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QCR HOLDINGS INC - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

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

For the transition period from ______to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

42-1397595

(State or other jurisdiction of incorporation or organization)

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

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736-3580

(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 Par Value

QCRH

The Nasdaq Global Market

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

Yes       No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes       No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2021, the Registrant had outstanding 15,596,681 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 September 30, 2021 and December 31, 2020

4

Consolidated Statements of Income
For the Three Months Ended September 30, 2021 and 2020

5

Consolidated Statements of Income

For the Nine Months Ended September 30, 2021 and 2020

6

Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2021 and 2020

7

Consolidated Statements of Changes in Stockholders' Equity
For the Three and Nine Months Ended September 30, 2021 and 2020

8

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2021 and 2020

9

Notes to Consolidated Financial Statements

11

Note 1. Summary of Significant Accounting Policies

11

Note 2. Investment Securities

21

Note 3. Loans/Leases Receivable

25

Note 4. Derivatives and Hedging Activities

36

Note 5. Income Taxes

39

Note 6. Earnings Per Share

40

Note 7. Fair Value

41

Note 8. Business Segment Information

43

Note 9. Regulatory Capital Requirements

44

Item 2

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

Introduction

46

General

46

Impact of COVID-19

46

Executive Overview

47

Strategic Financial Metrics

48

Strategic Developments

49

GAAP to Non-GAAP Reconciliations

50

Net Interest Income - (Tax Equivalent Basis)

52

Critical Accounting Policies

57

Goodwill

57

Allowance for Credit Losses

58

Results of Operations

58

Interest Income

58

Interest Expense

58

2

Table of Contents

Provision for Credit Losses

59

Noninterest Income

60

Noninterest Expense

63

Income Taxes

65

Financial Condition

66

Investment Securities

66

Loans/Leases

67

Allowance for Credit Losses on Loans/Leases and OBS Exposures

69

Nonperforming Assets

71

Deposits

72

Borrowings

73

Stockholders' Equity

74

Liquidity and Capital Resources

74

Special Note Concerning Forward-Looking Statements

76

Item 3

    

Quantitative and Qualitative Disclosures About Market Risk

77

Item 4

Controls and Procedures

79

Part II

    

OTHER INFORMATION

80

Item 1

Legal Proceedings

80

Item 1A

Risk Factors

80

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3

Defaults Upon Senior Securities

80

Item 4

Mine Safety Disclosures

80

Item 5

Other Information

80

Item 6

Exhibits

81

Signatures

82

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 September 30, 2021 and December 31, 2020

September 30, 

December 31,

2021

2020

(dollars in thousands)

Assets

Cash and due from banks

$

57,310

$

61,329

Federal funds sold

 

6,985

 

9,080

Interest-bearing deposits at financial institutions

 

63,841

 

86,596

Securities held to maturity, at amortized cost, net of allowance for credit losses

 

484,003

 

476,165

Securities available for sale, at fair value

 

344,716

 

361,966

Total securities

828,719

 

838,131

Loans receivable held for sale

 

3,452

 

3,758

Loans/leases receivable held for investment

 

4,596,278

 

4,247,371

Gross loans/leases receivable

 

4,599,730

 

4,251,129

Less allowance for credit losses

 

(80,670)

 

(84,376)

Net loans/leases receivable

 

4,519,060

 

4,166,753

 

  

 

  

Bank-owned life insurance

 

61,955

 

60,586

Premises and equipment, net

 

74,993

 

72,693

Restricted investment securities

 

19,936

 

18,103

Other real estate owned, net

 

 

20

Goodwill

 

74,066

 

74,066

Intangibles

 

9,857

 

11,381

Derivatives

198,393

222,757

Other assets

 

99,393

 

61,302

Total assets

$

6,014,508

$

5,682,797

 

  

 

  

Liabilities and Stockholders' Equity

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

1,342,273

$

1,145,378

Interest-bearing

 

3,529,555

 

3,453,759

Total deposits

 

4,871,828

 

4,599,137

 

  

 

  

Short-term borrowings

 

1,600

 

5,430

Federal Home Loan Bank advances

 

30,000

 

15,000

Subordinated notes

113,811

118,691

Junior subordinated debentures

 

38,103

 

37,993

Derivatives

201,450

229,270

Other liabilities

 

107,902

 

83,483

Total liabilities

 

5,364,694

 

5,089,004

 

  

 

  

 

  

 

  

Stockholders' Equity:

 

  

 

  

Preferred stock, $1 par value; shares authorized 250,000 September 2021 and December 2020 - no shares issued or outstanding

 

 

Common stock, $1 par value; shares authorized 20,000,000 September 2021 - 15,590,428 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding

 

15,590

 

15,806

Additional paid-in capital

 

272,964

 

275,807

Retained earnings

 

360,003

 

300,804

Accumulated other comprehensive income (loss):

 

 

Securities available for sale

 

5,825

 

9,008

Derivatives

(4,568)

(7,632)

Total stockholders' equity

 

649,814

 

593,793

Total liabilities and stockholders' equity

$

6,014,508

$

5,682,797

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 September 30, 2021 and 2020

    

2021

    

2020

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$

44,858

$

44,768

Securities:

Taxable

 

2,347

 

1,938

Nontaxable

 

4,160

 

3,842

Interest-bearing deposits at financial institutions

 

39

 

92

Restricted investment securities

 

262

 

249

Federal funds sold

 

1

 

1

Total interest and dividend income

 

51,667

 

50,890

Interest expense:

Deposits

 

3,273

 

4,484

Short-term borrowings

 

1

 

11

Federal Home Loan Bank advances

 

41

 

211

Subordinated notes

1,554

1,031

Junior subordinated debentures

 

569

 

572

Total interest expense

 

5,438

 

6,309

Net interest income

 

46,229

 

44,581

Provision for credit losses

 

 

20,342

Net interest income after provision for loan/lease losses

 

46,229

 

24,239

Noninterest income:

Trust department fees

 

2,714

 

2,280

Investment advisory and management fees

 

1,054

 

1,266

Deposit service fees

 

1,588

 

1,403

Gains on sales of residential real estate loans, net

 

954

 

1,370

Swap fee income/capital markets revenue

 

24,885

 

26,688

Securities gains (losses), net

 

 

1,802

Earnings on bank-owned life insurance

 

446

 

502

Debit card fees

 

1,085

 

946

Correspondent banking fees

 

265

 

220

Other

 

1,661

 

1,482

Total noninterest income

 

34,652

 

37,959

Noninterest expense:

Salaries and employee benefits

 

28,207

 

25,999

Occupancy and equipment expense

 

4,122

 

3,807

Professional and data processing fees

 

3,568

 

3,758

Disposition costs

192

FDIC insurance, other insurance and regulatory fees

 

1,108

 

1,301

Loan/lease expense

 

308

 

403

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

 

(1,346)

 

16

Advertising and marketing

 

1,095

 

750

Bank service charges

 

525

 

488

Losses on liability extinguishment

 

 

1,874

Correspondent banking expense

 

201

 

205

Intangibles amortization

 

508

 

531

Loss on sale of subsidiary

305

Other

 

3,091

 

1,209

Total noninterest expense

 

41,387

 

40,838

Net income before income taxes

 

39,494

 

21,360

Federal and state income tax expense

 

7,929

 

4,016

Net income

$

31,565

$

17,344

Basic earnings per common share

$

2.02

$

1.10

Diluted earnings per common share

$

1.99

$

1.09

Weighted average common shares outstanding

 

15,635,123

 

15,767,152

Weighted average common and common equivalent shares outstanding

 

15,869,798

 

15,923,578

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 INCOME (UNAUDITED)

Nine Months Ended September 30, 2021 and 2020

    

2021

    

2020

    

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$

128,639

$

130,542

Securities:

Taxable

 

6,521

 

5,714

Nontaxable

 

12,146

 

10,865

Interest-bearing deposits at financial institutions

 

110

 

587

Restricted investment securities

 

718

 

795

Federal funds sold

 

1

 

19

Total interest and dividend income

 

148,135

 

148,522

Interest expense:

Deposits

 

9,935

 

19,457

Short-term borrowings

 

4

 

81

Federal Home Loan Bank advances

 

66

 

1,007

Subordinated notes

4,718

3,019

Junior subordinated debentures

 

1,692

 

1,715

Total interest expense

 

16,415

 

25,279

Net interest income

 

131,720

 

123,243

Provision for credit losses

 

6,713

 

48,624

Net interest income after provision for loan/lease losses

 

125,007

 

74,619

Noninterest income:

Trust department fees

 

8,363

 

6,819

Investment advisory and management fees

 

3,033

 

4,392

Deposit service fees

 

4,488

 

4,166

Gains on sales of residential real estate loans, net

 

3,475

 

3,218

Swap fee income/capitals markets revenue

 

48,010

 

53,419

Securities gains (losses), net

 

(88)

 

1,867

Earnings on bank-owned life insurance

 

1,368

 

1,443

Debit card fees

 

3,144

 

2,479

Correspondent banking fees

 

848

 

633

Other

 

4,796

 

3,345

Total noninterest income

 

77,437

 

81,781

Noninterest expenses:

Salaries and employee benefits

 

76,098

 

65,822

Occupancy and equipment expense

 

12,195

 

11,587

Professional and data processing fees

 

10,713

 

10,773

Post-acquisition compensation, transition and integration costs

 

 

189

Disposition costs

 

8

 

626

FDIC insurance, other insurance and regulatory fees

 

3,159

 

2,892

Loan/lease expense

 

1,065

 

970

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

 

(1,420)

 

(303)

Advertising and marketing

 

2,575

 

1,984

Bank service charges

 

1,620

 

1,493

Losses on liability extinguishment

 

 

2,450

Correspondent banking expense

599

633

Intangibles amortization

1,524

1,628

Goodwill impairment

500

Loss on sale of subsidiary

 

 

305

Other

 

6,154

 

3,842

Total noninterest expenses

 

114,290

 

105,391

Net income before income taxes

 

88,154

 

51,009

Federal and state income tax expense

 

16,258

 

8,698

Net income

$

71,896

$

42,311

Basic earnings per common share

$

4.54

$

2.68

Diluted earnings per common share

$

4.48

$

2.65

Weighted average common shares outstanding

 

15,829,124

 

15,770,335

Weighted average common and common equivalent shares outstanding

 

16,058,420

 

15,945,832

Cash dividends declared per common share

$

0.18

$

0.18

See Notes to Consolidated Financial Statements (Unaudited)

6

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine Months Ended September 30, 2021 and 2020

Three Months Ended September 30, 

    

    

2021

    

2020

(dollars in thousands)

Net income

$

31,565

$

17,344

Other comprehensive loss:

Unrealized gains (losses) on securities available for sale:

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

(3,194)

 

585

Less reclassification adjustment for gains included in net income before tax

1,802

 

(3,194)

 

(1,217)

Unrealized gains (losses) on derivatives:

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

 

(342)

 

445

Less reclassification adjustment for caplet amortization before tax

(181)

149

 

(161)

 

296

Other comprehensive loss, before tax

 

(3,355)

 

(921)

Tax expense

 

(809)

 

(307)

Other comprehensive loss, net of tax

 

(2,546)

 

(614)

Comprehensive income

$

29,019

$

16,730

Nine Months Ended September 30, 

    

2021

    

2020

(dollars in thousands)

Net income

$

71,896

$

42,311

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

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

 

(4,290)

 

8,467

Less reclassification adjustment for gains (losses) included in net income before tax

(88)

1,867

 

(4,202)

 

6,600

Unrealized gains (losses) on derivatives:

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

 

3,383

 

(7,903)

Less reclassification adjustment for caplet amortization before tax

 

(495)

 

(384)

 

3,878

 

(7,519)

Other comprehensive loss, before tax

 

(324)

 

(919)

Tax expense

 

(206)

 

(236)

Other comprehensive loss, net of tax

 

(118)

 

(683)

Comprehensive income

$

71,778

$

41,628

See Notes to Consolidated Financial Statements (Unaudited)

7

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine Months Ended September 30, 2021 and 2020

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

(Loss) Income

    

Total

(dollars in thousands)

Balance December 31, 2020

$

15,806

$

275,807

$

300,804

$

1,376

$

593,793

Net income

 

 

 

17,982

 

 

17,982

Other comprehensive loss, net of tax

 

 

 

 

(1,751)

 

(1,751)

Impact of adoption of ASU 2016-13

 

 

 

(937)

 

 

(937)

Common cash dividends declared, $0.06 per share

 

 

 

(949)

 

 

(949)

Stock-based compensation expense

 

 

841

 

 

 

841

Issuance of common stock under employee benefit plans

 

38

 

(298)

 

 

 

(260)

Balance, March 31, 2021

$

15,844

$

276,350

$

316,900

$

(375)

$

608,719

Net income

 

 

 

22,349

 

 

22,349

Other comprehensive income, net of tax

 

 

 

 

4,179

 

4,179

Common cash dividends declared, $0.06 per share

 

 

 

(951)

 

 

(951)

Repurchase and cancellation of 100,000 shares of common stock

as a result of a share repurchase program

(100)

(1,826)

(2,874)

(4,800)

Stock-based compensation expense

 

520

 

 

 

520

Issuance of common stock under employee benefit plans

 

20

 

440

 

 

 

460

Balance, June 30, 2021

$

15,764

$

275,485

$

335,424

$

3,803

$

630,476

Net income

 

 

 

31,565

 

 

31,565

Other comprehensive loss, net of tax

 

 

 

 

(2,546)

 

(2,546)

Repurchase and cancellation of 193,153 shares of common stock

 

 

 

 

 

as a result of a share repurchase program

(193)

(3,134)

(6,040)

(9,367)

Common cash dividends declared, $0.06 per share

 

 

 

(946)

 

 

(946)

Stock-based compensation expense

 

504

 

 

 

504

Issuance of common stock under employee benefit plans

 

19

 

109

 

 

 

128

Balance, September 30, 2021

$

15,590

$

272,964

$

360,003

$

1,257

$

649,814

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 loss, 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)

Stock-based compensation expense

 

 

641

 

 

 

641

Issuance of common stock under employee benefit plans

 

47

 

285

 

 

 

332

Balance, March 31, 2020

$

15,774

$

273,867

$

254,287

$

(4,789)

$

539,139

Net income

 

 

 

13,739

 

 

13,739

Other comprehensive income, net of tax

 

 

 

 

3,622

 

3,622

Common cash dividends declared, $0.06 per share

 

 

 

(945)

 

 

(945)

Stock-based compensation expense

 

 

423

 

 

 

423

Issuance of common stock under employee benefit plans

 

17

 

25

 

 

 

42

Balance, June 30, 2020

$

15,791

$

274,315

$

267,081

$

(1,167)

$

556,020

Net income

 

 

 

17,344

 

 

17,344

Other comprehensive loss, net of tax

 

 

 

 

(614)

 

(614)

Common cash dividends declared, $0.06 per share

 

 

 

(945)

 

 

(945)

Stock-based compensation expense

 

 

472

 

 

 

472

Issuance of common stock under employee benefit plans

 

1

 

335

 

 

 

336

Balance, September 30, 2020

$

15,792

$

275,122

$

283,480

$

(1,781)

$

572,613

See Notes to Consolidated Financial Statements (Unaudited)

8

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2021 and 2020

    

2021

    

2020

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

71,896

$

42,311

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

 

  

 

  

Depreciation

 

4,087

 

4,006

Provision for credit losses

 

6,713

 

48,624

Stock-based compensation expense

 

1,865

 

1,536

Deferred compensation expense accrued

 

3,288

 

2,660

Gains on other real estate owned, net

 

(1,754)

 

(298)

Amortization of premiums on securities, net

 

1,506

 

728

Caplet amortization

495

383

Mark to market gains on unhedged derivatives, net

(74)

Securities (gains) losses, net

 

88

 

(1,867)

Loans originated for sale

 

(157,392)

 

(172,282)

Proceeds on sales of loans

 

161,173

 

170,362

Gains on sales of residential real estate loans

 

(3,475)

 

(3,218)

Loss on liability extinguishment, net

2,450

Losses (gains) on sales and disposals of premises and equipment

1,457

(13)

Amortization of intangibles

 

1,524

 

1,628

Accretion of acquisition fair value adjustments, net

 

(1,251)

 

(2,194)

Increase in cash value of bank-owned life insurance

 

(1,369)

 

(1,443)

Loss on sale of subsidiary/certain assets and liabilities of subsidiary

305

Goodwill impairment

500

Increase in other assets

 

(37,630)

 

(8,351)

Decrease in other liabilities

13,161

43,489

Net cash provided by operating activities

$

64,308

$

129,316

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Net decrease in federal funds sold

 

2,095

 

9,270

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

 

22,755

 

(154,247)

Proceeds from sales of other real estate owned

 

4,592

 

4,353

Activity in securities portfolio:

 

 

Purchases

 

(151,702)

 

(255,500)

Calls, maturities and redemptions

 

81,000

 

38,461

Paydowns

 

50,177

 

33,870

Sales

 

23,874

 

28,579

Activity in restricted investment securities:

 

  

 

  

Purchases

 

(4,280)

 

(4,600)

Redemptions

 

2,447

 

8,843

Proceeds from the liquidation of bank-owned life insurance

10,999

Net increase in loans/leases originated and held for investment

 

(353,616)

 

(555,315)

Purchase of premises and equipment

 

(7,866)

 

(2,250)

Proceeds from sales of premises and equipment

22

94

Net cash transferred In sale of subsidiary

(349)

Net cash used in investing activities

$

(330,502)

$

(837,792)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net increase in deposit accounts

 

272,691

 

731,374

Net increase (decrease) in short-term borrowings

 

(3,830)

 

17,007

Activity in Federal Home Loan Bank advances:

 

  

 

  

Term advances

 

 

125,000

Calls and maturities

 

 

(81,600)

Net change in short-term and overnight advances

 

15,000

 

(109,300)

Prepayments

 

 

(55,274)

Prepayments on brokered and public time deposits

29,359

Prepayments of subordinated notes

(5,000)

Proceeds from subordinated notes

50,000

Payment of cash dividends on common stock

 

(2,847)

 

(2,831)

Proceeds from issuance of common stock, net

328

1,199

Repurchase and cancellation of shares

(14,167)

(3,780)

Net cash provided by financing activities

$

262,175

$

701,154

Net increase (decrease) in cash and due from banks

 

(4,019)

 

(7,322)

Cash and due from banks, beginning

 

61,329

 

76,254

Cash and due from banks, ending

$

57,310

$

68,932

9

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued

Nine Months Ended September 30, 2021 and 2020

Supplemental disclosure of cash flow information, cash payments for:

 

  

 

  

Interest

$

18,617

$

26,920

Income/franchise taxes

 

36,987

 

16,713

 

  

 

Supplemental schedule of noncash investing activities:

 

  

 

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

 

(118)

 

(683)

Transfers of loans to other real estate owned

 

2,812

 

51

Due to broker for purchases of securities

8,550

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

 

(25,503)

 

151,398

Dividends payable

 

946

 

945

Consideration received on sale of the Bates Companies

1,328

See Notes to Consolidated Financial Statements (Unaudited)

10

Table of Contents

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2021

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:  The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, or for any other period.

