  

 

3.02

%  

 

2.86

%

NIM

 

3.56

%  

 

3.51

%  

 

3.40

%  

 

3.40

%  

 

3.36

%  

 

3.25

%

NIM Excluding Acquisition Accounting Net Accretion

 

3.50

%  

 

3.43

%  

 

3.31

%  

 

3.37

%  

 

3.28

%  

 

3.15

%

 

Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans.  In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons.  A comparison of acquisition accounting net accretion included in NIM is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

    

2020

    

 

2019

    

 

2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Acquisition Accounting Net Accretion in NIM

$

625

 

$

931

 

$

1,069

 

42

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NIM on a tax equivalent basis was up 5 basis points on a linked quarter basis.  Excluding acquisition accounting net accretion, NIM was up 7 basis points on a linked quarter basis.  The increase in net interest margin during the quarter was due to an 11 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

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.

 

In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020.  These decreases impact the comparability of net interest income between 2019 and 2020.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

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

 

$

5,324

 

$

18

 

 

1.36

%  

 

$

15,736

 

$

93

 

 

2.40

%

Interest-bearing deposits at financial institutions

 

 

128,612

 

 

361

 

 

1.13

%  

 

 

155,463

 

 

923

 

 

2.41

%

Investment securities (1)

 

 

619,307

 

 

6,080

 

 

3.95

%  

 

 

660,454

 

 

6,096

 

 

3.74

%

Restricted investment securities

 

 

21,365

 

 

258

 

 

4.86

%  

 

 

21,285

 

 

307

 

 

5.85

%

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

 

 

3,686,410

 

 

44,056

 

 

4.81

%  

 

 

3,759,615

 

 

46,477

 

 

5.01

%

Total interest earning assets

 

 

4,461,018

 

 

50,773

 

 

4.58

%  

 

 

4,612,553

 

 

53,896

 

 

4.74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Cash and due from banks

 

 

99,426

 

 

 

 

 

 

 

 

 

78,631

 

 

 

 

 

 

 

Premises and equipment

 

 

73,906

 

 

 

 

 

 

 

 

 

76,523

 

 

 

 

 

 

 

Less allowance

 

 

(36,000)

 

 

 

 

 

 

 

 

 

(40,461)

 

 

 

 

 

 

 

Other

 

 

349,936

 

 

 

 

 

 

 

 

 

241,256

 

 

 

 

 

 

 

Total assets

 

$

4,948,286

 

 

 

 

 

 

 

 

$

4,968,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing liabilities:

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

2,379,635

 

 

5,327

 

 

0.90

%  

 

$

2,288,109

 

 

7,174

 

 

1.27

%

Time deposits

 

 

785,135

 

 

3,879

 

 

1.99

%  

 

 

1,012,459

 

 

5,305

 

 

2.12

%

Short-term borrowings

 

 

19,315

 

 

64

 

 

1.33

%  

 

 

14,377

 

 

71

 

 

2.00

%

FHLB advances

 

 

111,407

 

 

449

 

 

1.62

%  

 

 

147,355

 

 

903

 

 

2.49

%

Other borrowings

 

 

 —

 

 

 —

 

 

 —

%  

 

 

43,701

 

 

605

 

 

5.61

%

Subordinated notes

 

 

68,418

 

 

994

 

 

5.84

%  

 

 

38,637

 

 

564

 

 

5.92

%

Junior subordinated debentures

 

 

37,853

 

 

571

 

 

6.07

%  

 

 

37,686

 

 

572

 

 

6.16

%

Total interest-bearing liabilities

 

 

3,401,763

 

 

11,284

 

 

1.33

%  

 

 

3,582,324

 

 

15,194

 

 

1.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

 

789,913

 

 

 

 

 

 

 

 

 

810,300

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

210,932

 

 

 

 

 

 

 

 

 

93,455

 

 

 

 

 

 

 

Total liabilities

 

 

4,402,608

 

 

 

 

 

 

 

 

 

4,486,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

545,678

 

 

 

 

 

 

 

 

 

482,423

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

4,948,286

 

 

 

 

 

 

 

 

$

4,968,502

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

39,489

 

 

 

 

 

 

 

 

$

38,702

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

3.24

%  

 

 

 

 

 

 

 

 

3.02

%

Net interest margin

 

 

 

 

 

 

 

 

3.40

%  

 

 

 

 

 

 

 

 

3.25

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

 

3.56

%  

 

 

 

 

 

 

 

 

3.40

%

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

 

 

 

 

 

 

 

 

3.50

%  

 

 

 

 

 

 

 

 

3.31

%

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

 

 

131.14

%  

 

 

 

 

 

 

 

 

128.76

%  

 

 

 

 

 

 

 

(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.

43

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inc./(Dec.)

