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QCR HOLDINGS INC - Quarter Report: 2022 March (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 March 31, 2022

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 May 1, 2022, the Registrant had outstanding 17,651,425 shares of common stock, $1.00 par value per share.

1

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page
Number(s)

Part I

    

FINANCIAL INFORMATION

Item 1

    

Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets
As of March 31, 2022 and December 31, 2021

4

Consolidated Statements of Income
For the Three Months Ended March 31, 2022 and 2021

5

Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2022 and 2021

6

Consolidated Statements of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2022 and 2021

7

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2022 and 2021

8

Notes to Consolidated Financial Statements

9

Note 1. Summary of Significant Accounting Policies

9

Note 2. Investment Securities

11

Note 3. Loans/Leases Receivable

14

Note 4. Derivatives and Hedging Activities

23

Note 5. Income Taxes

25

Note 6. Earnings Per Share

26

Note 7. Fair Value

26

Note 8. Business Segment Information

28

Note 9. Regulatory Capital Requirements

29

Note 10. Acquisition

30

Item 2

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

Introduction

31

General

31

Impact of COVID-19

31

Critical Accounting Policies and Critical Accounting Estimates

32

Executive Overview

33

Strategic Financial Metrics

34

Strategic Developments

35

GAAP to Non-GAAP Reconciliations

36

Net Interest Income - (Tax Equivalent Basis)

38

Results of Operations

40

Interest Income

40

Interest Expense

41

Provision for Credit Losses

41

Noninterest Income

42

Noninterest Expense

44

Income Taxes

45

2

Table of Contents

Financial Condition

46

Investment Securities

46

Loans/Leases

47

Allowance for Credit Losses on Loans/Leases and OBS Exposures

49

Nonperforming Assets

50

Deposits

51

Borrowings

52

Stockholders' Equity

53

Liquidity and Capital Resources

54

Special Note Concerning Forward-Looking Statements

55

Item 3

    

Quantitative and Qualitative Disclosures About Market Risk

57

Item 4

Controls and Procedures

59

Part II

    

OTHER INFORMATION

60

Item 1

Legal Proceedings

60

Item 1A

Risk Factors

60

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3

Defaults Upon Senior Securities

60

Item 4

Mine Safety Disclosures

60

Item 5

Other Information

60

Item 6

Exhibits

61

Signatures

62

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

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of March 31, 2022 and December 31, 2021

March 31, 

December 31,

2022

2021

(dollars in thousands)

Assets

Cash and due from banks

$

50,540

$

37,490

Federal funds sold

 

9,635

 

12,370

Interest-bearing deposits at financial institutions

 

56,755

 

75,292

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

 

476,625

 

472,385

Securities available for sale, at fair value

 

346,686

 

337,830

Total securities

823,311

 

810,215

Loans receivable held for sale

 

2,968

 

3,828

Loans/leases receivable held for investment

 

4,824,900

 

4,676,304

Gross loans/leases receivable

 

4,827,868

 

4,680,132

Less allowance for credit losses

 

(74,786)

 

(78,721)

Net loans/leases receivable

 

4,753,082

 

4,601,411

 

  

 

  

Bank-owned life insurance

 

62,770

 

62,424

Premises and equipment, net

 

80,634

 

78,530

Restricted investment securities

 

30,722

 

19,353

Goodwill

 

74,066

 

74,066

Intangibles

 

8,856

 

9,349

Derivatives

107,326

222,220

Other assets

 

118,122

 

93,412

Total assets

$

6,175,819

$

6,096,132

 

  

 

  

Liabilities and Stockholders' Equity

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

1,275,493

$

1,268,788

Interest-bearing

 

3,564,196

 

3,653,984

Total deposits

 

4,839,689

 

4,922,772

 

  

 

  

Short-term borrowings

 

1,190

 

3,800

Federal Home Loan Bank advances

 

290,000

 

15,000

Subordinated notes

113,890

113,850

Junior subordinated debentures

 

38,190

 

38,155

Derivatives

116,193

225,135

Other liabilities

 

108,743

 

100,410

Total liabilities

 

5,507,895

 

5,419,122

 

  

 

  

 

  

 

  

Stockholders' Equity:

 

  

 

  

Preferred stock, $1 par value; shares authorized 250,000 March 2022 and December 2021 - no shares issued or outstanding

 

 

Common stock, $1 par value; shares authorized 20,000,000 March 2022 - 15,579,605 shares issued and outstanding December 2021 - 15,613,460 shares issued and outstanding

 

15,580

 

15,613

Additional paid-in capital

 

272,370

 

273,768

Retained earnings

 

405,762

 

386,077

Accumulated other comprehensive income (loss):

 

 

Securities available for sale

 

(16,171)

 

5,925

Derivatives

(9,617)

(4,373)

Total stockholders' equity

 

667,924

 

677,010

Total liabilities and stockholders' equity

$

6,175,819

$

6,096,132

See Notes to Consolidated Financial Statements (Unaudited)

4

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

    

2022

    

2021

(dollars in thousands, except share data)

Interest and dividend income:

Loans/leases, including fees

$

44,196

$

41,333

Securities:

Taxable

 

2,398

 

2,042

Nontaxable

 

4,150

 

3,934

Interest-bearing deposits at financial institutions

 

35

 

37

Restricted investment securities

 

281

 

219

Federal funds sold

 

2

 

Total interest and dividend income

 

51,062

 

47,565

Interest expense:

Deposits

 

3,137

 

3,427

Short-term borrowings

 

 

1

Federal Home Loan Bank advances

 

82

 

9

Subordinated notes

1,554

1,594

Junior subordinated debentures

 

556

 

559

Total interest expense

 

5,329

 

5,590

Net interest income

 

45,733

 

41,975

Provision for credit losses

 

(2,916)

 

6,713

Net interest income after provision for credit losses

 

48,649

 

35,262

Noninterest income:

Trust department fees

 

2,963

 

2,801

Investment advisory and management fees

 

1,036

 

940

Deposit service fees

 

1,555

 

1,408

Gains on sales of residential real estate loans, net

 

493

 

1,337

Gains on sales of government guaranteed portions of loans, net

 

19

 

Swap fee income/capital markets revenue

 

6,422

 

13,557

Earnings on bank-owned life insurance

 

346

 

471

Debit card fees

 

1,007

 

975

Correspondent banking fees

 

277

 

314

Other

 

1,515

 

1,686

Total noninterest income

 

15,633

 

23,489

Noninterest expense:

Salaries and employee benefits

 

23,627

 

24,847

Occupancy and equipment expense

 

3,937

 

4,108

Professional and data processing fees

 

3,671

 

3,443

Acquisition costs

 

1,851

 

Disposition costs

8

FDIC insurance, other insurance and regulatory fees

 

1,310

 

1,065

Loan/lease expense

 

267

 

300

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

 

(1)

 

39

Advertising and marketing

 

761

 

627

Bank service charges

 

541

 

523

Correspondent banking expense

 

199

 

200

Intangibles amortization

 

493

 

508

Other

 

1,669

 

1,560

Total noninterest expense

 

38,325

 

37,228

Net income before income taxes

 

25,957

 

21,523

Federal and state income tax expense

 

2,333

 

3,541

Net income

$

23,624

$

17,982

Basic earnings per common share

$

1.51

$

1.14

Diluted earnings per common share

$

1.49

$

1.12

Weighted average common shares outstanding

 

15,625,112

 

15,803,643

Weighted average common and common equivalent shares outstanding

 

15,852,256

 

16,025,548

Cash dividends declared per common share

$

0.06

$

0.06

See Notes to Consolidated Financial Statements (Unaudited)

5

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31, 

    

    

2022

    

2021

(dollars in thousands)

Net income

$

23,624

$

17,982

Other comprehensive income (loss):

Unrealized losses on securities available for sale:

Unrealized holding losses arising during the period before tax

(29,170)

 

(5,759)

Unrealized gains (losses) on derivatives:

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

 

(6,858)

 

3,153

Less reclassification adjustment for caplet amortization before tax

(221)

(151)

 

(6,637)

 

3,304

Other comprehensive loss, before tax

 

(35,807)

 

(2,455)

Tax benefit

 

(8,467)

 

(704)

Other comprehensive loss, net of tax

 

(27,340)

 

(1,751)

Comprehensive income (loss)

$

(3,716)

$

16,231

See Notes to Consolidated Financial Statements (Unaudited)

6

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

(Loss) Income

    

Total

(dollars in thousands)

Balance December 31, 2021

$

15,613

$

273,768

$

386,077

$

1,552

$

677,010

Net income

 

 

 

23,624

 

 

23,624

Other comprehensive (loss), net of tax

 

 

 

 

(27,340)

 

(27,340)

Common cash dividends declared, $0.06 per share

 

 

 

(939)

 

 

(939)

Repurchase and cancellation of 77,500 shares of common stock

as a result of a share repurchase program

(77)

(1,338)

(3,000)

(4,415)

Stock-based compensation expense

 

 

751

 

 

 

751

Issuance of common stock under employee benefit plans

 

44

 

(811)

 

 

 

(767)

Balance, March 31, 2022

$

15,580

$

272,370

$

405,762

$

(25,788)

$

667,924

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

(dollars in thousands)

Balance December 31, 2020

$

15,806

$

275,807

$

300,804

$

1,376

$

593,793

Impact of adoption of ASU 2016-13

(937)

(937)

Net income

 

 

 

17,982

 

 

17,982

Other comprehensive loss, net of tax

 

 

 

 

(1,751)

 

(1,751)

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

See Notes to Consolidated Financial Statements (Unaudited)

7

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended March 31, 2022 and 2021

    

2022

    

2021

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

 

  

Net income

$

23,624

$

17,982

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

 

  

 

  

Depreciation

 

1,297

 

1,331

Provision for credit losses

 

(2,916)

 

6,713

Stock-based compensation expense

 

751

 

841

Deferred compensation expense accrued

 

1,026

 

1,289

Gains on other real estate owned, net

 

 

(1)

Amortization of premiums on securities, net

 

336

 

597

Caplet amortization

221

151

Mark to market gains on unhedged derivatives, net

(906)

(164)

Loans originated for sale

 

(25,749)

 

(59,785)

Proceeds on sales of loans

 

27,121

 

59,216

Gains on sales of residential real estate loans

 

(493)

 

(1,337)

Gains on sales of government guaranteed portions of loans

 

(19)

 

Gains on sales and disposals of premises and equipment

(10)

(21)

Amortization of intangibles

 

493

 

508

Accretion of acquisition fair value adjustments, net

 

(118)

 

(504)

Increase in cash value of bank-owned life insurance

 

(346)

 

(471)

Increase in other assets

 

(16,243)

 

(8,243)

Decrease in other liabilities

(1,123)

(6,959)

Net cash provided by operating activities

$

6,946

$

11,143

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Net decrease in federal funds sold

 

2,735

 

7,730

Net decrease in interest-bearing deposits at financial institutions

 

18,537

 

32,890

Proceeds from sales of other real estate owned

 

 

1

Activity in securities portfolio:

 

 

Purchases

 

(52,403)

 

(53,567)

Calls, maturities and redemptions

 

7,213

 

48,988

Paydowns

 

10,113

 

19,308

Sales

 

 

19,540

Activity in restricted investment securities:

 

  

 

  

Purchases

 

(11,389)

 

(1,680)

Redemptions

 

20

 

59

Net increase in loans/leases originated and held for investment

 

(148,521)

 

(107,996)

Purchase of premises and equipment

 

(3,428)

 

(1,800)

Proceeds from sales of premises and equipment

37

21

Net cash used in investing activities

$

(177,086)

$

(36,506)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net increase (decrease) in deposit accounts

 

(83,083)

 

32,645

Net increase (decrease) in short-term borrowings

 

(2,610)

 

1,410

Activity in Federal Home Loan Bank advances:

 

  

 

  

Net change in short-term and overnight advances

 

275,000

 

10,000

Payment of cash dividends on common stock

 

(935)

 

(947)

Payment from issuance of common stock, net

(767)

(260)

Repurchase and cancellation of shares

(4,415)

Net cash provided by financing activities

$

183,190

$

42,848

Net increase in cash and due from banks

 

13,050

 

17,485

Cash and due from banks, beginning

 

37,490

 

61,329

Cash and due from banks, ending

$

50,540

$

78,814

Supplemental disclosure of cash flow information, cash payments for:

 

  

 

  

Interest

$

6,271

$

7,674

Income/franchise taxes

 

38

 

35

 

  

 

Supplemental schedule of noncash investing activities:

 

  

 

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

 

(27,340)

 

(1,751)

Change in retained earnings from adoption of ASU 2016-13

(937)

Transfers of loans to other real estate owned

 

 

153

Due to broker for purchases of securities

 

7,533

 

2,568

Decrease in the fair value of back-to-back interest rate swap assets and liabilities

 

(119,357)

 

(100,886)

Dividends payable

 

939

 

949

See Notes to Consolidated Financial Statements (Unaudited)

8

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

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, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2022. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended March 31, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022, 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

AFS: Available for sale

FTEs: Full-time equivalents

GAAP: Generally Accepted Accounting Principles

Allowance: Allowance for credit losses

GFED: Guaranty Federal Bancshares

AOCI: Accumulated other comprehensive income (loss)

HTM: Held to maturity

ASC: Accounting Standards Codification

LIBOR: London Inter-Bank Offered Rate

ASU: Accounting Standards Update

LIHTC: Low-income housing tax credit

Bates Companies: Bates Financial Advisors, Inc., Bates

m2: m2 Equipment Finance, LLC

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

ROAA: Return on average assets

EBA: Excess balance account

ROAE: Return on average equity

EPS: Earnings per share

SBA: U.S. Small Business Administration

Exchange Act: Securities Exchange Act of 1934, as

SEC: Securities and Exchange Commission

amended

SFCB: Guaranty Bank, formerly known as Springfield First

FASB: Financial Accounting Standards Board

Community Bank

FDIC: Federal Deposit Insurance Corporation

SFG: Specialty Finance Group

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.