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

ACL: Allowance for credit losses

Allowance: Allowance for credit losses

GAAP: Generally Accepted Accounting Principles

HTM: Held to maturity

AOCI: Accumulated other comprehensive income (loss)

LIBOR: London Inter-Bank Offered Rate

AFS: Available for sale

LRP: Loan Relief Program

ASC: Accounting Standards Codification

m2: m2 Equipment Finance, LLC

ASU: Accounting Standards Update

MSELF: Main Street Expanded Loan Facility

Bates Companies: Bates Financial Advisors, Inc., Bates

MSNLF: Main Street New Loan Facility

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

NIM: Net interest margin

Bates Financial Group, Inc.

NPA: Nonperforming asset

BOLI: Bank-owned life insurance

NPL: Nonperforming loan

Caps: Interest rate cap derivatives

OBS: Off-balance sheet

CARES Act: Coronavirus Aid, Relief and Economy

OREO: Other real estate owned

Security Act

OTTI: Other-than-temporary impairment

CECL: Current Expected Credit Losses

PCAOB: Public Company Accounting Oversight Board

Community National: Community National Bancorporation

PCD: Purchased credit deteriorated loan

COVID-19: Coronavirus Disease 2019

PCI: Purchased credit impaired

CRBT: Cedar Rapids Bank & Trust Company

PPP: Paycheck Protection Program

CRE: Commercial real estate

Provision: Provision for credit losses

CSB: Community State Bank

QCBT: Quad City Bank & Trust Company

C&I: Commercial and industrial

RB&T: Rockford Bank & Trust Company

EPS: Earnings per share

ROAA: Return on average assets

Exchange Act: Securities Exchange Act of 1934, as

SBA: U.S. Small Business Administration

amended

SEC: Securities and Exchange Commission

FASB: Financial Accounting Standards Board

SFCB: Springfield First Community Bank

FDIC: Federal Deposit Insurance Corporation

Springfield Bancshares: Springfield Bancshares, Inc.

Federal Reserve: Board of Governors of the Federal

TA: Tangible assets

Reserve System

TCE: Tangible common equity

FHLB: Federal Home Loan Bank

TDRs: Troubled debt restructurings

FRB: Federal Reserve Bank of Chicago

TEY: Tax equivalent yield

The Company: QCR Holdings, Inc.

11

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  Under the standard, assets measured at amortized cost (including loans, leases and HTM securities) are presented at the net amount expected to be collected.  Rather than the “incurred” model previously utilized, the standard requires the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life.  For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law.  The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13.  Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate would be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.

On December 27, 2020, the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022.  Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021.  The Company has developed a CECL allowance model which calculates allowances over the life of a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions.  Those assumptions are based upon the existing probability of default and loss given the default framework.  The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.  

Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, established an ACL on held to maturity debt securities of $183 thousand and established an ACL on OBS credit exposures of $9.1 million. The company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.

The Company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-Q.

The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.

12

The following table illustrates the impact of ASU 2016-13  as of January 1, 2021:

As Reported

Pre-

Impact of

Under

ASU 2016-13

ASU 2016-13

ASU 2016-13

Adoption

    

Adoption

Assets:

Allowance for credit losses HTM securities

$

183

$

$

183

Loans*:

C&I

35,421

(35,421)

C&I - revolving

2,982

2,982

C&I - other

29,130

29,130

CRE

42,161

(42,161)

CRE - owner occupied

8,696

8,696

CRE - non owner occupied

11,428

11,428

Construction & Land Development

11,999

11,999

Multi-family

5,836

5,836

Direct financing leases

1,764

(1,764)

1-4 family real estate

5,042

5,042

Residential real estate

3,732

(3,732)

Consumer

1,161

1,298

(137)

Allowance for credit losses on loans

76,274

84,376

(8,102)

Liabilities:

Allowance for credit losses on OBS credit exposures

9,117

9,117

*     Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven.

Further discussion contained in this quarterly report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discussion in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.

Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.

Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $20 million at September 30, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 3.

The Company’s portfolio segments and class of loans receivable are as follows:

C&I – revolving
C&I – other
CRE – owner occupied
CRE – non-owner occupied

13

Construction and land development
Multi-family
1-4 family real estate
Consumer

The Company’s classes of loans receivable are as follows:

C&I – revolving
C&I – other
CRE – owner occupied
CRE – non-owner occupied
Construction and land development
Multi-family
Direct financing leases
1-4 family real estate
Consumer

Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.

Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.

For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:

It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan;
When full repayment of principal and interest is not expected;
When the loan is graded “doubtful”
When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or
When foreclosure action is initiated.

When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.

For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:

The loan is current, and all principal and interest amounts contractually due have been made;
All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and
There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:
oSix months of repayment performance for contractual monthly payments, or
oOne year of repayment performance for contractual quarterly or semi-annual payments.

Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are

14

recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.

Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at the lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.

The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.

The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.

TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.

The following criteria, related to granting a concession, together or separately, create a TDR:

A modification of terms of a debt such as one or a combination of:
oThe reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.
oThe extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
oThe reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
oThe reduction of accrued interest.
A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.
The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.

Allowance:

Allowance for Credit Losses on Loans and Leases

The ACL on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the eight portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectibility of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable -- to the identified pools of

15

financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.

A discussion of the risk characteristics and the allowance by each loan portfolio segment follows:

For C&I loans, both revolving lines of credit and other C&I, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:

Ability and stability of current management of the borrower;
Stable earnings with positive financial trends;
Sufficient cash flow to support debt repayment;
Earnings projections based on reasonable assumptions;
Financial strength of the industry and business; and
Value and marketability of collateral.

Collateral for C&I loans generally includes accounts receivable, inventory, equipment and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.

The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally 7 years with average terms ranging from 3 to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.

In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.

Multi-family loans provide a source of repayment from rental income.

The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.

Construction loans include any loans to finance the construction of any new residential property, CRE property or major rehabilitation or expansion of existing commercial structures. Construction lending carries a high degree of risk because of the difficulty of protecting the bank against a myriad of pitfalls. The following factors are evaluated when underwriting these types of loans:

Borrowers/contractors experience and ability is analyzed with the type and size of project being considered.
Financial ability to cover cost overruns.
Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits.
Reliability of the estimate of time to complete the project.

16

The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the Bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.

For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.

Quantitative Factors:

The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.

Qualitative Factors:

The Company’s allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.

The Company utilizes the following qualitative factors:

National and local economy
Loan volume and trend
Loan quality
Loan policies and procedures
Management and staff experience
Concentrations
Collateral
Loan review system
Regulatory environment and oversight

The qualitative adjustments are based on the current condition and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.

Economic Forecasting:

The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity.  This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity.

It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.

17

Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectibility based on current information and events.  Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating.  Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell.  However if the repayment is dependent on the operations of the company the fair market value less estimated cost to sell cannot be used.  Thus the net present value of the cash-flow will be utilized.

For non-homogenous loans, the Company utilizes the following internal risk rating scale:

1.Highest Quality (Pass) – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.

2.Superior Quality (Pass) – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.

3.Satisfactory Quality (Pass) – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate.

4.Fair Quality (Pass) – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peers, or borrowers operating in highly cyclical or declining industries.

5.Early Warning (Pass) – loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.

6.Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left

18

uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

7.Substandard – loans which are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.

8.Doubtful – loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction.

For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.

The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.

The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I – Other segment and allowance is established in the same manner as C&I loans.

Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.

The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.

For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.

TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.

19

Allowance for Credit Losses on Off-Balance Sheet Exposures

The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on unfunded commitments is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases.  The allowance for OBS exposures is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheet.

Allowance for Credit Losses on Held to Maturity Debt Securities

The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions.

Allowance for Credit Losses on Available for Sale Debt Securities

ASU 2016-13 modifies the impairment model for available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.

The Company did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13.

Risks and Uncertainties:

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic.  Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic.  The Company currently expects that the COVID-19 pandemic will continue to have a significant impact on its business.  In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries will continue to endure economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of  collateral pledged to the banks.  These developments, together with economic conditions generally, have impacted and are expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.

20

Pending accounting developments:

In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Management is currently assessing the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2021 and December 31, 2020 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost*

    

Gains

    

(Losses)

    

Value

    

(dollars in thousands)

September 30, 2021:

 

  

 

  

 

  

 

  

 

Securities HTM:

 

  

 

  

 

  

 

  

 

Municipal securities

$

483,127

$

47,122

$

(20)

$

530,229

Other securities

 

1,050

 

 

 

1,050

$

484,177

$

47,122

$

(20)

$

531,279

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

23,616

$

413

$

(340)

$

23,689

Residential mortgage-backed and related securities

 

97,762

 

3,627

 

(645)

 

100,744

Municipal securities

 

162,964

 

4,124

 

(729)

 

166,359

Asset-backed securities

29,622

985

30,607

Other securities

 

23,048

 

299

 

(30)

 

23,317

$

337,012

$

9,448

$

(1,744)

$

344,716

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

(Losses)

Value

(dollars in thousands)

December 31, 2020:

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

Municipal securities

$

475,115

$

45,360

$

(248)

$

520,227

Other securities

 

1,050

 

 

 

1,050

$

476,165

$

45,360

$

(248)

$

521,277

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

14,936

$

447

$

(47)

$

15,336

Residential mortgage-backed and related securities

 

127,670

 

5,510

 

(338)

 

132,842

Municipal securities

 

147,241

 

5,215

 

(48)

 

152,408

Asset-backed securities

39,663

1,111

(91)

40,683

Other securities

 

20,550

 

147

 

 

20,697

$

350,060

$

12,430

$

(524)

$

361,966

*     HTM securities shown on the balance sheet of $484.0 million represents amortized cost of $484.2 million, net of allowance for credit losses of $174 thousand as of September 30, 2021.

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

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

21

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

(dollars in thousands)

September 30, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities

$

14,880

$

(20)

$

$

$

14,880

$

(20)

 

  

 

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

9,809

$

(148)

$

3,001

$

(192)

$

12,810

$

(340)

Residential mortgage-backed and related securities

 

18,422

 

(593)

 

8,629

 

(52)

 

27,051

 

(645)

Municipal securities

 

50,754

 

(689)

 

966

 

(40)

 

51,720

 

(729)

Other securities

 

3,970

 

(30)

 

 

 

3,970

 

(30)

$

82,955

$

(1,460)

$

12,596

$

(284)

$

95,551

$

(1,744)

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, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities

$

8,407

$

(248)

$

$

$

8,407

$

(248)

Securities AFS:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

3,199

$

(47)

$

$

$

3,199

$

(47)

Residential mortgage-backed and related securities

 

37,549

 

(338)

 

 

 

37,549

 

(338)

Municipal securities

 

10,110

 

(48)

 

 

 

10,110

 

(48)

Asset-backed securities

6,884

(52)

9,945

(39)

16,829

(91)

$

57,742

$

(485)

$

9,945

$

(39)

$

67,687

$

(524)

At September 30, 2021, the investment portfolio included 629 securities. Of this number, 91 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.22% of the total amortized cost of the portfolio. Of these 91 securities, there were nine securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2021, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.  

On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the nine months ended September 30, 2021.

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Municipal

Other

Municipal

Other

    

securities

    

securities

    

Total

    

securities

    

securities

    

Total

 

 

Allowance for credit losses:

Beginning balance

$

173

$

1

$

174

$

$

$

Impact of adopting ASU 2016-13

182

1

183

Provision for credit loss expense

(9)

(9)

Balance, ending

$

173

$

1

$

174

$

173

$

1

$

174

22

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant  Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

All sales of securities for the three and nine months ended September 30, 2021 and September 30, 2020 were securities identified as AFS.

Three Months Ended

    

Nine Months Ended

    

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Proceeds from sales of securities

$

$

22,252

$

23,874

$

28,579

Gross gains from sales of securities

 

 

1,802

 

 

1,936

Gross losses from sales of securities

 

 

 

(88)

 

(69)

The amortized cost and fair value of securities as of September 30, 2021 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

    

Amortized Cost

    

Fair Value

(dollars in thousands)

Securities HTM:

 

  

 

  

Due in one year or less

$

3,171

$

3,188

Due after one year through five years

 

26,563

 

27,189

Due after five years

 

454,443

 

500,902

$

484,177

$

531,279

Securities AFS:

 

  

 

  

Due in one year or less

$

1,280

$

1,295

Due after one year through five years

 

12,409

 

12,694

Due after five years

 

195,939

 

199,376

209,628

213,365

Residential mortgage-backed and related securities

97,762

100,744

Asset-backed securities

 

29,622

 

30,607

$

337,012

$

344,716

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

    

Amortized Cost

    

Fair Value

(dollars in thousands)

Securities HTM:

 

  

 

  

Municipal securities

$

285,608

$

297,413

 

  

 

  

Securities AFS:

 

  

 

  

Municipal securities

157,961

161,122

Other securities

 

23,048

 

23,317

$

181,009

$

184,439

23

As of September 30, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $115.0 million and revenue bonds issued by 168 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $581.6 million. The Company also held investments in general obligation bonds in 20 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2021 and as of December 31, 2020, the Company held revenue bonds of two issuers, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of September 30, 2021, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of September 30, 2021, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

24

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio by classes of loans/leases as of September 30, 2021 and December 31, 2020 is presented as follows:

    

September 30, 2021

(dollars in thousands)

C&I:

C&I - revolving

$

175,155

C&I - other *

1,465,580

1,640,735

 

  

CRE - owner occupied

 

434,014

CRE - non-owner occupied

 

644,850

Construction and land development

 

852,418

Multi-family

529,727

Direct financing leases**

 

50,237

1-4 family real estate***

376,067

Consumer

 

71,682

 

4,599,730

Allowance for credit losses

 

(80,670)

$

4,519,060

** Direct financing leases:

 

  

Net minimum lease payments to be received

$

55,042

Estimated unguaranteed residual values of leased assets

 

165

Unearned lease/residual income

 

(4,970)

 

50,237

Plus deferred lease origination costs, net of fees

 

652

 

50,889

Less allowance for credit losses

 

(1,744)

$

49,145

    

December 31, 2020

C&I loans*

$

1,726,723

CRE loans

 

  

Owner-occupied CRE

 

496,471

Commercial construction, land development, and other land

 

541,455

Other non owner-occupied CRE

 

1,069,703

 

2,107,629

Direct financing leases **

 

66,016

Residential real estate loans ***

 

252,121

Installment and other consumer loans

 

91,302

 

4,243,791

Plus deferred loan/lease origination costs, net of fees

 

7,338

 

4,251,129

Less allowance

 

(84,376)

$

4,166,753

** Direct financing leases:

 

  

Net minimum lease payments to be received

$

72,940

Estimated unguaranteed residual values of leased assets

 

239

Unearned lease/residual income

 

(7,163)

 

66,016

Plus deferred lease origination costs, net of fees

 

1,072

 

67,088

Less allowance

 

(1,764)

$

65,324

*     Includes equipment financing agreements outstanding at m2, totaling $212.7 million and $171.5 million as of September 30, 2021 and December 31, 2020, respectively and PPP loans totaling $83.6 million and $273.1 million as of September 30, 2021 and December 31, 2020, respectively.

**   Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

*** Includes residential real estate loans held for sale totaling $3.5 million and $3.8 million as of September 30, 2021 and December 31, 2020, respectively.

25

Changes in accretable yield for acquired loans were as follows:

Three months ended September 30, 2021

Nine months ended September 30, 2021

    

PCI

    

Performing

    

PCI

    

Performing

    

Loans

Loans

Total

    

Loans

    

Loans

    

Total

(dollars in thousands)

Balance at the beginning of the period

$

$

(2,189)

$

(2,189)

$

$

(3,139)

$

(3,139)

Accretion recognized

 

 

505

 

505

 

 

1,455

 

1,455

Balance at the end of the period

$

$

(1,684)

$

(1,684)

$

$

(1,684)

$

(1,684)

Three months ended September 30, 2020

Nine months ended September 30, 2020

    

PCI

    

Performing

    

PCI

    

Performing

    

Loans

Loans

Total

    

Loans

    

Loans

    

Total

(dollars in thousands)

Balance at the beginning of the period

$

(58)

$

(4,935)

$

(4,993)

$

(57)

$

(6,378)

$

(6,435)

Reclassification of nonaccretable discount to accretable

(30)

(30)

Accretion recognized

 

1

 

941

 

942

 

30

 

2,384

 

2,414

Balance at the end of the period

$

(57)

$

(3,994)

$

(4,051)

$

(57)

$

(3,994)

$

(4,051)

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2021 and December 31, 2020 is presented as follows:

As of September 30, 2021

 

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:

C&I - revolving

$

175,155

$

$

$

$

$

175,155

C&I - other

1,459,194

874

137

14

5,361

1,465,580

CRE - owner occupied

 

433,361

 

653

 

 

 

 

434,014

CRE - non-owner occupied

 

638,613

 

 

6,237

 

 

 

644,850

Construction and land development

852,343

75

852,418

Multi-family

 

529,727

 

 

 

 

 

529,727

Direct financing leases

 

49,215

 

167

 

11

 

 

844

 

50,237

1-4 family real estate

 

375,366

 

96

 

130

 

 

475

 

376,067

Consumer

 

71,606

 

13

 

 

 

63

 

71,682

$

4,584,580

$

1,803

$

6,515

$

14

$

6,818

$

4,599,730

 

  

 

  

 

  

 

  

 

  

 

  

As a percentage of total loan/lease portfolio

 

99.67

%  

 

0.04

%  

 

0.14

%  

 

0.00

%  

 

0.15

%  

 

100.00

%

As of December 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

$

1,720,058

$

1,535

$

323

$

$

4,807

$

1,726,723

CRE

 

  

 

  

 

  

 

  

 

 

  

Owner-occupied CRE

 

496,459

 

 

 

 

12

 

496,471

Commercial construction, land development, and other land

 

541,455

 

 

 

 

 

541,455

Other non-owner occupied CRE

 

1,062,215

 

 

 

 

7,488

 

1,069,703

Direct financing leases

 

64,918

 

501

 

191

 

 

406

 

66,016

Residential real estate

 

249,364

 

1,512

 

223

 

 

1,022

 

252,121

Installment and other consumer

 

91,047

 

43

 

4

 

3

 

205

 

91,302

$

4,225,516

$

3,591

$

741

$

3

$

13,940

$

4,243,791

As a percentage of total loan/lease portfolio

 

99.57

%  

 

0.08

%  

 

0.02

%  

 

0.00

%  

 

0.33

%  

 

100.00

%

26

NPLs by classes of loans/leases as of September 30, 2021 and December 31, 2020 are presented as follows:

As of September 30, 2021

Accruing Past

Nonaccrual

Nonaccrual

Due 90 Days or

Loans/Leases

Loans/Leases

Percentage of

Classes of Loans/Leases

    

More

    

with an ACL

    

without an ACL

    

Total NPLs

    

Total NPLs

 

 

(dollars in thousands)

C&I:

 

C&I - revolving

$

$

$

$

 

-

%

C&I - other

14

5,024

337

5,375

78.68

CRE - owner occupied

 

 

 

 

 

-

CRE - non-owner occupied

 

 

 

 

 

-

Construction and land development

75

75

1.10

Multi-family

 

 

 

 

 

-

Direct financing leases

 

 

112

 

732

 

844

 

12.35

1-4 family real estate

 

 

475

 

 

475

 

6.95

Consumer

 

 

63

 

 

63

 

0.92

$

14

$

5,749

$

1,069

$

6,832

 

100.00

%

The Company did not recognize any interest income on nonaccrual loans during the three and nine months ended September 30, 2021.