 

Components

 

 

from

 

of Change (1)

 

    

Prior Period (1)

    

Rate

    

Volume

 

 

2020 vs. 2019

 

 

(dollars in thousands)

INTEREST INCOME

 

 

  

 

 

  

 

 

  

Federal funds sold

 

$

(75)

 

$

(30)

 

$

(45)

Interest-bearing deposits at financial institutions

 

 

(562)

 

 

(424)

 

 

(138)

Investment securities (2)

 

 

(16)

 

 

1,435

 

 

(1,451)

Restricted investment securities

 

 

(49)

 

 

(58)

 

 

 9

Gross loans/leases receivable (2) (3)

 

 

(2,421)

 

 

(1,645)

 

 

(776)

Total change in interest income

 

 

(3,123)

 

 

(722)

 

 

(2,401)

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

Interest-bearing deposits

 

 

(1,847)

 

 

(3,672)

 

 

1,825

Time deposits

 

 

(1,426)

 

 

(320)

 

 

(1,106)

Short-term borrowings

 

 

(7)

 

 

(101)

 

 

94

Federal Home Loan Bank advances

 

 

(454)

 

 

(267)

 

 

(187)

Other borrowings

 

 

(605)

 

 

(303)

 

 

(302)

Subordinated notes

 

 

430

 

 

 —

 

 

430

Junior subordinated debentures

 

 

(1)

 

 

(16)

 

 

15

Total change in interest expense

 

 

(3,910)

 

 

(4,679)

 

 

769

 

 

 

 

 

 

 

 

 

 

Total change in net interest income

 

$

787

 

$

3,957

 

$

(3,170)

 

(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.  In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10‑K for the year ended December 31, 2019.

Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions have led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020.  When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

recorded to earnings.  Such a charge would have no impact on tangible capital or regulatory capital.  Based upon the results of the interim goodwill assessment, the Company concluded that an impairment did not exist as of the time of the assessment.

 

During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies.  This was the result of the announcement of a sale of the Bates Companies as discussed in Note 9 of the Consolidated Financial Statements.

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, 2019.

 

The Company believes the COVID-19 pandemic may have an adverse effect on the credit quality of its loan portfolio during the remainder of 2020. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the allowance for loan and lease losses.

 

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income decreased 6%, comparing the first quarter of 2020 to the same period of 2019. This increase was primarily the result of a reduction in average yields on loans and leases and a decrease in average earning assets due to the sale of RB&T. 

Overall, the Company's average earning assets decreased 3%, comparing the first quarter of 2020 to the first quarter of 2019. During the same time period, average gross loans and leases decreased 2%, while average investment securities decreased 6%. The decreases in average earning assets and average gross loans and leases were the result of the sale of RB&T.

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

INTEREST EXPENSE

Interest expense for the first quarter of 2020 decreased 26% from the first quarter of 2019.  The cost of funds on the Company’s average interest-bearing liabilities has decreased with the current rate environment.  During the last month of the first quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate by 150 bps to a range of 0%-0.25%. 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. The Company also increased short-term wholesale funding at the end of the quarter to quickly generate on-balance liquidity in an abundance of caution as a response to the COVID-19 pandemic.

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PROVISION FOR LOAN/LEASE LOSSES

The Company’s provision for loan and lease losses totaled $8.4 million for the first quarter of 2020, up from $2.1 million in the first quarter of 2019. The increase in the provision for loan and lease losses was primarily due to increased qualitative allocations in response to deteriorating economic conditions related to the effects of COVID-19.

 

With the uncertainty regarding the severity and duration of the economic impacts caused by the effects of COVID-19, the Company is not providing specific forward guidance on future provisions.  The Company does anticipate the provision to be elevated in future periods due to the broad reach of COVID-19 across many individuals and industries impacted.  The dramatic slowdown in economic activity will likely negatively impact the credit quality of the Company’s loan portfolio with increased levels of loan defaults.  The CARES Act provides significant resources for individuals and industries that could lessen the impact of COVID-19, in addition to the Company’s own loan relief programs.

The Company has elected to defer its implementation of CECL as allowed by the CARES Act. See Note 1 of the Consolidated Financial Statements for further discussion.

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 and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.

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 $2.1 million for the first three months of 2020, increased the Company's allowance to $42.2 million at March 31, 2020. As of March 31, 2020, the Company's allowance to total loans/leases was 1.14%, which was up from 0.98% at December 31, 2019 and 1.08% at March 31, 2019. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($6.3 million and $10.4 million at March 31, 2020 and March 31, 2019, respectively).

The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19:

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

 

2020

 

 

    

 

    

% of Total Gross

 

 

 

Amount

    

Loans and Leases

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Construction

 

$

282,117

 

7.62

%

Retail and Lessors of Property Secured by Retail Property, excluding Automotive

 

 

201,998

 

5.45

 

Manufacturing

 

 

138,782

 

3.75

 

Wholesale

 

 

105,880

 

2.86

 

Hotel

 

 

66,129

 

1.79

 

Nursing & Senior Care

 

 

65,644

 

1.77

 

Restaurants and Lessors of Property Secured by Restaurant Property

 

 

52,172

 

1.41

 

Arts & Entertainment

 

 

23,589

 

0.64

 

Educational Services

 

 

19,956

 

0.54

 

 

 

$

956,267

 

25.81

%

 

 

 

 

 

 

 

 

 

 

 

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The following table represents a breakdown of retail loans, excluding automotive related loans:

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

 

2020

 

 

    

 

 

    

% of Total Gross

 

 

 

Amount

    

Loans and Leases

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Non-Owner Occupied Retail CRE

 

$

172,376

 

4.65

%

Owner Occupied Retail CRE

 

 

10,115

 

0.27

 

All Other Retail

 

 

19,507

 

0.53

 

 

 

$

201,998

 

5.45

%

 

Additional 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 months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

 

 

 

 

 

 

    

2020

    

2019

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust department fees

 

$

2,312

 

$

2,493

 

$

(181)

 

(7.3)

%

 

Investment advisory and management fees

 

 

1,727

 

 

1,736

 

 

(9)

 

(0.5)

 

 

Deposit service fees

 

 

1,477

 

 

1,554

 

 

(77)

 

(5.0)

 

 

Gains on sales of residential real estate loans, net

 

 

652

 

 

369

 

 

283

 

76.7

 

