Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017.

2019.

Commission file number: 0-22208

0‑22208

QCR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

42-1397595

42‑1397595

(State of incorporation)

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

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices)

(309) 736-3580736‑3580

(Registrant’sRegistrant’s telephone number, including area code)

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

Common stock, $1.00 Par Value The Nasdaq Global Market

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

 

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

Preferred Share Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  [ ]  No  [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes  [ ]  No  [ X ]

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 past 90 days.  Yes  [ X ]  No  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  [ X ]   No  [ ]

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]

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-212b‑2 of the Exchange Act.

 

Large accelerated filer [ ]

Accelerated filer  [X]

Non-accelerated filer [  ]

Smaller reporting company [  ]

Emerging growth company [  ]

(Do not check if a smaller

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.   [   ]          

reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Act).

Yes  [   ]  No  [ X ]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq Global Market on June 30, 2017,2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $586,207,934.

$522,033,613.

As of February 28, 20182020 the Registrant had outstanding 13,931,62815,867,838 shares of common stock, $1.00 par value per share.

Documents incorporated by reference:

Part III of Form 10-K Certain10‑K  incorporates by reference portions of the proxy statement for annual meeting of stockholders to be held in May 2018.2020.

 

2

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX

INDEX

Page


Number(s)

Part I

Item 1.

Business

5

4

Item 1A.

Risk Factors

14

12

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

26

25

Item 3.

Legal Proceedings

27

25

Item 4.

Mine Safety Disclosures

27

25

Part II

Item 5.

Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

28

26

Item 6.

Selected Financial Data

30

28

Item 7.

Management'sItem 7.

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

29

General

31

29

Executive Overview

31

29

Long-Term Financial Goals

32

30

Strategic Developments

34

31

GAAP to Non-GAAP Reconciliations

35

32

Net Interest Income and Margin (Tax Equivalent Basis)(Non-GAAP)

38

34

Critical Accounting Policies

41

36

Results of Operations

38

Interest Income

42

38

Interest Expense

42

38

Provision for Loan/Lease Losses

43

38

Noninterest Income

44

39

Noninterest Expenses

47

41

Income Tax Expense

49

42

Financial Condition

43

Overview

49

43

Investment Securities

49

43

Loans/Leases

50

44

Allowance for Estimated Losses on Loans/Leases

52

45

Nonperforming Assets

55

48

Deposits

56

48

Short-Term Borrowings

56

49

FHLB Advances and Other Borrowings

57

49

Stockholders'Subordinated Notes

50

Stockholders’ Equity

58

50

Liquidity and Capital Resources

59

51

Commitments, Contingencies, Contractual Obligations, and Off-Balance Sheet Arrangements

60

52

Impact of Inflation and Changing Prices

61

53

Forward-Looking Statements

61

53

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

62

54

Item 8.

Consolidated Financial Statements

64

56

Consolidated Balance Sheets as of December 31, 20172019 and 20162018

66

58

Consolidated Statements of Income for the years ended December 31, 2017, 20162019, 2018 and   20152017

59

2

Table of Contents

67

Consolidated Statements of Comprehensive Income for the years ended December 31,    2017, 20162019, 2018 and 20152017

68

60

Consolidated Statements of Changes in Stockholders'Stockholders’ Equity for the years ended December 31, 2017, 20162019, 2018 and 20152017

69

61

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162019, 2018 and 20152017

62

70

Notes to Consolidated Financial Statements

64

Note 1:1 Nature of Business and Significant Accounting Policies

72

64

Note 2: 2 Sales/Mergers/Acquisitions

88

79

Note 3:3 Investment Securities

96

88

Note 4:4 Loans/Leases Receivable

102

92

Note 5:5 Premises and Equipment

113

103

Note 6:6 Goodwill and Intangibles

114

105

Note 7:7 Derivatives and Hedging Activities

115

107

Note 8:8 Deposits

116

109

Note 9:9 Short-Term Borrowings

116

110

Note 10:10 FHLB Advances

117

111

Note 11:11 Other Borrowings and Unused Lines of Credit

119

112

Note 12:12 Subordinated Notes

113

Note 13 Junior Subordinated Debentures

121

114

Note 13:14 Federal and State Income Taxes

122

114

Note 14:15 Employee Benefit Plans

125

117

Note 15:16 Stock-Based Compensation

126

118

Note 16:17 Regulatory Capital Requirements and Restrictions on Dividends

129

120

Note 17:18 Earnings Per Share

131

122

Note 18:19 Commitments and Contingencies

132

123

Note 19:20 Quarterly Results of Operations (Unaudited)

133

124

Note 20:21 Parent Company Only Financial Statements

134

125

Note 21:22 Fair Value

137

128

Note 22:23 Business Segment Information

140

131

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

142

132

Item 9A.

Controls and Procedures

142

132

Item 9B.

Other Information

145

135

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

145

136

Item 11.

Executive Compensation

145

136

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

145

136

Item 13.

Certain Relationships and Related Transactions, and Director Independence

146

136

Item 14.

Principal Accountant Fees and Services

146

137

Part IV

Item 15.

Exhibits and Financial Statement Schedules

146

138

Item 16.

Form 10-K10‑K Summary

142

149

Signatures

143

Signatures

150

Appendix A. Supervision and Regulation

145

Appendix B. Guide 3 Information

156

 

Throughout the Notes to the Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition

Throughout the Notes to the Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, and remaining sections of this Form 10-K (including appendices), we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

 

3

4

Table of Contents

Part I

Item 1.    Business

General. QCR Holdings, Inc. is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. In 2016, the Company elected to operate as a financial holding company under the BHCA. The Company serves the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny and RockfordSpringfield communities through the following four wholly-owned banking subsidiaries (collectively, the “Banks”), which provide full-service commercial and consumer banking and trust and asset management services:

●·

QCBT,, which is based in Bettendorf, Iowa, and commenced operations in 1994;

●·

CRBT,, which is based in Cedar Rapids, Iowa, and commenced operations in 2001;

●·

CSB, which is based in Ankeny, Iowa, and was acquired in 2016; and

●

RB&T,·

SFC Bank, which is based in Rockford, Illinois,Springfield, Missouri, and commenced operationswas acquired in 2005.2018.

 

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T.  Prior to this time, the Company provided full service banking services to the Rockford community.

On October 1, 2017,2018, the Company acquired Guarantythe Bates Companies, headquartered in Rockford, Illinois.   The acquisition of the Bates Companies has enhanced the wealth management services of the Company.

On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Cedar Rapids, Iowa. On December 2, 2017,Springfield, Missouri.  From that time, the Company merged Guarantyhas operated SFC Bank with and into CRBT with CRBT as the surviving bank.an independent banking subsidiary.

See Note 2 to the Consolidated Financial Statements for further discussion.

On August 31, 2016, the Company acquired CSB, located in Ankeny, Iowa (Des Moines MSA). See Note 2 to the Consolidated Financial Statements for further discussion.

discussion on mergers, acquisitions and sales.

The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT based in Brookfield, Wisconsin.

Subsidiary Banks. Segments of the Company have been established by management as defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters. The Company’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which arecorrespond to the four subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB and RB&T.SFC Bank. See the consolidated financial statementsConsolidated Financial Statements incorporated herein generally, and Note 2223 to the consolidated financial statementsConsolidated Financial Statements specifically, for additional business segment information.

QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. QCBT provides full service commercial, correspondent, and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. QCBT, on a consolidated basis with m2, had total segment assets of $1.54$1.68 billion and $1.40$1.62 billion as of December 31, 20172019 and 2016,2018, respectively.

CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September 2001. The acquiredAcquired branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.”  CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Marion and Waterloo/Cedar Falls, Iowa and adjacent communities through its eight facilities. The headquarters for CRBT is located in downtown Cedar Rapids with three other branches located in Cedar Rapids, one branch in Marion, two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $1.3$1.57 billion and $913.1 million$1.38 billion as of December 31, 20172019 and 2016,2018, respectively.

CSB is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. CSB was acquired by the Company in 2016. CSB provides full-service commercial and consumer banking to Des Moines, Iowa and adjacent communities through its headquarters located in Ankeny, Iowa and its nine other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $670.5$853.8 million and $600.1$785.4 million as of December 31, 20172019 and 2016,2018, respectively.

4

5

Table of Contents

RB&TSFC Bank is an Illinois-chartereda Missouri-chartered commercial bank that is a member of the Federal Reserve System. TheSFC Bank was acquired by the the Company commenced operations in Rockford, Illinois in September 2004, operating as2018 through a branch of QCBT, and that operation began functioning under the RB&T charter in January 2005. RB&Tmerger with Springfield Bancshares.  SFC Bank provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communitiesthe Springfield, Missouri area through its headquarters located on Guilford Road at Alpine RoadGlenstone Avenue in RockfordSpringfield and its branch facility located on East Primrose in downtown Rockford. RB&TSpringfield.  SFC Bank had total segment assets of $461.7$748.8 million and $391.2$632.8 million as of December 31, 20172019 and 2016,2018, respectively.

Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to C&I businesses under direct financing lease contracts.  The Bates Companies, which are based in Rockford, Illinois, are engaged in the business of wealth management services.

Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 20172019 and 2016:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Amount Outstanding

    

Amount Outstanding

    

 

    

Interest

 

 

Interest

 

 

 

as of

 

as of

 

 

 

Rate as of

 

 

Rate as of

Name

Date Issued

 

Amount Issued
as of
12/31/17

  

Amount Issued
as of
12/31/16

Interest Rate

 

Interest

Rate as of

12/31/2017

  

Interest

Rate as of

12/31/2016

 

 

Date Issued

 

December 31, 2019

 

December 31, 2018

 

Interest Rate

 

December 31, 2019

 

 

December 31, 2018

                 

QCR Holdings Statutory Trust II

February 2004

 $10,310,000  $10,310,000

2.85% over 3-month LIBOR

  4.54%   3.85% 

 

February 2004

 

$

10,310

 

$

10,310

 

2.85% over 3-month LIBOR

 

4.79

%  

 

 

5.65

%

QCR Holdings Statutory Trust III

February 2004

  8,248,000   8,248,000

2.85% over 3-month LIBOR

  4.54%   3.85% 

 

February 2004

 

 

8,248

 

 

8,248

 

2.85% over 3-month LIBOR

 

4.79

%  

 

 

5.65

%

QCR Holdings Statutory Trust V

February 2006

  10,310,000   10,310,000

1.55% over 3-month LIBOR

  2.91%   2.43% 

 

February 2006

 

 

10,310

 

 

10,310

 

1.55% over 3-month LIBOR

 

3.54

%  

 

 

3.99

%

Community National Statutory Trust II

September 2004

  3,093,000   3,093,000

2.17% over 3-month LIBOR

  3.80%   3.17% 

 

September 2004

 

 

3,093

 

 

3,093

 

2.17% over 3-month LIBOR

 

4.08

%  

 

 

4.96

%

Community National Statutory Trust III

March 2007

  3,609,000   3,609,000

1.75% over 3-month LIBOR

  3.32%   2.71% 

 

March 2007

 

 

3,609

 

 

3,609

 

1.75% over 3-month LIBOR

 

3.64

%  

 

 

4.54

%

Guaranty Bankshares Statutory Trust I

May 2005

  4,640,000   -

1.75% over 3-month LIBOR

  3.34%   N/A 

 

May 2005

 

 

4,640

 

 

4,640

 

1.75% over 3-month LIBOR

 

3.64

%  

 

 

4.54

%

  $40,210,000  $35,570,000

Weighted Average Rate

  3.82%   3.26% 

 

 

 

$

40,210

 

$

40,210

 

Weighted Average Rate

 

4.18

%  

 

 

4.94

%

 

Securities issued by all of the trusts listed above mature thirty30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust.