As of December 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

$

$

4,807

$

606

$

5,413

 

36.87

%

CRE

 

  

 

  

 

  

 

  

 

  

Owner-occupied CRE

 

 

12

 

 

12

 

0.08

%

Commercial construction, land development, and other land

 

 

 

 

 

-

%

Other non-owner occupied CRE

 

 

7,488

 

 

7,488

 

50.99

%

Direct financing leases

 

 

406

 

135

 

541

 

3.68

%

Residential real estate

 

 

1,022

 

 

1,022

 

6.96

%

Installment and other consumer

 

3

 

205

 

 

208

 

1.42

%

$

3

$

13,940

$

741

$

14,684

100.00

%

*   Nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, $48 thousand in installment loans.

27

Changes in the ACL-loans/leases by portfolio segment for the three and nine months ended September 30, 2021 and 2020, respectively, are presented as follows:

Three Months Ended September 30, 2021

CRE

CRE

Construction

Direct

Residential

1-4

C&I -

C&I -

Owner

Non-Owner

and Land

Multi-

Financing

Real

Family

    

C&I

Revolving

Other*

    

CRE

Occupied

Occupied

Development

Family

    

Leases

    

Estate

Real Estate

    

Consumer

Total

 

(dollars in thousands)

Balance, beginning

$

$

3,177

$

32,325

$

$

8,020

$

8,911

$

13,640

$

6,977

$

$

$

4,925

$

919

$

78,894

Provision

 

 

(262)

 

(276)

 

 

(62)

 

25

 

2,141

 

923

 

 

 

(558)

 

(36)

 

1,895

Charge-offs

 

 

 

(283)

 

 

 

 

 

 

 

 

 

(4)

 

(287)

Recoveries

 

 

 

109

 

 

4

 

50

 

 

 

 

 

 

5

 

168

Balance, ending

$

$

2,915

$

31,875

$

$

7,962

$

8,986

$

15,781

$

7,900

$

$

$

4,367

$

884

$

80,670

Nine Months Ended September 30, 2021

CRE -

CRE -

Construction

Direct

Residential 

C&I -

C&I -

Owner

Non-Owner

and Land

Multi

Financing

Real

1-4

    

C&I

Revolving

Other**

    

CRE

Occupied

Occupied

Development

Family

    

Leases

    

Estate

Family

    

Consumer

Total

 

(dollars in thousands)

Balance, beginning

$

35,421

$

$

$

42,161

$

$

$

$

$

1,764

$

3,732

$

$

1,298

$

84,376

Adoption of ASU 2016-13

(35,421)

2,982

29,130

(42,161)

8,696

11,428

11,999

5,836

(1,764)

(3,732)

5,042

(137)

(8,102)

Provision

 

 

(67)

 

4,271

 

 

(732)

 

(637)

 

3,782

 

2,214

 

 

 

(502)

 

(582)

 

7,747

Charge-offs

 

 

 

(1,949)

 

 

 

(1,876)

 

 

(150)

 

 

 

(690)

 

(9)

 

(4,674)

Recoveries

 

 

 

423

 

 

(2)

 

71

 

 

 

 

 

517

 

314

 

1,323

Balance, ending

$

$

2,915

$

31,875

$

$

7,962

$

8,986

$

15,781

$

7,900

$

$

$

4,367

$

884

$

80,670

*   Included within the C&I – Other column are ACL on leases with a beginning balance of $2.0 million, negative provision of $212 thousand, charge-offs of $72 thousand and recoveries of $52 thousand. ACL on leases was $1.7 million as of September 30, 2021.

**   Included within the C&I – Other column are ACL on leases with a beginning balance of $1.8 million, adoption impact of $685 thousand, negative provision of negative $491 thousand, charge-offs of $400 thousand and recoveries of $186 thousand. ACL on leases was $1.7 million as of September 30, 2021.

Three Months Ended September 30, 2020

Direct Financing

Residential Real

Installment and

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

(dollars in thousands)

Balance, beginning

$

25,748

$

29,123

$

1,639

$

3,010

$

1,307

$

60,827

Provision

 

9,008

 

10,428

 

608

 

253

 

45

 

20,342

Charge-offs

 

(1,079)

 

(362)

 

(358)

 

 

(20)

 

(1,819)

Recoveries

 

150

 

64

 

13

 

 

5

 

232

Balance, ending

$

33,827

$

39,253

$

1,902

$

3,263

$

1,337

$

79,582

Nine Months Ended September 30, 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 charged to expense

 

20,564

 

24,609

 

1,890

 

1,286

 

275

 

48,624

Loans/leases charged off

 

(3,058)

 

(873)

 

(1,554)

 

 

(119)

 

(5,604)

Recoveries on loans/leases previously charged off

 

249

 

138

 

102

 

29

 

43

 

561

Balance, ending

$

33,827

$

39,253

$

1,902

$

3,263

$

1,337

$

79,582

28

The composition of the ACL-loans/leases by portfolio segment based on evaluation method are as follows:

As of September 30, 2021

Amortized Cost of Loans Receivable

Allowance for Credit Losses

Individually

Collectively

Individually

Collectively

Evaluated for

Evaluated for

Evaluated for

Evaluated for

    

Credit Losses

    

Credit Losses

Total

Credit Losses

    

Credit Losses

Total

(dollars in thousands)

C&I :

C&I - revolving

$

2,650

$

172,505

$

175,155

$

188

$

2,727

$

2,915

C&I - other*

 

26,124

 

1,489,693

 

1,515,817

 

3,173

 

28,702

 

31,875

 

28,774

 

1,662,198

 

1,690,972

 

3,361

 

31,429

 

34,790

CRE - owner occupied

 

3,883

 

430,131

 

434,014

 

287

 

7,675

 

7,962

CRE - non-owner occupied

 

19,183

 

625,667

 

644,850

 

 

8,986

 

8,986

Construction and land development

 

10,507

 

841,911

 

852,418

 

12

 

15,769

 

15,781

Multi-family

529,727

529,727

7,900

7,900

1-4 family real estate

 

1,527

 

374,540

 

376,067

 

203

 

4,164

 

4,367

Consumer

 

227

 

71,455

 

71,682

 

28

 

856

 

884

$

64,101

$

4,535,629

$

4,599,730

$

3,891

$

76,779

$

80,670

*   Included within the C&I – Other category are leases individually evaluated of $844 thousand with a related allowance for credit losses of $34 thousand and leases collectively evaluated of $49.4 million with a related allowance for credit losses of $1.7 million.

Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below.  The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease.  The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the nine months ended September 30, 2020 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

$

2,004

$

2,114

$

$

1,418

$

35

$

35

CRE

 

  

 

  

 

 

 

 

  

Owner-occupied CRE

 

287

 

528

 

 

146

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

1,336

 

1,336

 

 

334

 

22

 

22

Direct financing leases

 

944

 

944

 

 

792

 

16

 

16

Residential real estate

 

507

 

507

 

 

416

 

 

Installment and other consumer

 

146

 

146

 

 

119

 

 

$

5,224

$

5,575

$

$

3,225

$

73

$

73

 

  

 

  

 

  

 

  

 

  

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

$

$

$

$

$

CRE

 

 

 

 

 

 

Owner-occupied CRE

 

 

 

 

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

13,046

 

13,046

 

3,210

 

7,228

 

 

Direct financing leases

 

 

 

 

 

 

Residential real estate

 

259

 

259

 

21

 

220

 

 

Installment and other consumer

 

75

 

75

 

75

 

69

 

 

$

13,380

$

13,380

$

3,306

$

7,517

$

$

 

  

 

  

 

  

 

  

 

  

 

  

Total Impaired Loans/Leases:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

2,004

$

2,114

$

$

1,418

$

35

$

35

CRE

 

  

 

  

 

  

 

  

 

  

 

  

Owner-occupied CRE

 

287

 

528

 

 

146

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

14,382

 

14,382

 

3,210

 

7,562

 

22

 

22

Direct financing leases

 

944

 

944

 

 

792

 

16

 

16

Residential real estate

 

766

 

766

 

21

 

636

 

 

Installment and other consumer

 

221

 

221

 

75

 

188

 

 

$

18,604

$

18,955

$

3,306

$

10,742

$

73

$

73

29

Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended September 30, 2020 are presented as follows:

Three Months Ended September 30, 2020

    

Interest Income

Average

Recognized for

Recorded

Interest Income

Cash Payments

Classes of Loans/Leases

Investment

    

Recognized

    

Received

 

Impaired Loans/Leases with No Specific Allowance Recorded:

 

  

 

  

 

  

C&I

$

1,825

$

11

$

11

CRE

 

 

 

Owner-Occupied CRE

 

292

 

 

Commercial Construction, Land Development, and Other Land

 

 

 

Other Non Owner-Occupied CRE

 

668

 

7

 

7

Direct Financing Leases

 

953

 

6

 

6

Residential Real Estate

 

512

 

 

Installment and Other Consumer

 

146

 

 

$

4,396

$

24

$

24

 

  

 

  

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

  

 

  

 

  

C&I

$

$

$

CRE

 

 

 

Owner-Occupied CRE

 

 

 

Commercial Construction, Land Development, and Other Land

 

 

 

Other Non Owner-Occupied CRE

 

9,757

 

 

Direct Financing Leases

 

 

 

Residential Real Estate

 

260

 

 

Installment and Other Consumer

 

77

 

 

$

10,094

$

$

 

  

 

  

 

  

Total Impaired Loans/Leases:

 

  

 

  

 

  

C&I

$

1,825

$

11

$

11

CRE

 

  

 

  

 

  

Owner-Occupied CRE

 

292

 

 

Commercial Construction, Land Development, and Other Land

 

 

 

Other Non Owner-Occupied CRE

 

10,425

 

7

 

7

Direct Financing Leases

 

953

 

6

 

6

Residential Real Estate

 

772

 

 

Installment and Other Consumer

 

223

 

 

$

14,490

$

24

$

24

30

Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2020 are presented as

follows:

December 31, 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

$

1,361

$

1,441

$

$

1,002

$

33

$

33

CRE

 

  

 

 

 

 

 

Owner-occupied CRE

 

 

 

 

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

1,133

 

1,933

 

 

494

 

29

 

29

Direct financing leases

 

578

 

578

 

 

483

 

17

 

17

Residential real estate

 

719

 

719

 

 

476

 

 

Installment and other consumer

 

133

 

133

 

 

121

 

 

$

3,924

$

4,804

$

$

2,576

$

79

$

79

 

  

 

  

 

  

 

  

 

  

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

  

 

  

 

  

 

  

 

 

  

C&I

$

4,020

$

4,020

$

650

$

1,555

$

$

CRE

 

 

  

 

 

 

 

Owner-occupied CRE

 

 

 

 

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

6,354

 

6,354

 

1,938

 

5,726

 

 

Direct financing leases

 

 

 

 

 

 

Residential real estate

 

258

 

258

 

20

 

227

 

 

Installment and other consumer

 

72

 

72

 

72

 

70

 

 

$

10,704

$

10,704

$

2,680

$

7,578

$

$

 

  

 

  

 

  

 

  

 

  

 

  

Total Impaired Loans/Leases:

 

  

 

  

 

  

 

  

 

  

 

  

C&I

$

5,381

$

5,461

$

650

$

2,557

$

33

$

33

CRE

 

  

 

  

 

  

 

  

 

  

 

  

Owner-occupied CRE

 

 

 

 

 

 

Commercial construction, land development, and other land

 

 

 

 

 

 

Other non-owner occupied CRE

 

7,487

 

8,287

 

1,938

 

6,220

 

29

 

29

Direct financing leases

 

578

 

578

 

 

483

 

17

 

17

Residential real estate

 

977

 

977

 

20

 

703

 

 

Installment and other consumer

 

205

 

205

 

72

 

191

 

 

$

14,628

$

15,508

$

2,680

$

10,154

$

79

$

79

Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.

31

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:

As of September 30, 2021

Non

Commercial

Owner-Occupied

Owner Occupied

    

Assets

    

Real Estate

Real Estate

Securities

Equipment

Other

Total

(dollars in thousands)

C & I:

C&I - revolving

$

2,400

$

$

$

$

250

$

$

2,650

C&I - other*

 

746

 

 

2,530

 

145

 

22,404

 

299

 

26,124

 

3,146

 

 

2,530

 

145

 

22,654

 

299

 

28,774

CRE - owner occupied

 

 

 

3,883

 

 

 

 

3,883

CRE - non-owner occupied

 

 

19,183

 

 

 

 

 

19,183

Construction and land development

 

 

10,431

 

76

 

 

 

 

10,507

Multi-family

1-4 family real estate

 

 

 

1,527

 

 

 

 

1,527

Consumer

 

 

 

207

 

 

 

20

 

227

$

3,146

$

29,614

$

8,223

$

145

$

22,654

$

319

$

64,101

*   Included within the C&I – Other category are leases individually evaluated of $844 thousand with primary collateral of equipment.

For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings.  Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans.  Delinquency status is updated daily by the Company’s loan system.

32

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of September 30, 2021:

As of September 30, 2021

Term Loans

 

Amortized Cost Basis by Origination Year

 

Revolving

Loans

Internally Assigned

Amortized

Risk Rating

    

2021

    

2020

    

2019

    

2018

    

2017

Prior

Cost Basis

Total

(dollars in thousands)

C&I - revolving

Pass (Ratings 1 through 5)

$

$

$

$

$

$

$

171,646

$

171,646

Special Mention (Rating 6)

 

 

 

 

 

 

 

859

 

859

Substandard (Rating 7)

 

 

 

 

 

 

 

2,650

 

2,650

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - revolving

$

$

$

$

$

$

$

175,155

$

175,155

C&I - other

Pass (Ratings 1 through 5)

$

389,930

$

414,997

$

158,888

$

109,194

$

91,950

$

58,973

$

$

1,223,932

Special Mention (Rating 6)

 

3,572

 

381

 

 

67

 

381

 

1,263

 

 

5,664

Substandard (Rating 7)

 

411

 

6,439

 

15,945

 

355

 

59

 

50

 

 

23,259

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - other

$

393,913

$

421,817

$

174,833

$

109,616

$

92,390

$

60,286

$

$

1,252,855

CRE - owner occupied

Pass (Ratings 1 through 5)

$

99,294

$

154,383

$

57,484

$

30,136

$

19,636

$

52,166

$

12,616

$

425,715

Special Mention (Rating 6)

 

889

 

 

177

 

237

 

1,875

 

1,234

 

 

4,412

Substandard (Rating 7)

 

197

 

 

1,913

 

1,250

 

527

 

 

 

3,887

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - owner occupied

$

100,380

$

154,383

$

59,574

$

31,623

$

22,038

$

53,400

$

12,616

$

434,014

CRE - non-owner occupied

Pass (Ratings 1 through 5)

$

142,226

$

168,609

$

90,613

$

67,934

$

62,429

$

38,946

$

8,336

$

579,093

Special Mention (Rating 6)

 

6,807

 

15,462

 

2,226

 

12,299

 

4,144

 

5,627

 

19

 

46,584

Substandard (Rating 7)

 

386

 

628

 

15,605

 

1,126

 

950

 

 

478

 

19,173

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - non-owner occupied

$

149,419

$

184,699

$

108,444

$

81,359

$

67,523

$

44,573

$

8,833

$

644,850

Construction and land development

Pass (Ratings 1 through 5)

$

304,504

$

244,267

$

155,738

$

110,633

$

4,904

$

182

$

6,860

$

827,088

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

 

 

10,433

 

 

 

 

 

10,433

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Construction and land development

$

304,504

$

244,267

$

166,171

$

110,633

$

4,904

$

182

$

6,860

$

837,521

Multi-family

Pass (Ratings 1 through 5)

$

191,982

$

203,030

$

69,276

$

48,093

$

5,719

$

8,638

$

2,989

$

529,727

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

 

 

 

 

 

 

 

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Multi-family

$

191,982

$

203,030

$

69,276

$

48,093

$

5,719

$

8,638

$

2,989

$

529,727

1-4 family real estate

Pass (Ratings 1 through 5)

$

34,087

$

30,604

$

18,906

$

8,462

$

6,001

$

6,744

$

6,267

$

111,071

Special Mention (Rating 6)

 

37

 

179

 

 

545

 

354

 

 

 

1,115

Substandard (Rating 7)

 

 

 

 

 

 

 

 

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total 1-4 family real estate

$

34,124

$

30,783

$

18,906

$

9,007

$

6,355

$

6,744

$

6,267

$

112,186

Total

$

1,174,322

$

1,238,979

$

597,204

$

390,331

$

198,929

$

173,823

$

212,720

$

3,986,308

33

As of September 30, 2021

Term Loans

 

Amortized Cost Basis by Origination Year

Revolving

Loans

Amortized

Delinquency Status *

    

2021

    

2020

    

2019

    

2018

    

2017

Prior

Cost Basis

Total

 

(dollars in thousands)

C&I - other

Performing

$

90,454

$

59,480

$

38,136

$

17,435

$

5,160

$

515

$

$

211,180

Nonperforming

 

90

 

236

 

722

 

435

 

47

 

15

 

 

1,545

Total C&I - other

$

90,544

$

59,716

$

38,858

$

17,870

$

5,207

$

530

$

$

212,725

Direct financing leases

Performing

$

5,448

$

13,473

$

13,211

$

10,874

$

5,026

$

1,361

$

$

49,393

Nonperforming

 

 

732

 

 

41

 

23

 

48

 

 

844

Total Direct financing leases

$

5,448

$

14,205

$

13,211

$

10,915

$

5,049

$

1,409

$

$

50,237

Construction and land development

Performing

$

7,131

$

6,697

$

212

$

502

$

$

$

280

$

14,822

Nonperforming

 

 

 

 

 

75

 

 

 

75

Total Construction and land development

$

7,131

$

6,697

$

212

$

502

$

75

$

$

280

$

14,897

1-4 family real estate

Performing

$

85,172

$

82,206

$

20,469

$

12,210

$

12,232

$

51,088

$

28

$

263,405

Nonperforming

 

 

 

72

 

 

 

404

 

 

476

Total 1-4 family real estate

$

85,172

$

82,206

$

20,541

$

12,210

$

12,232

$

51,492

$

28

$

263,881

Consumer

Performing

$

4,218

$

6,190

$

2,517

$

2,132

$

674

$

2,391

$

53,497

$

71,619

Nonperforming

 

45

 

 

 

 

16

 

2

 

 

63

Total Consumer

$

4,263

$

6,190

$

2,517

$

2,132

$

690

$

2,393

$

53,497

$

71,682

Total

$

192,558

$

169,014

$

75,339

$

43,629

$

23,253

$

55,824

$

53,805

$

613,422

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

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

As of December 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)

$

1,506,578

$

488,478

$

530,297

$

999,931

$

3,525,284

 

96.25

%

Special Mention (Rating 6)

 

23,929

 

3,087

 

680

 

43,785

 

71,481

 

1.95

%

Substandard (Rating 7)

 

24,710

 

4,906

 

10,478

 

25,987

 

66,081

 

1.80

%

Doubtful (Rating 8)

 

 

 

 

 

 

%

$

1,555,217

$

496,471

$

541,455

$

1,069,703

$

3,662,846

 

100.00

%

As of December 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

$

170,712

$

65,475

$

251,099

$

91,094

$

578,380

 

99.56

%

Nonperforming

 

794

 

541

 

1,022

 

208

 

2,565

 

0.44

%

$

171,506

$

66,016

$

252,121

$

91,302

$

580,945

 

100.00

%

* Prior to Adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.