 

Gains on sales of government guaranteed portions of loans, net

 

 

 —

 

 

31

 

 

(31)

 

(100.0)

 

 

Swap fee income

 

 

6,804

 

 

3,198

 

 

3,606

 

112.8

 

 

Earnings on bank-owned life insurance

 

 

329

 

 

540

 

 

(211)

 

(39.1)

 

 

Debit card fees

 

 

758

 

 

792

 

 

(34)

 

(4.3)

 

 

Correspondent banking fees

 

 

215

 

 

216

 

 

(1)

 

(0.5)

 

 

Other

 

 

922

 

 

1,064

 

 

(142)

 

(13.3)

 

 

Total noninterest income

 

$

15,196

 

$

11,993

 

$

3,203

 

26.7

%

 

 

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. However, assets under management decreased $474.7 million in the first three months of 2020 with the deteriorating economic conditions. With the decrease in assets under management, trust department fees decreased 7%, comparing the first quarter of 2020 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. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations.

Investment advisory and management fees decreased 1%, comparing the first quarter of 2020 to the same period of the prior year.  Brokerage assets decreased $279.4 million in the first three months of 2020 with the deteriorating economic conditions. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of trust and brokerage assets under management were negatively impacted by the decline in the market as a result of COVID-19. 

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Deposit service fees decreased 5% comparing the first quarter of 2020 to the same period of the prior year. This decrease was primarily due to the sale of RB&T, as well as lower transactional volume due to current economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, increased 77% when comparing the first quarter of 2020 to the same period of the prior year. The increase was primarily due to the refinancing of residential real estate loans with lower interest rates in the first quarter of 2020.

The Company did not have any gains on the sale of government-guaranteed portions of loans for the first quarter of 2020 as compared to $31 thousand in the first quarter of 2019. 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 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 $6.8 million for the first quarter of 2020, compared to $3.2 million for the first quarter of 2019.  The increase in swap fee income for the first three months of 2020, 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.

Earnings on BOLI decreased 39% comparing the first quarter of 2020 to the first quarter of 2019.  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 decreased 4% comparing the first quarter of 2020 to the first quarter of the prior year. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a retail deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 1% comparing the first quarter of 2020 to the first quarter of the prior year. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 195 banks in Iowa, Illinois, Missouri and Wisconsin.

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Other noninterest income decreased 13% comparing the first quarter of 2020 to the first quarter of the prior year.  This decrease was primarily due to the sale of RB&T.

NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

 

 

 

 

 

 

    

2020

    

2019

    

$ Change

    

% Change

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

18,519

 

$

20,879

 

$

(2,360)

 

(11.3)

%

 

Occupancy and equipment expense

 

 

4,032

 

 

3,694

 

 

338

 

9.1

 

 

Professional and data processing fees

 

 

3,369

 

 

2,750

 

 

619

 

22.5

 

 

Post-acquisition compensation, transition and integration costs

 

 

151

 

 

134

 

 

17

 

12.7

 

 

Disposition costs

 

 

517

 

 

 —

 

 

517

 

100.0

 

 

FDIC insurance, other insurance and regulatory fees

 

 

683

 

 

964

 

 

(281)

 

(29.1)

 

 

Loan/lease expense

 

 

228

 

 

214

 

 

14

 

6.5

 

 

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

 

 

13

 

 

298

 

 

(285)

 

(95.6)

 

 

Advertising and marketing

 

 

682

 

 

785

 

 

(103)

 

(13.1)

 

 

Bank service charges

 

 

504

 

 

483

 

 

21

 

4.3

 

 

Loss on debt extinguishment

 

 

147

 

 

 —

 

 

147

 

100.0

 

 

Correspondent banking expense

 

 

216

 

 

204

 

 

12

 

5.9

 

 

Intangibles amortization

 

 

549

 

 

532

 

 

17

 

3.2

 

 

Goodwill Impairment

 

 

500

 

 

 —

 

 

500

 

100.0

 

 

Other

 

 

1,305

 

 

1,498

 

 

(193)

 

(12.9)

 

 

Total noninterest expense

 

$

31,415

 

$

32,435

 

$

(1,020)

 

(3.1)

%

 

 

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency.

Salaries and employee benefits, which is the largest component of noninterest expense, decreased from the first quarter of 2020 to the first quarter of 2019 by 11%.  This decrease was primarily related to the sale of RB&T and reduced bonus and incentive compensation due to the impact of COVID-19. 

Occupancy and equipment expense increased 9% comparing the first quarter of 2020 to the same period of the prior year. The increased expense was due to higher information technology service contract costs and increases in repairs and maintenance costs to existing buildings.

Professional and data processing fees increased 23% comparing the first quarter of 2020 to the same period in 2019. This increased expense was mostly due to higher data processing costs. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs.

Post-acquisition costs totaled $151 thousand for the first quarter of 2020 as compared to $134 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.

Disposition costs totaled $517 thousand for the first quarter of 2020. The costs were primarily legal, accounting, personnel costs and IT deconversion costs related to the sale of RB&T in the fourth quarter of 2019.  There were no disposition costs for the first quarter of 2019.

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FDIC insurance, other insurance and regulatory fee expense decreased 29%, comparing the first quarter of 2020 to the first quarter of 2019. The decrease in expense was due to the award of assessment credits by the FDIC in September 2019 that carried forward into the first quarter of 2020.

Loan/lease expense increased 7% when comparing the first quarter of 2020 to the same quarter of 2019. 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 $13 thousand for the first quarter of 2020, compared to $298 thousand for the first quarter of 2019. 