9

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. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. 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.

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 has assessed the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition. Specifically, management has identified all of the financial instruments with LIBOR exposure which includes certain commercial loans, interest rate swaps, interest rate caps, and certain securities.  In all cases, management has determined a plan of transition from LIBOR to a different index.  The transition will happen prior to the expiration of published LIBOR rates on June 30, 2023.  Management expects the transition to have a minimal impact to the Company’s financial statements.

In April 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures.  Under the standard, the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 is eliminated and guidance on “vintage disclosures” is amended to require disclosure of current-period gross write-offs by year of origination.  The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.  For public companies that have adopted ASC 326, the changes take effect in reporting periods beginning after December 15, 2022.  Management is currently analyzing the impact of the statement on the Company’s financial statements.

10

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of March 31, 2022 and December 31, 2021 are summarized as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost*

    

Gains

    

(Losses)

    

Value

    

(dollars in thousands)

March 31, 2022:

 

  

 

  

 

  

 

  

 

Securities HTM:

 

  

 

  

 

  

 

  

 

Municipal securities

$

475,773

$

10,649

$

(3,095)

$

483,327

Other securities

 

1,050

 

 

 

1,050

$

476,823

$

10,649

$

(3,095)

$

484,377

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

22,655

$

37

$

(1,312)

$

21,380

Residential mortgage-backed and related securities

 

88,935

 

207

 

(2,762)

 

86,380

Municipal securities

 

209,052

 

701

 

(18,280)

 

191,473

Asset-backed securities

22,859

449

(76)

23,232

Other securities

 

24,519

 

142

 

(440)

 

24,221

$

368,020

$

1,536

$

(22,870)

$

346,686

*     HTM securities shown on the balance sheet of $476.6 million represents amortized cost of $476.8 million, net of allowance for credit losses of $198 thousand as of March 31, 2022.

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost*

    

Gains

    

(Losses)

Value

(dollars in thousands)

December 31, 2021:

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

Municipal securities

$

471,533

$

49,715

$

$

521,248

Other securities

 

1,050

 

 

(1)

 

1,049

$

472,583

$

49,715

$

(1)

$

522,297

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

23,370

$

254

$

(296)

$

23,328

Residential mortgage-backed and related securities

 

92,431

 

2,672

 

(780)

 

94,323

Municipal securities

 

163,253

 

5,228

 

(215)

 

168,266

Asset-backed securities

26,372

752

27,124

Other securities

 

24,568

 

251

 

(30)

 

24,789

$

329,994

$

9,157

$

(1,321)

$

337,830

*     HTM securities shown on the balance sheet of $472.4 million represents amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.

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

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

11

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021, are summarized as follows:

Less than 12 Months

12 Months or More

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

(dollars in thousands)

March 31, 2022:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Municipal securities

$

87,662

$

(3,095)

$

$

$

87,662

$

(3,095)

 

  

 

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

13,725

$

(850)

$

2,675

$

(462)

$

16,400

$

(1,312)

Residential mortgage-backed and related securities

 

40,124

 

(869)

 

18,455

 

(1,893)

 

58,579

 

(2,762)

Municipal securities

 

139,706

 

(17,719)

 

4,914

 

(561)

 

144,620

 

(18,280)

Asset-backed securities

10,853

(76)

10,853

(76)

Other securities

 

13,267

 

(440)

 

 

 

13,267

 

(440)

$

217,675

$

(19,954)

$

26,044

$

(2,916)

$

243,719

$

(22,870)

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, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

Securities HTM:

 

  

 

  

 

  

 

  

 

  

 

  

Other securities

$

1,049

$

(1)

$

$

$

1,049

$

(1)

Securities AFS:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

9,802

$

(156)

$

3,035

$

(140)

$

12,837

$

(296)

Residential mortgage-backed and related securities

 

5,363

 

(67)

 

19,406

 

(713)

 

24,769

 

(780)

Municipal securities

 

13,287

 

(211)

 

1,001

 

(4)

 

14,288

 

(215)

Other securities

4,528

(30)

4,528

(30)

$

32,980

$

(464)

$

23,442

$

(857)

$

56,422

$

(1,321)

At March 31, 2022, the investment portfolio included 649 securities. Of this number, 286 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 3.07% of the total amortized cost of the portfolio. Of these 286 securities, there were 19 securities that had an unrealized loss for twelve months or more.

The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Municipal

Other

Municipal

Other

    

securities

    

securities

    

Total

securities

    

securities

    

Total

 

Allowance for credit losses:

Beginning balance

$

198

$

$

198

$

$

$

Impact of adopting ASU 2016-13

182

1

183

Provision for credit loss expense

(9)

(9)

Balance, ending

$

198

$

$

198

$

173

$

1

$

174

There were no proceeds or gains/losses from the sales of securities in the first quarter of 2022.  There were $19.5 million in proceeds during the first quarter of 2021 with no gains/losses from those sales.

12

The amortized cost and fair value of securities as of March 31, 2022 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

$

3,666

$

3,672

Due after one year through five years

 

20,506

 

20,571

Due after five years

 

452,651

 

460,134

$

476,823

$

484,377

Securities AFS:

 

  

 

  

Due in one year or less

$

5,259

$

5,282

Due after one year through five years

 

5,809

 

5,878

Due after five years

 

245,158

 

225,914

256,226

237,074

Residential mortgage-backed and related securities

88,935

86,380

Asset-backed securities

 

22,859

 

23,232

$

368,020

$

346,686

Portions of the U.S. government sponsored agency securities and municipal 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, summarized as follows:

    

Amortized Cost

    

Fair Value

(dollars in thousands)

Securities HTM:

 

  

 

  

Municipal securities

$

281,122

$

281,819

 

  

 

  

Securities AFS:

 

  

 

  

Municipal securities

204,976

187,341

Other securities

 

24,519

 

24,220

$

229,495

$

211,561

As of March 31, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $112.5 million and revenue bonds issued by 174 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $562.3 million. The Company also held investments in general obligation bonds in 22 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 14 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company also held investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2022 and as of December 31, 2021, 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.

13

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of March 31, 2022, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of March 31, 2022, 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.

NOTE 3 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of March 31, 2022 and December 31, 2021 is presented as follows:

    

March 31, 2022

December 31, 2021

(dollars in thousands)

C&I:

C&I - revolving

$

263,441

$

248,483

C&I - other *

1,374,221

1,346,602

1,637,662

1,595,085

 

  

 

  

CRE - owner occupied

 

439,257

 

421,701

CRE - non-owner occupied

 

679,898

646,500

Construction and land development

 

863,116

 

918,571

Multi-family

711,682

600,412

Direct financing leases**

 

43,330

 

45,191

1-4 family real estate***

379,613

377,361

Consumer

 

73,310

 

75,311

 

4,827,868

 

4,680,132

Allowance for credit losses

 

(74,786)

 

(78,721)

$

4,753,082

$

4,601,411

** Direct financing leases:

 

  

 

  

Net minimum lease payments to be received

$

47,410

$

49,362

Estimated unguaranteed residual values of leased assets

 

165

 

165

Unearned lease/residual income

 

(4,245)

 

(4,336)

 

43,330

 

45,191

Plus deferred lease origination costs, net of fees

 

484

 

568

 

43,814

 

45,759

Less allowance for credit losses

 

(1,465)

 

(1,546)

$

42,349

$

44,213

*     Includes equipment financing agreements outstanding at m2, totaling $242.5 million and $225.1 million as of March 31, 2022 and December 31, 2021, respectively and PPP loans totaling $6.3 million and $28.2 million as of March 31, 2022 and December 31, 2021, 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 $3.0 million and $3.8 million as of March 31, 2022 and December 31, 2021, respectively.

14

Changes in accretable yield for the loans acquired in mergers and acquisitions are as follows:

Three months ended

March 31, 2022

March 31, 2021

    

Performing

    

Performing

Loans

Loans

Balance at the beginning of the period

$

(1,533)

$

(3,139)

Accretion recognized

 

161

 

609

Balance at the end of the period

$

(1,372)

$

(2,530)

The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2022 and December 31, 2021 is presented as follows:

As of March 31, 2022

 

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

$

263,441

$

$

$

$

$

263,441

C&I - other

1,370,189

2,083

476

4

1,469

1,374,221

CRE - owner occupied

 

439,257

 

 

 

 

 

439,257

CRE - non-owner occupied

 

679,898

 

 

 

 

 

679,898

Construction and land development

863,095

21

863,116

Multi-family

 

711,682

 

 

 

 

 

711,682

Direct financing leases

 

42,253

 

136

 

121

 

 

820

 

43,330

1-4 family real estate

 

378,032

 

1,156

 

 

 

425

 

379,613

Consumer

 

73,278

 

2

 

 

 

30

 

73,310

$

4,821,125

$

3,377

$

618

$

4

$

2,744

$

4,827,868

 

  

 

  

 

  

 

  

 

  

 

  

As a percentage of total loan/lease portfolio

 

99.86

%  

 

0.07

%  

 

0.01

%  

 

0.00

%  

 

0.06

%  

 

100.00

%

As of December 31, 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

$

248,483

$

$

$

$

$

248,483

C&I - other

 

1,337,034

 

859

 

7,308

 

1

 

1,400

 

1,346,602

CRE - owner occupied

 

421,701

 

 

 

 

 

421,701

CRE - non-owner occupied

 

646,500

 

 

 

 

 

646,500

Construction and land development

 

918,498

 

 

 

 

73

 

918,571

Multi-family

600,412

600,412

Direct financing leases

 

44,174

 

10

 

160

 

 

847

 

45,191

1-4 family real estate

 

374,912

 

1,325

 

716

 

 

408

 

377,361

Consumer

 

75,272

 

8

 

 

 

31

 

75,311

$

4,666,986

$

2,202

$

8,184

$

1

$

2,759

$

4,680,132

As a percentage of total loan/lease portfolio

 

99.57

%  

 

0.05

%  

 

0.17

%  

 

0.00

%  

 

0.06

%  

 

100.00

%

15

NPLs by classes of loans/leases as of March 31, 2022 and December 31, 2021 are presented as follows:

As of March 31, 2022

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

4

1,212

257

1,473

53.60

CRE - owner occupied

 

 

 

 

 

-

CRE - non-owner occupied

 

 

 

 

 

-

Construction and land development

-

Multi-family

 

 

 

 

 

-

Direct financing leases

 

 

820

 

 

820

 

29.84

1-4 family real estate

 

 

425

 

 

425

 

15.47

Consumer

 

 

30

 

 

30

 

1.09

$

4

$

2,487

$

257

$

2,748

 

100.00

%

As of December 31, 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

1

1,130

270

1,401

50.77

CRE - owner occupied

 

 

 

 

 

-

CRE - non-owner occupied

 

 

 

 

 

-

Construction and land development

 

 

73

 

 

73

 

2.64

Multi-family

 

 

 

 

 

-

Direct financing leases

 

 

115

 

732

 

847

 

30.69

1-4 family real estate

 

 

408

 

 

408

 

14.78

Consumer

 

 

31

 

 

31

 

1.12

$

1

$

1,757

$

1,002

$

2,760

100.00

%

The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2022 and 2021.

Changes in the ACL loans/leases by portfolio segment for the three months ended March 31, 2022 and 2021, respectively, are presented as follows:

Three Months Ended March 31, 2022

CRE

CRE

Construction

1-4

C&I -

C&I -

Owner

Non-Owner

and Land

Multi-

Family

    

Revolving

Other*

Occupied

    

Occupied

Development

Family

Real Estate

    

Consumer

    

Total

 

(dollars in thousands)

Balance, beginning

$

3,907

$

25,982

$

8,501

$

8,549

$

16,972

$

9,339

$

4,541

$

930

$

78,721

Provision

 

(288)

 

(331)

 

(609)

 

(820)

 

(2,301)

 

997

 

(387)

 

(110)

 

(3,849)

Charge-offs

 

 

(449)

 

 

 

 

 

 

(7)

 

(456)

Recoveries

 

 

235

 

5

 

128

 

 

 

 

2

 

370

Balance, ending

$

3,619

$

25,437

$

7,897

$

7,857

$

14,671

$

10,336

$

4,154

$

815

$

74,786

*   Included within the C&I – Other column are ACL on leases with a beginning balance of $1.5 million, negative provision of $27 thousand, charge-offs of $114 thousand and recoveries of $60 thousand. ACL on leases was $1.5 million as of March 31, 2022.

16

Three Months Ended March 31, 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

$

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

 

 

565

 

4,549

 

 

451

 

(286)

 

328

 

442

 

 

 

161

 

(217)

 

5,993

Charge-offs

 

 

 

(668)

 

 

 

 

 

 

 

 

(44)

 

(1)

 

(713)

Recoveries

 

 

 

156

 

 

 

13

 

 

 

 

 

6

 

102

 

277

Balance, ending

$

$

3,547

$

33,167

$

$

9,147

$

11,155

$

12,327

$

6,278

$

$

$

5,165

$

1,045

$

81,831

*   Included within the C&I – Other column are ACL on leases with adoption impact of $685 thousand, provision of $135 thousand, charge-offs of $198 thousand and recoveries of $76 thousand. ACL on leases was $2.2 million as of March 31, 2021.