34

As of September 30, 2021 and December 31, 2020, TDRs totaled $591 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 nine months ended September 30, 2021 and during the three and nine months ended September 30, 2020. There were no loans restructured during the three months ended September 30, 2021. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.

For the three months ended September 30, 2021

For the nine months ended September 30, 2021

   

   

Pre-

    

Post-

    

    

    

Pre-

    

Post-

    

Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Extension of Maturity

 

  

 

  

 

  

 

  

  

 

  

 

  

 

  

1-4 family real estate

$

$

$

1

$

2,532

$

2,532

$

 

  

 

  

 

  

 

  

  

 

  

 

  

 

  

CONCESSION - Interest Rate Adjusted Below Market

 

  

 

  

 

  

 

  

  

 

  

 

  

 

  

1-4 family real estate

 

$

$

$

1

$

54

$

54

$

6

Consumer

1

13

13

6

$

$

$

2

$

67

$

67

$

12

TOTAL

 

$

$

$

3

$

2,599

$

2,599

$

12

For the three months ended September 30, 2020

For the nine months ended September 30, 2020

   

   

Pre-

    

Post-

    

    

    

Pre-

    

Post-

    

Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

CONCESSION - Significant Payment Delay

 

  

 

  

 

  

 

  

  

 

  

 

  

 

  

C&I

3

$

197

$

197

$

5

$

308

$

308

$

Direct financing leases

3

145

145

 

3

$

197

$

197

$

8

$

453

$

453

$

TOTAL

 

3

$

197

$

197

$

8

$

453

$

453

$

Of the loans restructured during the nine months ended September 30, 2021, one with a post-modification recorded investment totaling $54 thousand was on nonaccrual and of the loans restructured during the three and nine months ended September 30, 2020, none were on nonaccrual.  

For the three and nine months ended September 30, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

For the three months ended September 30, 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 a lease restructured in the fourth quarter of 2019 with a pre-modification balance totaling $32 thousand.  For the nine months ended September 30, 2020, three of the Company’s TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.  These TDRs included the TDR that defaulted in the three months ended September 30, 2020 as well as a lease that was restructured in the fourth quarter of 2019 with pre-modification balance totaling $55 thousand and a commercial loan that was restructured in the fourth quarter of 2019 with a pre-modification balance of $48 thousand.

Not included in the table above are 10 TDRs that were restructured and charged off for the nine months ended September 30, 2020, totaling $482 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,

35

extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators clarified that this guidance may continue to be applied in 2021.

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be (1) related to COVID-19,  (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the National Emergency or (B) December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days.  As of  September 30, 2021, there were no bank modifications and eight m2 modifications of loans and leases totaling $2.9 million, representing 0.06% of the total loan and lease portfolio, that were on deferral as of such date.  

On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended the debt relief program to the earlier of 60 days after the national emergency termination date or January 1, 2022.  The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.

The adoption of ASU 2016-13 required an allowance for OBS exposures, specifically on unfunded commitments. Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2021 and 2020 are presented as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

    

September 30, 2020

September 30, 2021

    

September 30, 2020

(dollars in thousands)

Balance, beginning

$

9,987

$

$

$

Impact of adopting ASU 2016-13

9,117

Provisions credited to expense

 

(1,895)

 

 

(1,025)

 

Balance, ending

$

8,092

$

$

8,092

$

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

Derivatives are summarized as follows as of September 30, 2021 and December 31, 2020:

    

September 30, 2021

    

December 31, 2020

(dollars in thousands)

Assets:

Interest rate caps - hedged

$

517

$

259

Interest rate caps

 

141

 

67

Interest rate swaps - hedged

807

Interest rate swaps

 

196,928

 

222,431

$

198,393

$

222,757

Liabilities:

Interest rate swaps - hedged

$

(4,522)

$

(6,839)

Interest rate swaps

(196,928)

(222,431)

$

(201,450)

$

(229,270)

36

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

The Company entered into interest rate caps to hedge against the risk of rising interest rates on liabilities.  The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps executed.  The details of the interest rate caps are as follows:  

Balance Sheet

Fair Value as of

Hedged Item

Effective Date

Maturity Date

Location

Notional Amount

Strike Rate

September 30, 2021

December 31, 2020

(dollars in thousands)

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

$

25,000

1.75

%  

$

1

$

3

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

50,000

1.57

2

5

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

25,000

1.80

1

3

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.75

26

15

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

50,000

1.57

53

31

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.80

26

15

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.75

101

46

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

50,000

1.57

205

94

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.80

102

47

$

300,000

$

517

$

259

In December 2020, the Company redesignated three of its interest rate caps, which had been purchased in 2019 for $800 thousand.  The caps, which were designated as cash flow hedges at the time of purchase, were redesignated as unhedged.  For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings.  The details of the unhedged interest rate caps are as follows:

Balance Sheet

Fair Value as of

Effective Date

Maturity Date

Location

Notional Amount

Strike Rate

September 30, 2021

December 31, 2020

(dollars in thousands)

1/1/2020

1/1/2023

Derivatives - Assets

$

25,000

1.90

%  

$

1

$

2

2/1/2020

2/1/2024

Derivatives - Assets

25,000

1.90

26

15

3/1/2020

3/1/2025

Derivatives - Assets

25,000

1.90

114

50

$

75,000

$

141

$

67

The Company has entered into interest rate swaps to hedge against the risk of declining interest rates on floating rate loans.    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

September 30, 2021

December 31, 2020

(dollars in thousands)

QCBT - Loans

 

7/1/2021

7/1/2031

Derivatives - Assets

 

35,000

1.40

%  

 

2.81

%  

192

N/A

CRBT - Loans

 

7/1/2021

7/1/2031

Derivatives - Assets

 

50,000

1.40

%  

 

2.81

%  

274

N/A

CSB - Loans

 

7/1/2021

7/1/2031

Derivatives - Assets

 

40,000

1.40

%  

 

2.81

%  

204

N/A

SFCB - Loans

 

7/1/2021

7/1/2031

Derivatives - Assets

 

25,000

1.40

%  

 

2.81

%  

137

N/A

 

  

 

$

150,000

$

807

$

N/A

The Company has entered into interest rate swaps to hedge against the risk of rising rates on 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

September 30, 2021

December 31, 2020

(dollars in thousands)

QCR Holdings Statutory Trust II

 

9/30/2018

9/30/2028

Derivatives - Liabilities

 

10,000

2.98

%  

 

5.85

%  

(1,169)

(1,767)

QCR Holdings Statutory Trust III

 

9/30/2018

9/30/2028

Derivatives - Liabilities

 

8,000

2.98

%  

 

5.85

%  

(936)

(1,414)

QCR Holdings Statutory Trust V

 

7/7/2018

7/7/2028

Derivatives - Liabilities

 

10,000

1.68

%  

 

4.54

%  

(1,135)

(1,721)

Community National Statutory Trust II

 

9/20/2018

9/20/2028

Derivatives - Liabilities

 

3,000

2.29

%  

 

5.17

%  

(350)

(529)

Community National Statutory Trust III

 

9/15//2018

9/15/2028

Derivatives - Liabilities

 

3,500

1.87

%  

 

4.75

%  

(408)

(616)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

9/15/2028

Derivatives - Liabilities

 

4,500

1.87

%  

 

4.75

%  

(524)

(792)

 

  

 

$

39,000

$

(4,522)

$

(6,839)

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.

37

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

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

September 30, 2021

December 31, 2020

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

Interest rate swap contracts

$

3,609,566

$

196,928

$

1,539,602

$

222,431

Non-Hedging Interest Rate Derivatives Liabilities:

Interest rate swap contracts

$

3,609,566

$

196,928

$

1,539,602

$

222,431

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended September 30, 2021 and September 30, 2020 are as follows:

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

Interest and

Interest

Interest and

Interest

Dividend Income

Expense

Dividend Income

Expense

(dollars in thousands)

Income and expense line items presented in the consolidated statements of income

$

51,667

$

5,438

$

50,890

$

6,309

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

-

-

-

79

Interest rate swap on variable rate loans

502

-

-

-

Interest rate cap on deposits

-

181

-

128

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the nine months ended September 30, 2021 and September 30, 2020 are as follows:

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Interest and

Interest

Interest and

Interest

Dividend Income

Expense

Dividend Income

Expense

(dollars in thousands)

Income and expense line items presented in the consolidated statements of income

$

148,135

$

16,415

$

148,522

$

25,279

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

-

-

-

114

Interest rate swap on variable rate loans

502

-

-

-

Interest rate cap on deposits

-

495

-

336

38

The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:

    

September 30, 2021

December 31, 2020

(dollars in thousands)

Cash

$

13,220

$

45,719

U.S treasuries and govt. sponsored agency securities

3,579

3,628

Municipal securities

69,397

85,937

Residential mortgage-backed and related securities

 

122,606

 

89,646

$

208,802

$

224,930

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements.  The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information.  Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements,  central clearing mechanisms and counterparty limits.  The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.  The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values.   For the majority of the Company’s swapped loan portfolio, the loan-to-value including the potential swap exposure is below 65%.  The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 5 – INCOME TAXES

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three and nine months ended September 30, 2021 and September 30, 2020:

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

2021

2020

2021

2020

% of

% of

% of

% of

Pretax

Pretax

Pretax

Pretax

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

 

(dollars in thousands)

Computed "expected" tax expense

$

8,293

 

21.0

%  

$

4,486

 

21.0

%  

$

18,512

 

21.0

%  

$

10,712

 

21.0

%

Tax exempt income, net

 

(2,032)

 

(5.1)

 

(1,350)

 

(6.3)

 

(5,553)

 

(6.3)

 

(3,822)

 

(7.5)

Bank-owned life insurance

 

(93)

 

(0.2)

 

(101)

 

(0.5)

 

(287)

 

(0.3)

 

(271)

 

(0.5)

State income taxes, net of federal benefit, current year

 

1,799

 

4.6

 

1,003

 

4.7

 

4,070

 

4.6

 

2,456

 

4.8

Tax credits

 

(57)

 

(0.1)

 

(116)

 

(0.5)

 

(171)

 

(0.2)

 

(348)

 

(0.7)

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

 

(107)

 

(0.3)

 

14

 

0.1

 

(311)

 

(0.4)

 

(248)

 

(0.5)

Other

 

126

 

0.2

 

80

 

0.4

 

(2)

 

 

219

 

0.5

Federal and state income tax expense

$

7,929

 

20.1

%  

$

4,016

 

18.9

%  

$

16,258

 

18.4

%  

$

8,698

 

17.1

%

 

 

39

NOTE 6 - EARNINGS PER SHARE

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

Three months ended

Nine months ended

September 30, 

September 30, 

2021

    

2020

    

2021

    

2020

(dollars in thousands, except share data)

Net income

$

31,565

$

17,344

$

71,896

$

42,311

Basic EPS

$

2.02

$

1.10

$

4.54

$

2.68

Diluted EPS

$

1.99

$

1.09

$

4.48

$

2.65

Weighted average common shares outstanding

 

15,635,123

 

15,767,152

 

15,829,124

 

15,770,335

Weighted average common shares issuable upon exercise of stock options

and under the employee stock purchase plan

 

234,675

 

156,426

 

229,296

 

175,497

Weighted average common and common equivalent shares outstanding

 

15,869,798

 

15,923,578

 

16,058,420

 

15,945,832

40

NOTE 7 – FAIR VALUE

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

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis comprise the following at September 30, 2021 and December 31, 2020:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

(dollars in thousands)

September 30, 2021:

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

23,689

$

$

23,689

$

Residential mortgage-backed and related securities

 

100,744

 

 

100,744

 

Municipal securities

 

166,359

 

 

166,359

 

Asset-backed securities

30,607

30,607

Other securities

 

23,317

 

 

23,317

 

Derivatives

 

198,393

 

 

198,393

 

Total assets measured at fair value

$

543,109

$

$

543,109

$

 

  

 

  

 

  

 

  

Derivatives

$

201,450

$

$

201,450

$

Total liabilities measured at fair value

$

201,450

$

$

201,450

$

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2020:

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

15,336

$

$

15,336

$

Residential mortgage-backed and related securities

 

132,842

 

 

132,842

 

Municipal securities

 

152,408

 

 

152,408

 

Asset-backed securities

40,683

40,683

Other securities

 

20,697

 

 

20,697

 

Derivatives

 

222,757

 

 

222,757

 

Total assets measured at fair value

$

584,723

$

$

584,723

$

 

  

 

  

 

  

 

  

Derivatives

$

229,270

$

$

229,270

$

Total liabilities measured at fair value

$

229,270

$

$

229,270

$

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

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

Interest rate swaps are used for the purpose of hedging interest rate risk on loans, FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements.

41

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 executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).

Assets measured at fair value on a non-recurring basis comprise the following at September 30, 2021 and December 31, 2020:

    

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

(dollars in thousands)

September 30, 2021:

 

  

 

  

 

  

 

  

Loans/leases evaluated individually

$

65,027

$

$

$

65,027

OREO

 

 

 

 

$

65,027

$

$

$

65,027

December 31, 2020:

 

  

 

  

 

  

 

  

Loans/leases evaluated individually

$

9,926

$

$

$

9,926

OREO

 

22

 

 

 

22

$

9,948

$

$

$

9,948

The increase in loans/leases evaluated individually is due to the change in ACL methodology with the adoption of ASU 2016-13 as well as the downgrading of one large relationship.

Loans/leases evaluated individually are valued at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.

OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy.  The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.

42

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

Quantitative Information about Level Fair Value Measurements

 

Fair Value

Fair Value

 

September 30, 

December 31, 

 

    

2021

    

2020

    

Valuation Technique

    

Unobservable Input

    

Range

(dollars in thousands)

Loans/leases evaluated individually

$

65,027

$

9,926

 

Appraisal of collateral

 

Appraisal adjustments

 

-10.00

%  

to

 

-30.00

%

OREO

 

 

22

 

Appraisal of collateral

 

Appraisal adjustments

 

0.00

%  

to

 

-35.00

%

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

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and nine months ended September 30, 2021 and 2020.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

Fair Value

As of September 30, 2021

As of December 31, 2020

Hierarchy

Carrying

Estimated

Carrying

Estimated

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

(dollars in thousands)

Cash and due from banks

 

Level 1

$

57,310

$

57,310

$

61,329

$

61,329

Federal funds sold

 

Level 2

 

6,985

 

6,985

 

9,080

 

9,080

Interest-bearing deposits at financial institutions

 

Level 2

 

63,841

 

63,841

 

86,596

 

86,596

Investment securities:

 

  

 

 

 

 

HTM

 

Level 2

 

484,003

 

531,279

 

476,165

 

521,277

AFS

 

Level 2

 

344,716

 

344,716

 

361,966

 

361,966

Loans/leases receivable, net

 

Level 3

 

60,210

 

65,027

 

9,191

 

9,926

Loans/leases receivable, net

 

Level 2

 

4,458,850

 

4,361,433

 

4,157,562

 

4,112,735

Derivatives

 

Level 2

 

198,393

 

198,393

 

222,757

 

222,757

Deposits:

 

  

 

 

 

 

Nonmaturity deposits

 

Level 2

 

4,426,844

 

4,426,844

 

4,138,478

 

4,138,478

Time deposits

 

Level 2

 

444,984

 

440,549

 

460,659

 

465,681

Short-term borrowings

 

Level 2

 

1,600

 

1,600

 

5,430

 

5,430

FHLB advances

 

Level 2

 

30,000

 

30,000

 

15,000

 

14,998

Subordinated notes

Level 2

113,811

116,321

118,691

112,406

Junior subordinated debentures

 

Level 2

 

38,103

 

30,912

 

37,993

 

30,618

Derivatives

 

Level 2

 

201,450

 

201,450

 

229,270

 

229,270

NOTE 8 – BUSINESS SEGMENT INFORMATION

Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company's internal organization, focusing on the financial information that the Company's operating decision-makers routinely use to make decisions about operating matters.

The Company's Commercial Banking business, is geographically divided by markets into the operating segments which are the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFCB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

43

The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.  

Selected financial information on the Company's business segments is presented as follows as of and for the three and nine months ended September 30, 2021 and 2020.