Advertising and marketing expense decreased 13% comparing the first quarter of 2020 to the first quarter of 2019. The decrease in expense was primarily due to the sale of RB&T.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 4% when comparing the first quarter of 2020 to the same quarter of 2019.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

Losses on debt extinguishment were $147 thousand for the three months ended March 31, 2020.  These losses relate to the prepayment of certain high-cost brokered certificates of deposit.  There were no losses on debt extinguishment for the three ended March 31, 2019.

Correspondent banking expense increased 6% when comparing the first quarter of 2020 to the first quarter of 2019.  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 first quarter of 2020 to the same quarter of 2019.

Goodwill impairment expense totaled $500 thousand in the first quarter of 2020 related to the sale of the Bates Companies.  There was no goodwill impairment expense in the first quarter of 2019.

Other noninterest expense was down 13% when comparing the first quarter of 2020 to the first quarter of 2019. This was primarily due to the sale of RB&T.  Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.

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INCOME TAXES

In the first quarter of 2020, the Company incurred income tax expense of $1.9 million.  Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 

 

 

 

2020

 

2019

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

    

Amount

    

Income

    

Amount

    

Income

    

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Computed "expected" tax expense

 

$

2,754

 

21.0

%  

$

3,010

 

21.0

%  

Tax exempt income, net

 

 

(1,225)

 

(9.3)

 

 

(1,107)

 

(7.7)

 

Bank-owned life insurance

 

 

(55)

 

(0.4)

 

 

(113)

 

(0.8)

 

State income taxes, net of federal benefit, current year

 

 

677

 

5.2

 

 

649

 

4.5

 

Tax credits

 

 

(116)

 

(0.9)

 

 

(39)

 

(0.3)

 

True-up adjustment to year-end provision

 

 

 —

 

 —

 

 

(715)

 

(5.0)

 

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

 

 

(264)

 

(2.0)

 

 

(100)

 

(0.7)

 

Other

 

 

113

 

0.8

 

 

(171)

 

(1.2)

 

Federal and state income tax expense

 

$

1,884

 

14.4

%  

$

1,414

 

9.9

%  

 

The effective tax rate for the quarter ended March 31, 2020 was 14.4%, which was an increase from the effective tax rate of 9.9% for the quarter ended March 31, 2019.   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 15.0% for the three months ended March 31, 2019.

 

 

 

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet.  On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T.  As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of March 31, 2020 and December 31, 2019, the removal of which impacts balance sheet comparisons to March 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Cash, federal funds sold, and interest-bearing deposits

$

376,535

 

 7

%  

 

$

233,945

 

 5

%  

 

$

292,559

 

 6

%

 

Securities

 

684,571

 

13

%  

 

 

611,341

 

12

%  

 

 

655,749

 

13

%

 

Net loans/leases

 

3,662,435

 

70

%  

 

 

3,654,204

 

75

%  

 

 

3,758,268

 

74

%

 

Derivatives

 

195,973

 

 4

%  

 

 

87,827

 

 2

%  

 

 

36,375

 

 1

%  

 

Other assets

 

301,803

 

 6

%

 

 

309,767

 

 6

%  

 

 

323,711

 

 6

%

 

Assets held for sale

 

10,758

 

 0

%  

 

 

11,966

 

 0

%  

 

 

 —

 

 -

%

 

Total assets

$

5,232,075

 

100

%  

 

$

4,909,050

 

100

%  

 

$

5,066,662

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

$

4,170,478

 

80

%  

 

$

3,911,051

 

80

%  

 

$

4,194,220

 

82

%

 

Total borrowings

 

244,399

 

 5

%  

 

 

278,955

 

 5

%  

 

 

282,994

 

 6

%

 

Derivatives

 

203,744

 

 4

%  

 

 

88,437

 

 2

%  

 

 

38,229

 

 1

%  

 

Other liabilities

 

71,185

 

 1

%  

 

 

90,253

 

 2

%  

 

 

62,812

 

 1

%

 

Liabilities held for sale

 

3,130

 

 -

%  

 

 

5,003

 

 -

%  

 

 

 —

 

 -

%

 

Total stockholders' equity

 

539,139

 

10

%  

 

 

535,351

 

11

%  

 

 

488,407

 

10

%

 

Total liabilities and stockholders' equity

$

5,232,075

 

100

%  

 

$

4,909,050

 

100

%  

 

$

5,066,662

 

100

%

 

During the first quarter of 2020, the Company's total assets increased $323.0 million, or 7% from December 31, 2019, to a total of $5.2 billion. The Company’s cash, federal funds sold, and interest-bearing deposits increased $142.6 million and total deposits increased $259.4 million in the first quarter of 2020 primarily due to an increase in noninterest-bearing demand deposits and short-term brokered CDs, the latter of which were accessed to build liquidity in an abundance of caution in light of current economic factors.  Borrowings decreased $34.6 million in the first quarter of 2020 which consisted primarily of allowing short-term FHLB advances to mature given the increase in deposits.

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.