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

As of March 31, 2022

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

$

2,801

$

260,640

$

263,441

$

181

$

3,438

$

3,619

C&I - other*

 

14,806

 

1,402,745

 

1,417,551

 

2,185

 

23,252

 

25,437

 

17,607

 

1,663,385

 

1,680,992

 

2,366

 

26,690

 

29,056

CRE - owner occupied

 

3,567

 

435,690

 

439,257

 

1,253

 

6,644

 

7,897

CRE - non-owner occupied

 

24,765

 

655,133

 

679,898

 

 

7,857

 

7,857

Construction and land development

 

10,362

 

852,754

 

863,116

 

1

 

14,670

 

14,671

Multi-family

711,682

711,682

10,336

10,336

1-4 family real estate

 

3,166

 

376,447

 

379,613

 

361

 

3,793

 

4,154

Consumer

 

385

 

72,925

 

73,310

 

47

 

768

 

815

$

59,852

$

4,768,016

$

4,827,868

$

4,028

$

70,758

$

74,786

*   Included within the C&I – Other category are leases individually evaluated of $820 thousand with a related allowance for credit losses of $128 thousand and leases collectively evaluated of $42.5 million with a related allowance for credit losses of $1.5 million.

As of December 31, 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

$

2,638

$

245,845

$

248,483

$

168

$

3,739

$

3,907

C&I - other*

 

13,456

 

1,378,337

 

1,391,793

 

743

 

25,239

 

25,982

 

16,094

 

1,624,182

 

1,640,276

 

911

 

28,978

 

29,889

CRE - owner occupied

 

3,841

 

417,860

 

421,701

 

1,264

 

7,237

 

8,501

CRE - non-owner occupied

 

25,006

 

621,494

 

646,500

 

 

8,549

 

8,549

Construction and land development

 

10,436

 

908,135

 

918,571

 

11

 

16,961

 

16,972

Multi-family

600,412

600,412

9,339

9,339

1-4 family real estate

 

2,950

 

374,411

 

377,361

 

329

 

4,212

 

4,541

Consumer

 

350

 

74,961

 

75,311

 

39

 

891

 

930

$

58,677

$

4,621,455

$

4,680,132

$

2,554

$

76,167

$

78,721

*   Included within the C&I – Other category are leases individually evaluated of $847 thousand with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.

17

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 March 31, 2022 and December 31, 2021:

As of March 31, 2022

Non

Commercial

Owner-Occupied

Owner Occupied

    

Assets

    

Real Estate

Real Estate

Securities

Equipment

Other

Total

(dollars in thousands)

C & I:

C&I - revolving

$

2,681

$

$

$

$

120

$

$

2,801

C&I - other*

 

1,427

 

 

2,467

 

128

 

8,412

 

2,372

 

14,806

 

4,108

 

 

2,467

 

128

 

8,532

 

2,372

 

17,607

CRE - owner occupied

 

 

 

3,567

 

 

 

 

3,567

CRE - non-owner occupied

 

 

24,765

 

 

 

 

 

24,765

Construction and land development

 

 

10,362

 

 

 

 

 

10,362

Multi-family

1-4 family real estate

 

 

804

 

2,362

 

 

 

 

3,166

Consumer

 

 

1

 

376

 

 

 

8

 

385

$

4,108

$

35,932

$

8,772

$

128

$

8,532

$

2,380

$

59,852

*   Included within the C&I – Other category are leases individually evaluated of $820 thousand with primary collateral of equipment.

As of December 31, 2021

Non

Commercial

Owner-Occupied

Owner Occupied

    

Assets

    

Real Estate

Real Estate

Securities

Equipment

Other

Total

(dollars in thousands)

C & I:

C&I - revolving

$

2,518

$

$

$

$

120

$

$

2,638

C&I - other*

 

683

 

 

2,471

 

134

 

9,877

 

291

 

13,456

 

3,201

 

 

2,471

 

134

 

9,997

 

291

 

16,094

CRE - owner occupied

 

 

 

3,841

 

 

 

 

3,841

CRE - non-owner occupied

 

 

25,006

 

 

 

 

 

25,006

Construction and land development

 

 

10,362

 

74

 

 

 

 

10,436

Multi-family

1-4 family real estate

 

 

817

 

2,133

 

 

 

 

2,950

Consumer

 

 

 

340

 

 

1

 

9

 

350

$

3,201

$

36,185

$

8,859

$

134

$

9,998

$

300

$

58,677

*   Included within the C&I – Other category are leases individually evaluated of $847 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.  Delinquency status is updated daily by the Company’s loan system.

18

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of March 31, 2022:

As of March 31, 2022

Term Loans

 

Amortized Cost Basis by Origination Year

 

Revolving

Loans

Internally Assigned

Amortized

Risk Rating

    

2022

    

2021

    

2020

    

2019

    

2018

Prior

Cost Basis

Total

(dollars in thousands)

C&I - revolving

Pass (Ratings 1 through 5)

$

$

$

$

$

$

$

260,449

$

260,449

Special Mention (Rating 6)

 

 

 

 

 

 

 

191

 

191

Substandard (Rating 7)

 

 

 

 

 

 

 

2,801

 

2,801

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - revolving

$

$

$

$

$

$

$

263,441

$

263,441

C&I - other

Pass (Ratings 1 through 5)

$

134,078

$

329,424

$

317,610

$

127,119

$

79,548

$

127,637

$

$

1,115,416

Special Mention (Rating 6)

 

255

 

3,578

 

7

 

25

 

 

329

 

 

4,194

Substandard (Rating 7)

 

 

2,519

 

2,969

 

6,107

 

377

 

99

 

 

12,071

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - other

$

134,333

$

335,521

$

320,586

$

133,251

$

79,925

$

128,065

$

$

1,131,681

CRE - owner occupied

Pass (Ratings 1 through 5)

$

41,459

$

99,653

$

140,078

$

49,753

$

31,419

$

59,392

$

10,745

$

432,499

Special Mention (Rating 6)

 

56

 

 

 

 

148

 

2,987

 

 

3,191

Substandard (Rating 7)

 

576

 

 

 

1,246

 

1,229

 

516

 

 

3,567

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - owner occupied

$

42,091

$

99,653

$

140,078

$

50,999

$

32,796

$

62,895

$

10,745

$

439,257

CRE - non-owner occupied

Pass (Ratings 1 through 5)

$

70,649

$

164,063

$

149,524

$

83,183

$

65,477

$

72,195

$

3,417

$

608,508

Special Mention (Rating 6)

 

1,169

 

4,873

 

18,713

 

1,780

 

12,150

 

7,951

 

 

46,636

Substandard (Rating 7)

 

 

1,054

 

6,240

 

15,476

 

1,048

 

936

 

 

24,754

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - non-owner occupied

$

71,818

$

169,990

$

174,477

$

100,439

$

78,675

$

81,082

$

3,417

$

679,898

Construction and land development

Pass (Ratings 1 through 5)

$

67,369

$

366,918

$

246,856

$

95,054

$

34,661

$

452

$

15,112

$

826,422

Special Mention (Rating 6)

 

800

 

7,070

 

717

 

 

 

 

 

8,587

Substandard (Rating 7)

 

 

10,362

 

 

 

 

 

 

10,362

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Construction and land development

$

68,169

$

384,350

$

247,573

$

95,054

$

34,661

$

452

$

15,112

$

845,371

Multi-family

Pass (Ratings 1 through 5)

$

45,350

$

252,544

$

196,255

$

97,500

$

106,138

$

11,329

$

2,515

$

711,631

Special Mention (Rating 6)

 

 

51

 

 

 

 

 

 

51

Substandard (Rating 7)

 

 

 

 

 

 

 

 

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Multi-family

$

45,350

$

252,595

$

196,255

$

97,500

$

106,138

$

11,329

$

2,515

$

711,682

1-4 family real estate

Pass (Ratings 1 through 5)

$

14,717

$

43,640

$

22,315

$

14,481

$

6,154

$

7,755

$

2,159

$

111,221

Special Mention (Rating 6)

 

 

329

 

223

 

 

220

 

 

 

772

Substandard (Rating 7)

 

 

 

177

 

 

430

 

198

 

 

805

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total 1-4 family real estate

$

14,717

$

43,969

$

22,715

$

14,481

$

6,804

$

7,953

$

2,159

$

112,798

Consumer

Pass (Ratings 1 through 5)

$

$

984

$

473

$

100

$

210

$

780

$

2,915

$

5,462

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

 

 

 

 

131

 

 

 

131

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Consumer

$

$

984

$

473

$

100

$

341

$

780

$

2,915

$

5,593

Total

$

376,478

$

1,287,062

$

1,102,157

$

491,824

$

339,340

$

292,556

$

300,304

$

4,189,721

19

As of March 31, 2022

Term Loans

 

Amortized Cost Basis by Origination Year

Revolving

Loans

Amortized

Delinquency Status *

    

2022

    

2021

    

2020

    

2019

    

2018

    

Prior

Cost Basis

Total

 

(dollars in thousands)

C&I - other

Performing

$

90,552

$

92,958

$

37,588

$

14,734

$

4,689

$

755

$

$

241,276

Nonperforming

 

 

1,021

 

157

 

86

 

 

 

 

1,264

Total C&I - other

$

90,552

$

93,979

$

37,745

$

14,820

$

4,689

$

755

$

$

242,540

Direct financing leases

Performing

$

15,181

$

6,535

$

8,554

$

6,874

$

4,093

$

1,273

$

$

42,510

Nonperforming

 

 

801

 

19

 

 

 

 

 

820

Total Direct financing leases

$

15,181

$

7,336

$

8,573

$

6,874

$

4,093

$

1,273

$

$

43,330

Construction and land development

Performing

$

5,626

$

10,768

$

707

$

$

484

$

$

160

$

17,745

Nonperforming

 

 

 

 

 

 

 

 

Total Construction and land development

$

5,626

$

10,768

$

707

$

$

484

$

$

160

$

17,745

1-4 family real estate

Performing

$

19,739

$

92,023

$

77,036

$

18,020

$

10,009

$

49,489

$

74

$

266,390

Nonperforming

 

 

 

 

 

96

 

329

 

 

425

Total 1-4 family real estate

$

19,739

$

92,023

$

77,036

$

18,020

$

10,105

$

49,818

$

74

$

266,815

Consumer

Performing

$

2,048

$

3,834

$

3,733

$

1,816

$

1,460

$

1,489

$

53,307

$

67,687

Nonperforming

 

 

 

 

14

 

 

16

 

 

30

Total Consumer

$

2,048

$

3,834

$

3,733

$

1,830

$

1,460

$

1,505

$

53,307

$

67,717

Total

$

133,146

$

207,940

$

127,794

$

41,544

$

20,831

$

53,351

$

53,541

$

638,147

* 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.

20

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of December 31, 2021:

As of December 31, 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)

$

$

$

$

$

$

$

245,212

$

245,212

Special Mention (Rating 6)

 

 

 

 

 

 

 

633

 

633

Substandard (Rating 7)

 

 

 

 

 

 

 

2,638

 

2,638

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - revolving

$

$

$

$

$

$

$

248,483

$

248,483

C&I - other

Pass (Ratings 1 through 5)

$

391,532

$

362,256

$

133,678

$

82,177

$

83,419

$

53,310

$

$

1,106,372

Special Mention (Rating 6)

 

3,580

 

373

 

349

 

 

336

 

2

 

 

4,640

Substandard (Rating 7)

 

506

 

2,366

 

7,138

 

396

 

55

 

46

 

 

10,507

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total C&I - other

$

395,618

$

364,995

$

141,165

$

82,573

$

83,810

$

53,358

$

$

1,121,519

CRE - owner occupied

Pass (Ratings 1 through 5)

$

118,014

$

143,045

$

47,660

$

30,523

$

17,038

$

46,185

$

11,477

$

413,942

Special Mention (Rating 6)

 

637

 

 

 

233

 

1,846

 

1,202

 

 

3,918

Substandard (Rating 7)

 

 

 

2,080

 

1,239

 

522

 

 

 

3,841

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - owner occupied

$

118,651

$

143,045

$

49,740

$

31,995

$

19,406

$

47,387

$

11,477

$

421,701

CRE - non-owner occupied

Pass (Ratings 1 through 5)

$

176,813

$

145,712

$

88,697

$

63,849

$

55,752

$

28,808

$

8,592

$

568,223

Special Mention (Rating 6)

 

7,295

 

20,881

 

1,802

 

12,230

 

5,494

 

5,580

 

 

53,282

Substandard (Rating 7)

 

1,105

 

6,297

 

15,563

 

1,087

 

943

 

 

 

24,995

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total CRE - non-owner occupied

$

185,213

$

172,890

$

106,062

$

77,166

$

62,189

$

34,388

$

8,592

$

646,500

Construction and land development

Pass (Ratings 1 through 5)

$

394,045

$

248,360

$

126,941

$

106,790

$

3,012

$

$

13,277

$

892,425

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

10,362

 

 

 

 

 

 

 

10,362

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Construction and land development

$

404,407

$

248,360

$

126,941

$

106,790

$

3,012

$

$

13,277

$

902,787

Multi-family

Pass (Ratings 1 through 5)

$

266,120

$

197,224

$

74,033

$

47,486

$

5,609

$

7,376

$

2,564

$

600,412

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

 

 

 

 

 

 

 

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Multi-family

$

266,120

$

197,224

$

74,033

$

47,486

$

5,609

$

7,376

$

2,564

$

600,412

1-4 family real estate

Pass (Ratings 1 through 5)

$

47,097

$

24,029

$

16,188

$

7,569

$

5,845

$

5,213

$

3,079

$

109,020

Special Mention (Rating 6)

 

37

 

 

 

 

 

 

 

37

Substandard (Rating 7)

 

 

178

 

 

437

 

201

 

 

 