Commercial Banking

Intercompany

Consolidated

    

QCBT

    

CRBT

    

CSB

    

SFCB

    

All other

    

Eliminations

    

Total

(dollars in thousands)

Three Months Ended September 30, 2021

  

  

Total revenue

$

22,630

$

41,415

$

11,445

$

10,886

$

36,749

$

(36,806)

$

86,319

Net interest income

 

16,862

 

14,784

 

9,303

 

7,058

 

(2,121)

 

343

 

46,229

Provision for credit losses

 

247

 

(733)

 

596

 

(110)

 

 

 

Net income (loss) from continuing operations

 

8,704

 

19,730

 

3,243

 

4,590

 

31,740

 

(36,442)

 

31,565

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

1,824

 

2,816

 

5,217

 

 

 

9,857

Total assets

 

2,106,631

 

2,019,018

 

1,140,933

 

880,143

 

828,808

 

(961,025)

 

6,014,508

 

  

 

  

 

  

 

 

 

  

 

Three Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

Total revenue

$

22,971

$

44,164

$

11,159

$

10,266

$

22,128

$

(21,839)

$

88,849

Net interest income

 

16,648

 

14,432

 

8,593

 

6,159

 

(1,531)

 

280

 

44,581

Provision for loan/lease losses

 

7,861

 

8,878

 

2,493

 

1,110

 

 

 

20,342

Net income (loss) from continuing operations

 

3,273

 

13,437

 

1,888

 

2,869

 

17,360

 

(21,483)

 

17,344

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

2,313

 

3,474

 

6,115

 

 

 

11,902

Total assets

 

2,205,934

 

2,012,182

 

937,016

 

803,478

 

756,716

 

(850,766)

 

5,864,560

Nine Months Ended September 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

Total revenue

$

65,590

$

98,270

$

32,677

$

28,813

$

86,699

$

(86,477)

$

225,572

Net interest income

 

48,800

 

42,395

 

26,343

 

19,606

 

(6,342)

 

918

 

131,720

Provision for loan/lease losses

 

2,495

 

759

 

2,718

 

741

 

 

 

6,713

Net income (loss)

 

24,547

 

42,271

 

8,414

 

10,544

 

72,008

 

(85,888)

 

71,896

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

1,824

 

2,816

 

5,217

 

 

 

9,857

Total assets

 

2,106,631

 

2,019,018

 

1,140,933

 

880,143

 

828,808

 

(961,025)

 

6,014,508

 

  

 

  

 

  

 

  

 

  

 

 

Nine Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

Total revenue

$

66,370

$

102,548

$

31,234

$

28,490

$

57,003

$

(55,342)

$

230,303

Net interest income

 

46,728

 

38,638

 

23,631

 

18,002

 

(4,514)

 

758

 

123,243

Provision for loan/lease losses

 

18,583

 

18,288

 

7,268

 

4,485

 

 

 

48,624

Net income (loss) from continuing operations

 

12,995

 

30,941

 

3,523

 

6,714

 

42,295

 

(54,157)

 

42,311

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

2,313

 

3,474

 

6,115

 

 

 

11,902

Total assets

 

2,205,934

 

2,012,182

 

937,016

 

803,478

 

756,716

 

(850,766)

 

5,864,560

NOTE 9 – REGULATORY CAPITAL REQUIREMENTS

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

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation.  Management believes, as of September 30, 2021 and December 31, 2020, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of September 30, 2021 and

44

December 31, 2020 are presented in the following tables (dollars in thousands).  As of September 30, 2021 and December 31, 2020, each of the subsidiary banks met the requirements to be “well capitalized”.

For Capital

To Be Well

 

Adequacy Purposes

Capitalized Under

 

For Capital

With Capital

Prompt Corrective

 

Actual

Adequacy Purposes

Conservation Buffer

Action Provisions

 

    

Amount

    

Ratio

    

Amount

Ratio

    

Amount

Ratio

    

Amount

Ratio

As of September 30, 2021:

Company:

Total risk-based capital

$

785,424

14.64

%  

$

429,282

> 

8.00

%  

$

563,433

> 

10.50

%  

$

536,603

> 

10.00

%

Tier 1 risk-based capital

 

604,268

 

11.26

 

321,962

> 

6.00

 

456,113

> 

8.50

 

429,282

> 

8.00

Tier 1 leverage

 

604,268

 

10.28

 

235,118

> 

4.00

 

235,118

> 

4.00

 

293,897

> 

5.00

Common equity Tier 1

 

566,165

 

10.55

 

241,471

> 

4.50

 

375,622

> 

7.00

 

348,792

> 

6.50

Quad City Bank & Trust:

 

 

 

  

 

  

 

  

Total risk-based capital

$

237,936

13.07

%  

$

145,613

> 

8.00

%  

$

191,117

> 

10.50

%  

$

182,017

> 

10.00

%

Tier 1 risk-based capital

 

215,059

 

11.82

 

109,210

> 

6.00

 

154,714

> 

8.50

 

145,613

> 

8.00

Tier 1 leverage

 

215,059

 

10.33

 

83,257

> 

4.00

 

83,257

> 

4.00

 

104,071

> 

5.00

Common equity Tier 1

 

215,059

 

11.82

 

81,907

> 

4.50

 

127,412

> 

7.00

 

118,311

> 

6.50

Cedar Rapids Bank & Trust:

 

 

  

 

  

 

  

Total risk-based capital

$

264,015

14.39

%  

$

146,780

> 

8.00

%  

$

192,649

> 

10.50

%  

$

183,475

> 

10.00

%

Tier 1 risk-based capital

 

241,037

 

13.14

 

110,085

> 

6.00

 

155,954

> 

8.50

 

146,780

> 

8.00

Tier 1 leverage

 

241,037

 

12.20

 

79,004

> 

4.00

 

79,004

> 

4.00

 

98,755

> 

5.00

Common equity Tier 1

 

241,037

 

13.14

 

82,564

> 

4.50

 

128,433

> 

7.00

 

119,259

> 

6.50

Community State Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

118,637

11.69

%  

$

81,208

> 

8.00

%  

$

106,585

> 

10.50

%  

$

101,510

> 

10.00

%

Tier 1 risk-based capital

 

105,894

 

10.43

 

60,906

> 

6.00

 

86,283

> 

8.50

 

81,208

> 

8.00

Tier 1 leverage

 

105,894

 

9.80

 

43,204

> 

4.00

 

43,204

> 

4.00

 

54,005

> 

5.00

Common equity Tier 1

 

105,894

 

10.43

 

45,679

> 

4.50

 

71,057

> 

7.00

 

65,981

> 

6.50

Springfield First Community Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

96,864

12.77

%  

$

60,706

> 

8.00

%  

$

79,676

> 

10.50

%  

$

75,882

> 

10.00

%

Tier 1 risk-based capital

 

87,367

 

11.51

 

45,529

> 

6.00

 

64,500

> 

8.50

 

60,706

> 

8.00

Tier 1 leverage

 

87,367

 

10.67

 

32,751

> 

4.00

 

32,751

> 

4.00

 

40,939

> 

5.00

Common equity Tier 1

 

87,367

 

11.51

 

34,147

> 

4.50

 

53,117

> 

7.00

 

49,223

> 

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, 2020:

Company:

Total risk-based capital

$

721,004

14.95

%  

$

385,832

> 

8.00

%  

$

506,404

> 

10.50

%  

$

482,290

> 

10.00

%

Tier 1 risk-based capital

 

546,729

 

11.34

 

289,374

> 

6.00

 

409,946

> 

8.50

 

385,832

> 

8.00

Tier 1 leverage

 

546,729

 

9.49

 

230,345

> 

4.00

 

230,345

> 

4.00

 

287,931

> 

5.00

Common equity Tier 1

 

508,736

 

10.55

 

217,030

> 

4.50

 

337,603

> 

7.00

 

313,488

> 

6.50

Quad City Bank & Trust:

 

 

 

  

 

  

 

  

Total risk-based capital

$

213,608

12.24

%  

$

139,581

> 

8.00

%  

$

183,200

> 

10.50

%  

$

174,477

> 

10.00

%

Tier 1 risk-based capital

 

191,693

10.99

 

104,686

> 

6.00

 

148,305

> 

8.50

 

139,581

> 

8.00

Tier 1 leverage

 

191,693

8.48

 

90,430

> 

4.00

 

90,430

> 

4.00

 

113,038

> 

5.00

Common equity Tier 1

 

191,693

10.99

 

78,514

> 

4.50

 

122,134

> 

7.00

 

113,410

> 

6.50

Cedar Rapids Bank & Trust:

 

 

  

 

  

 

  

Total risk-based capital

$

217,227

13.14

%  

$

132,269

> 

8.00

%  

$

173,603

> 

10.50

%  

$

165,336

> 

10.00

%

Tier 1 risk-based capital

 

196,438

11.88

 

99,202

> 

6.00

 

140,536

> 

8.50

 

132,269

> 

8.00

Tier 1 leverage

 

196,438

10.01

 

78,535

> 

4.00

 

78,535

> 

4.00

 

98,169

> 

5.00

Common equity Tier 1

 

196,438

11.88

 

74,401

> 

4.50

 

115,735

> 

7.00

 

107,469

> 

6.50

Community State Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

108,040

12.69

%  

$

68,117

> 

8.00

%  

$

89,404

> 

10.50

%  

$

85,146

> 

10.00

%

Tier 1 risk-based capital

 

97,350

11.43

 

51,088

> 

6.00

 

72,374

> 

8.50

 

68,117

> 

8.00

Tier 1 leverage

 

97,350

10.27

 

37,930

> 

4.00

 

37,930

> 

4.00

 

47,412

> 

5.00

Common equity Tier 1

 

97,350

11.43

 

38,316

> 

4.50

 

59,602

> 

7.00

 

55,345

> 

6.50

Springfield First Community Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

90,334

14.35

%  

$

50,357

> 

8.00

%  

$

66,094

> 

10.50

%  

$

62,947

> 

10.00

%

Tier 1 risk-based capital

 

77,668

12.34

 

37,768

> 

6.00

 

53,505

> 

8.50

 

50,357

> 

8.00

Tier 1 leverage

 

77,668

10.87

 

28,575

> 

4.00

 

28,575

> 

4.00

 

35,719

> 

5.00

Common equity Tier 1

 

77,668

12.34

 

28,326

> 

4.50

 

44,063

> 

7.00

 

40,915

> 

6.50

45

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and nine months ending September 30, 2021. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. Page locations and specific sections and notes that are referred to in this discussion are listed in the table of contents.

Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.

GENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT.  Over the past twenty-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries.  As of September 30, 2021, the Company had $6.0 billion in consolidated assets, including $4.5 billion in net loans/leases, and $4.9 billion in  deposits.  The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report.  Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2021, and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on the Company’s Market Areas

The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois.  Each of these three states has taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic.  

Effects on the Company’s Business

The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have an on-going impact on its business.  In particular, the Company anticipates that a portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries could continue to experience economic challenges, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks.  These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans.  As a result, the Company anticipates that its asset quality and results of operations could be adversely affected, as described in further detail below.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company’s Response

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

The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days.  As of September 30, 2021 there were no bank and eight m2 modifications of loans and leases totaling $2.9 million representing 0.06% of the total loan and lease portfolio, that were currently on deferral.
The Company has processed 2,633 loans for a total of $484 million as of September 30, 2021 under the PPP. PPP loans are included in the C&I - other category of loans in Note 3 of the Consolidated Financial Statements and total $83.6 million at September 30, 2021 compared to $273.1 million at December 31, 2020.

EXECUTIVE OVERVIEW

The Company reported net income of $31.6 million and diluted EPS of $1.99 for the quarter ended September 30, 2021. By comparison, for the quarter ended June 30, 2021 the Company reported net income of $22.3 million and diluted EPS of $1.39.  For the quarter ended September 30, 2020, the Company reported net income of $17.3 million, and diluted EPS of $1.09.  For the nine months ended September 30, 2021, the Company reported net income of $71.9 million, and diluted EPS of $4.48.  By comparison, for the nine months ended September 30, 2020, the Company reported net income of $42.3 million and diluted EPS of $2.65.

The third quarter of 2021 was also highlighted by the following results and events:

Record net income of $31.6 million, or $1.99 per diluted share;
NIM increased 8 basis points and Adjusted NIM (TEY)(non-GAAP) increased by 9 basis points to 3.36% and 3.53%, respectively;
Adjusted net interest income (non-GAAP) increased by $2.8 million, or 6.2%;
Annualized traditional loan and lease growth (non-GAAP) of 23.0% for the quarter and 18.0% year-to-date, excluding SBA PPP loans;  
Annualized core deposit growth of 15.6% for the quarter;
Nonperforming assets improved by 32% for the quarter and now represent only 0.11% of total assets; and
ACL for loans/leases to total loans/leases of 1.79%, excluding PPP loans (non-GAAP).

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

For the three months ended

For the nine months ended

September 30, 2021

June 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

(dollars in thousands)

Net income

$

31,565

$

22,349

$

17,344

$

71,896

$

42,311

Diluted earnings per common share

$

1.99

$

1.39

$

1.09

$

4.48

$

2.65

Weighted average common and common equivalent shares outstanding

 

15,869,798

 

16,045,239

 

15,923,578

 

16,058,420

 

15,945,832

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company reported adjusted net income (non-GAAP) of $31.6 million, with adjusted diluted EPS of $1.99.  See section titled “GAAP to Non-GAAP Reconciliations” for additional information.  

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

For the three months ended

For the nine months ended

    

September 30, 2021

    

June 30, 2021

    

September 30, 2020

    

September 30, 2021

    

September 30, 2020

 

(dollars in thousands)

Net interest income

$

46,229

$

43,516

$

44,581

$

131,720

$

123,243

Provision for credit losses

 

 

 

20,342

 

6,713

 

48,624

Noninterest income

 

34,652

 

19,296

 

37,959

 

77,437

 

81,781

Noninterest expense

 

41,387

 

35,675

 

40,838

 

114,290

 

105,391

Federal and state income tax expense

 

7,929

 

4,788

 

4,016

 

16,258

 

8,698

Net income

$

31,565

$

22,349

$

17,344

$

71,896

$

42,311

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

Net interest income in the third quarter of 2021 increased 6% compared to the second quarter of 2021.  Net interest income increased 4% compared to the third quarter of 2020 and 7% when comparing the first nine months of 2021 to the same period of the prior year. The increase was due to strong loan growth funded by core deposit growth while maintaining modest excess liquidity.  The Company had success holding on to earning asset yield while moving cost of funds lower which helped to drive NIM expansion.
There was no provision expense in the third or second quarter of 2021.  Provision expense decreased $41.9 million when comparing the first nine months of 2021 to the same period in the prior year. The decrease was primarily due to continued strong credit quality, a reduction in NPLs and improving economic conditions.  The provision amounts for prior years were calculated under different accounting standards due to the adoption of CECL on January 1, 2021. See the Provision for Credit Losses section of this report for additional details.
Noninterest income in the third quarter of 2021 increased $15.4 million or 80% compared to the second quarter of 2021. Noninterest income decreased $3.3 million or 9% compared to the third quarter of 2020 and decreased $4.3 million or 5% when comparing the first nine months of 2021 to the same period of the prior year. The increase in the third quarter of 2021 was primarily due to swap fee income/capital market revenue for certain loans that closed in the third quarter that were scheduled to close in the second quarter due to factors outside of the Company’s control.
Noninterest expense increased $5.7 million or 16% in the third quarter of 2021 compared to the second quarter of 2021. This increase was due to several factors but was primarily the result of higher salary and benefits expense of $5.2 million, driven by higher incentive compensation and commission expense in the quarter due to higher swap fee income/capital market revenue and higher incentive compensation accruals.  In addition, there was a $1.2 million increase in net income from and gains/losses on operations of other real estate due to the sale of one large other real estate owned property.  Noninterest expense increased $549 thousand or 1% compared to the third quarter of 2020 and increased $8.9 million or 8% when comparing the first nine months of 2021 to the same period in the prior year.  The increase was primarily due to increased incentive compensation with improved financial performance of the Company.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The Company's long-term strategic financial metrics are as follows:

Generate 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.

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

Year to Date*

Strategic Financial Metric*

    

Key Metric

    

Target

September 30, 2021

June 30, 2021

September 30, 2020

Loan and lease growth organically **

 

Loans and leases growth

 

> 9% annually

18.0

%  

14.7

%  

11.5

%

Fee income growth

 

Fee income growth

 

> 6% annually

(7.5)

%  

(23.3)

%  

61.1

%

Improve operational efficiencies and hold noninterest expense growth

Noninterest expense growth

 

< 5% annually

3.3

%  

(1.0)

%  

(5.3)

%

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

** Loan and lease growth excludes PPP loans.

It should be noted that these initiatives are long-term targets.  

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the third quarter of 2021 to support its corporate strategy:

The Company grew loans and leases organically in the third quarter of 2021 by 23.0% on an annualized basis, excluding PPP loans (non-GAAP), driven by both our specialty finance group and our traditional commercial lending and leasing business.
Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Wisconsin, Missouri and Illinois. The Company acted as the correspondent bank for 186 downstream banks with average total noninterest bearing deposits of $350.0 million and average total interest bearing deposits of $317.5 million during the nine months of 2021. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $307.0 million and average total interest bearing deposits of $542.6 million during the nine months of 2020. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.
As a result of the low interest rate environment, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments.  The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Capital markets revenue totaled $24.9 million for the quarter, which benefited from a number of swap transactions that were scheduled to close in the second quarter carrying over into the third quarter.  Capital markets revenue averaged $16 million per quarter for the first nine months of 2021 and $16.3

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

million for the last eight quarters. Future levels of swap fee income/capital markets revenue are somewhat dependent upon prevailing interest rates.
Noninterest expense for the first nine months of 2021 totaled $114.3 million as compared to $105.4 million in the first nine months of 2020. Salaries and employee benefits for the first nine months of 2021 were up 15.6% from the same period of the prior year primarily due to the higher incentive compensation due to strong financial results.
In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $687.5 million in the first nine months of 2021.  There were 233 new relationships added in the first nine months of 2021 totaling $319.0 million of new assets under management. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

GAAP TO NON-GAAP RECONCILIATIONS

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

TCE/TA ratio (non-GAAP) is reconciled to stockholders' equity and total assets;
TCE/TA ratio excluding PPP loans (non-GAAP) is reconciled to stockholders’ equity and total assets;
Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;
NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM;
Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and
ACL to total loans and leases excluding PPP loans and loan growth annualized excluding PPP loans are reconciled to ACL and total loans and leases.

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets.  The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarters ended September 30, 2021 and June 30, 2021 were materially higher due to the addition of PPP loans.  By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.

The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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.