Guaranty Bankshares Statutory Trust I was acquired in 2017 as part of the acquisition of Guaranty Bank and is further discussed in Note 12 to the Consolidated Financial Statements.

Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10-K.10‑K. Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, gains on the sale of residential real estate and government guaranteed loans, earnings from BOLI and other noninterest income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.

The Company and its subsidiaries collectively employed 641697 and 572755 FTEs at December 31, 20172019 and 2016,2018, respectively. The majority of the increasedecrease in FTEs during 20172019 was primarily the result of the acquisitionsale of Guaranty Bank.

RB&T’S operations.

The Federal Reserve is the primary federalfederal regulator of the Company, QCBT, CRBT, RB&TCSB and CSB.SFC Bank.  QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking and RB&TSFC Bank is regulated by the IDFPR.Missouri Division of Finance. The FDIC, as administrator of the DIF, also has regulatory authority over the subsidiary banks. See Appendix A for more information on the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.

6

Lending/Leasing.The Company and its subsidiaries provide a broad range of commercial and retail lending/leasing and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.

In accordance with Iowa regulation, the legal lending limit to one borrowerborrower for QCBT, CRBT and CSB, calculated as 15% of aggregate capital, was $22.8$26.7 million, $17.4$28.7 million, and $12.0$15.3 million, respectively, as of December 31, 2017.2019. In accordance with IllinoisMissouri regulation, the legal lending limit to one borrower for RB&T,SFC Bank, calculated as 25%15% of aggregate capital, totaled $11.4$10.7 million as of December 31, 2017.2019.

5

Table of Contents

The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.

The in-house lending limit is the maximummaximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. As of January 1, 2017, theThe Company implementedimplements a tiered approach, based on the risk rating.rating of the borrower. Under the most recent in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:

 

 

 

 

 

 

 

 

 

High Quality

Medium Quality

Low Quality

 

High Quality

 

Medium Quality

 

Low Quality

(Risk Ratings 1-3)

(Risk Rating 4)

(Risk Ratings 5-8)

    

(Risk Ratings 1-3)

    

(Risk Rating 4)

    

(Risk Ratings 5-8)

(dollars in thousands)

 

(dollars in thousands)

QCBT

$13,500

$11,250

$7,750

 

$

16,000

 

$

13,500

 

$

9,000

CRBT

$9,500

$8,000

$5,500

 

$

14,500

 

$

12,000

 

$

8,000

CSB

$9,500

$8,000

$5,500

 

$

9,500

 

$

8,000

 

$

5,500

RB&T

$4,000

$3,250

$2,250

   

SFC Bank

 

$

9,000

 

$

7,500

 

$

5,000

QCRH Consolidated

$22,000

$16,500

$11,000

 

$

25,000

 

$

19,000

 

$

12,500

 

The QCRH Consolidated amount represents the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.

In addition, m2’sm2’s in-house lending limit is $1.0 million to a single leasing entity or group of related entities, subject to certain exceptions.

As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks.   To complement the in-house loan review, an independent third-party performs external loan reviews. Historically, management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.

The Company recognizes that a diversified loan/loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.

7

Specifically, each subsidiary bank’sbank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the subsidiary banks as of December 31, 20172019 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s average gross loans:

  

QCBT

  

CRBT

  

CSB

  

RB&T

 

Type of Loan *

 

Maximum

Percentage

per Loan

Policy

  

As of

December 31,

2017

  

Maximum

Percentage

per Loan

Policy

  

As of

December 31,

2017

  

Maximum

Percentage

per Loan

Policy

  

As of

December 31,

2017

  

Maximum

Percentage

per Loan

Policy

  

As of

December 31,

2017

 
                                 

One-to-four family residential

  30%  13%  25%  13%  35%  16%  30%  18%

Multi-family

  15%  3%  15%  6%  15%  2%  15%  4%

Farmland

  5%  1%  5%  -   15%  1%  5%  - 

Non-farm, nonresidential

  50%  26%  50%  32%  40%  30%  50%  36%

Construction and land development

  20%  3%  15%  6%  35%  20%  20%  4%

C&I

  60%  26%  60%  34%  40%  21%  60%  31%

Loans to individuals

  10%  1%  10%  1%  10%  -   10%  1%

Lease financing

  30%  13%  5%  -   5%  -   20%  - 

Bank stock loans

  **   **   10%  -   -   -   10%  - 

All other loans

  15%  14%  10%  8%  10%  10%  10%  6%
       100%      100%      100%      100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCBT

 

CRBT

 

CSB

 

SFC Bank

 

 

 

Maximum

    

 

    

Maximum

    

 

    

Maximum

    

 

    

Maximum

    

 

 

 

 

Percentage

 

As of

 

Percentage

 

As of

 

Percentage

 

As of

 

Percentage

 

As of

 

 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

 

Type of Loan *

Policy

 

2019

 

Policy

 

2019

 

Policy

 

2019

 

Policy

 

2019

 

 

One-to-four family residential

30

%  

12

%  

25

%  

 9

%  

35

%  

12

%  

30

%  

15

%

 

Multi-family

15

%  

 2

%  

15

%  

 8

%  

15

%  

 3

%  

20

%  

 7

%

 

Farmland

 5

%  

 —

%  

 5

%  

 —

%  

15

%  

 2

%  

 5

%  

 1

%

 

Non-farm, nonresidential

50

%  

22

%  

50

%  

24

%  

50

%  

28

%  

50

%  

44

%

 

Construction and land development

20

%  

 8

%  

15

%  

12

%  

35

%  

19

%  

15

%  

10

%

 

C&I

60

%  

30

%  

60

%  

36

%  

50

%  

27

%  

20

%  

17

%

 

Loans to individuals

10

%  

 1

%  

10

%  

 1

%  

10

%  

 —

%  

 5

%  

 1

%

 

Lease financing

30

%  

 7

%  

 5

%  

 —

%  

 5

%  

 —

%  

 5

%  

 —

%

 

Bank stock loans

**

 

 —

 

10

%  

 —

%  

 —

%

 —

%  

20

%  

 —

%

 

All other loans

15

%  

18

%  

10

%  

10

%  

10

%  

 9

%  

15

%  

 5

%

 

 

  

 

100

%  

  

 

100

%  

  

 

100

%  

  

 

100

%

 

*   The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).

** QCBT’s maximum percentage for bank stock loans is 150% of risk-based capital (bank stock loan commitments are limited to 200% of risk-based capital). At December 31, 2017,2019, QCBT’s bank stock loans totaled 34%58% of risk-based capital.

6

Table of Contents

 

The following table presents total loans/leases by major loan/lease type and subsidiarysubsidiary as of December 31, 20172019 and 2016.2018. Residential real estate loans held for sale are included in residential real estate loans below.

         

m2

                          

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCBT

  

Lease Funds

  

CRBT

  

CSB

  

RB&T

  

Total

 

 

 

 

 

 

 

m2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 $  

%

  $  

%

  $  

%

  $  

%

  $  

%

  $  

%

 

 

QCBT

 

Lease Funds

 

CRBT

 

CSB

 

SFC Bank

 

RB&T

 

Total

 

 

(dollars in thousands)

 

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

 

%

 

As of December 31, 2017:                                                

 

(dollars in thousands)

 

As of December 31, 2019

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

C&I loans

 $384,401   42% $66,758   31% $402,146   41% $148,198   30% $133,013   36% $1,134,516   38%

 

$

474,264

 

43

%  

$

141,977

 

60

%  

$

536,294

 

46

%  

$

234,527

 

37

%  

$

120,763

 

22

%  

$

N/A

 

N/A

%  

$

1,507,825

 

41

%

CRE loans

  384,684   42%  -   -   455,443   47%  291,254   60%  172,111   47%  1,303,492   44%

 

 

455,389

 

42

%  

 

 —

 

 —

%  

 

554,101

 

47

%  

 

350,159

 

55

%  

 

376,747

 

69

%  

 

N/A

 

N/A

%  

 

1,736,396

 

47

%

Direct financing leases

  -   -   141,290   66%  -   -   158   -   -   -   141,448   5%

 

 

 —

 

 —

%  

 

87,869

 

37

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

N/A

 

N/A

%  

 

87,869

 

 2

%

Residential real estate loans

  114,818   12%  -   -   62,755   6%  38,831   8%  42,242   12%  258,646   9%

 

 

122,675

 

11

%  

 

 —

 

 —

%  

 

49,544

 

 4

%  

 

40,224

 

 6

%  

 

27,461

 

 5

%  

 

N/A

 

N/A

%  

 

239,904

 

 7

%

Installment and other consumer loans

  36,360   4%  -   -   54,448   6%  10,814   2%  16,989   5%  118,611   4%

 

 

38,706

 

 4

%  

 

 —

 

 —

%  

 

35,362

 

 3

%  

 

14,272

 

 2

%  

 

21,012

 

 4

%  

 

N/A

 

N/A

%  

 

109,352

 

 3

%

Deferred loan/lease origination costs, net of fees

  1,254   -   7,188   3%  (821)  -   (180)  -   331   -   7,772   - 

 

 

1,897

 

 —

%  

 

6,889

 

 3

%  

 

(338)

 

 —

%  

 

88

 

 —

%  

 

323

 

 —

%  

 

N/A

 

N/A

%  

 

8,859

 

 —

%  

 $921,517   100% $215,236   100% $973,971   100% $489,075   100% $364,686   100% $2,964,485   100%

 

$

1,092,931

 

100

%  

$

236,735

 

100

%  

$

1,174,963

 

100

%  

$

639,270

 

100

%  

$

546,306

 

100

%  

$

N/A

 

N/A

%  

$

3,690,205

 

100

%

                                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016:

                                                
                                                

As of December 31, 2018

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

C&I loans

 $314,310   39% $38,668   18% $276,130   42% $101,530   24% $96,999   31% $827,637   34%

 

$

425,500

 

42

%  

$

103,404

 

45

%  

$

458,170

 

44

%  

$

201,871

 

35

%  

$

95,910

 

20

%  

$

144,555

 

36

%  

$

1,429,410

 

38

%

CRE loans

  355,850   45%  -   -   305,655   47%  272,174   63%  159,780   51%  1,093,459   46%

 

 

421,032

 

42

%  

 

 —

 

 —

%  

 

486,084

 

47

%  

 

327,775

 

56

%  

 

332,547

 

70

%  

 

198,673

 

49

%  

 

1,766,111

 

48

%

Direct financing leases

  -   -   165,026   78%  -   -   393   -   -   -   165,419   7%

 

 

 —

 

 —

%  

 

117,968

 

52

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

117,968

 

 3

%

Residential real estate loans

  99,626   12%  -   -   43,706   7%  43,383   10%  42,518   14%  229,233   10%

 

 

120,855

 

12

%  

 

 —

 

 —

%  

 

57,469

 

 6

%  

 

39,190

 

 7

%  

 

30,706

 

 9

%  

 

42,539

 

11

%  

 

290,759

 

 8

%

Installment and other consumer loans

  28,694   4%  -   -   27,117   4%  12,132   3%  13,723   4%  81,666   3%

 

 

35,325

 

 4

%  

 

 —

 

 —

%  

 

36,563

 

 3

%  

 

13,696

 

 2

%  

 

16,450

 

 1

%  

 

17,348

 

 4

%  

 

119,382

 

 3

%

Deferred loan/lease origination costs, net of fees

  918   -   7,351   4%  (395)  -   (102)  -   301   -   8,073   - 

 

 

1,759

 

 —

%  

 

7,274

 

 3

%  

 

(815)

 

 —

%  

 

(81)

 

 —

%  

 

188

 

 —

%  

 

799

 

 —

%  

 

9,124

 

 —

%  

 $799,398   100% $211,045   100% $652,213   100% $429,510   100% $313,321   100% $2,405,487   100%

 

$

1,004,471

 

100

%  

$

228,646

 

100

%  

$

1,037,471

 

100

%  

$

582,451

 

100

%  

$

475,801

 

100

%  

$

403,914

 

100

%  

$

3,732,754

 

100

%

 

Proper pricing of loans is necessary to provide adequate return to the Company’sCompany’s stockholders. Loan pricing, as established by the subsidiary banks’ internal loan committees, includes consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for more discussion on the Company’s management of interest rate risk.