816

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total 1-4 family real estate

$

47,134

$

24,207

$

16,188

$

8,006

$

6,046

$

5,213

$

3,079

$

109,873

Consumer

Pass (Ratings 1 through 5)

$

1,558

$

487

$

108

$

216

$

$

824

$

2,031

$

5,224

Special Mention (Rating 6)

 

 

 

 

 

 

 

 

Substandard (Rating 7)

 

 

 

 

137

 

 

 

 

137

Doubtful (Rating 8)

 

 

 

 

 

 

 

 

Total Consumer

$

1,558

$

487

$

108

$

353

$

$

824

$

2,031

$

5,361

Total

$

1,418,701

$

1,151,208

$

514,237

$

354,369

$

180,072

$

148,546

$

289,503

$

4,056,636

21

As of December 31, 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

$

117,163

$

54,261

$

33,390

$

14,274

$

4,200

$

455

$

$

223,743

Nonperforming

 

95

 

177

 

644

 

368

 

42

 

14

 

 

1,340

Total C&I - other

$

117,258

$

54,438

$

34,034

$

14,642

$

4,242

$

469

$

$

225,083

Direct financing leases

Performing

$

6,690

$

12,130

$

11,638

$

9,235

$

3,695

$

956

$

$

44,344

Nonperforming

 

 

732

 

 

52

 

18

 

45

 

 

847

Total Direct financing leases

$

6,690

$

12,862

$

11,638

$

9,287

$

3,713

$

1,001

$

$

45,191

Construction and land development

Performing

$

12,857

$

2,080

$

$

494

$

$

$

280

$

15,711

Nonperforming

 

 

 

 

 

73

 

 

 

73

Total Construction and land development

$

12,857

$

2,080

$

$

494

$

73

$

$

280

$

15,784

1-4 family real estate

Performing

$

104,005

$

78,713

$

19,001

$

10,784

$

10,533

$

43,976

$

68

$

267,080

Nonperforming

 

 

 

 

106

 

 

302

 

 

408

Total 1-4 family real estate

$

104,005

$

78,713

$

19,001

$

10,890

$

10,533

$

44,278

$

68

$

267,488

Consumer

Performing

$

4,891

$

4,020

$

2,114

$

1,660

$

593

$

1,230

$

55,411

$

69,919

Nonperforming

 

 

 

15

 

 

15

 

1

 

 

31

Total Consumer

$

4,891

$

4,020

$

2,129

$

1,660

$

608

$

1,231

$

55,411

$

69,950

Total

$

245,701

$

152,113

$

66,802

$

36,973

$

19,169

$

46,979

$

55,759

$

623,496

As of March 31, 2022 and December 31, 2021, TDRs totaled $120 thousand and $494 thousand, respectively.

There were no TDRs restructured during the first three months of 2022 or 2021. For the three months ended March 31, 2022 and March 31, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. There were no TDRs that were restructured and charged off for the three months ended March 31, 2022.

Changes in the ACL for OBS exposures for the three months ended March 31, 2022 and 2021 are presented as follows:

Three Months Ended

March 31, 2022

    

March 31, 2021

(dollars in thousands)

Balance, beginning

$

6,886

$

Impact of adopting ASU 2016-13

9,117

Provisions credited to expense

 

933

 

729

Balance, ending

$

7,819

$

9,846

22

NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES

Derivatives are summarized as follows as of March 31, 2022 and December 31, 2021:

    

March 31, 2022

    

December 31, 2021

(dollars in thousands)

Assets:

Interest rate caps - hedged

$

4,484

$

927

Interest rate caps

 

1,144

 

238

Interest rate swaps

 

101,698

 

221,055

$

107,326

$

222,220

Liabilities:

Interest rate swaps - hedged

$

(14,495)

$

(4,080)

Interest rate swaps

(101,698)

(221,055)

$

(116,193)

$

(225,135)

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 has 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

March 31, 2022

December 31, 2021

(dollars in thousands)

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

$

25,000

1.75

%  

$

48

$

5

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

50,000

1.57

97

11

Deposits

1/1/2020

1/1/2023

Derivatives - Assets

25,000

1.80

48

5

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.75

355

60

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

50,000

1.57

723

125

Deposits

1/1/2020

1/1/2024

Derivatives - Assets

25,000

1.80

361

62

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.75

695

161

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

50,000

1.57

1,438

332

Deposits

1/1/2020

1/1/2025

Derivatives - Assets

25,000

1.80

719

166

$

300,000

$

4,484

$

927

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

March 31, 2022

December 31, 2021

(dollars in thousands)

1/1/2020

1/1/2023

Derivatives - Assets

$

25,000

1.90

%  

$

41

$

3

2/1/2020

2/1/2024

Derivatives - Assets

25,000

1.90

369

62

3/1/2020

3/1/2025

Derivatives - Assets

25,000

1.90

734

173

$

75,000

$

1,144

$

238

23

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

March 31, 2022

December 31, 2021

(dollars in thousands)

Loans

 

7/1/2021

7/1/2031

Derivatives - Liabilities

 

35,000

1.40

%  

 

0.23

%  

(2,387)

(17)

Loans

 

7/1/2021

7/1/2031

Derivatives - Liabilities

 

50,000

1.40

%  

 

0.23

%  

(3,411)

(25)

Loans

 

7/1/2021

7/1/2031

Derivatives - Liabilities

 

40,000

1.40

%  

 

0.23

%  

(2,742)

(34)

Loans

 

7/1/2021

7/1/2031

Derivatives - Liabilities

 

25,000

1.40

%  

 

0.23

%  

(1,705)

(13)

Loans

 

4/1/2022

4/1/2027

Derivatives - Liabilities

 

15,000

1.91

%  

 

N/A

(281)

N/A

Loans

 

4/1/2022

4/1/2027

Derivatives - Liabilities

 

50,000

1.91

%  

 

N/A

(938)

N/A

Loans

 

4/1/2022

4/1/2027

Derivatives - Liabilities

 

35,000

1.91

%  

 

N/A

(656)

N/A

Loans

 

4/1/2022

4/1/2027

Derivatives - Liabilities

 

50,000

1.91

%  

 

N/A

(939)

N/A

 

  

 

$

300,000

$

(13,059)

$

(89)

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

March 31, 2022

December 31, 2021

(dollars in thousands)

QCR Holdings Statutory Trust II

 

9/30/2018

9/30/2028

Derivatives - Liabilities

 

10,000

3.86

%  

 

5.85

%  

(375)

(1,035)

QCR Holdings Statutory Trust III

 

9/30/2018

9/30/2028

Derivatives - Liabilities

 

8,000

3.86

%  

 

5.85

%  

(300)

(828)

QCR Holdings Statutory Trust V

 

7/7/2018

7/7/2028

Derivatives - Liabilities

 

10,000

1.79

%  

 

4.54

%  

(350)

(996)

Community National Statutory Trust II

 

9/20/2018

9/20/2028

Derivatives - Liabilities

 

3,000

3.10

%  

 

5.17

%  

(112)

(309)

Community National Statutory Trust III

 

9/15//2018

9/15/2028

Derivatives - Liabilities

 

3,500

2.58

%  

 

4.75

%  

(131)

(360)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

9/15/2028

Derivatives - Liabilities

 

4,500

2.58

%  

 

4.75

%  

(168)

(463)

 

  

 

$

39,000

$

(1,436)

$

(3,991)

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

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

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

March 31, 2022

December 31, 2021

Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

Interest rate swap contracts

$

2,069,977

$

101,698

$

2,024,599

$

221,055

Non-Hedging Interest Rate Derivatives Liabilities:

Interest rate swap contracts

$

2,069,977

$

101,698

$

2,024,599

$

221,055

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended March 31, 2022 and March 31, 2021 are as follows:

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

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

$

51,062

$

5,329

$

47,565

$

5,590

The effects of cash flow hedging:

Gain (loss) on cash flow hedges:

Interest rate caps on deposits

-

221

-

151

Interest rate swaps on variable rate loans

471

-

-

-

Interest rate swaps on junior subordinated debentures

-

267

-

269

24

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:

    

March 31, 2022

December 31, 2021

(dollars in thousands)

Cash

$

4,193

$

21,100

U.S treasuries and govt. sponsored agency securities

3,518

3,555

Municipal securities

123,763

139,166

Residential mortgage-backed and related securities

 

59,683

 

65,104

$

191,157

$

228,925

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 manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits.  The 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.   The majority of the Company’s swapped loan portfolio consists of loans on projects, with loan-to-values including the potential swap exposure that is below 65%.  The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 5 – INCOME TAXES

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three months ended March 31, 2022 and March 31, 2021:

For the Three Months Ended March 31, 

2022

2021

% of

% of

Pretax

Pretax

    

Amount

    

Income

    

Amount

    

Income

    

 

(dollars in thousands)

Computed "expected" tax expense

$

5,451

 

21.0

%  

$

4,520

 

21.0

%  

Tax exempt income, net

 

(2,222)

 

(8.6)

 

(1,719)

 

(8.0)

Bank-owned life insurance

 

(73)

 

(0.3)

 

(99)

 

(0.5)

State income taxes, net of federal benefit, current year

 

1,291

 

5.0

 

1,024

 

4.8

Provision adjustment from accounting method change

(1,181)

(4.5)

Tax credits

 

(242)

 

(0.9)

 

(57)

 

(0.3)

Income from tax credit equity investments

(301)

(1.2)

Acquisition costs

 

130

 

0.5

 

 

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

 

(434)

 

(1.7)

 

(164)

 

(0.8)

Other

 

(86)

 

(0.3)

 

36

 

0.2

Federal and state income tax expense

$

2,333

 

9.0

%  

$

3,541

 

16.4

%  

 

25

NOTE 6 - EARNINGS PER SHARE

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

Three months ended

March 31, 

2022

    

2021

    

(dollars in thousands, except share data)

Net income

$

23,624

$

17,982

Basic EPS

$

1.51

$

1.14

Diluted EPS

$

1.49

$

1.12

Weighted average common shares outstanding

 

15,625,112

 

15,803,643

Weighted average common shares issuable upon exercise of stock options

and under the employee stock purchase plan

 

227,144

 

221,905

Weighted average common and common equivalent shares outstanding

 

15,852,256

 

16,025,548

NOTE 7 – FAIR VALUE

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

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

Assets and liabilities measured at fair value on a recurring basis comprise the following at March 31, 2022 and December 31, 2021:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

(dollars in thousands)

March 31, 2022:

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. treasuries and govt. sponsored agency securities

$

21,380

$

$

21,380

$

Residential mortgage-backed and related securities

 

86,380

 

 

86,380

 

Municipal securities

 

191,473

 

 

191,473

 

Asset-backed securities

23,232

23,232

Other securities

 

24,221

 

 

24,221

 

Derivatives

 

107,326

 

 

107,326

 

Total assets measured at fair value

$

454,012

$

$

454,012

$

 

  

 

  

 

  

 

  

Derivatives

$

116,193

$

$

116,193

$

Total liabilities measured at fair value

$

116,193

$

$

116,193

$

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2021:

 

  

 

  

 

  

 

  

Securities AFS:

 

  

 

  

 

  

 

  

U.S. govt. sponsored agency securities

$

23,328

$

$

23,328

$

Residential mortgage-backed and related securities

 

94,323

 

 

94,323

 

Municipal securities

 

168,266

 

 

168,266

 

Asset-backed securities

27,124

27,124

Other securities

 

24,789

 

 

24,789

 

Derivatives

 

222,220

 

 

222,220

 

Total assets measured at fair value

$

560,050

$

$

560,050

$

 

  

 

  

 

  

 

  

Derivatives

$

225,135

$

$

225,135

$

Total liabilities measured at fair value

$

225,135

$

$

225,135

$

26

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

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

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

Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2022 and December 31, 2021:

    

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

    

Fair Value

    

Level 1

    

Level 2

    

Level 3

(dollars in thousands)

March 31, 2022:

 

  

 

  

 

  

 

  

Loans/leases evaluated individually

$

19,913

$

$

$

19,913

December 31, 2021:

 

  

 

  

 

  

 

  

Loans/leases evaluated individually

$

6,618

$

$

$

6,618

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.

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

Quantitative Information about Level Fair Value Measurements

 

Fair Value

Fair Value

 

March 31, 

December 31, 

 

    

2022

    

2021

    

Valuation Technique

    

Unobservable Input

    

Range

(dollars in thousands)

Loans/leases evaluated individually

$

19,913

$

6,618

 

Appraisal of collateral

 

Appraisal adjustments

 

-10.00

%  

to

 

-30.00

%

For the loans/leases evaluated individually, 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.

27

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, 2022 and 2021.

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

Fair Value

As of March 31, 2022

As of December 31, 2021

Hierarchy

Carrying

Estimated

Carrying

Estimated

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

(dollars in thousands)

Cash and due from banks

 

Level 1

$

50,540

$

50,540

$

37,490

$

37,490

Federal funds sold

 

Level 2

 

9,635

 

9,635

 

12,370

 

12,370

Interest-bearing deposits at financial institutions

 

Level 2

 

56,755

 

56,755

 

75,292

 

75,292

Investment securities:

 

  

 

 

 

 

HTM

 

Level 2

 

476,625

 

484,377

 

472,385

 

522,297

AFS

 

Level 2

 

346,686

 

346,686

 

337,830

 

337,830

Loans/leases receivable, net

 

Level 3

 

18,438

 

19,913

 

6,128

 

6,618

Loans/leases receivable, net

 

Level 2

 

4,734,644

 

4,670,679

 

4,595,283

 

4,478,899

Derivatives

 

Level 2

 

107,326

 

107,326

 

222,220

 

222,220

Deposits:

 

  

 

 

 

 

Nonmaturity deposits

 

Level 2

 

4,454,329

 

4,454,329

 

4,501,424

 

4,501,424

Time deposits

 

Level 2

 

385,360

 

376,546

 

421,348

 

419,453

Short-term borrowings

 

Level 2

 

1,190

 

1,190

 

3,800

 

3,800

FHLB advances

 

Level 2

 

290,000

 

290,000

 

15,000

 

15,000

Subordinated notes

Level 2

113,890

116,113

113,850

116,203

Junior subordinated debentures

 

Level 2

 

38,190

 

31,350

 

38,155

 

31,072

Derivatives

 

Level 2

 

116,193

 

116,193

 

225,135

 

225,135

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.