ACL to total loans and leases, excluding PPP loans, and loan growth annualized, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarters ended September 30, 2021 and June 30, 2021 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ACL.  By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

As of

GAAP TO NON-GAAP

    

September 30, 

    

June 30, 

    

September 30, 

    

RECONCILIATIONS

2021

2021

2020

 

(dollars in thousands, except per share data)

TCE/TA RATIO

 

  

 

Stockholders' equity (GAAP)

$

649,814

$

630,476

$

572,613

Less: Intangible assets

 

83,923

 

84,431

 

85,968

TCE (non-GAAP)

$

565,891

$

546,045

$

486,645

Total assets (GAAP)

$

6,014,508

$

5,805,165

$

5,864,560

Less: Intangible assets

 

83,923

 

84,431

 

85,968

TA (non-GAAP)

$

5,930,585

$

5,720,734

$

5,778,592

TCE/TA ratio (non-GAAP)

 

9.54

%  

 

9.55

%

 

8.42

%  

TCE/TA RATIO EXCLUDING PPP LOANS

 

  

 

Stockholders' equity (GAAP)

$

649,814

$

630,476

$

572,613

Less: PPP loan interest income (post-tax)

12,297

10,788

4,934

Less: Intangible assets

 

83,923

 

84,431

 

85,968

TCE (non-GAAP)

$

553,594

$

535,257

$

481,711

Total assets (GAAP)

$

6,014,508

$

5,805,165

$

5,864,560

Less: PPP loans

83,575

147,506

357,506

Less: Intangible assets

 

83,923

 

84,431

 

85,968

TA (non-GAAP)

$

5,847,010

$

5,573,228

$

5,421,086

TCE/TA ratio excluding PPP loans (non-GAAP)

 

9.47

%  

 

9.60

%

 

8.89

%  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

For the Quarter Ended

For the Nine Months Ended

 

September 30, 

    

June 30, 

    

September 30, 

September 30, 

September 30, 

 

    

2021

    

2021

    

2020

    

2021

2020

 

(dollars in thousands, except per share data)

ADJUSTED NET INCOME

Net income (GAAP)

$

31,565

$

22,349

$

17,344

$

71,896

$

42,311

Less non-core items (post-tax) (*):

 

  

 

  

 

  

 

  

 

Income:

 

  

 

  

 

  

 

  

 

  

Securities gains (losses), net

$

$

(69)

$

1,424

$

(69)

$

1,475

Mark to market gains (losses) on unhedged derivatives, net

(13)

(58)

58

Gain on sale of loan

$

28

$

$

28

Total non-core income (non-GAAP)

$

15

$

(127)

$

1,424

$

17

$

1,475

Expense:

 

  

 

  

 

  

 

  

 

  

Losses on liability extinguishment

$

$

$

1,480

$

$

1,936

Goodwill impairment

500

Disposition costs

152

7

495

Post-acquisition compensation, transition and integration costs

 

 

 

(25)

 

 

149

Separation agreement

 

 

 

 

734

 

Loss on sale of subsidiary

 

 

 

212

 

 

212

Total non-core expense (non-GAAP)

$

$

$

1,819

$

741

$

3,291

Adjusted net income (non-GAAP)

$

31,550

$

22,476

$

17,739

$

72,620

$

44,127

ADJUSTED EPS

 

  

 

  

 

  

 

  

 

  

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

$

31,550

$

22,476

$

17,739

$

72,620

$

44,127

Weighted average common shares outstanding

 

15,635,123

 

15,813,932

 

15,767,152

 

15,829,124

 

15,770,335

Weighted average common and common equivalent shares outstanding

 

15,869,768

 

16,045,239

 

15,923,578

 

16,058,420

 

15,945,832

Adjusted EPS (non-GAAP):

 

  

 

  

 

  

 

  

 

  

Basic

$

2.02

$

1.42

$

1.13

$

4.59

$

2.80

Diluted

$

1.99

$

1.40

$

1.11

$

4.52

$

2.77

ADJUSTED ROAA

 

  

 

  

 

  

 

  

 

  

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

$

31,550

$

22,476

$

17,739

$

72,620

$

44,127

Average Assets

$

5,960,336

$

5,739,067

$

5,820,555

$

5,789,753

$

5,524,087

Adjusted ROAA (annualized) (non-GAAP)

 

2.12

%  

 

1.57

%  

 

1.22

%  

 

1.67

%  

 

1.07

%  

ADJUSTED NIM (TEY)*

 

 

 

 

Net interest income (GAAP)

$

46,229

$

43,516

$

44,581

$

131,720

$

123,243

Plus: Tax equivalent adjustment

 

2,708

 

2,444

 

1,942

 

7,411

 

5,587

Net interest income - tax equivalent (non-GAAP)

$

48,937

$

45,960

$

46,523

$

139,131

$

128,830

Less: Acquisition accounting net accretion

456

291

833

1,251

2,194

Adjusted net interest income

48,481

45,669

45,690

137,880

126,636

Average earning assets

$

5,451,571

$

5,320,881

$

5,278,298

$

5,330,338

$

4,998,352

NIM (GAAP)

 

3.36

%  

 

3.28

%  

 

3.36

%  

 

3.30

%  

 

3.29

%  

NIM (TEY) (non-GAAP)

 

3.56

%  

 

3.46

%  

 

3.51

%  

 

3.49

%  

 

3.44

%  

Adjusted NIM (TEY) (non-GAAP)

3.53

%  

3.44

%  

3.44

%  

3.46

%  

3.38

%

EFFICIENCY RATIO

 

  

 

  

 

  

 

  

 

  

Noninterest expense (GAAP)

$

41,387

$

35,675

$

40,838

$

114,290

$

105,391

Net interest income (GAAP)

$

46,229

$

43,516

$

44,581

$

131,720

$

123,243

Noninterest income (GAAP)

 

34,652

 

19,296

 

37,959

 

77,437

 

81,781

Total income

$

80,881

$

62,812

$

82,540

$

209,157

$

205,024

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

 

51.17

%  

 

56.80

%  

 

49.48

%  

 

54.64

%  

 

51.40

%  

ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS

ACL

$

80,670

$

78,894

$

79,582

$

80,670

$

79,582

Total loans and leases

$

4,599,730

$

4,417,705

$

4,247,977

$

4,599,730

$

4,247,977

Less: PPP loans

83,575

147,506

357,506

83,575

357,506

Total loans and leases, excluding PPP loans

$

4,516,155

$

4,270,199

$

3,890,471

$

4,516,155

$

3,890,471

ACL to total loans and leases, excluding PPP loans

1.79

%

1.85

%

2.05

%

1.79

%

2.05

%

LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS

 

  

 

  

 

  

 

  

 

  

Total loans and leases

$

4,599,730

$

4,417,705

$

4,247,977

$

4,599,730

$

4,247,977

Less: PPP loans

 

83,575

 

147,506

 

357,506

 

83,575

 

357,506

Total loans and leases, excluding PPP loans

$

4,516,155

$

4,270,199

$

3,890,471

$

4,516,155

$

3,890,471

Loan growth annualized, excluding PPP loans

 

23.04

%  

 

14.87

%  

 

11.45

%  

 

16.08

%  

 

16.28

%  

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

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 5% to $48.9 million for the quarter ended September 30, 2021 compared to the same quarter of the prior year and increased 8% to $139.1 million for the nine months ended September 30, 2021 as compared to the same period of the prior year. Net interest income, on a GAAP basis, increased 4% for the quarter ended September 30, 2021 compared to the same quarter of the prior year, and increased 7% for the nine months

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ended September 30, 2021 compared to the same period of the prior year. Net interest income improved due to the following factors:

Strong organic loan and deposit growth;
Significant growth in PPP loans in 2020 and 2021;
Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and
Reduction in cost of funds.

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

Tax Equivalent Basis

GAAP

For the Quarter Ended

For the Quarter Ended

 

September 30, 

June 30, 

September 30, 

September 30, 

June 30, 

September 30, 

2021

2021

2020

2021

2021

2020

Average Yield on Interest-Earning Assets

3.96

%  

3.87

%  

3.99

%  

3.79

%  

3.68

%  

3.86

%

Average Cost of Interest-Bearing Liabilities

0.58

%  

0.60

%  

0.66

%  

0.59

%  

0.60

%  

0.67

%

Net Interest Spread

3.38

%  

3.27

%  

3.33

%  

3.21

%  

3.08

%  

3.19

%

NIM (TEY) (Non-GAAP)

3.56

%  

3.46

%  

3.51

%  

3.36

%  

3.28

%  

3.36

%

NIM Excluding Acquisition Accounting Net Accretion

3.53

%  

3.44

%  

3.44

%  

3.38

%  

3.27

%  

3.36

%

Tax Equivalent Basis

GAAP

 

For the Nine Months Ended

For the Nine Months Ended

 

September 30, 

September 30, 

September 30, 

September 30, 

 

2021

2020

2021

2020

 

Average Yield on Interest-Earning Assets

3.90

%  

4.12

%  

3.71

%  

3.96

%

Average Cost of Interest-Bearing Liabilities

0.60

%  

0.91

%  

0.60

%  

0.67

%

Net Interest Spread

3.30

%  

3.21

%  

3.11

%  

3.29

%

NIM (TEY) (Non-GAAP)

3.49

%  

3.44

%  

3.30

%  

3.29

%

NIM Excluding Acquisition Accounting Net Accretion

3.46

%  

3.38

%  

3.26

%  

3.24

%

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

For the Nine Months Ended

September 30, 

June 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2021

    

2020

    

2021

    

2020

    

(dollars in thousands)

(dollars in thousands)

Acquisition Accounting Net Accretion in NIM

$

456

$

291

$

833

$

1,251

$

2,194

The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet strategies

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

In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020.  These decreases impact the comparability of net interest income between 2021 and 2020.

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

For the Three Months Ended September 30,

2021

2020

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

$

3,030

$

1

 

0.10

%  

$

2,205

$

1

 

0.18

%

Interest-bearing deposits at financial institutions

 

99,024

 

39

 

0.16

%  

 

321,679

 

92

 

0.11

%

Investment securities (1)

 

799,471

 

7,646

 

3.82

%  

 

749,425

 

6,836

 

3.66

%

Restricted investment securities

 

20,910

 

262

 

4.97

%  

 

19,714

 

249

 

4.94

%

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

 

4,529,136

 

46,427

 

4.07

%  

 

4,185,275

 

45,654

 

4.34

%

Total interest earning assets

5,451,571

54,375

 

3.96

%  

5,278,298

52,832

 

3.99

%

Noninterest-earning assets:

  

 

  

 

  

  

 

  

 

  

Cash and due from banks

55,359

75,480

Premises and equipment

 

75,712

 

72,618

Less allowance

 

(78,884)

 

(61,892)

Other

 

456,578

 

456,051

Total assets

$

5,960,336

$

5,820,555

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

$

3,041,941

 

2,183

 

0.28

%  

$

2,932,988

 

2,086

 

0.28

%

Time deposits

 

461,210

 

1,090

 

0.94

%  

 

638,031

 

2,399

 

1.50

%

Short-term borrowings

 

6,858

 

1

 

0.10

%  

 

26,996

 

11

 

0.17

%

FHLB advances

 

54,293

 

41

 

0.30

%  

 

57,078

 

211

 

1.45

%

Subordinated notes

113,789

1,554

5.46

%  

77,783

1,031

5.30

%

Junior subordinated debentures

 

38,084

 

569

 

5.84

%  

 

37,936

 

571

 

5.89

%

Total interest-bearing liabilities

3,716,175

5,438

 

0.58

%  

3,770,812

6,309

 

0.66

%

Noninterest-bearing demand deposits

1,276,725

1,155,862

Other noninterest-bearing liabilities

313,250

318,890

Total liabilities

5,306,150

5,245,564

Stockholders' equity

 

654,186

 

574,991

Total liabilities and stockholders' equity

$

5,960,336

$

5,820,555

Net interest income

$

48,937

$

46,523

Net interest spread

 

 

 

3.38

%  

 

 

 

3.33

%

Net interest margin

 

 

 

3.36

%  

 

 

 

3.36

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

3.56

%  

 

 

 

3.51

%

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

3.53

%  

3.44

%

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

 

146.70

%  

 

 

 

139.98

%  

 

 

(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.

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Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended September 30, 2021

Inc./(Dec.)

Components

from

of Change (1)

    

Prior Period (1)

    

Rate

    

Volume

 

2021 vs. 2020

(dollars in thousands)

INTEREST INCOME

 

  

 

  

 

  

Federal funds sold

$

$

(1)

$

1

Interest-bearing deposits at financial institutions

 

(53)

 

168

 

(221)

Investment securities (2)

 

810

 

320

 

490

Restricted investment securities

 

13

 

1

 

12

Gross loans/leases receivable (2) (3)

 

773

 

(12,517)

 

13,290

Total change in interest income

1,543

(12,029)

13,572

INTEREST EXPENSE

  

  

  

Interest-bearing deposits

97

(113)

210

Time deposits

(1,309)

(750)

(559)

Short-term borrowings

(10)

(4)

(6)

Federal Home Loan Bank advances

(170)

(160)

(10)

Subordinated notes

523

523

Junior subordinated debentures

(2)

(14)

12

Total change in interest expense

(871)

(1,041)

170

Total change in net interest income

$

2,414

$

(10,988)

$

13,402

(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.

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For the Nine Months Ended September 30,

2021

2020

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

$

1,503

$

1

 

0.13

%  

$

2,795

$

19

 

0.89

%  

Interest-bearing deposits at financial institutions

 

101,225

 

110

 

0.15

%  

 

327,902

 

587

 

0.24

%  

Investment securities (1)

 

802,715

 

21,989

 

3.65

%  

 

688,985

 

19,567

 

3.78

%  

Restricted investment securities

 

19,540

 

718

 

4.85

%  

 

20,767

 

795

 

5.03

%  

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

 

4,405,355

 

132,728

 

4.03

%  

 

3,957,903

 

133,141

 

4.49

%  

Total interest earning assets

5,330,338

 

155,546

 

3.90

%  

4,998,352

 

154,109

 

4.12

%  

Noninterest-earning assets:

  

 

  

 

  

  

 

  

 

  

Cash and due from banks

61,579

85,655

Premises and equipment, net

 

74,413

 

73,298

Less allowance for estimated losses on loans/leases

 

(81,941)

 

(46,978)

Other

 

405,364

 

413,760

Total assets

$

5,789,753

$

5,524,087

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing demand deposits

$

3,000,766

 

6,219

 

0.28

%  

$

2,718,613

 

9,920

 

0.49

%  

Time deposits

 

449,996

 

3,716

 

1.10

%  

 

743,746

 

9,537

 

1.71

%  

Short-term borrowings

 

7,560

 

4

 

0.08

%  

 

23,804

 

81

 

0.45

%  

Federal Home Loan Bank advances

 

29,875

 

66

 

0.29

%  

 

87,920

 

1,007

 

1.50

%  

Subordinated notes

115,927

4,718

5.43

%  

71,582

3,019

5.63

%

Junior subordinated debentures

 

38,045

 

1,692

 

5.86

%  

 

37,894

 

1,715

 

5.95

%  

Total interest-bearing liabilities

3,642,169

 

16,415

 

0.60

%  

3,683,559

 

25,279

 

0.91

%  

Noninterest-bearing demand deposits

1,255,957

1,009,970

Other noninterest-bearing liabilities

264,044

271,639

Total liabilities

5,162,170

4,965,168

Stockholders' equity

 

627,583

 

558,919

Total liabilities and stockholders' equity

$

5,789,753

$

5,524,087

Net interest income

$

139,131

$

128,830

Net interest spread

 

 

 

3.30

%  

 

 

 

3.21

%  

Net interest margin

 

 

 

3.30

%  

 

 

 

3.29

%  

Net interest margin (TEY)(Non-GAAP)

 

 

 

3.49

%  

 

 

 

3.44

%  

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

3.46

%  

3.38

%

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

 

146.35

%  

 

 

 

135.69

%  

 

 

(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.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the nine months ended September 30, 2021

Inc./(Dec.)

Components

from

of Change (1)

    

Prior Period (1)

    

Rate

    

Volume

2021 vs. 2020

(dollars in thousands)

INTEREST INCOME

 

  

 

  

 

  

Federal funds sold

$

(18)

$

(12)

$

(6)

Interest-bearing deposits at other financial institutions

 

(477)

 

(167)

 

(310)

Investment securities (2)

 

2,422

 

(1,065)

 

3,487

Restricted investment securities

 

(77)

 

(29)

 

(48)

Gross loans/leases receivable (2) (3)

 

(413)

 

(19,381)

 

18,968

Total change in interest income

1,437

(20,654)

22,091

INTEREST EXPENSE

  

  

  

Interest-bearing demand deposits

(3,701)

(5,186)

1,485

Time deposits

(5,821)

(2,767)

(3,054)

Short-term borrowings

(77)

(42)

(35)

Federal Home Loan Bank advances

(941)

(518)

(423)

Subordinated notes

1,699

1,699

Junior subordinated debentures

(23)

(23)

Total change in interest expense

(8,864)

(8,513)

(351)

Total change in net interest income

$

10,301

$

(12,141)

$

22,442

(1)The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
(2)Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate.
(3)Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income/capital market revenue, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income.  Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.

The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.

CRITICAL ACCOUNTING POLICIES

The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value.  Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment.  In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a

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reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

As of November 30, 2020 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.

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.

There was no occurrence of a triggering event during the three and nine months ended September 30, 2021, therefore no impairment test of goodwill was performed as of September 30, 2021.

ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES

On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology.

The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. A more detailed discussion of this critical accounting policy can be found in Note 1 to the Consolidated Financial Statements for September 30, 2021.

The Company believes that COVID-19 pandemic losses have been incurred that are not yet known and this could have an adverse effect on the Company’s ACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes individually analyzed loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL.

Although management believes the level of the ACL as of September 30, 2021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income increased 2%, comparing the third quarter of 2021 to the same period of 2020, and was unchanged when comparing the first nine months of 2021 to the same period of 2020. This was primarily due to an increase in the volume of average securities and average loans/leases offset by a decline in yields on loans/leases. Average gross loans and leases increased 8%, while average investment securities increased 7%, when comparing the quarter ended September 30, 2021 to September 30, 2020. Average gross loans and leases increased 11%, while average investment securities increased 17%, when comparing the nine months ended September 30, 2021 to September 30, 2020.  

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

INTEREST EXPENSE

Interest expense for the third quarter of 2021 decreased 14% from the third quarter of 2020, and decreased 35% comparing the first nine months of 2021 to the same period of 2020.  The Company has grown organically at a significant pace over the past several years.  Core deposit growth has funded loan growth and has allowed the Company to prepay higher cost brokered deposits and FHLB advances.  The cost of funds on the Company’s average interest-bearing liabilities declined

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in conjunction with the declining rate environment. The Company’s cost of funds was 0.58% for the quarter ended September 30, 2021, which was down from 0.66% for the quarter ended September 30, 2020.  The Company’s cost of funds was 0.60% for the nine months ended September 30, 2021, which was down from 0.91% for the nine months ended September 30, 2020.  

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

PROVISION FOR CREDIT LOSSES

The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three and nine months ended September 30, 2021 and 2020.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

2021

    

2020

(dollars in thousands)

(dollars in thousands)

Provision for credit losses - loans and leases (1)

$

1,895

$

20,342

$

7,747

$

48,624

Provision for credit losses - off-balance sheet exposures (2)

(1,895)

N/A

(1,025)

N/A

Provision for credit losses - held to maturity securities (3)

 

 

N/A

 

(9)

 

N/A

Total provision for credit losses

$

$

20,342

$

6,713

$

48,624

(1)2021 and years forward are evaluated using ASU 2016-13 and years prior to 2021 were calculated under an incurred loss model.
(2)Prior to adoption of ASU 2016-13 on January 1, 2021, there were no requirements to record provision for off-balance sheet exposures.
(3)Prior to the adoption of ASU 2016-13 on January 1, 2021, there was no requirement to record provision for credit losses for held to maturity securities.

The Company’s total provision for credit losses was zero for the third quarter of 2021, compared to $20.3 million for the third quarter of 2020.  Provision for the first nine months of 2021 totaled $6.7 million, which was down from $48.6 million in the first nine months of 2020.  The adoption of ASU 2016-13 now requires an allowance on held to maturity debt securities and OBS exposures, specifically unfunded commitments. For the nine months ended September 30, 2021, the provision related to HTM debt securities was negative due to the decrease in the balance of those HTM debt securities. For the three and nine months ended September 30, 2021, the provision related to OBS was negative due to the decrease in the balance of those OBS exposures with increase of line of credit usage. In the three and nine months ended September 30, 2021, loans/leases saw a decrease in provision from the same periods in the prior year.  The decrease in provision on loans and leases was substantially driven by decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19.  