8

C&I Lending

As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to smalland mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the SBA and USDA. Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.

Loan approval is generally based on the following factors:

●·

Ability and stability of current management of the borrower;

●·

Stable earnings with positive financial trends;

●·

Sufficient cash flow to support debt repayment;

●·

Earnings projections based on reasonable assumptions;

●·

Financial strength of the industry and business; and

●·

Value and marketability of collateral.

For C&I loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the consolidated financial statementsConsolidated Financial Statements for additional information, including the internal risk rating scale.

As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain C&I loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:

●·

Minimum debt service coverage ratio;

●·

Minimum current ratio;

●·

Maximum debt to tangible net worth ratio; and/or

●·

Minimum tangible net worth.worth.

7

Table of Contents

Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry.

industry in which the borrower is engaged.

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

9

Approved Collateral Type

Maximum Advance %

Financial Instruments

U.S. Government Securities

90% of market value

Securities of Federal Agencies

90% of market value

Municipal Bonds rated by Moody’s Moody’s As “A” or better

80% of market value

Listed Stocks

75% of market value

Mutual Funds

75% of market value

Cash Value Life Insurance

95%, less policy loans

Savings/Time Deposits (Bank)

100% of current value

Penny Stocks

0%

General Business

Accounts Receivable

80% of eligible accounts

Inventory

50% of value

Crop and Grain Inventories

80% of current market value

Livestock

80% of purchase price, or current market value; or higher if cross-collateralized with other assets

Fixed Assets (Existing)

50% of net book value, or 75% of orderly liquidation appraised value

Fixed Assets (New)

80% of cost, or higher if cross-collateralized with other assets

Leasehold Improvements

0%

 

Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.

The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years. Generally, term loans range from three to five years. For lines of credit, the maximum term is typically 365 days.

For low income housing tax credits permanent loans, the maximum term is generally up to 20 years.

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

Following is a summary of the five largest industry concentrations within the C&I portfolio as of December 31, 20172019 and 2016:2018:

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

Amount

 

Amount

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Administration of urban planning & rural development

 

$

133,157

 

$

111,579

Bank holding companies

 

 

92,185

 

 

75,601

Hotels & motels

 

 

64,867

 

 

83,106

Skilled nursing care facilities

 

 

39,881

 

 

53,134

General medical & surgical hospitals

 

 

34,184

 

 

36,895

These loan categories are defined by industry-standard NAICS codes – refer to NAICS.com for a description of each category.

 

  

2017

  

2016

 
  

Amount

  

Amount

 
  

(dollars in thousands)

 

Administration of urban planning & rural development

 $83,344  $37,097 

Hotels & motels

  73,200   35,992 

Bank holding companies

  66,950   66,070 

Skilled nursing care facilities

  60,989   43,864 

General medical & surgical hospitals

  35,217   33,175 

 

8

10

Table of Contents

CRE Lending

The subsidiary banks also make CRE loans. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the Company’s lending policy for the major categories of CRE loans:

 

Maximum

CRE Loan Types

Maximum Advance Rate **

Maximum

Term

CRE Loans on Improved Property *

80%

7 years

Raw Land

Lesser of 90% of project cost, or 65% of

"as "as is" appraised value

12 months

Land DevelopmentDevelopment***

Lesser of 85% of project cost, or 75% of

"as-completed" "as-completed" appraised value

24 months

Commercial Construction Loans

Lesser of 85% of project cost, or 80% of

"as-completed" "as-completed" appraised value

365 days12 months

Residential Construction Loans to Builders

Lesser of 90% of project cost, or 80% of

"as-completed" "as-completed" appraised value

12 months

*     Generally, the debt service coverage ratio must be a minimum of 1.25x1.25x for non-owner occupied loans and 1.15x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitize this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.

**  These maximum rates are consistent with, or in some situations, more conservative than those established by regulatory authorities.

*** Generally, the maximum term for land development loans is 12 months but there are some situations where the maximum term would be 24 months.

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

In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied CRE loans. Owner-occupied CRE loans are generally considered to have less risk. As of December 31, 20172019 and 2016,2018, approximately 26% and 30%28%, respectively, of the CRE loan portfolio was owner-occupied.

In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied CRE lending exceeds 300% of total risk-based capital or construction, land development and other land loans exceed 100% of total risk-based capital. Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfolio levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate loan portfolio.

Following is a listing of the significant industries within the Company’sCompany’s CRE loan portfolio as of December 31, 20172019 and 2016:2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

 

$

553,142

 

32

%  

$

612,327

 

34

%

Lessors of Residential Buildings

 

 

465,172

 

27

%  

 

346,270

 

19

%

Hotels

 

 

63,720

 

 4

%  

 

81,345

 

 5

%

New Housing For-Sale Builders

 

 

55,525

 

 3

%

 

47,598

 

 3

%

Nonresidential Property Managers

 

 

48,059

 

 3

%  

 

69,885

 

 4

%

Land Subdivision

 

 

46,318

 

 3

%  

 

48,378

 

 3

%

Other Activities Related to Real Estate

 

 

42,060

 

 2

%  

 

25,345

 

 2

%

Other *

 

 

462,400

 

26

%  

 

534,963

 

30

%

Total CRE Loans

 

$

1,736,396

 

100

%  

$

1,766,111

 

100

%

 

  

2017

  

2016

 
  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

Lessors of Nonresidential Buildings

 $388,648   30% $322,337   30%

Lessors of Residential Buildings

  199,047   15%  141,321   13%

Hotels

  70,447   5%  35,006   3%

New Housing For-Sale Builders

  61,480   5%  56,711   5%

Nonresidential Property Managers

  51,621   4%  70,914   7%

Nursing Care Facilities

  47,008   4%  34,768   3%

Land Subdivision

  44,192   3%  45,132   4%

Other *

  441,049   34%  387,270   35%

Total Commercial Real Estate Loans

 $1,303,492   100% $1,093,459   100%

*   “Other” consists of all other industries. None of these had concentrations greater than $26.1$28.8 million, or 2%1.7%, of total CRE loans as of December 31, 2017.2019.

9

Table of Contents

Following is a breakdown of non owner-occupied CRE by property type as of December 31, 20172019 and 2016:2018:

 

2017

  

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

  

%

  

Amount

  

%

 

 

2019

2018

 

(dollars in thousands)

 

    

Amount

    

%

    

Amount

    

%

 

Retail

 $169,655   22% $128,394   22%

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

  143,685   18%  112,960   19%

 

$

359,469

 

39

%  

$

189,137

 

18

%

Office

  133,174   17%  97,878   16%

 

 

193,381

 

21

%  

 

255,452

 

25

%

Retail

 

 

175,602

 

19

%  

 

232,022

 

23

%

Hotel/motel

  76,186   10%  33,828   6%

 

 

71,611

 

 8

%  

 

89,906

 

 9

%

Industrial/warehouse

  37,401   5%  46,149   8%

 

 

68,978

 

 8

%  

 

93,503

 

 9

%

Other

  224,246   29%  176,713   30%

 

 

44,569

 

 5

%  

 

168,650

 

16

%

Total income-producing CRE

 $784,347   100% $595,922   100%

 

$

913,610

 

100

%  

$

1,028,670

 

100

%

 

A portion of the Company’sCompany’s construction portfolio is considered non-residential construction. Following is a summary of industry concentrations within that category as of December 31, 20172019 and 2016:2018:

 

 

 

 

 

 

 

 

 

 

 

 

2019

2018

 

2017

  

2016

 

    

Amount

    

%

    

Amount

    

%

 

 

Amount

  

%

  

Amount

  

%

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 $16,416   19% $17,991   19%

 

$

169,523

 

50

%  

$

61,055

 

30

%

Office

 

 

24,950

 

 7

%  

 

17,692

 

 9

%

Retail

  12,033   14%  14,647   16%

 

 

14,584

 

 4

%  

 

10,285

 

 5

%

Office

  11,580   13%  9,342   10%

Industrial/warehouse

 

 

8,388

 

 2

%  

 

4,591

 

 2

%

Hotel/motel

  8,407   10%  1,983   2%

 

 

5,715

 

 2

%  

 

5,679

 

 3

%

Industrial/warehouse

  3,604   4%  5,810   6%

Other

  36,195   41%  43,707   47%

 

 

115,349

 

35

%  

 

106,532

 

51

%

Total non-residential construction loans

 $88,235   100% $93,480   100%

 

$

338,509

 

100

%  

$

205,834

 

100

%

 

Additionally, the Company had approximately $81.3$48.4 million and $103.0$52.3 million of residential construction loans outstanding as of December 31, 20172019 and 2016,2018, respectively. Of this amount, approximately 79%66% was considered speculative, while 21%34% was pre-sold at December 31, 20172019, and approximately 75%72% was considered speculative, while 25%28% was pre-sold at December 31, 2016.2018.

Direct Financing Leasing

m2 leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.

The following private and public sector business assets are generally acceptable to consider for lease funding:

●·

Computer systems;systems;

●·

Photocopy systems;systems;

●·

Fire trucks;trucks;

●·

Specialized road maintenance equipment;equipment;

●·

Medical equipment;equipment;

●·

Commercial business furnishings;furnishings;

●·

Vehicles classifiedclassified as heavy equipment;

●·

Trucks and trailers;trailers;

●·

Equipment classified as plant or office equipment;equipment; and

●·

Marine boat lifts.lifts.

 

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m2 will generally refrain from funding leases of the following type:

●·

Leases collateralized by non-marketable items;items;

●·

Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.;

●·

Leases collateralized by used equipment, unless its remaining useful life can be readily determined;determined; and

●·

Leases with a repayment schedule exceeding seven years.

Residential Real Estate Lending

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

The following table presents the originations and sales of residential real estate loans for the Company. Included in originations is activity related to the refinancing of previously held in-house mortgages.

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

For the year ended December 31,

 

 

2019

2018

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Originations of residential real estate loans

 $38,079  $52,721  $41,279 

 

$

183,491

 

$

87,133

 

$

38,079

 

Sales of residential real estate loans

 $33,165  $35,499  $23,726 

 

$

141,195

 

$

51,010

 

$

33,165

 

Percentage of sales to originations

  87%  67%  57%

 

 

77

%  

 

59

%  

 

87

%

 

Installment and Other Consumer Lending

The consumer lending department of each subsidiary bank provides many types of consumer loans, including home improvement, home equity, motor vehicle, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 650. For both home equity loans and lines of credit, the maximum advance rate is 90% of value with a minimum credit bureau score of 720, and the maximum advance rate is 80% of value with a credit bureau score of 680 to 719.650. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 10 years.

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.

Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines and RockfordSpringfield markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, FinTech companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these unregulated competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to traditional banking services. The Company also competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

Appendices. The commercial banking business is a highly regulated business. See Appendix A “Supervision and Regulation” for a summarydiscussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. Supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of bank holding companies and banks.

See Appendix B for tables and schedules that show selected financial statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in the Form 10-K,10‑K, results are presented as of and for the fiscal years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, as applicable.

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Internet Site, Securities Filings and Governance Documents.The Company maintains an Internet site at www.qcrh.com. The Company makes available free of charge through this site its annual reportAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. These filings are available at http://www.snl.com/IRW/Docs/1024092.1024092. Also available are many of its corporate governance documents, including the Business Code of Conduct (http:and Ethics Policy (http://www.snl.com/IRW/govdocs/1024092)1024092).