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

Selected financial information on the Company's business segments is presented as follows as of and for the three months ended March 31, 2022 and 2021:

Commercial Banking

Intercompany

Consolidated

    

QCBT

    

CRBT

    

CSB

    

SFCB

    

All other

    

Eliminations

    

Total

(dollars in thousands)

Three Months Ended March 31, 2022

  

  

Total revenue

$

22,480

$

25,211

$

11,316

$

7,844

$

28,912

$

(29,068)

$

66,695

Net interest income

 

17,314

 

14,323

 

9,331

 

6,528

 

(2,109)

 

346

 

45,733

Provision for credit losses

 

(1,259)

 

(770)

 

(385)

 

(502)

 

 

 

(2,916)

Net income (loss) from continuing operations

 

9,970

 

11,129

 

4,126

 

3,104

 

23,827

 

(28,532)

 

23,624

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

1,583

 

2,497

 

4,776

 

 

 

8,856

Total assets

 

2,195,894

 

1,947,737

 

1,184,708

 

956,345

 

839,362

 

(948,227)

 

6,175,819

 

  

 

  

 

  

 

 

 

  

 

Three Months Ended March 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

Total revenue

$

21,284

$

30,357

$

10,423

$

8,746

$

23,223

$

(22,979)

$

71,054

Net interest income

 

15,786

 

13,606

 

8,368

 

6,069

 

(2,102)

 

248

 

41,975

Provision for loan/lease losses

 

2,112

 

2,184

 

1,366

 

1,051

 

 

 

6,713

Net income (loss) from continuing operations

 

7,164

 

11,396

 

2,062

 

2,269

 

17,948

 

(22,857)

 

17,982

Goodwill

 

3,223

 

14,980

 

9,888

 

45,975

 

 

 

74,066

Intangibles

 

 

2,067

 

3,143

 

5,663

 

 

 

10,873

Total assets

 

2,101,634

 

1,847,070

 

1,041,861

 

818,605

 

791,254

 

(955,277)

 

5,645,147

28

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 March 31, 2022 and December 31, 2021, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2022 and December 31, 2021 are presented in the following tables (dollars in thousands).  As of March 31, 2022 and December 31, 2021, each of the subsidiary banks met such capital 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

( dollars in thousands)

As of March 31, 2022:

Company:

Total risk-based capital

$

836,493

14.50

%  

$

461,539

> 

8.00

%  

$

605,770

> 

10.50

%  

$

576,924

> 

10.00

%

Tier 1 risk-based capital

 

650,356

 

11.27

 

346,154

> 

6.00

 

490,385

> 

8.50

 

461,539

> 

8.00

Tier 1 leverage

 

650,356

 

10.78

 

241,343

> 

4.00

 

241,343

> 

4.00

 

301,679

> 

5.00

Common equity Tier 1

 

612,166

 

10.61

 

259,616

> 

4.50

 

403,847

> 

7.00

 

375,000

> 

6.50

Quad City Bank & Trust:

 

 

 

  

 

  

 

  

Total risk-based capital

$

259,332

13.42

%  

$

154,616

> 

8.00

%  

$

202,934

> 

10.50

%  

$

193,270

> 

10.00

%

Tier 1 risk-based capital

 

235,098

 

12.16

 

115,962

> 

6.00

 

164,280

> 

8.50

 

154,616

> 

8.00

Tier 1 leverage

 

235,098

 

10.81

 

86,996

> 

4.00

 

86,996

> 

4.00

 

108,745

> 

5.00

Common equity Tier 1

 

235,098

 

12.16

 

86,972

> 

4.50

 

135,289

> 

7.00

 

125,626

> 

6.50

Cedar Rapids Bank & Trust:

 

 

  

 

  

 

  

Total risk-based capital

$

269,223

14.18

%  

$

151,921

> 

8.00

%  

$

199,396

> 

10.50

%  

$

189,901

> 

10.00

%

Tier 1 risk-based capital

 

245,509

 

12.93

 

113,941

> 

6.00

 

161,416

> 

8.50

 

151,921

> 

8.00

Tier 1 leverage

 

245,509

 

12.36

 

79,428

> 

4.00

 

79,428

> 

4.00

 

99,285

> 

5.00

Common equity Tier 1

 

245,509

 

12.93

 

85,456

> 

4.50

 

132,921

> 

7.00

 

123,436

> 

6.50

Community State Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

128,273

11.81

%  

$

86,889

> 

8.00

%  

$

114,042

> 

10.50

%  

$

108,612

> 

10.00

%

Tier 1 risk-based capital

 

114,660

 

10.56

 

65,167

> 

6.00

 

92,320

> 

8.50

 

86,889

> 

8.00

Tier 1 leverage

 

114,660

 

10.00

 

45,868

> 

4.00

 

45,868

> 

4.00

 

57,336

> 

5.00

Common equity Tier 1

 

114,660

 

10.56

 

48,875

> 

4.50

 

76,028

> 

7.00

 

70,597

> 

6.50

Springfield First Community Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

104,588

12.91

%  

$

64,795

> 

8.00

%  

$

85,043

> 

10.50

%  

$

80,994

> 

10.00

%

Tier 1 risk-based capital

 

94,945

 

11.72

 

48,596

> 

6.00

 

68,845

> 

8.50

 

64,795

> 

8.00

Tier 1 leverage

 

94,945

 

11.21

 

33,886

> 

4.00

 

33,886

> 

4.00

 

42,357

> 

5.00

Common equity Tier 1

 

94,945

 

11.72

 

36,447

> 

4.50

 

56,696

> 

7.00

 

52,646

> 

6.50

29

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

 

( dollars in thousands)

As of December 31, 2021:

Company:

Total risk-based capital

$

814,629

14.77

%  

$

441,100

> 

8.00

%  

$

578,944

> 

10.50

%  

$

551,375

> 

10.00

%

Tier 1 risk-based capital

 

631,649

 

11.46

 

330,825

> 

6.00

 

468,669

> 

8.50

 

441,100

> 

8.00

Tier 1 leverage

 

631,649

 

10.46

 

241,579

> 

4.00

 

241,579

> 

4.00

 

301,974

> 

5.00

Common equity Tier 1

 

593,494

 

10.76

 

248,119

> 

4.50

 

385,962

> 

7.00

 

358,394

> 

6.50

Quad City Bank & Trust:

 

 

 

  

 

  

 

  

Total risk-based capital

$

247,658

13.29

%  

$

149,126

> 

8.00

%  

$

195,727

> 

10.50

%  

$

186,407

> 

10.00

%

Tier 1 risk-based capital

 

224,253

12.03

 

111,844

> 

6.00

 

158,446

> 

8.50

 

149,126

> 

8.00

Tier 1 leverage

 

224,253

10.45

 

85,873

> 

4.00

 

85,873

> 

4.00

 

107,341

> 

5.00

Common equity Tier 1

 

224,253

12.03

 

83,883

> 

4.50

 

130,485

> 

7.00

 

121,164

> 

6.50

Cedar Rapids Bank & Trust:

 

 

  

 

  

 

  

Total risk-based capital

$

277,673

14.85

%  

$

149,595

> 

8.00

%  

$

196,343

> 

10.50

%  

$

186,993

> 

10.00

%

Tier 1 risk-based capital

 

254,279

13.60

 

112,196

> 

6.00

 

158,944

> 

8.50

 

149,595

> 

8.00

Tier 1 leverage

 

254,279

12.59

 

80,777

> 

4.00

 

80,777

> 

4.00

 

100,971

> 

5.00

Common equity Tier 1

 

254,279

13.60

 

84,147

> 

4.50

 

130,895

> 

7.00

 

121,546

> 

6.50

Community State Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

123,365

11.95

%  

$

82,601

> 

8.00

%  

$

108,413

> 

10.50

%  

$

103,251

> 

10.00

%

Tier 1 risk-based capital

 

110,410

10.69

 

61,951

> 

6.00

 

87,763

> 

8.50

 

82,601

> 

8.00

Tier 1 leverage

 

110,410

9.67

 

45,676

> 

4.00

 

45,676

> 

4.00

 

57,095

> 

5.00

Common equity Tier 1

 

110,410

10.69

 

46,463

> 

4.50

 

72,276

> 

7.00

 

67,113

> 

6.50

Springfield First Community Bank:

 

 

  

 

  

 

  

Total risk-based capital

$

101,067

13.39

%  

$

60,369

> 

8.00

%  

$

79,235

> 

10.50

%  

$

75,462

> 

10.00

%

Tier 1 risk-based capital

 

91,625

12.14

 

45,277

> 

6.00

 

64,142

> 

8.50

 

60,369

> 

8.00

Tier 1 leverage

 

91,625

11.08

 

33,088

> 

4.00

 

33,088

> 

4.00

 

41,360

> 

5.00

Common equity Tier 1

 

91,625

12.14

 

33,958

> 

4.50

 

52,823

> 

7.00

 

49,050

> 

6.50

NOTE 10 –ACQUISITION

On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank.

Stockholders of GFED received for each share of GFED common stock owned, at the election of each stockholder, and subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock. On March 31, 2022, the last trading date before the closing, the Company’s common stock closed at $56.59, resulting in stock consideration valued at $117.2 million and total cash consideration paid by the Company of $26.9 million. The Company funded the cash portion of the purchase price through operating cash.

As of the acquisition date, GFED had $1.2 billion in assets, $821 million in loans and $1.1 billion in deposits. The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed, including goodwill and core deposit intangible.

Acquisition costs totaled $1.9 million in the first quarter of 2022. These acquisition costs are primarily comprised of legal, accounting and other professional expenses.

30

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending March 31, 2022. 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-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries.  As of March 31, 2022, the Company had $6.2 billion in consolidated assets, including $4.8 billion in net loans/leases, and $4.8 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.  On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter.  The combined bank changed its name to Guaranty Bank.  The financial results of GFED are not included in this report.

IMPACT OF COVID-19

The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three months ended March 31, 2022 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 Business

The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic.  The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to continue to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, the Company’s market areas, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.

The Company currently expects that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital.  Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

31

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

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. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill and the fair value of financial instruments.

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 and estimates:

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value.  Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment.  In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

As of November 30, 2021 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.

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

On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the 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. 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, 2021.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.  A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities.  A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

FAIR VALUE OF SECURITIES

The fair value of securities is determined monthly and the securities are stated at fair value.  A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

32

Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

EXECUTIVE OVERVIEW

The Company reported net income of $23.6 million and diluted EPS of $1.49 for the quarter ended March 31, 2022. By comparison, for the quarter ended December 31, 2021 the Company reported net income of $27.0 million and diluted EPS of $1.71.  For the quarter ended March 31, 2021, the Company reported net income of $18.0 million, and diluted EPS of $1.12.  

The first quarter of 2022 was also highlighted by the following results and events:

Adjusted net income (non-GAAP) of $24.4 million, or $1.54 per diluted share;
NIM of 3.30% and Adjusted NIM (TEY)(non-GAAP) of 3.50%:
Annualized loan and lease growth (non-GAAP) of 14.6% for the quarter, excluding SBA PPP loans (non-GAAP);  
Nonperforming assets improved slightly during the quarter and represent a record low 0.04% of total assets; and
ACL to total loans/leases of 1.55%.

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

For the three months ended

March 31, 2022

December 31, 2021

March 31, 2021

(dollars in thousands)

Net income

$

23,624

$

27,009

$

17,982

Diluted earnings per common share

$

1.49

$

1.71

$

1.12

Weighted average common and common equivalent shares outstanding

 

15,852,256

 

15,838,246

 

16,025,548

The Company reported adjusted net income (non-GAAP) of $24.4 million, with adjusted diluted EPS of $1.54.  See section titled “GAAP to Non-GAAP Reconciliations” for additional information.  Adjusted net income for the three months ended excludes a number of non-recurring items, after-tax, most significantly $1.5 million of acquisition costs.

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

For the three months ended

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

    

(dollars in thousands)

Net interest income

$

45,733

$

46,513

$

41,975

Provision for credit losses

 

(2,916)

 

(3,227)

 

6,713

Noninterest income

 

15,633

 

22,985

 

23,489

Noninterest expense

 

38,325

 

39,412

 

37,228

Federal and state income tax expense

 

2,333

 

6,304

 

3,541

Net income

$

23,624

$

27,009

$

17,982

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

Net interest income in the first quarter of 2022 decreased 2% compared to the fourth quarter of 2021 due entirely to lower PPP loan forgiveness fees.  Net interest income increased 9% when comparing the first three months of 2022 to the same period of the prior year. The increase was due to strong loan growth, an expanding net interest margin, well managed expenses and continued strong credit quality.  The Company had success maintaining earning asset yield while moving cost of funds lower which helped to drive NIM expansion.