 

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Following is a breakdown of the Company's securities portfolio by type, the percentage of unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

March 31, 2019

 

 

    

Amount

    

%  

    

 

Amount

    

%

    

 

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 

$

19,457

 

 3

%  

 

$

20,078

 

 3

%  

 

$

35,843

 

 5

%

Municipal securities

 

 

493,664

 

72

%  

 

 

447,853

 

73

%  

 

 

450,376

 

69

%

Residential mortgage-backed and related securities

 

 

122,853

 

18

%  

 

 

120,587

 

20

%  

 

 

161,692

 

25

%

Asset-backed securities

 

 

28,499

 

 4

%

 

 

16,887

 

 3

%

 

 

 —

 

 —

%

Other securities

 

 

20,098

 

 3

%  

 

 

5,936

 

 1

%  

 

 

7,838

 

 1

%

 

 

$

684,571

 

100

%  

 

$

611,341

 

100

%  

 

$

655,749

 

100

%

 

 

 

  

 

  

 

 

 

  

 

  

 

 

 

  

 

  

 

Securities as a % of Total Assets

 

 

13.11

%  

  

 

 

 

12.45

%  

  

 

 

 

12.94

%  

  

 

Net Unrealized Gains as a % of Amortized Cost

 

 

3.73

%  

  

 

 

 

4.88

%  

  

 

 

 

1.46

%  

  

 

Duration (in years)

 

 

6.7

 

  

 

 

 

6.7

 

  

 

 

 

6.6

 

  

 

Yield on investment securities (tax equivalent)

 

 

3.95

%  

 

 

 

 

3.80

%  

 

 

 

 

3.74

%  

 

 

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

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. The asset-backed securities, which are comprised of collateral loan obligations, are backed by pools of senior secured commercial loans and were AAA rated as of March 31, 2020.

See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.

LOANS/LEASES

Total loans/leases grew 1.6% on an annualized basis during the first quarter of 2020. The Company experienced several large payoffs during the quarter, which impacted loan growth, as well as slower growth in March due to the pandemic.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

March 31, 2019

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 

$

1,484,979

 

41

%  

 

$

1,507,825

 

41

%  

 

$

1,479,247

 

39

%

 

CRE loans

 

 

1,783,086

 

48

%  

 

 

1,736,396

 

47

%  

 

 

1,790,845

 

47

%

 

Direct financing leases

 

 

83,324

 

2

%  

 

 

87,869

 

 2

%  

 

 

108,543

 

 3

%

 

Residential real estate loans

 

 

237,742

 

6

%  

 

 

239,904

 

 7

%  

 

 

288,502

 

 8

%

 

Installment and other consumer loans

 

 

106,728

 

3

%  

 

 

109,352

 

 3

%  

 

 

123,087

 

 3

%

 

Total loans/leases

 

$

3,695,859

 

100

%  

 

$

3,681,346

 

100

%  

 

$

3,790,224

 

100

%

 

Plus deferred loan/lease origination costs, net of fees

 

 

8,809

 

 

 

 

 

8,859

 

  

 

 

 

9,208

 

  

 

 

Less allowance

 

 

(42,233)

 

 

 

 

 

(36,001)

 

  

 

 

 

(41,164)

 

  

 

 

Net loans/leases

 

$

3,662,435

 

 

 

 

$

3,654,204

 

  

 

 

$

3,758,268

 

  

 

 

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of March 31, 2020 and December 31, 2019, approximately 26% of the CRE loan portfolio was owner-occupied.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

As of December 31, 

 

 

As of March 31, 

 

 

 

 

2020

 

 

2019

 

 

2019

 

 

 

    

Amount

    

%

    

    

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

 

$

546,384

 

31

%  

 

$

553,142

 

32

%  

 

$

613,024

 

33

%

 

Lessors of Residential Buildings

 

 

500,871

 

28

%  

 

 

465,172

 

27

%  

 

 

355,850

 

19

%

 

New Housing For-Sale Builders

 

 

56,916

 

3

%  

 

 

55,525

 

3

%  

 

 

47,276

 

3

%

 

Hotels

 

 

56,573

 

3

%  

 

 

63,720

 

4

%  

 

 

81,107

 

4

%

 

Land Subdivision

 

 

53,899

 

3

%  

 

 

46,318

 

3

%  

 

 

46,042

 

2

%

 

Nonresidential Property Managers

 

 

48,069

 

3

%  

 

 

48,059

 

3

%  

 

 

65,736

 

4

%

 

Lessors of Other Real Estate Property

 

 

42,260

 

2

%  

 

 

39,297

 

2

%  

 

 

34,212

 

2

%

 

Other Activities Related to Real Estate

 

 

39,352

 

2

%  

 

 

42,060

 

2

%

 

 

29,307

 

2

%

 

Other *

 

 

438,762

 

25

%  

 

 

423,103

 

23

%  

 

 

581,810

 

30

%

 

Total CRE Loans

 

$

1,783,086

 

100

%  

 

$

1,736,396

 

100

%  

 

$

1,854,364

 

100

%

 

 

*     “Other” consists of all other industries. None of these had concentrations greater than $31.9 million, or approximately 1.8% 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, 20-year and 30‑year fixed rate residential real estate loans that meet certain credit guidelines.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

As of December 31, 

 

 

As of March 31, 

 

 

2020

 

 

2019

 

 

2019

 

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trucks, Vans and Vocational Vehicles

$

57,225

 

25

%  

 

$

55,749

 

24

%  

 

$

43,489

 

20

%

Food Processing Equipment

 

16,703

 

 7

%  

 

 

16,742

 

 7

%  

 

 

15,622

 

 7

%

Manufacturing - General

 

16,277

 

 7

%  

 

 

15,847

 

 7

%  

 

 

16,952

 

 8

%

Construction - General

 

15,038

 

 7

%  

 

 

16,236

 

 7

%  

 

 

16,295

 

 7

%

Computer Hardware

 

12,142

 

 5

%  

 

 

11,509

 

 5

%  

 

 

8,350

 

 4

%

Marine - Travelifts

 

10,908

 

 5

%  

 