Item 1A.    Risk Factors

In addition to the other information in this Annual Report on Form 10-K,10‑K, stockholders or prospective investors should carefully consider the following risk factors:

Conditions in the financial market and economic conditions, including conditions in the markets in which we operate,, generally maymay adversely affect our business.

Our general financial performance is highly dependent upon the business environment in the markets where we operate and in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it offers. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of these or other factors.

For example, the coronavirus may have an adverse impact on international trade (including supply chains and export levels), travel, employee productivity and other economic activities, which could have a destabilizing effect on the financial markets and economic activity or cause the general economy in our market areas to decline.

While economic conditions have improved since the recession, there can be no assurance that this improvement will continue. Uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Downturns in the markets where our banking operations occur could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults, high or increased levels of problem assets and foreclosures and reduced wealth management fees resulting from lower asset values. Such conditions could adversely affect the credit quality of our loans, financial condition and results of operations.

Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:

●·

difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

 

●·

difficulties in supporting and transitioning customers of the target company;

 

●·

diversion of financial and management resources from existing operations;

 

●·

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

 

●·

risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

 

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●·

potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

 

●·

risks of acquiring loans with deteriorated credit quality;

 

●·

assumption of unanticipated problems or latent liabilities; and

 

●·

inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.

We must effectively manage our credit risk.

There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.

The majority of our subsidiary banks’banks’ loan portfolios are invested in C&I and CRE loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to C&I and CRE loans, our subsidiary banks are also active in residential mortgage and consumer lending. Our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.

C&I loans make up a large portion of our loan/lease portfolio.

C&I loans were $1.1$1.5 billion, or approximately 38%41% of our total loan/lease portfolio, as of December 31, 2017.2019. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee or cosigner on commercial loans. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may lose value over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, a prolonged recovery period could harm or continue to harm the businesses of our C&I customers and reduce the value of the collateral securing these loans.

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Our loan/lease portfolio has a significant concentration of CRE loans, which involve risks specific to real estate values.

CRE lending comprises a significant portion of our lending business. Specifically, CRE loans were $1.3$1.7 billion, or approximately 44%47% of our total loan/lease portfolio, as of December 31, 2017.2019. Of this amount, $332.7$444.0 million, or approximately 26%, was owner-occupied. The market value of real estate securing our CRE loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

The problems that have occurred in the residential real estate and mortgage markets throughout much of the U.S. in prior years also affected the commercial real estate market. In our market areas, we generally experienced a downturn in credit performance by our CRE loan customers in prior years relative to historical norms, and despite recent improvements in certain aspects of the economy, a level of uncertainty continues to exist in the economy and credit markets. There can be no guarantee that we will not experience further deterioration in the performance of CRE and other real estate loans in the future. In such case, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results, financial condition and/or capital.

Our allowance may prove to be insufficient to absorb losses in our loan/lease portfolio.

We establish our allowance for loan and lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2017,2019, our allowance as a percentage of total gross loans/leases was 1.16%0.98%, and as a percentage of total NPLs was 184.28%403.87%. In accordance with GAAP for acquisition accounting, the loans acquired through the acquisitionacquisitions of SFC Bank, Guaranty Bank and CSB were recorded at fair value; therefore, there was no allowance associated with SFC Bank’s, Guaranty Bank’s and CSB’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($8.17.0 million at December 31, 2017)2019). When factoring this remaining discount into the Company’s allowance to total loans and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from 1.16% to 1.43%.

In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.19%0.11% for the year ended December 31, 2017.2019. Because of the concentration of C&I and CRE loans in our loan portfolio, which tend to be larger in amount than residential real estate and installment loans, the movement of a small number of loans to nonperforming status can have a significant impact on these ratios. Although management believes that the allowance as of December 31, 20172019 was adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions are more difficult than what management currently expects. Additional provisions and loan/lease losses in excess of our allowance may adversely affect our business, financial condition and results of operations.

The FASB has issued an accounting standard update that will result in a significant change in how the Company recognizes credit losses and may have a material impact on our financial condition or results of operations.

 

In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. Under the CECL model, the Company will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity investment securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information from past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset initially recorded on the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The CECL model may create more volatility in the level of the allowance for loan losses.

On December 21, 2018, the regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of the CECL model. The final rule also revised the agencies' other rules to reflect the update to the accounting standards. The final rule became effective on April 1, 2019. Additionally, proposed guidance clarifying the final rule was issued in October 2019. The proposed guidance clarifies the state of pre-existing agency guidance and describes the appropriate CECL methodology for determining allowances for credit losses on specific assets, including net investments in leases, impaired available-for-sale investment securities, etc.

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The new CECL standard became effective for the Company for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The Company’s will recognize a one-time cumulative-effect adjustment to retained earnings and our allowance for loan losses as of January 1, 2020, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Company incurred transition costs and also expect to incur ongoing costs in maintaining the additional CECL models and methodology along with acquiring forecasts used within the models, and that the methodology will result in increased capital costs upon initial adoption as well as over time. The impact at adoption is expected to have an increase of 5-20% of the December 31, 2019 allowance for estimated losses on loans/leases and the after-tax charge will result in a decrease the opening stockholders' equity balance as of January 1, 2020. See Note 1 Summary of Significant Accounting Policies of the notes to consolidated financial statements for additional information on the Company’s impact of adoption.

The Company’s information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material adverse effect on the Company’s business.

The Company relies heavily on internal and outsourced technologies, communications, and information systems to conduct its business. Additionally, in the normal course of business, the Company collects, processes and retains sensitive and confidential information regarding our customers. As the Company’s reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in the Company’s customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-attacks (such as unauthorized access to the Company’s systems). These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others have also increased. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions, retailers and government agencies, particularly denial of service attacks that are designed to disrupt key business or government services, such as customer-facing web sites. The Company is not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. It is also possible that a cyber incident, such as a security breach, may remain undetected for a period of time, further exposing the Company to technology-related risks. However, applying guidance from the Federal Financial Institutions Examination Council, the Company has analyzed and will continue to analyze security related to device specific considerations, user access topics, transaction-processing and network integrity.

The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company’sCompany’s customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. Despite third-party security risks that are beyond our control, the Company offers its customers protection against fraud and attendant losses for unauthorized use of debit cards in order to stay competitive in the marketplace. Offering such protection (including the cost of replacing compromised cards) to our customers exposes the Company to potential losses which, in the event of a data breach at one or more retailers of considerable magnitude, may adversely affect its business, financial condition, and results of operations. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in increased costs, all of which could have a material adverse effect on the Company’s business. To the extent we are involved in any future cyber-attacks or other breaches, the Company’s reputation could be affected, which could also have a material adverse effect on the Company’s business, financial condition or results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our

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computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The Company may also need to spend additional resources to enhance protective and detective measures or to conduct investigations to remediate any vulnerabilities that arise.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Despite having business continuity plans and other safeguards, the Company could still be affected. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

We may be materially and adversely affected by the highly regulated environment in which we operate.

The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’depositors’ funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT,, CRBT and CSB, as Iowa-chartered state member banks, are subject to regulation and supervision primarily by both the Iowa Superintendent and the Federal Reserve. RB&T,SFC Bank, as an Illinois-chartered state membera Missouri-chartered commercial bank, is subject to regulation and supervision primarily by both the IDFPRMissouri Division of Finance and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies.

The primary federal and state banking laws and regulations that affect us are described in Appendix A to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. For example, the Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry. In addition, in recent years the Federal Reserve has adopted numerous new regulations addressing banks’banks’ overdraft and mortgage lending practices. Further, the Basel III regulatory capital reforms increased both the amount and quality of capital that financial institutions must hold.

U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.

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Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.

The financial services industry, as well as the broader economy, may be subject to new legislation, regulation, and government policy.

At this time, it is difficult to predict the legislative and regulatory changes that will result from the combination of a new President of the United States and the first year since 2010 in which both Houses of Congress and the White House have majority memberships from the same political party. Recently, however, both the new President and senior members of the House of Representatives have advocated for significant reduction of financial services regulation, to include amendments to the Dodd-Frank Act and structural changes to the CFPB. The new Administration and Congress also may cause broader economic changes due to changes in governing ideology and governing style. New appointments to the Federal Reserve could affect monetary policy and interest rates, and changes in fiscal policy could affect broader patterns of trade and economic growth. Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Interest rates and other conditions impact our results of operations.

Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms, the mix of adjustable and fixed rate loans/leases in our portfolio, the length of time deposits and borrowings, and the rate sensitivity of our deposit customers could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures about Market Risk” included under Item 7A of Part II of this Annual Report on Form 10-K.10‑K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations, which have recently increased due to the effectiveness of the Basel III regulatory capital reforms. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.

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Failure to pay interest on our debt may adversely impact our ability to pay common stock dividends.

As of December 31, 2017,2019, we had $40.2 million of junior subordinated debentures held by six business trusts that we control. Interest paymentsexpense on the debentures, which totaled $1.5$2.3 million for 2017,2019, must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. Deferral of interest payments on the debentures could cause a subsequent decline in the market price of our common stock because we would not be able to pay dividends on our common stock.

As a bank holding company, our sources of funds are limited.

We are a bank holding company, and our operations are primarily conducted by our subsidiary banks, which are subject to significant federal and state regulation. When available, cash to pay dividends to our stockholders is derived primarily from dividends received from our subsidiary banks. Our ability to receive dividends or loans from our subsidiary banks is restricted. Dividend payments by our subsidiaries to us in the future will require generation of future earnings by them and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, our right to participate in the assets of our subsidiary banks in the event of a liquidation or reorganization of any of the banks would be subject to the claims of the creditors of such bank, including depositors, which would take priority except to the extent we may be a creditor with a recognized claim. As of December 31, 2017,2019, our subsidiary banks had deposits, borrowings and other liabilities in the aggregate of approximately $3.6$4.4 billion.

Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.

The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2017,2019, we had gross unrealized losses of $5.4 million,$478 thousand, or 0.8%0.08% of amortized cost, in our investment portfolio (partially offset(offset by gross unrealized gains of $4.5$30.1 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the OTTI, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur. Based on management’s evaluation, it was determined that the gross unrealized losses at December 31, 20172019 were temporary and primarily a function of the changes in certain market interest rates.

Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities,, repayments, and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the FRB or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered deposits, and the ability to borrow at the FRB’s Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

During periods of economic turmoil, the financial services industry and the credit markets generally may be materially and adversely affected by significant declines in asset values andand depressed levels of liquidity. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

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The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.

As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender’slender’s SBA Preferred Lender status. If we lose our status as aan SBA Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.

Historically we have sold the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in our earning premium income and/or have created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the retained, non-guaranteed portion of the loans.

In the event of a loss resulting from default and the SBA determines there is a deficiency in the manner in which the loan was originated, funded or serviced by the us, the SBA may require us to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us, any of which could adversely affect our business, results of operations and financial condition.

A prolonged U.S. government shutdown or default by the U.S. on government obligations would harm our results of operations.

 

Our results of operations, including revenue, non-interest income, expenses and net interest income, would be adversely affected in the event of widespread financial and business disruption on account of a default by the U.S. on U.S. government obligations or a prolonged failure to maintain significant U.S. government operations.  Of particular impact to the Company are the operations pertaining to the SBA or the FDIC.  Any such failure to maintain such U.S. government operations, and the after-effects of such shutdown, could impede our ability to originate SBA loans and our ability to sell such loans in the secondary market, which would materially adversely affect our business, results of operations and financial condition.