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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Provision expense in the first quarter of 2022 decreased $311 thousand compared to the fourth quarter of 2021.    Provision expense decreased $9.6 million when comparing the first three months of 2022 to the same period in the prior year. The decrease was primarily due to continued strong credit quality and a corresponding reduction in the qualitative factor related to the pandemic.  
Noninterest income in the first quarter of 2022 decreased $7.4 million or 32% compared to the fourth quarter of 2021. Noninterest income decreased $7.9 million or 33% compared to the first quarter of 2021. The decrease was primarily due to lower capital markets revenue from swap fee income due to client project delays caused by ongoing supply chain disruptions and inflationary pressures.
Noninterest expense decreased $1.1 million or 3% in the first quarter of 2022 compared to the fourth quarter of 2021. This decrease was primarily due to lower salary and benefits expense of $1.2 million, the result of a decrease in variable compensation related to lower than expected capital markets revenue from swap fee income. Noninterest expense increased $1.1 million or 3% compared to the first quarter of 2021.  The increase was primarily due to acquisition costs of $1.9 million associated with the acquisition of GFED.  See Note 10 of the Consolidated Financial Statements for further discussion.

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The Company's long-term strategic financial metrics are as follows:

Generate 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

March 31, 2022

December 31, 2021

March 31, 2021

Loan and lease growth organically **

 

Loans and leases growth

 

> 9% annually

14.6

%  

16.9

%  

14.0

%

Fee income growth

 

Fee income growth

 

> 6% annually

(41.3)

%  

(10.1)

%  

(15.9)

%

Improve operational efficiencies and hold noninterest expense growth

Noninterest expense growth

 

< 5% annually

(4.1)

%  

4.0

%  

1.2

%

* 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.  

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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the first quarter of 2022 to support its corporate strategy:

The Company grew loans and leases in the first quarter of 2022 by 14.6% 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 188 downstream banks with average total noninterest bearing deposits of $356.3 million and average total interest-bearing deposits of $264.5 million during the first quarter of 2022. By comparison, the Company acted as the correspondent bank for 188 downstream banks with average total noninterest bearing deposits of $327.0 million and average total interest-bearing deposits of $398.2 million during the first quarter of 2021. 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.
The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent 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 nonrefundable 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. Future levels of capital markets revenue from swap fee income are dependent upon prevailing interest rates.  Capital markets revenue from swap fee income totaled $6.4 million for the quarter.  Capital markets revenue from swap fees averaged $15.2 million per quarter for the year 2021 and $16.9 million for the last eight quarters.
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 $389.3 million in the first quarter of 2022 due to market value fluctuations.  There were 97 new relationships added in the first quarter of 2022 totaling $80.6 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.
Noninterest expense for the first quarter of 2022 totaled $38.3 million as compared to $37.2 million in the first quarter of 2021. The increase was due to $1.9 million of acquisition costs in 2022 related to the acquisition of GFED as discussed in the Company’s financial statements and the accompanying notes.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

GAAP TO NON-GAAP RECONCILIATIONS

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio” 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;
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
Loan growth annualized excluding PPP loans is reconciled to 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 following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.

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

Loan growth annualized, excluding PPP loans, is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes this financial measure is important to investors as total loans and leases for the quarters ended March 31, 2021 were materially higher due to the addition of PPP loans.  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

    

March 31, 

    

December 31, 

    

March 31, 

    

    

    

 

RECONCILIATIONS

2022

2021

2021

 

(dollars in thousands, except per share data)

TCE/TA RATIO

 

  

 

Stockholders' equity (GAAP)

$

667,924

$

677,010

$

608,719

Less: Intangible assets

 

82,922

 

83,415

 

84,939

TCE (non-GAAP)

$

585,002

$

593,595

$

523,780

Total assets (GAAP)

$

6,175,819

$

6,096,132

$

5,645,147

Less: Intangible assets

 

82,922

 

83,415

 

84,939

TA (non-GAAP)

$

6,092,897

$

6,012,717

$

5,560,208

TCE/TA ratio (non-GAAP)

 

9.60

%  

 

9.87

%

 

9.42

%  

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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

For the Quarter Ended

March 31, 

    

December 31, 

    

March 31, 

    

    

2022

    

2021

    

2021

(dollars in thousands, except per share data)

ADJUSTED NET INCOME

Net income (GAAP)

$

23,624

$

27,009

$

17,982

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

 

  

 

  

 

  

Income:

 

  

 

  

 

  

Mark to market gains on unhedged derivatives, net

715

77

129

Total non-core income (non-GAAP)

$

715

$

77

$

129

Expense:

 

  

 

  

 

  

Disposition costs

3

7

Acquisition costs

1,462

493

$

Separation agreement

 

 

 

734

Total non-core expense (non-GAAP)

$

1,462

$

496

$

741

Adjusted net income (non-GAAP)

$

24,371

$

27,428

$

18,594

ADJUSTED EPS

 

  

 

  

 

  

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

$

24,371

$

27,428

$

18,594

Weighted average common shares outstanding

 

15,625,112

 

15,582,276

 

15,803,643

Weighted average common and common equivalent shares outstanding

 

15,852,256

 

15,838,246

 

16,025,548

Adjusted EPS (non-GAAP):

 

  

 

  

 

  

Basic

$

1.56

$

1.76

$

1.18

Diluted

$

1.54

$

1.73

$

1.16

ADJUSTED ROAA

 

  

 

  

 

  

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

$

24,371

$

27,428

$

18,594

Average Assets

$

6,115,127

$

6,121,446

$

5,668,850

Adjusted ROAA (non-GAAP)

 

1.59

%  

 

1.79

%  

 

1.31

%  

ADJUSTED NIM (TEY)*

 

 

Net interest income (GAAP)

$

45,733

$

46,513

$

41,975

Plus: Tax equivalent adjustment

 

2,933

 

2,800

 

2,267

Net interest income - tax equivalent (non-GAAP)

$

48,666

$

49,313

$

44,242

Less: Acquisition accounting net accretion

118

88

504

Adjusted net interest income

48,548

49,225

43,738

Average earning assets

$

5,625,813

$

5,602,222

$

5,218,198

NIM (GAAP)

 

3.30

%  

 

3.29

%  

 

3.26

%  

NIM (TEY) (non-GAAP)

 

3.50

%  

 

3.50

%  

 

3.43

%  

Adjusted NIM (TEY) (non-GAAP)

3.50

%  

3.49

%  

3.40

%  

EFFICIENCY RATIO

 

  

 

  

 

  

Noninterest expense (GAAP)

$

38,325

$

39,412

$

37,228

Net interest income (GAAP)

$

45,733

$

46,513

$

41,975

Noninterest income (GAAP)

 

15,633

 

22,985

 

23,489

Total income

$

61,366

$

69,498

$

65,464

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

 

62.45

%  

 

56.71

%  

 

56.87

%  

LOAN GROWTH, EXCLUDING PPP LOANS

 

  

 

  

 

  

Total loans and leases

$

4,827,868

$

4,680,132

$

4,361,051

Less: PPP loans

 

6,340

 

28,181

 

243,860

Total loans and leases, excluding PPP loans

$

4,821,528

$

4,651,951

$

4,117,191

Loan growth, excluding PPP loans

 

14.58

%  

 

12.03

%  

 

14.00

%  

*     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%.

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Table of Contents

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 10% to $48.7 million for the quarter ended March 31, 2022 compared to the same quarter of the prior year. Net interest income, on a GAAP basis, increased 9% to $45.7 million for the quarter ended March 31, 2022 compared to the same quarter of the prior year. Net interest income improved due to lower sequential PPP loan forgiveness fees, a favorable mix in our interest earning assets, lower deposit costs and a rotation of excess liquidity into higher average loan/lease balances.

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

Tax Equivalent Basis

GAAP

For the Quarter Ended

For the Quarter Ended

 

March 31, 

December 31, 

March 31, 

March 31, 

December 31, 

March 31, 

2022

2021

2021

2022

2021

2021

Average Yield on Interest-Earning Assets

3.88

%  

3.89

%  

3.86

%  

3.63

%  

3.71

%  

3.65

%

Average Cost of Interest-Bearing Liabilities

0.56

%  

0.57

%  

0.63

%  

0.55

%  

0.57

%  

0.62

%

Net Interest Spread

3.32

%  

3.32

%  

3.23

%  

3.08

%  

3.14

%  

3.03

%

NIM (TEY) (Non-GAAP)

3.50

%  

3.50

%  

3.43

%  

3.30

%  

3.29

%  

3.26

%

NIM Excluding Acquisition Accounting Net Accretion

3.50

%  

3.49

%  

3.40

%  

3.25

%  

3.32

%  

3.21

%

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

For the Quarter Ended

March 31, 

December 31, 

March 31, 

    

2022

    

2021

    

2021

(dollars in thousands)

Acquisition Accounting Net Accretion in NIM

118

$

88

$

504

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

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

For the Three Months Ended March 31,

2022

2021

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

$

4,564

$

2

 

0.15

%  

$

1,847

$

1

 

0.05

%

Interest-bearing deposits at financial institutions

 

69,328

 

35

 

0.20

%  

 

116,446

 

37

 

0.13

%

Investment securities (1)

 

802,260

 

7,682

 

3.83

%  

 

810,059

 

7,050

 

3.48

%

Restricted investment securities

 

22,183

 

281

 

5.06

%  

 

18,064

 

219

 

4.84

%

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

 

4,727,478

 

45,995

 

3.95

%  

 

4,271,782

 

42,525

 

4.04

%

Total interest earning assets

5,625,813

53,995

 

3.88

%  

5,218,198

49,832

 

3.86

%

Noninterest-earning assets:

  

 

  

 

  

  

 

  

 

  

Cash and due from banks

53,684

66,627

Premises and equipment

 

79,501

 

73,170

Less allowance

 

(78,899)

 

(86,418)

Other

 

435,028

 

397,273

Total assets

$

6,115,127

$

5,668,850

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

$

3,228,083

 

2,338

 

0.29

%  

$

2,981,306

 

1,986

 

0.27

%

Time deposits

 

398,897

 

799

 

0.81

%  

 

448,035

 

1,441

 

1.30

%

Short-term borrowings

 

1,951

 

 

0.05

%  

 

7,141

 

1

 

0.07

%

FHLB advances

 

85,778

 

82

 

0.38

%  

 

13,078

 

9

 

0.28

%

Subordinated notes

113,868

1,554

5.46

%  

118,706

1,594

5.37

%

Junior subordinated debentures

 

38,171

 

556

 

5.83

%  

 

38,007

 

559

 

5.88

%

Total interest-bearing liabilities

3,866,748

5,329

 

0.56

%  

3,606,273

5,590

 

0.63

%

Noninterest-bearing demand deposits

1,276,374

1,199,548

Other noninterest-bearing liabilities

287,879

259,017

Total liabilities

5,431,001

5,064,838

Stockholders' equity

 

684,126

 

604,012

Total liabilities and stockholders' equity

$

6,115,127

$

5,668,850

Net interest income

$

48,666

$

44,242

Net interest spread

 

 

 

3.32

%  

 

 

 

3.23

%

Net interest margin

 

 

 

3.30

%  

 

 

 

3.26

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

3.50

%  

 

 

 

3.43

%

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

3.50

%  

3.40

%

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

 

145.49

%  

 

 

 

144.70

%  

 

 

(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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Table of Contents

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended March 31, 2022

Inc./(Dec.)

Components

from

of Change (1)

    

Prior Period (1)

    

Rate

    

Volume

 

2022 vs. 2021

(dollars in thousands)

INTEREST INCOME

 

  

 

  

 

  

Federal funds sold

$

1

$

1

$

Interest-bearing deposits at financial institutions

 

(2)

 

69

 

(71)

Investment securities (2)

 

632

 

632

 

Restricted investment securities

 

62

 

10

 

52

Gross loans/leases receivable (2) (3)

 

3,470

 

(5,762)

 

9,232

Total change in interest income

4,163

(5,050)

9,213

INTEREST EXPENSE

  

  

Interest-bearing deposits

Time deposits

352

165

187

Short-term borrowings

(642)

(498)

(144)

Federal Home Loan Bank advances

(1)

(1)

Other borrowings

73

5

68

Subordinated notes

(40)

(40)

Junior subordinated debentures

(3)

(15)

12

Total change in interest expense

(261)

(343)

82

Total change in net interest income

$

4,424

$

(4,707)

$

9,131

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

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

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

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income (tax equivalent) increased 8%, comparing the first quarter of 2022 to the same period of 2021. This was primarily due to an increase in the yield of average securities and volume of average loans/leases partially offset by a decline in yields on loans/leases. Average gross loans and leases increased 11% when comparing the quarter ended March 31, 2022 to March 31, 2021.

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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INTEREST EXPENSE

Interest expense (tax equivalent) for the first quarter of 2022 decreased 5% from the first quarter of 2021.  The Company has grown organically at a significant pace over the past several years and core deposit growth has funded that growth.  The cost of funds on the Company’s average interest-bearing liabilities declined in conjunction with the declining rate environment. The Company’s cost of funds was 0.56% for the quarter ended March 31, 2022, which was down from 0.63% for the quarter ended March 31, 2021.

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

PROVISION FOR CREDIT LOSSES

The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three months ended March 31, 2022 and 2021.

Three Months Ended

March 31, 

March 31, 

    

2022

    

2021

(dollars in thousands)

Provision for credit losses - loans and leases

$

(3,849)

$

5,993

Provision for credit losses - off-balance sheet exposures

933

729

Provision for credit losses - held to maturity securities

 

 

(9)

Total provision for credit losses

$

(2,916)

$

6,713

The Company’s total provision for credit losses was a negative $2.9 million for the first quarter of 2022, compared to $6.7 million for the first quarter of 2021, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic. The adoption of ASU 2016-13 now requires an allowance on HTM debt securities and OBS exposures, specifically unfunded commitments. For the first quarter of 2022, there was no provision related to HTM debt securities. The provision related to HTM debt securities in the first quarter of 2021 was negative due to the decrease in the balance of those HTM debt securities. For the three months ended March 31, 2022, the provision related to OBS was $933 thousand, compared to $729 thousand for the three months ended March 31, 2021.  The increase was due to the increase in the balance of those OBS exposures with increase of line of credit usage. In the three months ended March 31, 2022, 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 continued strong asset quality and 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 1.55% of total gross loans/leases at March 31, 2022, compared to 1.68% of total gross loans/leases at December 31, 2021 and 1.88% at March 31, 2021.  