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

The Company had an ACL on loans/leases of 1.75% of total gross loans/leases at September 30, 2021, compared to 1.79% of total gross loans/leases at June 30, 2021 and 1.87% at September 30, 2020.  Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $1.7 million and $4.0 million at September 30, 2021 and September 30, 2020, respectively.

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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 September 30, 

 

2021

    

% of Total Gross

 

Amount

    

Loans and Leases

(dollars in thousands)

 

Hotels

$

78,478

1.71

%

Restaurants (full service and limited service only)

24,465

0.53

Arts, Entertainment and Recreation

25,551

0.55

$

128,494

2.79

%

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 and nine months ended September 30, 2021 and 2020.

Three Months Ended

 

September 30, 

September 30, 

 

    

2021

    

2020

    

$ Change

    

% Change

 

(dollars in thousands)

Trust department fees

$

2,714

$

2,280

$

434

19.0

%

Investment advisory and management fees

 

1,054

 

1,266

 

(212)

(16.7)

Deposit service fees

 

1,588

 

1,403

 

185

13.2

Gains on sales of residential real estate loans, net

 

954

 

1,370

 

(416)

(30.4)

Swap fee income/capital markets revenue

 

24,885

 

26,688

 

(1,803)

(6.8)

Securities gains (losses), net

 

 

1,802

 

(1,802)

(100.0)

Earnings on bank-owned life insurance

 

446

 

502

 

(56)

(11.2)

Debit card fees

 

1,085

 

946

 

139

14.7

Correspondent banking fees

 

265

 

220

 

45

20.5

Other

 

1,661

 

1,482

 

179

12.1

Total noninterest income

$

34,652

$

37,959

$

(3,307)

(8.7)

%

Nine Months Ended

 

September 30, 

September 30, 

 

    

2021

    

2020

    

$ Change

% Change

 

(dollars in thousands)

Trust department fees

$

8,363

$

6,819

$

1,544

22.6

%

Investment advisory and management fees

 

3,033

 

4,392

 

(1,359)

(30.9)

Deposit service fees

 

4,488

 

4,166

 

322

7.7

Gains on sales of residential real estate loans, net

 

3,475

 

3,218

 

257

8.0

Swap fee income/capital markets revenue

 

48,010

 

53,419

 

(5,409)

(10.1)

Securities gains (losses), net

 

(88)

 

1,867

 

(1,955)

(104.7)

Earnings on bank-owned life insurance

 

1,368

 

1,443

 

(75)

(5.2)

Debit card fees

 

3,144

 

2,479

 

665

26.8

Correspondent banking fees

 

848

 

633

 

215

34.0

Other

 

4,796

 

3,345

 

1,451

43.4

Total noninterest income

$

77,437

$

81,781

$

(4,344)

(5.3)

%

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $42.8 million in the

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third quarter of 2021 due to market volatility but increased by $687.5 million in the first nine months of 2021.  Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Trust department fees increased 19%, comparing the third quarter of 2021 to the same period of the prior year and they increased 23% when comparing the first nine months of 2021 to the same period of 2020.   The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

Investment advisory and management fees decreased 17%, comparing the third quarter of 2021 to the same period of the prior year and decreased 31% when comparing the first nine months of 2021 to the same period of 2020. 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 sale of the Bates Companies in August 2020 negatively impacted the results compared to 2020.  Excluding the impact of the Bates Companies sale, investment advisory and management fees increased 80% when comparing the first nine months of 2021 to the same period of 2020.

Deposit service fees increased 13% comparing the third quarter of 2021 to the same period of the prior year, and increased 8% when comparing the first nine months of 2021 to the same period of the prior year. This increase was primarily due to higher transactional volume due to improving 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, decreased 30% when comparing the third quarter of 2021 to the same period of the prior year, but increased 8% when comparing the first nine months of 2021 to the same period of the prior year. The increase was primarily due to increased residential real estate purchase and the refinancing of residential real estate loans with lower interest rates in the first nine months of 2021.

As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Capital markets revenue totaled $24.9 million for the third quarter of 2021, compared to $26.7 million for the third quarter of 2020. Capital markets revenue totaled $48.0 million for the first nine months of 2021, compared to $53.4 million for the first nine months of 2020. Future levels of capital markets revenue are somewhat dependent upon prevailing interest rates.

There were no securities gains or losses for the three months ended September 30, 2021.  Securities losses totaled $88 thousand for the nine months ended September 30, 2021.  By comparison, securities gains totaled $1.8 million and $1.9 million for the three and nine months ended September 30, 2020, respectively.

Earnings on BOLI decreased 11% comparing the third quarter of 2021 to the third quarter of 2020 and decreased 5% comparing the first nine months of 2021 to the same period of 2020. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets.  Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 15% comparing the third quarter of 2021 to the third quarter of the prior year, and increased 27% comparing the first nine

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months of 2021 to the same period of 2020. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees increased 21% comparing the third quarter of 2021 to the third quarter of the prior year, and increased 34% comparing the first nine months of 2021 to the same period of 2020. 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. Correspondent bank deposit volumes are higher on average in 2021 than in 2020 which is driving the higher fee income.  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 186 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased 12% comparing the third quarter of 2021 to the third quarter of the prior year, and increased 43% comparing the first nine months of 2021 to the same period of 2020.  The increase in the third quarter and first nine months of 2021 was primarily due to equity investment income and gains on disposal of leased assets.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2021 and 2020.

Three Months Ended

 

September 30, 

September 30, 

 

    

2021

    

2020

    

$ Change

    

% Change

 

(dollars in thousands)

Salaries and employee benefits

$

28,207

$

25,999

$

2,208

 

8.5

%

Occupancy and equipment expense

 

4,122

 

3,807

 

315

 

8.3

Professional and data processing fees

 

3,568

 

3,758

 

(190)

 

(5.1)

Disposition costs

 

192

 

(192)

 

(100.0)

FDIC insurance, other insurance and regulatory fees

 

1,108

 

1,301

 

(193)

 

(14.8)

Loan/lease expense

 

308

 

403

 

(95)

 

(23.6)

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

 

(1,346)

 

16

 

(1,362)

 

(8,512.5)

Advertising and marketing

 

1,095

 

750

 

345

 

46.0

Bank service charges

 

525

 

488

 

37

 

7.6

Loss on liability extinguishment

 

1,874

 

(1,874)

 

(100.0)

Correspondent banking expense

 

201

 

205

 

(4)

 

(2.0)

Intangibles amortization

 

508

 

531

 

(23)

 

(4.3)

Loss on sale of subsidiary

305

(305)

(100.0)

Other

 

3,091

 

1,209

 

1,882

 

155.7

Total noninterest expense

$

41,387

$

40,838

$

549

 

1.3

%

Nine Months Ended

 

September 30, 

September 30, 

 

    

2021

    

2020

    

$ Change

    

% Change

 

(dollars in thousands)

Salaries and employee benefits

 

$

76,098

 

$

65,822

 

$

10,276

 

15.6

%

Occupancy and equipment expense

 

 

12,195

 

 

11,587

 

 

608

 

5.2

Professional and data processing fees

 

 

10,713

 

 

10,773

 

 

(60)

 

(0.6)

Post-acquisition compensation, transition and integration costs

 

 

 

 

189

 

 

(189)

 

(100.0)

Disposition costs

8

 

626

 

(618)

 

(98.7)

FDIC insurance, other insurance and regulatory fees

 

 

3,159

 

 

2,892

 

 

267

 

9.2

Loan/lease expense

 

 

1,065

 

 

970

 

 

95

 

9.8

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

 

 

(1,420)

 

 

(303)

 

 

(1,117)

 

368.6

Advertising and marketing

 

 

2,575

 

 

1,984

 

 

591

 

29.8

Bank service charges

 

 

1,620

 

 

1,493

 

 

127

 

8.5

Losses on liability extinguishment, net

2,450

(2,450)

 

(100.0)

Correspondent banking expense

 

 

599

 

 

633

 

 

(34)

 

(5.4)

Intangibles amortization

 

 

1,524

 

 

1,628

 

 

(104)

 

(6.4)

Goodwill Impairment

500

(500)

(100.0)

Loss on sale of subsidiary

305

(305)

(100.0)

Other

 

 

6,154

 

 

3,842

 

 

2,312

 

60.2

Total noninterest expense

 

$

114,290

 

$

105,391

 

$

8,899

 

8.4

%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2021 and 2020.  

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2020 to the third quarter of 2021 by 9%, and increased from the first nine months of 2020 to the first nine months of 2021 by 16%.  The increased expense was primarily related to increased incentive compensation driven by strong financial results.  

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Occupancy and equipment expense increased 8% comparing the third quarter of 2021 to the same period of the prior year, and increased 5% comparing the first nine months of 2021 to the same period of 2020. The increase was due to higher investments for information technology and repair and maintenance costs.

Professional and data processing fees decreased 5% comparing both the third quarter of 2021 to the same period in 2020, and decreased 1% comparing the first nine months of 2021 to the same period of 2020.  Generally, professional and data processing fees can fluctuate depending on certain one-time project costs.  Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.

There were no post-acquisition costs incurred in the three and nine months of 2021.  Post-acquisition costs totaled $189 thousand for the first nine months of 2020. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.

There were no disposition costs for the third quarter of 2021 and there were $8 thousand for the first nine months of 2021.   Disposition costs totaled $192 thousand for the third quarter of 2020 and $626 thousand for the first nine months of 2020. The costs were comprised primarily of legal, accounting, personnel costs and IT deconversion costs related to the sale of the Bates Companies in the third quarter of 2020 and the sale of RB&T in the fourth quarter of 2019.  

FDIC insurance, other insurance and regulatory fee expense decreased 15%, comparing the third quarter of 2021 to the third quarter of 2020, and increased 9% comparing the first nine months of 2021 to the same period of 2020.  The increase in expense was due to an increase in the asset size of the Company in 2020 and 2021 as well as FDIC insurance assessment credits applied in 2020.

Loan/lease expense decreased 24% when comparing the third quarter of 2021 to the same quarter of 2020, and increased 10% comparing the first nine months of 2021 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled $1.3 million for the third quarter of 2021, compared to net expense from and gains/losses on operations of other real estate of $16 thousand for the third quarter of 2020.   Net income from and gains/losses on operations of other real estate totaled $1.4 million for the first nine months of 2021, compared to $303 thousand for the first nine months of 2020.   The increase in the third quarter of 2021 was due primarily to the sale of one commercial other real estate property.

Advertising and marketing expense increased 46% comparing the third quarter of 2021 to the third quarter of 2020, and increased 30% comparing the first nine months of 2021 to the same period of 2020. The increase in expense was primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 8% when comparing the third quarter of 2021 to the same quarter of 2020, and increased 9% when comparing the first nine months of 2021 to the same period of 2020.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.

There were no losses on liability extinguishment during the three and nine months of 2021. Losses on liability extinguishment were $1.9 million for the third quarter of 2020 and $2.5 million for the first nine months of 2020. These losses relate to the prepayment of certain FHLB advances.  

Correspondent banking expense decreased 2% when comparing the third quarter of 2021 to the third quarter of 2020 and decreased 5% when comparing the first nine months of 2021 to the same period of the prior year.  These are direct costs

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incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense decreased 4% when comparing the third quarter of 2021 to the same quarter of 2020 and decreased 6% when comparing the first nine months of 2021 to the same period of the prior year. These expenses naturally decrease unless there is an addition to intangible assets.

There was no goodwill impairment expense in the three and nine months ended September 30, 2021.  Goodwill impairment expense totaled $0 and $500 thousand for the three and nine months ended September 30, 2020 related to the sale of the Bates Companies.  

There was no loss on sale of subsidiary in the first three and nine months of 2021.  Loss on sale of subsidiary totaled $305 thousand in the first three and nine months of 2020 related to the sale of the Bates Companies.  

Other noninterest expense increased 156% when comparing the third quarter of 2021 to the third quarter of 2020 and increased 60% when comparing the first nine months of 2021 to the same period of the prior year.  The increase was due primarily to the write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets.

INCOME TAXES

In the third quarter of 2021, the Company incurred income tax expense of $7.9 million.  During the first nine months of the year, the Company incurred income tax expense of $16.3 million.  Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.

For the Three Months Ended September 30, 

For the Nine Months Ended September 30, 

2021

2020

2021

2020

% of

% of

% of

% of

Pretax

Pretax

Pretax

Pretax

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

 

(dollars in thousands)

Computed "expected" tax expense

$

8,293

 

21.0

%  

$

4,486

 

21.0

%  

$

18,512

 

21.0

%  

$

10,712

 

21.0

%

Tax exempt income, net

 

(2,032)

 

(5.1)

 

(1,350)

 

(6.3)

 

(5,553)

 

(6.3)

 

(3,822)

 

(7.5)

Bank-owned life insurance

 

(93)

 

(0.2)

 

(101)

 

(0.5)

 

(287)

 

(0.3)

 

(271)

 

(0.5)

State income taxes, net of federal benefit, current year

 

1,799

 

4.6

 

1,003

 

4.7

 

4,070

 

4.6

 

2,456

 

4.8

Tax credits

 

(57)

 

(0.1)

 

(116)

 

(0.5)

 

(171)

 

(0.2)

 

(348)

 

(0.7)

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

 

(107)

 

(0.3)

 

14

 

0.1

 

(311)

 

(0.4)

 

(248)

 

(0.5)

Other

 

126

 

0.2

 

80

 

0.4

 

(2)

 

 

219

 

0.5

Federal and state income tax expense

$

7,929

 

20.1

%  

$

4,016

 

18.9

%  

$

16,258

 

18.4

%  

$

8,698

 

17.1

%

 

 

The effective tax rate for the quarter ended September 30, 2021 was 20.1%, which was an increase from the effective tax rate of 18.8% for the quarter ended September 30, 2020.  The effective tax rate for the nine months ended September 30, 2021 was 18.4%, which was an increase from the effective tax rate of 17.1% for the nine months ended September 30, 2020.  The increase for both periods was due to increased levels of taxable income as compared to tax exempt income.

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet.  

As of

September 30, 2021

June 30, 2021

 

December 31, 2020

September 30, 2020

 

(dollars in thousands)

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

Cash, federal funds sold, and interest-bearing deposits

$

128,136

 

2

%  

$

144,378

 

2

%  

$

157,005

 

3

%  

$

371,600

 

6

%

Securities

828,719

 

14

%  

810,445

 

14

%  

838,131

 

15

%  

782,088

 

13

%

Net loans/leases

4,519,060

 

75

%  

4,338,811

 

76

%  

4,166,753

 

73

%  

4,168,395

 

72

%

Derivatives

198,393

3

%  

193,395

3

%  

222,757

4

%  

236,381

4

%  

Other assets

340,200

6

%  

318,136

5

%  

298,151

5

%  

306,096

5

%

Total assets

$

6,014,508

 

100

%  

$

5,805,165

 

100

%  

$

5,682,797

 

100

%  

$

5,864,560

 

100

%

Total deposits

$

4,871,828

 

81

%  

$

4,688,935

 

81

%  

$

4,599,137

 

82

%  

$

4,672,268

 

79

%

Total borrowings

183,514

 

3

%  

198,908

 

3

%  

177,114

 

3

%  

226,962

 

4

%

Derivatives

201,450

3

%  

196,092

3

%  

229,270

4

%  

244,510

4

%  

Other liabilities

107,902

 

2

%  

90,754

 

2

%  

83,483

 

1

%  

148,207

 

3

%

Total stockholders' equity

649,814

 

11

%  

630,476

 

11

%  

593,793

 

10

%  

572,613

 

10

%

Total liabilities and stockholders' equity

$

6,014,508

 

100

%  

$

5,805,165

 

100

%  

$

5,682,797

 

100

%  

$

5,864,560

 

100

%

During the third quarter of 2021, the Company's total assets increased $209.3 million, or 4% from June 30, 2021, to a total of $6.0 billion. The Company’s net loans/leases increased $180.2 million in the third quarter of 2021. Total deposits increased $182.9 million in the third quarter of 2021 primarily due to an increase in interest-bearing demand deposits.  Borrowings decreased $15.4 million in the third quarter of 2021 which consisted primarily of a decrease in FHLB overnight borrowings of $10.0 million.

INVESTMENT SECURITIES

The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

As of

September 30, 2021

June 30, 2021

December 31, 2020

 

September 30, 2020

 

    

Amount

    

%  

    

Amount

    

%  

    

Amount

    

%

    

Amount

    

%

(dollars in thousands)

 

U.S. treasuries and govt. sponsored agency securities

$

23,689

 

3

%  

$

14,670

 

2

%  

$

15,336

 

2

%  

$

18,437

 

2

%

Municipal securities

 

649,312

 

78

%  

 

641,430

 

79

%  

 

627,523

 

75

%  

 

569,075

 

73

%

Residential mortgage-backed and related securities

 

100,744

 

12

%  

 

106,138

 

13

%  

 

132,842

 

16

%  

 

134,147

 

17

%

Asset-backed securities

30,607

4

%

31,779

4

%  

40,683

4

%

40,665

5

%

Other securities

 

24,367

 

3

%  

 

16,428

 

2

%  

 

21,747

 

3

%  

 

19,764

 

3

%

$

828,719

 

100

%  

$

810,445

 

100

%  

$

838,131

 

100

%  

$

782,088

 

100

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Securities as a % of Total Assets

 

13.78

%  

  

 

13.96

%  

  

 

14.75

%  

  

 

13.34

%  

  

Net Unrealized Gains as a % of Amortized Cost

 

6.67

%  

  

 

7.63

%  

  

 

6.90

%  

  

 

4.62

%  

  

Duration (in years)

 

8.2

  

 

8.1

 

  

 

7.0

  

 

6.6

  

Yield on investment securities (tax equivalent)

3.82

%  

3.66

%  

3.74

%  

3.66

%  

At January 1, 2021, the Company adopted ASU 2016-13, which requires an allowance for credit losses related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.

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

LOANS/LEASES

Total loans/leases, excluding PPP loans (non-GAAP), grew 23% on an annualized basis during the third quarter of 2021.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for years prior to 2021 are shown in a separate table.