 

11,556

 

 5

%  

 

 

11,819

 

 5

%

Trailers

 

9,469

 

 4

%  

 

 

9,907

 

 4

%  

 

 

9,603

 

 4

%

Other *

 

90,821

 

40

%  

 

 

92,301

 

41

%  

 

 

99,181

 

45

%

Total m2 loans and leases

$

228,583

 

100

%  

 

$

229,847

 

100

%  

 

$

221,311

 

100

%

 

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

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES

Changes in the allowance for the three months ended March  31, 2020 and 2019 are presented as follows:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2020

    

March 31, 2019

    

 

(dollars in thousands)

 

 

 

 

 

 

 

Balance, beginning

$

36,001

 

$

39,847

 

Provisions charged to expense

 

8,367

 

 

2,134

 

Loans/leases charged off

 

(2,335)

 

 

(1,060)

 

Recoveries on loans/leases previously charged off

 

200

 

 

243

 

Balance, ending

$

42,233

 

$

41,164

 

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, 2019, 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.

The Company's levels of criticized and classified loans are reported in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

Internally Assigned Risk Rating *

    

March 31, 2020

    

December 31, 2019

    

March 31, 2019

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Rating 6)

 

$

34,738

 

$

19,952

 

$

24,769

 

 

Substandard (Rating 7)

 

 

36,612

 

 

33,649

 

 

43,696

 

 

Doubtful (Rating 8)

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

$

71,350

 

$

53,601

 

$

68,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans **

 

$

71,350

 

$

53,601

 

$

68,465

 

 

Classified Loans ***

 

$

36,612

 

$

33,649

 

$

43,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

 

1.93

%

 

1.47

%

 

1.80

%

 

Classified Loans as a % of Total Loans/Leases

 

 

0.99

%

 

0.92

%

 

1.16

%

 

 

*      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.

Criticized loans increased 33% and classified loans increased 9% from December 31, 2019 to March 31, 2020.  The increase was due to a few isolated relationships.    The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

March 31, 2020

    

December 31, 2019

    

 

March 31, 2019

 

 

Allowance / Gross Loans/Leases

 

1.14

%  

0.98

%  

 

1.08

%

 

Allowance / NPLs

 

310.72

%  

403.87

%  

 

238.48

%

 

Although management believes that the allowance at March 31, 2020 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

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for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the allowance for loan losses calculation.  The Company anticipates that the allowance for loan losses as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic.  Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

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

NONPERFORMING ASSETS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 

 

As of December 31, 

 

As of March 31, 

 

 

 

 

 

 

    

2020

    

2019

    

2019

    

 

 

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

11,628

 

$

7,902

 

$

13,406

 

 

 

 

 

Accruing loans/leases past due 90 days or more

 

 

1,419

 

 

33

 

 

61

 

 

 

 

 

TDRs - accruing

 

 

545

 

 

979

 

 

3,794

 

 

 

 

 

Total NPLs

 

 

13,592

 

 

8,914

 

 

17,261

 

 

 

 

 

OREO

 

 

3,298

 

 

4,129

 

 

9,110

 

 

 

 

 

Other repossessed assets

 

 

45

 

 

41

 

 

 —

 

 

 

 

 

Total NPAs

 

$

16,935

 

$

13,084

 

$

26,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

    

 

0.37

%  

 

0.24

%  

 

0.45

%  

 

 

 

 

NPAs to total loans/leases plus repossessed property

 

 

0.46

%  

 

0.35

%  

 

0.69

%  

 

 

 

 

NPAs to total assets

 

 

0.32

%  

 

0.27

%  

 

0.52

%  

 

 

 

 

 

(1)

Includes government guaranteed portion of loans, as applicable.

(2)

Includes TDRs of $298 thousand at March 31, 2020, $747 thousand million at December 31, 2019, and $1.5 million at March 31, 2019.

 

NPAs at March 31, 2020 were $16.9 million, up $3.8 million from December 31, 2019 and down $9.5 million from March 31, 2019.  The increase in NPAs in the first quarter of 2020 was primarily due to one borrower relationship. The improvement from prior year was primarily attributed to the sale of RB&T.

The ratio of NPAs to total assets was 0.32% at March 31, 2020, up from 0.27% at December 31, 2019 and down from 0.52% at March 31, 2019. 

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.

Due to the economic impacts of COVID-19, the Company established a Loan Relief Program (“LRP”) for its clients.  The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term.  Those deferred payments will be added to the end of the original term of the loan.  The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest.  The relief from TDR

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guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020.  The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions.

DEPOSITS

Deposits increased $259.4 million during the first quarter of 2020, primarily due an increase in correspondent deposits, public deposits and short-term brokered CDs. The table below presents the composition of the Company's deposit portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

March 31, 2020

    

 

December 31, 2019

 

 

March 31, 2019

 

 

 

    

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

$

829,782

 

20

%  

 

$

777,224

 

20

%  

 

$

821,599

 

20

%

 

Interest bearing demand deposits

 

 

2,440,907

 

58

%  

 

 

2,407,502

 

61

%  

 

 

2,334,474

 

55

%

 

Time deposits

 

 

617,979

 

15

%  

 

 

571,343

 

15

%  

 

 

719,286

 

17

%

 

Brokered deposits

 

 

281,810

 

 7

%  

 

 

154,982

 

 4

%  

 

 

318,861

 

 8

%

 

 

 

$

4,170,478

 

100

%  

 

$

3,911,051

 

100

%  

 

$

4,194,220

 

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 industry concentrations and large accounts are monitored by the internal asset liability management committees.