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

41

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three months ended March 31, 2022 and 2021.

Three Months Ended

 

March 31, 

March 31, 

 

    

2022

    

2021

    

$ Change

    

% Change

 

(dollars in thousands)

Trust department fees

$

2,963

$

2,801

$

162

5.8

%

Investment advisory and management fees

 

1,036

 

940

 

96

10.2

Deposit service fees

 

1,555

 

1,408

 

147

10.4

Gains on sales of residential real estate loans, net

 

493

 

1,337

 

(844)

(63.1)

Gains on sales of government guaranteed portions of loans, net

 

19

 

 

19

100.0

Swap fee income/capital markets revenue

 

6,422

 

13,557

 

(7,135)

(52.6)

Earnings on bank-owned life insurance

 

346

 

471

 

(125)

(26.5)

Debit card fees

 

1,007

 

975

 

32

3.3

Correspondent banking fees

 

277

 

314

 

(37)

(11.8)

Other

 

1,515

 

1,686

 

(171)

(10.1)

Total noninterest income

$

15,633

$

23,489

$

(7,856)

(33.4)

%

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 $389.3 million in the first quarter of 2022 due to market volatility but increased by $192.1 million since March 31, 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 6%, comparing the first quarter of 2022 to the same period of the prior year.  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 increased 10%, comparing the first quarter of 2022 to the same period of the prior year. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.

Deposit service fees increased 10% comparing the first quarter of 2022 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 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 63% when comparing the first quarter of 2022 to the same period of the prior year. The decrease was primarily due to decreased residential real estate purchase and the refinancing of residential real estate loans with higher interest rates in 2022.

The Company has grown its interest rate swap program significantly over the past several years.  The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans.  Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience.  The LIHTC industry is strong and growing with an increased need for affordable housing.  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 nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $6.4 million for the first quarter of 2022, compared to $13.6 million for the first quarter of 2021. Swap fee income relative to the

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increase in notional amount of the non-hedging interest rate swap contracts was 14.1% for the three months ended March 31, 2022 and 10.1% for the same period of the prior year.  The decrease was primarily due to project delays caused by ongoing supply chain disruptions and inflationary pressures. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans.  The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans.  Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.

There were no securities gains or losses for the three months ended March 31, 2022 or March 31, 2021.  

Earnings on BOLI decreased 27% comparing the first quarter of 2022 to the first quarter of 2021. 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 3% comparing the first quarter of 2022 to the first quarter of the prior year. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 12% comparing the first quarter of 2022 to the first quarter of the prior year. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees.  Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 188 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income decreased 10% comparing the first quarter of 2022 to the first quarter of the prior year.  The decrease was primarily due to lower equity investment income and lower gains on disposal of leased assets in the first quarter of 2022 as compared to the first quarter of 2021.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2022 and 2021.

Three Months Ended

 

March 31, 

March 31, 

 

    

2022

    

2021

    

$ Change

    

% Change

 

(dollars in thousands)

Salaries and employee benefits

$

23,627

$

24,847

$

(1,220)

 

(4.9)

%

Occupancy and equipment expense

 

3,937

 

4,108

 

(171)

 

(4.2)

Professional and data processing fees

 

3,671

 

3,443

 

228

 

6.6

Acquisition costs

 

1,851

 

 

1,851

 

100.0

Disposition costs

 

8

 

(8)

 

(100.0)

FDIC insurance, other insurance and regulatory fees

 

1,310

 

1,065

 

245

 

23.0

Loan/lease expense

 

267

 

300

 

(33)

 

(11.0)

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

 

(1)

 

39

 

(40)

 

(102.6)

Advertising and marketing

 

761

 

627

 

134

 

21.4

Bank service charges

 

541

 

523

 

18

 

3.4

Correspondent banking expense

 

199

 

200

 

(1)

 

(0.5)

Intangibles amortization

 

493

 

508

 

(15)

 

(3.0)

Other

 

1,669

 

1,560

 

109

 

7.0

Total noninterest expense

$

38,325

$

37,228

$

1,097

 

2.9

%

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 and employment separation expenses impacted expense in 2022 and 2021.  

Salaries and employee benefits, which is the largest component of noninterest expense, decreased from the first quarter of 2021 to the first quarter of 2022 by 5%.  The decreased expense was primarily related to lower performance compensation from swap fee income/capital markets revenue.  

Occupancy and equipment expense decreased 4% comparing the first quarter of 2022 to the same period of the prior year. The decrease was due to lower repair and maintenance costs.

Professional and data processing fees increased 7% comparing both the first quarter of 2022 to the same period in 2021.  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.

Acquisition costs totaled $1.9 million in the first quarter of 2022.  There were no acquisition costs incurred in the first quarter of 2021.  The acquisition costs, which were primarily legal, accounting and other professional fees, relate to the acquisition of GFED as discussed in Note 10 of the consolidated financial statements.

There were no disposition costs for the first quarter of 2022 and there were $8 thousand for the first quarter of 2021.   The costs were comprised primarily of legal, accounting and personnel costs related to the sale of the Bates Companies in the third quarter of 2020.  

FDIC insurance, other insurance and regulatory fee expense increased 23%, comparing the first quarter of 2022 to the first quarter of 2021.  The increase in expense was due to an increase in the asset size of the Company in 2021, which increased the Company’s rates.

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Loan/lease expense decreased 11% when comparing the first quarter of 2022 to the same quarter of 2021. 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 thousand for the first quarter of 2022, compared to net cost from and gains/losses on operations of other real estate of $39 thousand for the first quarter of 2021.

Advertising and marketing expense increased 21% comparing the first quarter of 2022 to the first quarter of 2021. The increase in expense was primarily due to the return to more normal operations during the second half of 2021 and first quarter of 2022 after improvements in the general environment due to COVID-19 as compared to the first quarter of 2021.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 3% when comparing the first quarter of 2022 to the same quarter of 2021.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses are expected to also increase.

Correspondent banking expense decreased 1% when comparing the first quarter of 2022 to the first quarter of 2021.  These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense decreased 3% when comparing the first quarter of 2022 to the same quarter of 2021. These expenses naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Other noninterest expense increased 7% when comparing the first quarter of 2022 to the first quarter of 2021 primarily due to increased travel.  Also included in other noninterest expense are other items such as subscriptions, sales and use tax and expenses related to wealth management.

INCOME TAXES

In the first quarter of 2022, the Company incurred income tax expense of $2.3 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 months ended March 31, 2022 and 2021.

For the Three Months Ended March 31, 

2022

2021

% of

% of

Pretax

Pretax

    

Amount

    

Income

    

Amount

    

Income

    

 

(dollars in thousands)

Computed "expected" tax expense

$

5,451

 

21.0

%  

$

4,520

 

21.0

%  

Tax exempt income, net

 

(2,222)

 

(8.6)

 

(1,719)

 

(8.0)

Bank-owned life insurance

 

(73)

 

(0.3)

 

(99)

 

(0.5)

State income taxes, net of federal benefit, current year

 

1,291

 

5.0

 

1,024

 

4.8

Provision adjustment from accounting method change

(1,181)

(4.5)

Tax credits

 

(242)

 

(0.9)

 

(57)

 

(0.3)

Income from tax credit equity investments

(301)

(1.2)

Acquisition costs

 

130

 

0.5

 

 

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

 

(434)

 

(1.7)

 

(164)

 

(0.8)

Other

 

(86)

 

(0.3)

 

36

 

0.2

Federal and state income tax expense

$

2,333

 

9.0

%  

$

3,541

 

16.4

%  

 

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The effective tax rate for the quarter ended March 31, 2022 was 9.0%, which was a decrease from the effective tax rate of 16.4% for the quarter ended March 31, 2021. The decrease was primarily due to a $1.2 million provision adjustment from an accounting method change and excess tax benefit on stock compensation in the first quarter of 2022.

FINANCIAL CONDITION

As of

March 31, 2022

December 31, 2021

 

March 31, 2021

(dollars in thousands)

    

Amount

    

%

    

Amount

    

%

    

    

Amount

    

%

    

Cash, federal funds sold, and interest-bearing deposits

$

116,930

 

2

%  

$

125,152

 

2

%  

$

133,870

 

2

%  

Securities

823,311

 

13

%  

810,215

 

13

%  

799,825

 

14

%  

Net loans/leases

4,753,082

 

77

%  

4,601,411

 

75

%  

4,279,220

 

77

%  

Derivatives

107,326

2

%  

222,220

4

%  

122,668

2

%  

Other assets

375,170

6

%  

337,134

6

%  

309,564

5

%

Total assets

$

6,175,819

 

100

%  

$

6,096,132

 

100

%  

$

5,645,147

 

100

%  

Total deposits

$

4,839,689

 

78

%  

$

4,922,772

 

80

%  

$

4,631,782

 

82

%  

Total borrowings

443,270

 

7

%  

170,805

 

3

%  

188,601

 

3

%  

Derivatives

116,193

2

%  

225,135

4

%  

125,863

2

%  

Other liabilities

108,743

 

2

%  

100,410

 

2

%  

90,182

 

2

%  

Total stockholders' equity

667,924

 

11

%  

677,010

 

11

%  

608,719

 

11

%  

Total liabilities and stockholders' equity

$

6,175,819

 

100

%  

$

6,096,132

 

100

%  

$

5,645,147

 

100

%  

During the first quarter of 2022, the Company's total assets increased $79.7 million, or 1% from December 31, 2021, to a total of $6.2 billion. The Company’s net loans/leases increased $151.7 million in the first quarter of 2022. Total deposits decreased $83.1 million in the first quarter of 2022 primarily due to a decrease in interest-bearing demand deposits and time deposits.  Borrowings increased $272.5 million in the first quarter of 2022 which consisted primarily of an increase in FHLB overnight borrowings of $275.0 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 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 and are generated by our specialty finance group.

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

As of

March 31, 2022

December 31, 2021

 

March 31, 2021

 

    

Amount

    

%  

    

Amount

    

%

    

Amount

    

%

(dollars in thousands)

 

U.S. treasuries and govt. sponsored agency securities

$

21,380

 

3

%  

$

23,328

 

3

%  

$

14,581

 

2

%

Municipal securities

 

667,048

 

81

%  

 

639,601

 

79

%  

 

614,476

 

76

%

Residential mortgage-backed and related securities

 

86,380

 

10

%  

 

94,323

 

12

%  

 

118,052

 

15

%

Asset-backed securities

23,232

3

%

27,124

3

%

39,815

5

%

Other securities

 

25,271

 

3

%  

 

25,839

 

3

%  

 

12,901

 

2

%

$

823,311

 

100

%  

$

810,215

 

100

%  

$

799,825

 

100

%

 

  

 

  

 

  

 

  

 

  

 

  

Securities as a % of total assets

 

13.33

%  

  

 

13.29

%  

  

 

14.17

%  

  

Net unrealized gains (losses) as a % of Amortized Cost

 

(1.63)

%  

  

 

7.17

%  

  

 

5.59

%  

  

Duration (in years)

 

7.9

  

 

8.2

  

 

7.6

  

Yield on investment securities (tax equivalent)

3.83

%  

3.66

%  

3.48

%  

Due to the sharp increase in intermediate and long-term interest rates during the first quarter ended March 31, 2022, the valuation of the Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gain as a percentage of amortized cost changed from 7.17% as of December 31, 2021 to a net unrealized loss as a percentage of amortized cost of -1.63% as of March 31, 2022.

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

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

LOANS/LEASES

Total loans/leases, excluding PPP loans (non-GAAP), grew 14.6% on an annualized basis during the first quarter of 2022.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.

As of

March 31, 2022

December 31, 2021

March 31, 2021

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

(dollars in thousands)

C&I - revolving

$

263,441

 

5

%  

$

248,483

 

5

%  

$

168,842

 

4

%

C&I - other *

1,374,221

28

%  

1,346,602

29

1,616,144

37

CRE - owner occupied

439,257

9

%  

421,701

9

461,272

11

CRE - non-owner occupied

679,898

14

%  

646,500

14

610,582

14

Construction and land development

863,116

18

%  

918,571

20

607,798

14

Multi-family

 

711,682

 

15

%  

 

600,412

 

12

 

396,272

 

9

Direct financing leases

 

43,330

 

1

%  

 

45,191

 

1

 

60,134

 

1

1-4 family real estate

 

379,613

 

8

%  

 

377,361

 

8

 

368,927

 

8

Consumer

 

73,310

 

2

%  

 

75,311

 

2

 

71,080

 

2

Total loans/leases

$

4,827,868

 

100

%  

$

4,680,132

 

100

%  

$

4,361,051

 

100

%

Less allowance

 

(74,786)

 

 

(78,721)

 

  

(81,831)

 

  

  

Net loans/leases

$

4,753,082

$

4,601,411

$

4,279,220

*Includes PPP loans totaling $6.3 million, $28.2 million and $243.9 million as of March 31, 2022, December 31, 2021 and March 31, 2021, 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 March 31, 2022 and December 31, 2021, approximately 22% and 19% of the CRE loan portfolio was owner-occupied, respectively.