In addition, many of our investment securities are issued by and some of our loans are made to the U.S. government and government agencies and sponsored entities. Uncertain domestic political conditions, including prior federal government shutdowns and potential future federal government shutdowns or other unresolved political issues, may pose credit default and liquidity risks with respect to investments in financial instruments issued or guaranteed by the federal government and loans to the federal government. Any downgrade in the sovereign credit rating of the U.S., as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions in the U.S. and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition and results of operations.

Changes in U.S. trade policies, such as the implementation of tariffs, and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.

In recent years, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the U.S., including agricultural products.  Additional tariffs and retaliatory tariffs may be imposed in the future by the U.S. and these and other countries.  Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or

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on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.

 

Our business is concentrated in and dependent upon the continued growth and welfare of the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and RockfordSpringfield, Missouri markets.

We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and RockfordSpringfield, Missouri markets, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Bettendorf, Cedar Falls, Cedar Rapids, Davenport, Waterloo, and Ankeny, Iowa and Moline and Rock Island, Illinois and Rockford, IllinoisSpringfield, Missouri and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce demand for our products and services, affect the ability of our customers to repay their loans to us, increase the levels of our nonperforming and problem loans, and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

We face intense competition in all phases of our business from other banks and financial institutions.

The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions,, online lenders and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.

Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan/lease rates and deposit rates or loan/lease terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modifyour underwriting standards, we could be exposed to higher losses from lending and leasing activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.

The stock market can be volatile, and fluctuations in our operating results and other factors, could cause our stock price to decline.

The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Most recently, like the stock of other financial institutions generally, the price of the Company’s common stock as reported on the Nasdaq Global Market has increased substantially since the U.S. presidential election. Market fluctuations could also adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results and the impact of these risk factors on our operating results or financial position.

The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions.

 

The LIBOR represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans.  Beginning in 2008, concerns were expressed that some of the member banks surveyed by the BBA in connection with the calculation of LIBOR rates may have been under-reporting or otherwise manipulating the interbank lending rates applicable to them. Regulators and law enforcement agencies from a number of governments have conducted investigations relating to the calculation of LIBOR across a range of maturities and currencies. If manipulation of LIBOR or another inter-bank lending rate occurred, it may have resulted in that rate being artificially lower (or higher)

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than it otherwise would have been. Responsibility for the calculation of LIBOR was transferred to ICE Benchmark Administration Limited, as independent LIBOR administrator, effective February 1, 2014.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021 (the “July 27th Announcement”). The July 27th Announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has proposed a paced-market transition plan to SOFR from U.S. dollar-LIBOR and organizations are working on industry-wide and company-specific transition plans relating to derivatives and cash markets exposed to LIBOR.

At this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark, whether SOFR or another rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the value of LIBOR-linked securities.

Although the Financial Stability Oversight Council has recommended a transition to an alternative reference rate in the event LIBOR is no longer available after 2021, such plans are still in development and, if enacted, could present challenges.  Moreover, contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties.  The downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact the financial markets and individual institutions. The uncertainty surrounding the sustainability of LIBOR more generally could undermine market integrity and threaten individual financial institutions and the U.S. financial system more broadly.

 

If securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, the price of our stock could decline.

The trading market for our common stock can be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If there is limited or no securities or industry analyst coverage of us, the market price for our stock could be negatively impacted. Moreover, if any of the analysts who elect to cover us downgrade our common stock, provide more favorable relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price of our common stock may decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

The soundness of other financial institutions could negatively affect us.

Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks and government-sponsored financial institutions, which would increase the capital we need to support our growth.

Our community banking strategy relies heavily on our subsidiaries’subsidiaries’ independent management teams, and the unexpected loss of key managers may adversely affect our operations.

We rely heavily on the success of our bank subsidiaries’subsidiaries’ independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about

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our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.

The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

Our reputation could be damaged by negative publicity.

Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.

The preparation of our consolidated financial statementsConsolidated Financial Statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.

Our consolidated financial statementsConsolidated Financial Statements are prepared in accordance with U.S. GAAP and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.

From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations.

For example, thethe FASB has adopted a new accounting standard that will be effective for our first2020 fiscal year after December 15, 2019.year.  This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances.  This will change the currentprior method of providing allowances that are probable, which may require us to increase our allowance and could introduce significant earnings volatility compared to the prior method.  CECL will greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance. Any increaseThe ongoing impacts of CECL will be dependent upon changes in our allowance or expenses incurred to determine the appropriate level of the allowance may have a material adverse effect on our financial conditioneconomic conditions and results of operations.forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.

 

See Note 1 to the Consolidated Financial Statements for further discussion.

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Secondary mortgage, government guaranteed loan and interest rate swap market conditions could have a material impact on our financial condition and results of operations.

Currently, we sell a portion of the residential real estate and government guaranteed loans we originate. The profitability of these operations depends in large part upon our ability to make loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.

In addition to being affected by interest rates, the secondary markets are also subject to investor demand for residential mortgages and government guaranteed loans and investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.

The interest rate swap market is dependent upon market conditions. If interest rates move, interest rate swap transactions may no longer make sense for the Company and/or its customers. Interest rate swaps are generally appropriate for commercial customers with a certain level of expertise and comfort with derivatives, so our success is dependent upon the ability to make loans to these types of commercial customers. Additionally, our ability to execute interest rate swaps is also dependent upon counterparties that are willing to enter into the interest rate swap that is equal and offsetting to the interest rate swap we enter into with the commercial customer.

Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could adversely affect our business and results of operations.

Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.

New lines of business or new products and services may subject us to additional risks.

From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business in our current markets or new markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results.

We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which could restrict our operations.

As of December 31, 2019, we had approximately $101.4 million of total indebtedness outstanding at the holding company level. In the future, it is possible that we may not generate sufficient revenues to service or repay our debt, and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, and to pay dividends to our common stockholders.

Moreover, the degree to which we are leveraged could have important consequences for our stockholders, including:

·

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·

making it more difficult for us to satisfy our debt and other obligations;

·

limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;

·

increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and

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·

placing us at a competitive disadvantage compared to our competitors that have less debt.

Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment.  As a result, political and social attention to the issue of climate change has increased.  In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions.  The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. These agreements and measures may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, each of which may require us to expend significant capital and incur compliance, operating, maintenance and remediation costs.  Consumers and businesses may also change their behavior on their own as a result of these concerns.  The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities.  Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities.

Severe weather, natural disasters, pandemic, acts of terrorism or war or other adverse external events could significantly impact the Company’s business.

As the Company’s operating and market footprint continues to grow, severe weather, natural disasters, pandemic, acts of terrorism or war and other adverse external events could have a significant impact on the Company’s ability to conduct business. The Company’s current footprint poses a wide variety of potential weather, natural disaster, or other adverse events that could impact the Company in various ways. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The coronavirus outbreak may have an adverse impact on our customers that are directly or indirectly engaged in industries that could be affected by the outbreak, such as international trade or hospitality.  Their businesses may be adversely affected by quarantines and travel restrictions in areas most affected by the coronavirus.  In addition, entire industries, such as agriculture, may be adversely impacted due to lower exports caused by reduced economic activity in the affected areas.  The occurrence of any such event in the future could have a material adverse effect on the Company’s business, which in turn, could have a material adverse effect on the financial condition and results of operation.

Evolving law impacting cannabis-related businesses in Illinois may have an impact on the Company’s operations and risk profile.

The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana.  Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries.  It is the Banks’ current policy to avoid knowingly providing banking products or services to entities or individuals that: (i) directly or indirectly manufacture, distribute, or dispense marijuana or hemp products, or those who have a significant financial interest in such entities; and (ii) derive a significant percentage of revenue from providing products or services to, or other involvement with, such entities.  The Banks are taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers do not engage in any such activities.  Nonetheless, the shift in Illinois law is increasing the number of direct and indirect cannabis-related businesses in Illinois, and therefore increasing the likelihood that the Banks could interact with such businesses, as well as their owners and employees.  Such interactions could create additional legal, regulatory, strategic, and reputational risk to the Banks and the Company.

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The recent interest rate cuts by the Federal Reserve have led to the potential for higher inflation and financial instability driven by low borrowing costs that could have a negative effect on financial markets.

The Federal Reserve cut rates in 2019 as it sought to offset risks to an otherwise healthy economy exposed to trade uncertainty and slowing global economic growth. The rate cuts were generally supported by most central banks. However, there is potential that the rate cuts could pose additional risks to the economy primarily through higher inflation and financial-stability concerns driven by low borrowing costs. There is a possibility that labor markets could tighten causing inflationary pressures to build faster than the expected gradual pace. There is additional risk that persistently low interest rates could lead consumers and firms to take on riskier financial investments in search of better returns, increasing asset prices to unsustainable levels. The potential rise in asset prices to unsustainable levels could pose potential financial-stability risks in the commercial real estate and corporate borrowing sectors. Sustained low interest rate periods were something that preceded the 1990 and 2007 recessions, placing significant pressure on real estate asset prices through reach-for-yield investor behavior.

Item 1B.    Unresolved Staff Comments

There are no unresolved staff comments.

Item 2.    Properties

Item 2.     Properties

The following table is a listingeach respective entity or otherwise facilitate the business operations of the Company’s operating facilities:

Facility Address

Facility Square

Footage

Facility

Owned or

Leased

QCR Holdings, Inc.

3551 7th Street in Moline, IL (1)

30,000

Owned

QCBT

2118 Middle Road in Bettendorf, IA

6,700

Owned

4500 N Brady Street in Davenport, IA

36,000

Owned

5405 Utica Ridge Road in Davenport, IA

7,400

Leased

1700 Division Street in Davenport, IA

12,000

Owned

CRBT

500 1st Avenue NE, in Cedar Rapids, IA

48,000

Owned

5400 Council Street in Cedar Rapids, IA

5,900

Owned

422 Commercial Street in Waterloo, IA (2)

25,000

Owned

11 Tower Park Drive in Waterloo, IA (2)

6,000

Owned

312 W 1st Street in Cedar Falls, IA (2)

4,800

Owned

2711 Bever Ave SE, Cedar Rapids, IA (3)

2,200

Owned

191 Jacolyn Dr NW, Cedar Rapids, IA (3)

1,700

Owned

700 25th St, Marion, IA (3)

3,400

Owned

CSB

817 N Ankeny Boulevard, in Ankeny, IA

13,000

Owned

200 8th Street SE, in Altoona, IA

6,000

Owned

902 SE Oralabor Road, in Ankeny, IA

3,900

Owned

1640 SW White Birch Circle, in Ankeny, IA

15,700

Owned

3540 E 33rd Street, in Des Moines, IA

3,900

Owned

1401 E Euclid, in Des Moines, IA

4,500

Owned

6175 Merle Hay Road, in Johnston, IA

9,200

Owned

1025 N Hickory Boulevard, in Pleasant Hill, IA

4,500

Owned

4811 SE 14th Street, in Des Moines, IA

3,500

Owned

460 SE University Avenue, in Waukee, IA

6,000

Owned

RB&T

4571 Guilford Road in Rockford, IL

20,000

Owned

308 West State Street in Rockford, IL

1,100

Leased

m2

175 North Patrick Boulevard in Brookfield, WI

6,500

Leased

(1) This facility and its subsidiaries. Each such property is utilized as a branch of QCBT in additionleased or owned by the Company or its subsidiaries and no such property is subject to housing the holding company.

(2) Branches of Community Bank & Trust, a division of CRBT.any material encumbrance.

(3) Branches acquired in 2017 through the purchase of Guaranty Bank.

 

The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured,, and are adequately equipped for carrying on the business of the Company.

No individual real estate property amounts to 10% or more of consolidated assets.

Item 3.    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 4.    Mine Safety Disclosures

Not applicable.