BORROWINGS

The subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company's short-term borrowings.

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

    

March 31, 2020

    

December 31, 2019

    

March 31, 2019

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Overnight repurchase agreements

 

$

10,690

 

$

2,193

 

$

3,056

 

Federal funds purchased

 

 

2,377

 

 

11,230

 

 

12,830

 

Overnight federal reserve borrowings

 

 

30,000

 

 

 —

 

 

 —

 

 

 

$

43,067

 

$

13,423

 

$

15,886

 

The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks.  The Company borrowed $30.0 million at the end of March to build on balance sheet liquidity in an abundance of caution as a response to the COVID-19 pandemic.

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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The table below presents the Company's term and overnight FHLB advances.

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

    

March 31, 2020

 

    

December 31, 2019

    

March 31, 2019

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Term FHLB advances

 

$

55,000

 

 

$

50,000

 

$

66,380

Overnight FHLB advances

 

 

40,000

 

 

 

109,300

 

 

59,800

 

 

$

95,000

 

 

$

159,300

 

$

126,180

FHLB advances decreased $64.3 million in the current quarter, as compared to the prior quarter due to the increased levels of deposits.

The Company had subordinated notes totaling $68.5 million as of March 31, 2020.  

It is management's intention to reduce its reliance on wholesale funding, including FHLB advances and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.

The table below presents the maturity schedule including weighted average interest cost for the Company's combined wholesale funding portfolio (defined as FHLB advances and brokered deposits).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

December 31, 2019

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

Maturity:

    

Amount Due

    

Interest Rate

    

 

 

Amount Due

    

Interest Rate

 

 

 

(dollars in thousands)

Year ending December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

$

295,455

 

0.94

%  

 

 

$

200,110

 

0.85

%

2021

 

 

32,955

 

1.47

 

 

 

 

43,887

 

1.82

 

2022

 

 

28,400

 

1.65

 

 

 

 

50,285

 

1.79

 

2023

 

 

20,000

 

1.84

 

 

 

 

20,000

 

1.84

 

Total Wholesale Funding

 

$

376,810

 

1.09

%  

 

 

$

314,282

 

1.20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the first three months of 2020, wholesale funding increased $62.5 million as the Company accessed short-term brokered CDs to build on balance sheet liquidity in an abundance of caution as a response to the COVID-19 pandemic. 

STOCKHOLDERS' EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

    

March 31, 2020

    

December 31, 2019

    

 

March 31, 2019

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

$

15,774

 

$

15,828

 

 

$

15,755

 

 

Additional paid in capital

 

 

273,867

 

 

274,785

 

 

 

271,673

 

 

Retained earnings

 

 

254,287

 

 

245,836

 

 

 

204,179

 

 

AOCI (loss)

 

 

(4,789)

 

 

(1,098)

 

 

 

(3,200)

 

 

Total stockholders' equity

 

$

539,139

 

$

535,351

 

 

$

488,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCE / TA ratio (non-GAAP)

 

 

8.76

%  

 

9.25

%  

 

 

7.92

%

 

 

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

*     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.

Capital was impacted by several atypical factors this quarter. First, the Company repurchased approximately 101,000 shares of its common stock during the quarter at a total cost of $3.8 million.  Second, AOCI declined $3.7 million during the quarter for mark-to-market adjustments on interest rate caps and an interest rate swap on trust preferred securities partially offset by an increase in net unrealized gains on AFS securities portfolio.  Furthermore as it relates to the Company’s TCE/TA, the Company experienced net dilution as TCE/TA fell from 9.25% to 8.76% which was primarily driven by an inflated balance sheet at quarter-end.  Specifically, the balance sheet was inflated by mark-to-market gross ups on the commercial loan swap portfolio and the previously mentioned excess liquidity.  As the impact of COVID-19 on the economy escalated in mid-March, the Company suspended the stock repurchase program and has focused on preserving capital and growing tangible book value.

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 $133.4 million during the first quarter of 2020. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The Company believes there could be potential stresses on liquidity management as a direct result of the COVID-19 pandemic and the Company's participation in the PPP. As customers manage their own liquidity stress, the Company could experience an increase in the utilization of existing lines of credit. The Federal Reserve Bank has provided a lending facility that will allow the Company, if desired, to obtain funding specifically for loans that the Company makes under the PPP, which will allow the Company to retain existing sources of liquidity for traditional operations. PPP loans will be pledged as collateral on the Company's borrowings under the Federal Reserve Bank's lending facility.

 

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

At March 31, 2020, the subsidiary banks had 26 lines of credit totaling $370.2 million, of which $36.7 million was secured and $333.5 million was unsecured. At March 31, 2020, the $340.2 of the $370.2 million was available.

At December 31, 2019, the subsidiary banks had 27 lines of credit totaling $380.6 million, of which $45.3 million was secured and $335.3 million was unsecured. At December 31, 2019, the full $380.6 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 March 31, 2020, the full $20.0 million was available.

As of March 31, 2020, the Company had $541.0 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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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Investing activities used cash of $133.5 million during the first three months of 2020, compared to $112.2 million for the same period of 2019. The net decrease in federal funds sold was $5.1 million for the first three months of 2020, compared to a net decrease of $24.5 million for the same period of 2019. The net decrease in interest-bearing deposits at financial institutions was $54.1 million for the first three months of 2020, compared to a net increase of $81.0 million for the same period of 2019. Proceeds from calls, maturities, and paydowns of securities were $13.1 million for the first three months of 2020, compared to $14.9 million for the same period of 2019. Purchases of securities used cash of $83.4 million for the first three months of 2020, compared to $4.1 million for the same period of 2019. There were no proceeds from sales of securities for the first three months of 2020 or 2019. The net increase in loans/leases used cash of $15.6 million for the first three months of 2020 compared to $65.8 million for the same period of 2019.