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Following is a listing of significant industries within the Company's CRE loan portfolio.  These include loans in the following portfolio segments as of March 31, 2022:  CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.

As of March 31, 

As of December 31, 

 

As of March 31, 

 

2022

2021

2021

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

(dollars in thousands)

 

Lessors of Residential Buildings

$

1,383,986

 

49

%  

$

1,316,851

 

49

%  

$

845,547

 

39

%

Lessors of Nonresidential Buildings

578,399

 

20

%  

557,859

 

21

%  

573,026

 

26

%

Hotels

 

71,448

 

3

%  

 

73,639

 

3

%  

 

67,072

 

3

%

New Housing For-Sale Builders

71,285

3

%  

61,028

2

%  

46,867

2

%

Lessors of Other Real Estate Property

63,759

2

%  

60,605

2

%

39,580

2

%

Other Activities Related to Real Estate

42,035

2

%  

42,507

2

%

43,411

2

%

Other *

 

578,094

 

21

%  

 

568,784

 

21

%  

 

566,699

 

26

%

Total CRE Loans

$

2,789,006

100

%

$

2,681,273

100

%

$

2,182,202

100

%

*     “Other” consists of all other industries. None of these had concentrations greater than $39.1 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.

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 March 31, 

As of December 31, 

As of March 31, 

2022

2021

2021

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

(dollars in thousands)

Trucks, Vans and Vocational Vehicles

$

70,241

 

25

%  

$

69,392

 

26

%  

$

63,643

 

25

%

Manufacturing - General

17,350

 

6

%  

17,320

 

6

%  

18,196

 

7

%

Trailers

15,702

 

6

%  

12,832

 

5

%  

10,109

 

4

%

Marine - Travelifts

15,513

 

5

%  

14,498

 

5

%  

12,188

 

5

%

Food Processing Equipment

14,846

 

5

%  

14,907

 

6

%  

14,873

 

6

%

Freightliners

14,224

5

%  

10,386

4

%  

1,231

1

%

Construction - General

13,851

 

5

%  

13,560

 

5

%  

13,128

 

5

%

Tractor

12,858

4

%  

10,508

4

%  

6,739

3

%

Computer Hardware

10,792

 

4

%  

11,223

 

4

%  

11,942

 

5

%

Other *

100,493

 

35

%  

95,648

 

35

%  

97,429

 

39

%

Total m2 loans and leases

$

285,870

 

100

%  

$

270,274

 

100

%  

$

249,478

 

100

%

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

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

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

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, 2021, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

Changes in the ACL for loans/leases for the three months ended March 31, 2022 and 2021 are presented as follows:

Three Months Ended

March 31, 2022

    

March 31, 2021

    

(dollars in thousands)

Balance, beginning

$

78,721

$

84,376

Impact of adopting ASU 2016-13

(8,102)

Provision

 

(3,849)

 

5,993

Charge-offs

 

(456)

 

(713)

Recoveries

 

370

 

277

Balance, ending

$

74,786

$

81,831

Changes in the ACL for OBS exposures for the three months ended March 31, 2022 and 2021 are presented as follows:

Three Months Ended

March 31, 2022

March 31, 2021

(dollars in thousands)

Balance, beginning

$

6,886

$

Impact of adopting ASU 2016-13

9,117

Provisions credited to expense

933

729

Balance, ending

$

7,819

$

9,846

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

As of

Internally Assigned Risk Rating *

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

 

(dollars in thousands)

Special Mention (Rating 6)

 

$

63,622

 

$

62,510

$

53,466

Substandard (Rating 7)

 

54,491

 

53,296

84,982

Doubtful (Rating 8)

 

 

 

$

118,113

 

$

115,806

$

138,448

Criticized Loans **

 

$

118,113

 

$

115,806

$

138,448

Classified Loans ***

 

$

54,491

 

$

53,296

$

84,982

Criticized Loans as a % of Total Loans/Leases

2.45

%

2.47

%

3.17

%

Classified Loans as a % of Total Loans/Leases

1.13

%

1.14

%

1.95

%

*      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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Criticized loans increased 2% and classified loans increased 2% from December 31, 2021 to March 31, 2022. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

As of

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

ACL on loans/leases / Gross loans/leases

 

1.55

%  

1.68

%  

1.88

%

ACL on loans/leases / NPLs

 

2,721.47

%  

2,825.21

%  

590.28

%

Although management believes that the ACL at March 31, 2022 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 for credit losses.  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 March 31, 

As of December 31, 

As of March 31, 

    

2022

    

2021

    

2021

(dollars in thousands)

Nonaccrual loans/leases (1)

$

2,744

$

2,759

$

13,863

Accruing loans/leases past due 90 days or more

 

4

 

1

 

Total NPLs

 

2,748

 

2,760

 

13,863

OREO

 

 

 

173

Other repossessed assets

 

 

 

50

Total NPAs

$

2,748

$

2,760

$

14,086

NPLs to total loans/leases

    

 

0.06

%  

 

0.06

%  

0.32

%  

NPAs to total loans/leases plus repossessed property

 

0.06

%  

 

0.06

%  

0.32

%  

NPAs to total assets

 

0.04

%  

 

0.05

%  

0.25

%  

Nonccrual loans/leases to total loans/leases

0.06

0.06

%

0.32

%  

ACL to nonaccrual loans

 

2,725.44

%  

 

2,853.24

%  

590.28

%  

(1)Includes government guaranteed portion of loans, as applicable.

NPAs at March 31, 2022 and December 31, 2021 were $2.7 million, down $11.3 million from March 31, 2021.  The ratio of NPAs to total assets was 0.04% at March 31, 2022, down from 0.05% at December 31, 2021, and down from 0.25% at March 31, 2021.

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.

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

50

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

DEPOSITS

Deposits decreased $83.1 million during the first quarter of 2022, driven by typical seasonality with our commercial client base and further rotation from time deposits to interest-bearing demand deposits.

The table below presents the composition of the Company's deposit portfolio.

As of

 

March 31, 2022

    

December 31, 2021

 

March 31, 2021

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

(dollars in thousands)

 

Noninterest bearing demand deposits

$

1,275,493

 

26

%  

$

1,268,788

 

26

%  

$

1,269,578

 

27

%

Interest bearing demand deposits

 

3,181,685

 

66

%  

 

3,232,633

 

65

%  

 

2,916,054

 

63

%

Time deposits

 

382,268

 

8

%  

 

421,348

 

9

%  

 

445,067

 

10

%

Brokered deposits

 

243

 

0

%  

 

3

 

0

%  

 

1,084

 

0

%

$

4,839,689

 

100

%  

$

4,922,772

 

100

%  

$

4,631,782

 

100

%

The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 21% in 2021.  Balances can fluctuate a great deal due to large customer and correspondent bank activity.  During the past year, the Company had significant core deposit growth mostly from its correspondent banking clients.    As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.

The Company’s correspondent bank deposit portfolio and funds managed consists of the following:

Noninterest-bearing deposits which represent the correspondent banks’ operating cash used for processing transactions with the Federal Reserve,
Money market deposits which represent some excess liquidity, and
The correspondent banks’ EBA at the FRB.

The Company has modified the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest-bearing deposits and the money market deposits.  This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB which is managed by the Company, but is off the Company’s balance sheet.  On average, over the past two years, the correspondent banks’ EBA portfolio ranges from $1.3 billion to $1.5 billion which is approximately $1 billion more than pre-pandemic levels.

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.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

BORROWINGS

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

As of

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

 

(dollars in thousands)

Federal funds purchased

$

1,190

$

3,800

$

6,840

The Company's federal funds purchased 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 overnight FHLB advances. The Company did not have any term FHLB advances for the dates in the table below.

As of

    

March 31, 2022

December 31, 2021

    

March 31, 2021

 

(dollars in thousands)

Overnight FHLB advances

$

290,000

$

15,000

 

$

25,000

 

FHLB advances (all overnight) increased $275.0 million in the current quarter compared to the prior quarter due to strong loan growth and a decrease in core deposits driven by typical seasonality with our commercial client base.

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 March 31, 2022.

The Company had subordinated notes totaling $113.9 million as of both March 31, 2022 and December 31, 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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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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

March 31, 2022

December 31, 2021

 

 

Weighted

 

Weighted

 

Average

 

Average

Maturity:

    

Amount Due

    

Interest Rate

    

Amount Due

    

Interest Rate

 

(dollars in thousands)

Year ending December 31:

2022

$

290,243

0.53

%  

$

15,003

0.31

%

2023

 

 

2024

2025

 

 

Total Wholesale Funding

 

$

290,243

0.53

%  

$

15,003

0.31

%

 

During the first quarter of 2022, wholesale funding, primarily overnight FHLB advances, increased $275.2 million due to strong loan growth and decreased deposits.

STOCKHOLDERS' EQUITY

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

As of

 

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

 

(dollars in thousands)

 

Common stock

$

15,580

$

15,613

$

15,844

Additional paid in capital

 

272,370

 

273,768

 

276,350

Retained earnings

 

405,762

 

386,077

 

316,900

AOCI

 

(25,788)

 

1,552

 

(375)

Total stockholders' equity

$

667,924

$

677,010

$

608,719

TCE / TA ratio (non-GAAP)

 

9.60

%  

 

9.87

%  

 

9.42

%

*     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.

Due to the sharp increase in intermediate and long-term interest rates, the valuation of the Company’s AFS securities portfolio and certain hedged financial instruments declined significantly.  The valuation change, net of taxes, that flows through the Company’s AOCI was a net decline of $27.3 million for the first quarter of 2022.

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.  As of March 31, 2022, the Company has purchased 471,585 shares under the program and all shares purchased have been retired.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

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 $73.9 million during the first quarter of 2022. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

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

At March 31, 2022, the subsidiary banks had 27 lines of credit totaling $482.5 million, of which $31.5 million was secured and $451.0 million was unsecured. At March 31, 2022, the full $451.0 million was available.

At December 31, 2021, the subsidiary banks had 31 lines of credit totaling $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, the full $517.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2022. At March 31, 2022, the full $25.0 million was available.

As of March 31, 2022, the Company had $620.8 million in average correspondent banking deposits spread over 188 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of $177.1 million during the first quarter of 2022, compared to $36.5 million for the same period of 2021. The net decrease in interest-bearing deposits at financial institutions was $18.5 million for the first quarter of 2022, compared to a net increase of $32.9 million for the same period of 2021. Proceeds from calls, maturities, and paydowns of securities were $17.3 million for the first three months of 2022, compared to $68.3 million for the same period of 2021. Purchases of securities used cash of $52.4 million for the first three months of 2022, compared to $53.6 million for the same period of 2021. There were no proceeds from the sales of securities in the first three months of 2022.  Proceeds from sales of securities were $19.5 million for the first three months of  2021.  The net increase in loans/leases used cash of $148.5 million for the first three months of 2022 compared to $108.0 million for the same period of 2021.

Financing activities provided cash of $183.2 million for the first three months of 2022, compared to $42.8 million for same period of 2021. Net increases in deposits totaled $83.1 million for the first three months of 2022, compared to $32.6 million for the same period of 2021. During the first three months of 2022, the Company's short-term borrowings decreased $2.6 million, compared to an increase in short-term borrowings of $1.4 million for the same period of 2021. There were no long-term FHLB advances during the first three months of 2022 and 2021.  There were no maturities and principal payments on FHLB term advances in the first three months of 2022 and 2021. Net increase in overnight advances totaled $275.0 million for the first three months of 2022.  In the first three months of 2021, the Company increased overnight FHLB advances by $10.0 million.  

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Total cash provided by operating activities was $6.9 million for the first three months of 2022, compared to $11.1 million for the same period of 2021.

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.

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 effects of inflationary pressures and supply chain constraints).
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 external events.
Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB.
Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business.
Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out.
Increased competition in the financial services sector and the inability to attract new customers.
Changes in  technology and the ability to develop and maintain secure and reliable electronic systems.
Unexpected results of acquisitions which may include failure to realize the anticipated benefits of acquisitions and the possibility that transaction costs may be greater than anticipated.
The loss of key executives or employees.
Changes in consumer spending.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Unexpected outcomes of existing or new litigation involving the Company.
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, 2021.

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

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Item 3

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

NET INTEREST INCOME EXPOSURE in YEAR 1

 

    

    

As of March 31, 

    

As of December 31, 

    

As of December 31, 

 

INTEREST RATE SCENARIO

POLICY LIMIT

 

2022

 

2021

 

2020

100 basis point downward shift

 

(10.0)

%  

(0.8)

%  

(0.1)

%  

%

200 basis point upward shift

 

(10.0)

%  

0.9

%  

3.1

%  

2.5

%

300 basis point upward shock

 

(30.0)

%  

6.2

%  

11.6

%  

10.3

%

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, 2022 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

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

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Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of March 31, 2022. 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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Table of Contents

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, 2021.  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 in March 2022. All shares repurchased under the share repurchase program during the first 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

January 1-31, 2022

405,915

February 1-28, 2022

405,915

March 1-31, 2022

77,500

$ 56.98

77,500

328,415

Total

77,500

$ 56.98

77,500

328,415

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 March 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three months ended March 31, 2022 and March 31, 2021; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and March 31, 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2022 and March 31, 2021; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and March 31, 2021; 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.

61

Table of Contents

SIGNATURES

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

QCR HOLDINGS, INC.

(Registrant)

Date

May 9, 2022

/s/ Larry J. Helling

Larry J. Helling

Chief Executive Officer

Date

May 9, 2022

/s/ Todd A. Gipple

Todd A. Gipple, President

Chief Operating Officer

Chief Financial Officer

Date

May 9, 2022

/s/ Nick W. Anderson

Nick W. Anderson

Chief Accounting Officer

(Principal Accounting Officer)

62