 

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Part II

 

Part II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information.  The common stock, par value $1.00 per share, of the Company is listed on The Nasdaq Global Market under the symbol “QCRH”. The stock began trading on Nasdaq on October 6, 1993. The Company transferred its listing from the Nasdaq Capital Market to the Nasdaq Global Market on March 1, 2010. As of February 28, 2018,2020, there were 13,931,62815,867,838 shares of common stock outstanding held by 741725 holders of record. Additionally, there are an estimated 3,5483,500 beneficial holders whose stock was held in the street name by brokerage houses and other nominees as of that date. The following table sets forth the high and low sales prices of the common stock, as reported by Nasdaq for the periods indicated.

  

2017 Sales Price

  

2016 Sales Price

 
  

High

  

Low

  

High

  

Low

 
                 

First quarter

 $45.00  $40.65  $24.15  $18.05 

Second quarter

  49.80   40.45   28.74   22.96 

Third quarter

  50.00   39.85   32.19   26.41 

Fourth quarter

  49.70   41.50   44.80   30.31 

Dividends on Common Stock. Dividends paid on common stock during the years ending December 31, 2017 and 2016 are as follows:Stock.

Declaration Date

 

Amount Declared

Per Share

 

Record Date

 

Total Amount

Paid to

Stockholders

(in

thousands)

 

Date Paid

         

February 11, 2016

 $0.04 

March 18, 2016

 $471 

April 6, 2016

May 13, 2016

 $0.04 

June 17, 2016

 $521 

July 6, 2016

August 25, 2016

 $0.04 

September 16, 2016

 $521 

October 5, 2016

December 15, 2016

 $0.04 

December 23, 2016

 $522 

January 6, 2017

February 9, 2017

 $0.05 

March 17, 2017

 $657 

April 5, 2017

May 12, 2017

 $0.05 

June 16, 2017

 $657 

July 6, 2017

August 24, 2017

 $0.05 

September 15, 2017

 $658 

October 4, 2017

November 16, 2017

 $0.05 

December 15, 2017

 $693 

January 4, 2018

The Company is heavily dependent on dividend payments from its subsidiary banks to provide cash flow for the operations of the holding company and dividend payments on the Company’s common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Applicable Iowa and Illinois lawMissouri laws provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.

The Company’sCompany’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. See Appendix A “Supervision and Regulation” for additional information regarding regulatory restrictions on the payment of dividends.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debenturesdebt securities in public offerings and in private placements. Under the terms of the debentures,securities, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Annual Report on Form 10-K.10‑K. See Note 1617 to the Consolidated Financial Statements for additional information regarding dividend restrictions.

PurchasePurchase of Equity Securities by the Company. There were no purchases of common stock by the Company during the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017.

On February 18, 2020, the Company announced a share repurchase program, permitting the repurchase of up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission.  The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors.  The repurchase program does not obligate the Company to purchase any shares or any particular number of shares.

 

26

Table of Contents

Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 20122014 and ending December 31, 2017,2019, a comparison of cumulative total returns for the Company, the Nasdaq Composite Index, and the SNL Bank Nasdaq Index prepared by SNL Financial,S&P Global, Charlottesville, Virginia. The graph was prepared at the Company’s request by SNL Financial.S&P Global. The information assumes that $100 was invested at the closing price on December 31, 20122014 in the common stock of the Company and in each index, and that all dividends were reinvested.

Picture 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index

    

12/31/14

    

12/31/15

    

12/31/16

    

12/31/17

    

12/31/18

    

12/31/19

QCR Holdings, Inc.

 

100.00

 

136.48

 

244.60

 

243.15

 

183.16

 

251.96

Nasdaq Composite Index

 

100.00

 

106.96

 

116.45

 

150.96

 

146.67

 

200.49

SNL Bank Nasdaq Index

 

100.00

 

107.95

 

149.68

 

157.58

 

132.82

 

166.75

 

    

Period Ending

 

Index

 

12/31/12

  

12/31/13

  

12/31/14

  

12/31/15

  

12/31/16

  

12/31/17

 

QCR Holdings, Inc.

 100.00  129.43  136.35  186.08  333.50  331.53 

Nasdaq Composite Index

 100.00  140.12  160.78  171.97  187.22  242.71 

SNL Bank Nasdaq Index

 100.00  143.73  148.86  160.70  222.81  234.58 

 

27

29

Table of Contents

Item 6.    Selected Financial Data

The following “Selected Financial Data” of the Company is derived in part from, and should be read in conjunction with, our consolidated financial statementsConsolidated Financial Statements and the accompanying notes thereto. See Item 8. Financial Statements. Results for past periods are not necessarily indicative of results to be expected for any future period.

  

Years Ended December 31,

 
  

2017

  

2016

  

2015

  

2014

  

2013

 

 

 

(dollars in thousands, except per share data)

 
STATEMENT OF INCOME DATA                    

Interest income

 $135,517  $106,468  $90,003  $85,965  $81,872 

Interest expense

  19,452   11,951   13,707   16,894   17,767 

Net interest income

  116,065   94,517   76,296   69,071   64,105 

Provision for loan/lease losses

  8,470   7,478   6,871   6,807   5,930 

Non-interest income

  30,482   31,037   24,364   21,282   26,846 

Non-interest expense (1)

  97,424   81,486   73,192   65,554   65,465 

Income tax expense

  4,946   8,903   3,669   3,039   4,618 

Net income attributable to QCR Holdings, Inc.

  35,707   27,687   16,928   14,953   14,938 

Less: preferred stock dividends and discount accretion

  -   -   -   1,082   3,168 

Net income attributable to QCR Holdings, Inc. common stockholders

  35,707   27,687   16,928   13,871   11,770 
                     

PER COMMON SHARE DATA

                    

Net income - Basic (2)

 $2.68  $2.20  $1.64  $1.75  $2.13 

Net income - Diluted (2)

  2.61   2.17   1.61   1.72   2.08 

Cash dividends declared

  0.20   0.16   0.08   0.08   0.08 

Dividend payout ratio

  7.46

%

  7.27

%

  4.88

%

  4.57

%

  3.76

%

Closing stock price

 $42.85  $43.30  $24.29  $17.86  $17.03 
                     

BALANCE SHEET DATA

                    

Total assets

 $3,982,665  $3,301,944  $2,593,198  $2,524,958  $2,394,953 

Securities

  652,382   574,022   577,109   651,539   697,210 

Total loans/leases

  2,964,485   2,405,487   1,798,023   1,630,003   1,460,280 

Allowance

  34,356   30,757   26,141   23,074   21,448 

Deposits

  3,266,655   2,669,261   1,880,666   1,679,668   1,646,991 

Borrowings

  309,480   290,952   444,162   662,558   563,381 

Stockholders' equity:

                    

Preferred

  -   -   -   -   29,799 

Common

  353,287   286,041   225,886   144,079   117,778 
                     

KEY RATIOS

                    

ROAA (3)

  1.01

%

  0.97

%

  0.66

%

  0.61

%

  0.64

%

ROACE (2)

  11.51   10.56   8.79   10.49   11.48 

ROAE (3)

  11.51   10.56   8.79   10.48   10.24 

NIM, tax equivalent yield (Non-GAAP) (4) (6)

  3.78   3.75   3.37   3.15   3.03 

Efficiency ratio (Non-GAAP) (5) (6)

  66.48   64.90   72.71   72.55   71.98 

Loans/leases to assets

  74.43   72.85   69.34   64.56   60.97 

Loans/leases to deposits

  90.75   90.12   95.61   97.04   88.66 

NPAs to total assets

  0.81   0.82   0.74   1.31   1.28 

Allowance to total loans/leases

  1.16   1.28   1.45   1.42   1.47 

Allowance to NPLs

  184.28   144.85   223.33   114.78   104.70 

Net charge-offs to average loans/leases

  0.19   0.14   0.22   0.34   0.31 

Average total stockholders' equity to average total assets

  8.81   9.21   7.55   5.82   6.26 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

    

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(dollars in thousands, except per share data)

 

STATEMENT OF INCOME DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

216,076

 

$

182,879

 

$

135,517

 

$

106,468

 

$

90,003

 

Interest expense

 

 

60,517

 

 

40,484

 

 

19,452

 

 

11,951

 

 

13,707

 

Net interest income

 

 

155,559

 

 

142,395

 

 

116,065

 

 

94,517

 

 

76,296

 

Provision for loan/lease losses

 

 

7,066

 

 

12,658

 

 

8,470

 

 

7,478

 

 

6,871

 

Non-interest income

 

 

78,768

 

 

41,541

 

 

30,482

 

 

31,037

 

 

24,364

 

Non-interest expense (1)

 

 

155,234

 

 

119,143

 

 

97,424

 

 

81,486

 

 

73,192

 

Income tax expense

 

 

14,619

 

 

9,015

 

 

4,946

 

 

8,903

 

 

3,669

 

Net income

 

 

57,408

 

 

43,120

 

 

35,707

 

 

27,687

 

 

16,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Net income - Basic (2)

 

$

3.65

 

$

2.92

 

$

2.68

 

$

2.20

 

$

1.64

 

Net income - Diluted (2)

 

 

3.60

 

 

2.86

 

 

2.61

 

 

2.17

 

 

1.61

 

Cash dividends declared

 

 

0.24

 

 

0.24

 

 

0.20

 

 

0.16

 

 

0.08

 

Dividend payout ratio

 

 

6.58

%  

 

8.22

%  

 

7.46

%  

 

7.27

%  

 

4.88

%

Closing stock price

 

$

43.86

 

$

32.09

 

$

42.85

 

$

43.30

 

$

24.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Total assets

 

$

4,909,050

 

$

4,949,710

 

$

3,982,665

 

$

3,301,944

 

$

2,593,198

 

Securities

 

 

611,341

 

 

662,969

 

 

652,382

 

 

574,022

 

 

577,109

 

Total loans/leases

 

 

3,690,205

 

 

3,732,754

 

 

2,964,485

 

 

2,405,487

 

 

1,798,023

 

Allowance

 

 

36,001

 

 

39,847

 

 

34,356

 

 

30,757

 

 

26,141

 

Deposits

 

 

3,911,051

 

 

3,977,031

 

 

3,266,655

 

 

2,669,261

 

 

1,880,666

 

Borrowings

 

 

278,955

 

 

404,968

 

 

309,480

 

 

290,952

 

 

444,162

 

Stockholders' equity: common

 

 

535,351

 

 

473,138

 

 

353,287

 

 

286,041

 

 

225,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KEY RATIOS

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

ROAA (2)

 

 

1.12

%  

 

0.98

%  

 

1.01

%  

 

0.97

%  

 

0.66

%

ROACE (2)

 

 

11.31

 

 

10.62

 

 

11.51

 

 

10.56

 

 

8.79

 

ROAE (2)

 

 

11.31

 

 

10.62

 

 

11.51

 

 

10.56

 

 

8.79

 

Loans/leases to assets

 

 

75.36

 

 

75.41

 

 

74.43

 

 

72.85

 

 

69.34

 

Loans/leases to deposits

 

 

94.35

 

 

93.86

 

 

90.75

 

 

90.12

 

 

95.61

 

NPAs to total assets

 

 

0.27

 

 

0.56

 

 

0.81

 

 

0.82

 

 

0.74

 

Allowance to total loans/leases

 

 

0.98

 

 

1.07

 

 

1.16

 

 

1.28

 

 

1.45

 

Allowance to NPLs

 

 

403.87

 

 

214.79

 

 

184.28

 

 

144.85

 

 

223.33

 

Net charge-offs to average loans/leases

 

 

0.11

 

 

0.21

 

 

0.19

 

 

0.14

 

 

0.22

 

Average total stockholders' equity to average total assets

 

 

9.94

 

 

9.24

 

 

8.81

 

 

9.21

 

 

7.55

 

(1)

Non-interest expense includes several one-time expenses - most notably, $5.4$6.9 million, $3.9 million and $2.4$5.4 million of acquisition, disposition and post-acquisition compensation, transition and integration costs for 20172019, 2018 and 2016,2017, respectively. See Note 2 to the Consolidated Financial Statements for additional information regarding sales/mergers/acquisitions. In addition, $3.0 million of goodwill impairment expense is included in non-interest expense for 2019.  See Note 6 to the acquisition of Guaranty Bank and CSB.Consolidated Financial Statements for additional information.  Additionally, non-interest expense for 2016 and 2015, respectively, included $4.6 million and $7.2 million of losses on debt extinguishment related to the prepayment of certain borrowings.