Financing activities provided cash of $220.4 million for the first three months of 2020, compared to $94.6 million for same period of 2019. Net increases in deposits totaled $259.3 million for the first three months of 2020, compared to $217.3 million for the same period of 2019. During the first three months of 2020, the Company's short-term borrowings increased $29.6 million, compared to $12.9 million for the same period of 2019. In the first three months of 2020, the Company decreased short-term and overnight FHLB advances by $109.3 million.  There were no maturities and principal payments on FHLB term advances in the first three months of 2020. In the first three months of 2019, the Company decreased short-term and overnight FHLB advances by $130.4 million and decreased other borrowings by $12.9 million.  Maturities and principal payments on borrowings totaled $47.3 million in the first three months of 2019. During the first three months of 2019, proceeds from subordinated notes were $63.4 million.

Total cash provided by operating activities was $6.6 million for the first three months of 2020, compared to $8.6 million for the same period of 2019.

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

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 8 of the Consolidated Financial Statements for additional information regarding regulatory capital.

 

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.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 the 2020 presidential election and the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation).

·

The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), or other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse events.

·

Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB (including the new CECL impairment standards, that will change how the Company estimates credit losses when implemented).

·

Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business.

·

Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out.

·

Increased competition in the financial services sector and the inability to attract new customers.

·

Changes in  technology and the ability to develop and maintain secure and reliable electronic systems.

·

Unexpected results of acquisitions, which may include failure to realize the anticipated benefits of acquisitions and the possibility that transaction costs may be greater than anticipated.

·

The loss of key executives or employees.

·

Changes in consumer spending.

·

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

·

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10‑K for the year ended December 31, 2019.

 

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.

Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company's asset/liability position, the board of directors and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.

Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift  (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.

The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

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Part I

Item 3

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

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME EXPOSURE in YEAR 1

 

 

    

 

    

As of March 31, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2020

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.7

%  

0.5

%  

0.7

%

200 basis point upward shift

 

(10.0)

%  

(2.3)

%  

1.2

%  

(2.7)

%

300 basis point upward shock

 

(25.0)

%  

(0.3)

%  

4.9

%  

(9.0)

%

The simulation is well within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, 2020 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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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) promulgated under the Exchange Act of 1934) as of March 31, 2020. 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

In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the following risk factors apply to the Company:

The outbreak of COVID-19 has adversely impacted, or an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak is expected to lead to an economic recession and other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. The Company is starting to see the impact from COVID-19 on its business, and its believes that it may be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created the threat of a recession, reduced economic activity and caused a significant correction in the global stock markets. The Company expects that it may experience significant disruptions across the Company’s business due to these effects, leading to decreased earnings and significant slowdowns in loan collections or loan defaults.

COVID-19 may impact businesses’ and consumers’ financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, entertainment, long-term healthcare and retail  industries and/or are located in areas that are quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on the Company’s direct lease financing, commercial real estate and consumer loan portfolios. A prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to the Company’s customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other

65

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financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in its market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

The Company believes that the economic impact from COVID-19 will be severe and could have a material and adverse impact on our business and that it could result in significant losses in its loan portfolio, all of which would adversely and materially impact the Company’s earnings and capital.

As a participating lender in the PPP, the Company and the subsidiary banks are subject to additional risks of litigation from their customers or other parties regarding the processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The subsidiary banks are participating as lenders in the PPP.  The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has authorized an additional $310 billion funding for PPP loans; however, it is unknown if and when this the additional authorized amount will be exhausted and whether Congress will again authorize additional PPP loan funding.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP.  The Company and the subsidiary banks may be exposed to the risk of similar litigation, from both customers and non‑customers that approached the banks regarding PPP loans, regarding their process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the subsidiary banks and is not resolved in a manner favorable to the Company or the banks, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The subsidiary banks also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the banks, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

 

 

 

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Table of Contents

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.   The share repurchase program suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic.  The shares were retired after purchased.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of shares

 

Maximum number

 

 

 

 

 

 

 

 

purchased as part of

 

of shares that may yet

 

 

    

Total number of

 

 

Average price

 

publicly announced

 

be purchased under

 

Period

 

shares purchased

 

 

paid per share

 

plans or programs

 

the plans or programs

 

 

 

 

 

 

 

 

 

 

 

 

January 1-31, 2020

 

 —

 

$

 —

 

 —

 

800,000

 

February 1-29, 2020

 

35,732

 

 

40.09

 

35,732

 

764,268

 

March 1-31, 2020

 

65,200

 

 

35.96

 

100,932

 

699,068

 

 

 

 

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

 

 

 

 

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 March 31, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three months ended March 31, 2020 and March 31, 2019; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and March 31, 2019; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2020 and March 31, 2019; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and March 31, 2019; 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

 May 8, 2020

 

/s/ Larry J. Helling

 

 

Larry J. Helling

 

 

Chief Executive Officer

 

 

 

 

 

 

Date

May 8, 2020

 

/s/ Todd A. Gipple

 

 

Todd A. Gipple, President

 

 

Chief Operating Officer

 

 

Chief Financial Officer

 

 

 

 

 

 

Date

May 8, 2020

 

/s/ Nick W. Anderson

 

 

Nick W. Anderson

 

 

Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

69