As of

September 30, 2021

June 30, 2021

    

Amount

    

%

    

Amount

    

%

    

(dollars in thousands)

C&I - revolving

$

175,155

 

4

%  

$

182,882

 

4

%  

C&I - other *

1,465,580

32

%  

1,505,384

34

%  

CRE - owner occupied

434,014

9

%  

427,734

10

%  

CRE - non-owner occupied

644,850

14

%  

618,879

14

%  

Construction and land development

852,418

19

%  

708,289

16

%  

Multi-family

 

529,727

 

11

%  

 

466,804

 

10

%  

Direct financing leases

 

50,237

 

1

%  

 

56,153

 

1

%  

1-4 family real estate

 

376,067

 

8

%  

 

382,142

 

9

%  

Consumer

 

71,682

 

2

%  

 

69,438

 

2

%  

Total loans/leases

$

4,599,730

 

100

%  

$

4,417,705

 

100

%  

Less allowance

 

(80,670)

 

(78,894)

 

Net loans/leases

$

4,519,060

$

4,338,811

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December 31, 2020

September 30, 2020

    

Amount

    

%

    

Amount

    

%

    

C&I loans*

$

1,726,723

 

41

%  

$

1,823,049

 

43

%

CRE loans

 

2,107,629

 

50

%  

 

1,999,715

 

47

%

Direct financing leases

 

66,016

 

1

%  

 

73,011

 

2

%

Residential real estate loans

 

252,121

 

6

%  

 

245,032

 

6

%

Installment and other consumer loans

 

91,302

 

2

%  

 

102,471

 

2

%

Total loans/leases

$

4,243,791

 

100

%  

$

4,243,278

 

100

%

Plus deferred loan/lease origination costs, net of fees

 

7,338

 

  

4,699

 

  

Less allowance

 

(84,376)

 

  

(79,582)

 

  

Net loans/leases

$

4,166,753

$

4,168,395

  

 

  

*Includes PPP loans totaling $83.6 million, $147.5 million, $273.1 million and $357.5 million as of September 30, 2021, June 30, 2021, December 31, 2020 and September 30, 2020, respectively.

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of September 30, 2021 and June 30, 2021, approximately 17% of the CRE loan portfolio was owner-occupied.

Following is a listing of significant industries within the Company's CRE loan portfolio.  These include loans in the following portfolio segments as of September 30, 2021:  CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.

As of September 30, 

As of June 30, 

 

As of December 31, 

 

As of September 30, 

 

2021

2021

2020

2020

    

Amount

    

%

    

Amount

    

%

 

    

Amount

    

%

    

Amount

    

%

 

(dollars in thousands)

 

Lessors of Residential Buildings

$

1,194,234

 

46

%  

$

1,002,902

 

43

%

$

786,066

 

37

%  

$

661,562

 

33

%

Lessors of Nonresidential Buildings

569,477

 

22

%  

557,786

 

24

%

567,759

 

27

%  

578,837

 

29

%

Hotels

 

75,212

 

3

%  

 

75,850

 

3

%

 

72,718

 

4

%  

 

71,435

 

4

%

New Housing For-Sale Builders

56,936

2

%  

56,143

2

%

45,619

2

%  

47,733

2

%

Lessors of Other Real Estate Property

 

50,576

 

2

%  

 

41,707

 

2

%

 

39,344

 

2

%  

 

46,877

 

2

%

Other Activities Related to Real Estate

41,185

2

%  

39,057

2

%

41,197

2

%

41,883

2

%

New Single-Family Housing Construction

40,426

2

%  

42,919

2

%

29,559

1

%

37,797

2

%

Nonresidential Property Managers

 

39,195

 

2

%  

 

39,502

 

2

%

 

46,764

 

2

%  

 

44,293

 

2

%

Other *

 

491,057

 

19

%  

 

472,090

 

19

%

 

478,603

 

23

%  

 

469,298

 

24

%

Total CRE Loans

$

2,558,298

100

%

$

2,327,956

100

%

$

2,107,629

100

%

$

1,999,715

100

%

*     “Other” consists of all other industries. None of these had concentrations greater than $36.4 million, or approximately 1.4% of total CRE loans in the most recent period presented.

The Company's 1-4 family real estate loan portfolio includes the following:

Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid long-term interest rate risk.
A limited amount of 15-year, 20-year and 30-year fixed rate residential real estate loans that meet certain credit guidelines.

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The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

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

As of September 30, 

As of June 30, 

As of December 31, 

As of September 30, 

2021

2021

2020

2020

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

(dollars in thousands)

Trucks, Vans and Vocational Vehicles

$

68,387

 

26

%  

$

65,063

 

25

%

$

61,044

 

26

%  

$

59,906

 

26

%

Manufacturing - General

18,274

 

7

%  

18,474

 

7

%

18,599

 

8

%  

18,914

 

8

%

Food Processing Equipment

14,717

 

6

%  

14,569

 

6

%

16,110

 

7

%  

16,219

 

7

%

Marine - Travelifts

14,629

 

6

%  

13,279

 

5

%

12,682

 

5

%  

12,266

 

5

%

Construction - General

12,482

 

5

%  

12,918

 

5

%

14,052

 

6

%  

14,198

 

6

%

Computer Hardware

11,781

 

4

%  

12,745

 

5

%

10,790

 

4

%  

10,930

 

5

%

Trailers

11,308

 

4

%  

10,715

 

4

%

9,008

 

4

%  

9,071

 

4

%

Tractor

9,188

3

%  

8,478

3

%

3,679

2

%  

%

Other *

102,196

 

39

%  

102,279

 

40

%

91,558

 

38

%  

93,194

 

40

%

Total m2 loans and leases

$

262,962

 

100

%  

$

258,520

 

100

%

$

237,522

 

100

%  

$

234,698

 

101

%

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

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

ALLOWANCE FOR CREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES

On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a current expected credit loss methodology.

The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report  on Form 10-K for the year ended December 31, 2020, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

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Changes in the ACL for loans/leases for the three and nine months ended September 30, 2021 and 2020 are presented as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

    

September 30, 2020

    

September 30, 2021

    

September 30, 2020

(dollars in thousands)

Balance, beginning

$

78,894

$

60,827

$

84,376

$

36,001

Impact of adopting ASU 2016-13

(8,102)

Provision

 

1,895

 

20,342

 

7,747

 

48,624

Charge-offs

 

(287)

 

(1,819)

 

(4,674)

 

(5,604)

Recoveries

 

168

 

232

 

1,323

 

561

Balance, ending

$

80,670

$

79,582

$

80,670

$

79,582

Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2021 and 2020 are presented as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

    

September 30, 2020

(dollars in thousands)

Balance, beginning (1)

$

9,987

$

$

$

Impact of adopting ASU 2016-13

9,117

Provisions credited to expense

(1,895)

 

(1,025)

 

Balance, ending

$

8,092

$

$

8,092

$

(1) Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table.

The ACL for OBS exposures totaled $9.1 million after the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded negative $1.9 million and negative $1.0 million of provision for credit losses related to OBS exposures, specifically unfunded commitments, in the third quarter of 2021 and first nine months of 2021, respectively. At September 30, 2021, the allowance for OBS exposures was $8.1 million.

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

As of

Internally Assigned Risk Rating *

    

September 30, 2021

    

June 30, 2021

    

December 31, 2020

    

September 30, 2020

 

(dollars in thousands)

Special Mention (Rating 6)

 

$

58,634

 

$

51,613

 

$

71,482

$

79,587

Substandard (Rating 7)

 

59,402

 

79,719

 

66,081

70,409

Doubtful (Rating 8)

 

 

 

 

$

118,036

 

$

131,332

 

$

137,563

$

149,996

Criticized Loans **

 

$

118,036

 

$

131,332

 

$

137,563

$

149,996

Classified Loans ***

 

$

59,402

 

$

79,719

 

$

66,081

$

70,409

Criticized Loans as a % of Total Loans/Leases

2.57

%

2.97

%

3.24

%

3.53

%

Classified Loans as a % of Total Loans/Leases

1.29

%

1.80

%

1.55

%

1.66

%

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

**    Criticized loans are defined as non homogeneous loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

***  Classified loans are defined as non homogeneous loans with internally assigned risk ratings of 7 or 8, regardless of performance.

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Criticized loans decreased 10% and classified loans decreased 25% from June 30, 2021 to September 30, 2021. The Company continues its strong focus on improving credit quality in an effort to limit NPLs. See further discussion on industries impacted by COVID-19 in the “Provision for Loan/Lease Losses” section of this report.

As of

    

September 30, 2021

    

June 30, 2021

    

December 31, 2020

    

September 30, 2020

ACL on loans/leases / Gross loans/leases

 

1.75

%  

1.79

%  

1.98

%  

1.87

%

ACL on loans/leases / NPLs

 

1,180.77

%  

952.02

%  

605.15

%  

450.05

%

Although management believes that the ACL at September 30, 2021 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the ACL calculation.  The Company anticipates that the ACL as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic.  Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

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

NONPERFORMING ASSETS

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

As of September 30, 

As of June 30, 

As of December 31, 

As of September 30, 

    

2021

    

2021

    

2020

    

2020

(dollars in thousands)

Nonaccrual loans/leases (1) (2)

$

6,818

$

8,230

$

13,940

$

17,597

Accruing loans/leases past due 90 days or more

 

14

 

57

 

3

 

86

Total NPLs

 

6,832

 

8,287

 

13,943

 

17,683

OREO

 

 

1,820

 

20

 

125

Other repossessed assets

 

 

 

135

 

110

Total NPAs

$

6,832

$

10,107

$

14,098

$

17,918

NPLs to total loans/leases

    

 

0.15

%  

 

0.19

%  

 

0.35

%  

0.42

%  

NPAs to total loans/leases plus repossessed property

 

0.15

%  

 

0.23

%  

 

0.35

%  

0.42

%  

NPAs to total assets

 

0.11

%  

 

0.17

%  

 

0.25

%  

0.32

%  

(1)Includes government guaranteed portion of loans, as applicable.
(2)Includes TDRs of $152 thousand at September 30, 2021, $2.7 million at June 30, 2021, $984 thousand at December 31, 2020 and $204 thousand at September 30, 2020.

NPAs at September 30, 2021 were $6.8 million, down $3.3 million from June 30, 2021, and down $11.1 million from September 30, 2020.  The ratio of NPAs to total assets was 0.11% at September 30, 2021, down from 0.17% at June 30, 2021, and down from 0.32% at September 30, 2020.

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

OREO is carried at the lower of carrying amount or fair value less costs to sell. Increase in OREO was from a single property.

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

Due to the economic impacts of COVID-19, the Company established its LRP for its clients.  The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term.  Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date.  The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days.  The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020.  On December 27, 2020, this relief was extended to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022.  The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of September 30, 2021, there were no Bank modifications and eight m2 modifications of loans and leases totaling $2.9 million representing 0.06% of the total loan and lease portfolio currently on deferral.  The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic.  The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented.  The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.  The regulators have clarified that this guidance may continue to be applied in 2021.

DEPOSITS

Deposits increased $182.9 million during the third quarter of 2021, primarily due to increases in both noninterest bearing and interest bearing deposits. The table below presents the composition of the Company's deposit portfolio.

As of

 

September 30, 2021

    

June 30, 2021

    

December 31, 2020

 

September 30, 2020

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

(dollars in thousands)

 

Noninterest bearing demand deposits

$

1,342,273

 

28

%  

$

1,258,885

 

27

%  

$

1,145,378

 

25

%  

$

1,175,085

 

25

%

Interest bearing demand deposits

 

3,086,711

 

63

%  

 

2,976,696

 

63

%  

 

2,987,469

 

65

%  

 

2,938,194

 

63

%

Time deposits

 

441,743

 

9

%  

 

452,171

 

10

%  

 

460,659

 

10

%  

 

499,021

 

11

%

Brokered deposits

 

1,101

 

0

%  

 

1,183

 

0

%  

 

5,631

 

0

%  

 

59,968

 

1

%

$

4,871,828

 

100

%  

$

4,688,935

 

100

%  

$

4,599,137

 

100

%  

$

4,672,268

 

100

%

Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had core deposit growth mostly from its noninterest bearing and interest bearing demand deposits.  As a result

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of strong core deposit growth since September 2020, the Company reduced its reliance on higher cost CDs and brokered deposits.

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

BORROWINGS

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

As of

    

September 30, 2021

    

June 30, 2021

    

December 31, 2020

    

September 30, 2020

 

(dollars in thousands)

Federal funds purchased

$

1,600

$

7,070

$

5,430

$

30,430

The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks.  

As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.  

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

As of

    

September 30, 2021

June 30, 2021

    

December 31, 2020

    

September 30, 2020

 

(dollars in thousands)

Term FHLB advances

 

$

$

 

$

 

$

40,000

Overnight FHLB advances

30,000

40,000

15,000

$

30,000

$

40,000

 

$

15,000

 

$

40,000

 

FHLB advances decreased $10.0 million in the current quarter compared to the prior quarter due to temporary changes in liquidity.

The Company renewed its revolving credit note in the second quarter of 2021.  At renewal, the line amount was $25.0 million.  Interest on the revolving line of credit was calculated at the effective Prime Rate plus 2.25% per annum.  The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries.  There was no outstanding balance on the revolving line of credit at September 30, 2021.

The Company had subordinated notes totaling $113.8 million as of September 30, 2021 and June 30, 2021.  The Company prepaid $5.0 million in subordinated debt in the second quarter of 2021 with no gain/loss.

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.

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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).

September 30, 2021

December 31, 2020

 

 

Weighted

 

Weighted

 

Average

 

Average

Maturity:

    

Amount Due

    

Interest Rate

    

Amount Due

    

Interest Rate

 

(dollars in thousands)

Year ending December 31:

2021

$

31,101

0.29

%  

$

20,631

0.21

%

2022

 

 

2023

2024

 

 

Total Wholesale Funding

 

$

31,101

0.29

%  

$

20,631

0.21

%

 

During the first nine months of 2021, wholesale funding increased $10.5 million due to temporary changes in liquidity, $15.0 million of which was overnight FHLB advances offset by decrease in brokered deposits of $4.5 million.

STOCKHOLDERS' EQUITY

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

As of

 

    

September 30, 2021

    

June 30, 2021

    

December 31, 2020

    

September 30, 2020

 

(dollars in thousands)

 

Common stock

$

15,590

$

15,764

$

15,806

$

15,792

Additional paid in capital

 

272,964

 

275,485

 

275,807

 

275,122

Retained earnings

 

360,003

 

335,424

 

300,804

 

283,480

AOCI (loss)

 

1,257

 

3,803

 

1,376

 

(1,781)

Total stockholders' equity

$

649,814

$

630,476

$

593,793

$

572,613

TCE / TA ratio (non-GAAP)

 

9.54

%  

 

9.55

%  

 

9.08

%  

 

8.42

%

*     TCE is defined as total common stockholders' equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.

Excluding the impact of PPP loans, the adjusted TCE/TA at September 30, 2021 was 9.47% (non-GAAP). 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $102.1 million during the third quarter of 2021 and $102.7 million during the first nine months of 2021. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The Company has been able to access available funding sources to address liquidity needs during the COVID-19 pandemic.  In addition, the Company has been able to pledge the PPP loans to the Federal Reserve as part of its operational line of credit.

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

At September 30, 2021, the subsidiary banks had 31 lines of credit totaling $560.6 million, of which $104.6 million was secured and $456.0 million was unsecured. At September 30, 2021, the full $560.6 million was available.

At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1 million was secured and $456.0 million was unsecured. At December 31, 2020, the full $743.1 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2022. At September 30, 2021, the full $25.0 million was available.

As of September 30, 2021, the Company had $667.4 million in average correspondent banking deposits spread over 186 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of $330.5 million during the first nine months of 2021, compared to $837.8 million for the same period of 2020. The net decrease in interest-bearing deposits at financial institutions was $22.8 million for the first nine months of 2021, compared to a net increase of $154.2 million for the same period of 2020. Proceeds from calls, maturities, and paydowns of securities were $131.1 million for the first nine months of 2021, compared to $72.3 million for the same period of 2020. Purchases of securities used cash of $151.7 million for the first nine months of 2021, compared to $255.5 million for the same period of 2020. Proceeds from sales of securities were $23.8 million for the first nine months of 2021, compared to $28.6 million for the same period of 2020. The net increase in loans/leases used cash of $353.6 million for the first nine months of 2021 compared to $555.3 million for the same period of 2020.

Financing activities provided cash of $262.2 million for the first nine months of 2021, compared to $701.2 million for same period of 2020. Net increases in deposits totaled $272.7 million for the first nine months of 2021, compared to $731.4 million for the same period of 2020. During the first nine months of 2021, the Company's short-term borrowings decreased $3.8 million, compared to an increase in short-term borrowings of $17.0 million for the same period of 2020. There were no long-term FHLB advances during the first nine months of 2021.  There were no maturities and principal payments on FHLB term advances in the first nine months of 2021. Net increase in overnight advances totaled $15.0 million for the first nine months of 2021.  In the first nine months of 2020, the Company decreased short-term and overnight FHLB advances by $16.0 million.  Prepayments on brokered and public time deposits totaled $29.4 million during the first nine months of 2020. Prepayment of subordinated notes totaled $5.0 million during the first nine months of 2021.

Total cash provided by operating activities was $64.3 million for the first nine months of 2021, compared to $129.3 million for the same period of 2020.

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

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 9 of the Consolidated Financial Statements for additional information regarding regulatory capital.

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SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,”  “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

The strength of the local, state, and national and international economies (including the impact of the current presidential administration).
The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), acts of war or threats thereof and other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse events.
Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB, including FASB’s CECL impairment standards.
Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business.
Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out.
Increased competition in the financial services sector and the inability to attract new customers.
Changes in  technology and the ability to develop and maintain secure and reliable electronic systems.
Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.
The loss of key executives or employees.
The costs, effects and outcomes of existing or future litigation.
The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.
The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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

NET INTEREST INCOME EXPOSURE in YEAR 1

 

    

    

As of September 30, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

POLICY LIMIT

 

2021

 

2020

 

2019

100 basis point downward shift

 

(10.0)

%  

(0.1)

%  

%  

0.5

%

200 basis point upward shift

 

(10.0)

%  

2.1

%  

2.5

%  

1.2

%

300 basis point upward shock

 

(30.0)

%  

9.4

%  

10.3

%  

4.9

%

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at September 30, 2021 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure.  Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.

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CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of September 30, 2021. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1           Legal Proceedings

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

Item 1A        Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  The program was paused for a period of time during the pandemic and then restarted on May 24, 2021. All shares repurchased under the share repurchase program during the second and third quarter were retired.

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

July 1-31, 2021

84,000

47.21

284,932

515,068

August 1-31, 2021

84,904

49.32

369,836

430,164

September 1-30, 2021

24,249

49.82

394,085

405,915

Item 3           Defaults Upon Senior Securities

None

Item 4           Mine Safety Disclosures

Not applicable

Item 5           Other Information

None

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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

Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and September 30, 2020; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and September 30, 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2021 and September 30, 2020; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and September 30, 2020; and (vi) Notes to the Consolidated Financial Statements.

104

Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

QCR HOLDINGS, INC.

(Registrant)

Date

November 5, 2021

/s/ Larry J. Helling

Larry J. Helling

Chief Executive Officer

Date

November 5, 2021

/s/ Todd A. Gipple

Todd A. Gipple, President

Chief Operating Officer

Chief Financial Officer

Date

November 5, 2021

/s/ Nick W. Anderson

Nick W. Anderson

Chief Accounting Officer

(Principal Accounting Officer)

82