(2)

Numerator is net income attributable to QCR Holdings, Inc. common stockholdersincome.

(3) Numerator is net income attributable to QCR Holdings, Inc.

(4) (3)

Interest earned and yields on nontaxable investments and nontaxable loans are determined on a tax equivalent basis using a 35% tax rate for years including and prior to December 31, 2017 and 21% for years after December 31, 2017.

(5)

(4)

Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest incomeincome.

(6)

(5)

See GAAP to Non-GAAP reconciliations.

28

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Table of Contents

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides additional information regardingThis section generally discusses 2019 and 2018 items and annual comparison between our operations fiscal 2019 performance compared to our fiscal 2018 performance.  A detailed review of our fiscal 2018 performance compared to our fiscal 2017 performance can be found in Part II, Item 7 of our Annual Report on Form 10-K for the years endingfiscal year ended December 31, 2017, 2016, 2018, under the caption “Management’s Discussion and 2015,Analysis of Financial Condition and our financial condition at December 31, 2017 and 2016.Results of Operations.”  This discussion should be read in conjunction with Part II, Item 6 hereof, “Selected Financial Data” and our consolidated financial statementsConsolidated Financial Statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.

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

GENERALGENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT.QCBT. Over the past twenty-fourtwenty-six years, the Company has grown to include three additionalfour banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2017,2019, the Company had $4.0$4.9 billion in consolidated assets, including $3.0$3.7 billion in total loans/leases, and $3.3$3.9 billion in deposits. The financial results of both Guaranty Bank and CSBacquired/merged entities for the periods since acquisitiontheir acquisition/merger are included in this report.

EXECUTIVE OVERVIEW

The Company reportedreported net income of $35.7$57.4 million for the year ended December 31, 2017,2019, and diluted EPS of $2.61.$3.60. For the same period in 2016,2018 the Company reported net income of $27.7$43.1 million and diluted EPS of $2.17. By comparison, for 2015, the Company reported net income of $16.9 million, and diluted EPS of $1.61.

$2.86.

The year ended December 31, 20172019 was highlighted by several significant items:

●

The successful acquisition·

Adjusted net income (non-GAAP) of Guaranty Bank (described in Note 2 to the Consolidated Financial Statements);$58.5 million, or $3.66 per diluted share;

●

Net interest income improvement of 23%·

NIM and NIM (TEY)(non-GAAP) at 3.31% and 3.45%, when comparing 2017 to 2016;respectively;

●

Organic deposit growth·

Noninterest income of 14.4%$78.8 million for the year;

●

Organic loan·

Completed the sale of the operations of RB&T, a wholly-owned subsidiary of the Company, to Heartland Financial USA, Inc.; and

·

Excluding RB&T assets and leaseliabilities sold:

·Deposit growth of 15.2%10.3% for the year;

●

Solid wealth management revenue·Loan and lease growth of 21%; and

●

Strong gains on the sale of government guaranteed portions of loans and swap fee income totaling $4.3 million10.9% for the year.year; and

·Nonperforming assets to total assets down to 0.27% at December 31, 2019 from 0.56% at December 31, 2018.

 

Following is a table that represents the various net income measurements for thethe years ended December 31, 2017, 2016,2019 and 2015.2018.

  Year Ended December 31, 
  

2017

  

2016

  

2015

 
             

Net income attributable to QCR Holdings, Inc. common stockholders

 $35,706,507  $27,686,787  $16,927,881 
             

Diluted EPS

 $2.61  $2.17  $1.61 
             

Weighted average common and common equivalent shares outstanding*

  13,680,472   12,766,003   10,499,841 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

 

2019

 

2018

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

Net income

$

57,408

 

$

43,120

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

3.60

 

$

2.86

 

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding

 

15,967,775

 

 

15,064,730

 

 

 

*The 2017 and 2016 increase in the weighted average common and common equivalent shares outstanding was primarily due to the common stock issued in connection with the acquisitions of CSB and Guaranty Bank discussed in Note 2 to the Consolidated Financial Statements.

 

29

31

Table of Contents

TheThe Company reported coreadjusted net income (non-GAAP) of $36.3$58.5 million, with adjusted diluted core EPS of $2.66.$3.66. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. CoreAdjusted net income for the year excludes a number of non-recurring items, most significantly $3.5 million of after-tax acquisition and post-acquisition related costs. See Note 13 to the Consolidated Financial Statements for additional information regarding the impact of Tax Act on deferred tax assets and income tax expense.significantly:

·

$8.5 million of after-tax gain on sale of assets and liabilities of RB&T;

·

$3.0 million of after-tax goodwill impairment expense;

·

$2.6 million of after-tax disposition costs; and

·

$2.8 million of after-tax post-acquisition compensation, transition and integration costs.

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

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

Year Ended December 31,

 

 

2019

    

2018

    

 

2017

  

2016

  

2015

 

 

(dollars are in thousands)

            

 

 

 

 

 

 

 

Net interest income

 $116,065,281  $94,516,777  $76,296,724 

 

$

155,559

 

$

142,395

 

Provision for loan/lease losses

  8,469,919   7,478,166   6,870,900 

Provision expense

 

 

7,066

 

 

12,658

 

Noninterest income

  30,482,292   31,036,875   24,363,321 

 

 

78,768

 

 

41,541

 

Noninterest expense

  97,424,697   81,485,912   73,192,022 

 

 

155,234

 

 

119,143

 

Federal and state income tax

  4,946,450   8,902,787   3,669,242 

Federal and state income tax expense

 

 

14,619

 

 

9,015

 

Net income

 $35,706,507  $27,686,787  $16,927,881 

 

$

57,408

 

$

43,120

 

 

TheThe following are some noteworthy developments in the Company’s financial results:

●·

Net interest income grew $21.5$13.2 million, or 23%9.2%, in 2017,2019 compared to the prior year. Net interest income for 2016 grew $18.2 million, or 24%, comparedThe increase in 2019 was primarily due to 2015.strong organic loan and lease growth and recent acquisitions.

●·

Provision increased $992 thousandexpense decreased $5.6 million when comparing 20172019 to 2016, while provision increased $607 thousand when comparing 20162018.  The decrease in 2019 was primarily attributable to 2015.continued asset quality improvements.

●·

Noninterest income decreased $555 thousand,increased $37.2 million, or 2%90%, when compared to the prior year.  NoninterestThe increase in 2019 was primarily attributable to higher swap fee income increased $6.7as well as a $12.3 million or 27%, when comparing 2016 to 2015, primarily due to $4.6 million of gainsgain on the sale of securities associated with a balance sheet restructuring strategy executed in 2016.substantially all of the assets and liabilities of RB&T.

●·

Noninterest expense increased $15.9$36.1 million, or 20%30.3%, in 2017,2019 compared to the prior year, including certain costs related to our recent acquisitions, including:due to:

○

Acquisition and post-acquisition compensation, transition and integration costs totaled $5.4 million and $2.4 million in 2017 and 2016, respectively. The increase primarily was due to legal and accounting costs with the acquisition of Guaranty Bank and IT integration and conversion costs associated with the acquisition of Guaranty Bank and CSB.

○

Professional and data processing fees increased $3.6 million in 2017, primarily due to the acquisitions of Guaranty Bank and CSB and increased legal fees.

○

Salaries and benefits increased $9.4 million with the addition of personnel with the Guaranty Bank and CSB acquisitions.

●

Noninterest expense increased $8.3 million, when comparing 2016 to 2015. Included in 2016 noninterest expense was $4.6 million of losses on debt extinguishment, net, as well as $2.4 million of acquisition and post-acquisition related costs

 

oDisposition costs of $3.3 million incurred in 2019 with no disposition costs in 2018;

oGoodwill impairment expense of $3.0 million incurred in 2019 with no impairment incurred in 2018; and

oSalaries and benefits increasing $23.1 million in light of bonuses and commissions being higher due to elevated swap fee income as well as the addition of personnel in connection with recent acquisitions.

LONG-TERM FINANCIAL GOALS

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

●

Improve balance sheet efficiency by maintaining·

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

 

32

●·

Improve profitability (measured by NIM and ROAA);

 

30

Table of Contents

●·

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

 

●

Maintain·

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

 

●

Grow noninterest bearing deposits to more than 30% of total assets;·

●

Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income to more than $4$8-12 million annually; and

 

●·

Grow wealth management segment net income by 10% annually.

.

The following table shows the evaluation of the Company’sCompany’s past long-term financial goals.

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ending

Goal

Key Metric

Target (2)

December 31, 2019

December 31, 2018

Balance sheet efficiency

Gross loans and leases to total assets

73% - 78%

 

75

%  

 

75

%  

 

NIM TEY (non-GAAP) (1)

> 3.35%

 

3.45

%  

 

3.62

%  

Profitability

ROAA

> 1.10%

 

1.12

%  

 

0.98

%  

 

Adjusted ROAA (non-GAAP) (1)

> 1.10%

 

1.15

%  

 

1.06

%  

Asset quality

NPAs to total assets

< 0.75%

 

0.27

%  

 

0.56

%  

 

Net charge-offs to average loans and leases

< 0.25% annually

 

0.11

%  

 

0.21

%  

Reliance on wholesale funding

Wholesale funding to total assets (3)

< 15%

 

 9

%  

 

14

%  

Consistent, high quality noninterest income revenue streams

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

$8-12 million annually

$

29 million

$

11.2 million

 

Grow wealth management net income

> 10% annually

 

21

%  

 

32

%  

 

 

 

 

For the Year Ending

   

 

 

   

December 31,

2017

December 31,

2016

GoalKey Metric (1)Target (2)

(dollars in thousands)

Balance sheet efficiency

Gross loans and leases to

total assets

73% - 78%

74%

73%

 

NIM TEY (non-GAAP)

> 3.85%

3.78%

3.75%

Profitability

ROAA

> 1.10%

1.01%

0.97%

 

Core ROAA (non-GAAP)

1.03%

1.03%

Asset quality

NPAs to total assets

< 0.75%

0.81%

0.82%

Net charge-offs to

average loans/leases

< 0.25% annually

0.19%

0.14%

Lower reliance on wholesale funding

Wholesale funding to total assets

< 15%

10%

11%

Funding mix

Noninterest bearing deposits

as a percentage of

total assets

> 30%

20%

24%

Consistent, high quality noninterest

income revenue streams

Gains on sales of

government guaranteed

portions of loans and swap

fee income

> $4 million annually

$4.3 million

$4.9 million

Grow wealth management

segment net income

> 10% annually

35%

1%

(1)  Non-GAAP calculations are provided, when applicable.

Refer to GAAP to non-GAAP reconciliation tableReconciliations for details.detail concerning non-GAAP financial measures.

(2)

Targets will be re-evaluated and adjusted as appropriate.

(3)

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

In 2020, the Company announced refreshed strategic financial metrics that it intends to measure, monitor and adhere to as follows:

·

Grow loans and leases organically by 9% per year, funded with core deposits;

33

·

Grow fee income by no less than 6% per year; and

Table of Contents

·

Improve operational efficiencies and hold noninterest expense growth to 5% per year.

 

STRATEGIC DEVELOPMENTS

The Company took the following actions in 2019 to support our corporate strategy and further the long-term financial goals shown above.

●

Organic loan·

Excluding the impact of RB&T loans/leases sold, loan and lease growth for the year was 15.2%10.9%. This exceededwas in the range of the Company’s target organic growth rate of 10-12%10‑12%. A portion of this growth was in the C&I category. As of December 31, 2017,2019, this segment of the portfolio accounted for 38%41% of total loans and leases. The Company has also grown CRE loans, with that segment now representing 44%47% of the portfolio as of December 31, 2017.2019. The strong organic loan and lease growth has continued to help movemaintain the loan and lease to total asset ratio upward to 74%, from 73% in the prior yearat 75% for both 2019 and 69% two years ago.2018. The Company has reached the targeted loan and lease to total asset ratio in the range of 73% - 78%. Going forward, the Company will strive to maintain the ratio in this range.

 

●

The Company intends to continue to participate in a prudent manner as an acquirer in the consolidation taking place in our markets to further boost ROAA and improve the Company’s efficiency ratio. In the fourth quarter of 2017,·

Excluding RB&T loans/leases sold, the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa. See Note 2 of the Consolidated Financial Statements for additional details.

●

The Company continuescontinues to focus on reducing the NPAs to total assets ratio.  The ratio of NPAs to total assets decreased slightly from 0.82%0.56% at December 31, 20162018 to 0.81%0.27% at December 31, 2017.2019. The Company remains committed to improving asset quality in 2018.2020.

 

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Table of Contents

●·

Management continuescontinues to focus on reducing the Company’s reliance on wholesale funding. The restructuring executedfunding and continues to prioritize core deposit growth through a variety of strategies including growth in 2016 (as described in Notes 10 and 11 of the Consolidated Financial Statements) further reduced the Company’s reliance on long-term wholesale funding. These prepayments, along with the addition of CSB and Guaranty Bank, which have very strong core funding bases with minimal wholesale borrowings, assisted in lowering the Company’s reliance on wholesale funding as a percentage of assets down to 10% as of December 31, 2017. Management will focus on growing core deposits as a means for funding loan and lease growth and maintaining a reliance on wholesale funding at less than 15% of total assets.correspondent banking.

 

●·

Correspondent banking continues 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 three states currently served – Iowa, Illinois and Wisconsin.Wisconsin – and to expand into Missouri.  The Company acts as the correspondent bank for 187193 downstream banks with total average noninterest bearing deposits of $260.9$170.4 million and total average interest bearing deposits of $236.5$326.7 million as of December 31, 2017.2019. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.

 

●

SBA and USDA lending is a specialty lending area on which the Company has focused. Once these loans are originated, the government-guaranteed portion of the loan can be sold to the secondary market for premiums. The Company aims to continue to make this a more consistent source of noninterest income.·

●

As a result of the historicallyrelatively low interest rate environment including a flat yield curve, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company.

 

●·

Wealth management is another core line of business for the Company and includes a full range of products, including trust services, brokerage and investment advisory services, asset management, estate planning and financial planning. As of December 31, 20172019, the Company had $2.6$3.2 billion of total financial assets in trust (and related)and related accounts and $971 million$1.7 billion of total financial assets in brokerage (and related)and related accounts. Continued growth in assets under management will help to drive trust and investment advisory fees. The Company offers trust and investment advisory services to the correspondent banks that it serves. As management focuses on growing fee income, expanding market share will continue to be a primary strategy.strategy both through organic growth as well as the acquisition of managed assets.  In 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois. The acquisition has enhanced the wealth management services of the Company.

GAAP TO NON-GAAP RECONCILIATIONS

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

●·

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

●

Core·

Adjusted net income, core net income attributable to QCR Holdings, Inc. common stockholders, coreadjusted EPS and coreadjusted ROAA (all non-GAAP measures) are reconciled to net incomeincome;

●·

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

●·

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

The TCE/TA non-GAAP ratio has been a focus for our 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 table below also includes several “core” non-GAAP measurements of financial performance. The Company'sCompany’s management believes that these measuresadjusted net income, adjusted EPS and adjusted ROAA are important to investors as they exclude non-recurring income and expense items; therefore,items.  Therefore, they provide a betterhelpful comparison for analysis and may provide a better indicator of future results.

NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain 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 a great deal, making comparisons difficult.

The efficiency ratio is a ratio that management utilizes to compare the Company to peers. Both are alsoIt is standard in the banking industry and widely utilized by investors.

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Table of Contents

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

 

 

 

 

 

 

 

 

 

December 31,

  

December 31,

 

 

As of

 

GAAP TO NON-GAAP RECONCILIATIONS

 

2017

  

2016

 

GAAP TO NON-GAAP

    

December 31, 

    

December 31, 

 

RECONCILIATIONS

 

2019

 

2018

 

 

(dollars in thousands, except per share data)

 

 

(dollars in thousands, except per share data)

 

TCE/TA RATIO

        

 

 

  

 

 

  

 

        

Stockholders' equity (GAAP)

 $353,287  $286,041 

 

$

535,351

 

$

473,138

 

Less: Intangible assets

  37,413   22,522 

 

 

89,718

 

 

95,282

 

TCE (non-GAAP)

 $315,874  $263,519 

 

$

445,633

 

$

377,856

 

        

 

 

 

 

 

 

 

Total assets (GAAP)

 $3,982,665  $3,301,944 

 

$

4,909,050

 

$

4,949,710

 

Less: Intangible assets

  37,413   22,522 

 

 

89,718

 

 

95,282

 

TA (non-GAAP)

 $3,945,252  $3,279,422 

 

$

4,819,332

 

$

4,854,428

 

        

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

  8.01%  8.04%

 

 

9.25

%  

 

7.78

%

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended

 

 

December 31, 

    

December 31, 

    

 

    

2019

    

2018

    

 

 

 

 

 

 

 

 

ADJUSTED NET INCOME

 

 

 

 

 

 

 

Net income (GAAP)

 

$

57,408

 

$

43,120

 

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

 

 

  

 

 

  

 

Income:

 

 

  

 

 

  

 

   Securities losses, net

 

$

(22)

 

$

 —

 

   Gain on sale of assets and liabilities of subsidiary

 

 

8,539

 

 

 —

 

Total nonrecurring income (non-GAAP)

 

$

8,517

 

$

 —

 

Expense:

 

 

  

 

 

  

 

     Losses on debt extinguishment

 

$

345

 

$

 —

 

     Goodwill impairment

 

 

3,000

 

 

 —

 

     Disposition costs

 

 

2,627

 

 

 —

 

Acquisition costs

 

 

 —

 

 

1,645

 

Tax expense on expected liquidation of RB&T BOLI

 

 

790

 

 

 —

 

Post-acquisition compensation, transition and integration costs

 

 

2,828

 

 

1,647

 

Total nonrecurring expense (non-GAAP)

 

$

9,590

 

$

3,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

58,481

 

$

46,412

 

 

 

 

 

 

 

 

 

ADJUSTED EPS

 

 

  

 

 

  

 

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

 

$

58,481

 

$

46,412

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,730,016

 

 

14,768,687

 

Weighted average common and common equivalent shares outstanding

 

 

15,967,775

 

 

15,064,730

 

 

 

 

 

 

 

 

 

Adjusted EPS (non-GAAP):

 

 

  

 

 

  

 

Basic

 

$

3.72

 

$

3.14

 

Diluted

 

$

3.66

 

$

3.08

 

 

 

 

 

 

 

 

 

ADJUSTED ROAA

 

 

  

 

 

  

 

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

 

$

58,481

 

$

46,412

 

 

 

 

 

 

 

 

 

Average Assets

 

$

5,102,980

 

$

4,392,121

 

 

 

 

 

 

 

 

 

Adjusted ROAA (annualized) (non-GAAP)

 

 

1.15

%  

 

1.06

%  

 

 

 

 

 

 

 

 

ADJUSTED NIM (TEY)*

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

155,559

 

$

142,395

 

Plus: Tax equivalent adjustment

 

 

6,727

 

 

6,637

 

Net interest income - tax equivalent (non-GAAP)

 

$

162,286

 

$

149,032

 

    Less: Accquisition accounting net accretion

 

 

4,344

 

 

5,527

 

Adjusted net interest income

 

$

157,942

 

$

143,505

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

4,703,289

 

$

4,120,144

 

 

 

 

 

 

 

 

 

NIM (GAAP)

 

 

3.31

%  

 

3.46

%  

NIM (TEY) (non-GAAP)

 

 

3.45

%  

 

3.62

%  

Adjusted NIM (TEY) (non-GAAP)

 

 

3.36

%

 

3.48

%

 

 

 

 

 

 

 

 

EFFICIENCY RATIO

 

 

  

 

 

  

 

Noninterest expense (GAAP)

 

$

155,234

 

$

119,143

 

 

 

 

 

 

 

 

 

Net interest income (GAAP)

 

$

155,559

 

$

142,395

 

Noninterest income (GAAP)

 

 

78,768

 

 

41,541

 

Total income

 

$

234,327

 

$

183,936

 

 

 

 

 

 

 

 

 

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

 

 

66.25

%  

 

64.77

%  

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

35

33

Table of Contents

  

For the Year Ended

 
  

December 31,

  

December 31,

  

December 31,

 

CORE NET INCOME

 

2017

  

2016

  

2015

 
             

Net income (GAAP)

 $35,707  $27,687  $16,928 
             

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

            

Income:

            

Securities gains

 $(57) $2,985  $519 

Lawsuit award

  -   -   252 

Total nonrecurring income (loss) (non-GAAP)

 $(57) $2,985  $771 
             

Expense:

            

Losses on debt extinguishment

 $-  $2,975  $4,671 

Acquisition costs

  695   1,086   - 

Post-acquisition compensation, transition and integration costs

  2,802   677   - 

Accrual adjustments

  -   -   (487)

Other non-recurring expenses

  -   -   513 

Total nonrecurring expense (non-GAAP)

 $3,497  $4,738  $4,697 
             

Adjustment of tax expense related to the Tax Act

 $2,919  $-  $- 
             

Core net income attributable to QCR Holdings, Inc. common stockholders (non-GAAP)

 $36,342  $29,440  $20,854 
             

CORE EARNINGS PER COMMON SHARE

            
             

Core net income attributable to QCR Holdings, Inc. common stockholders (non-GAAP) (from above)

 $36,342  $29,440  $20,854 
             

Weighted average common shares outstanding

  13,325,128   12,570,767   10,345,286 

Weighted average common and common equivalent shares outstanding

  13,680,472   12,766,003   10,499,841 
             

Core EPS (non-GAAP):

            

Basic

 $2.73  $2.34  $2.02 

Diluted

 $2.66  $2.31  $1.99 
             

CORE ROAA

            
             

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

 $36,342  $29,440  $20,854 
             

Average Assets

 $3,519,848  $2,846,699  $2,549,921 
             

Core ROAA (non-GAAP)

  1.03%  1.03%  0.82%

  

For the Year Ended

 
  

December 31,

  

December 31,

  

December 31,

 

GAAP TO NON-GAAP RECONCILIATIONS (CONTINUED)

 

2017

  

2016

  

2015

 
  

(dollars in thousands)

 

NIM (TEY)

            
             

Net interest income (GAAP)

 $116,065  $94,517  $76,296 
             

Plus: Tax equivalent adjustment

  9,215   6,021   4,881 
             

Net interest income - tax equivalent (Non-GAAP)

 $125,280  $100,538  $81,177 
             

Average earning assets

 $3,314,836  $2,678,359  $2,406,213 
             

NIM (GAAP)

  3.50%  3.53%  3.17%

NIM (TEY) (Non-GAAP)

  3.78%  3.75%  3.37%
             

EFFICIENCY RATIO

            
             

Noninterest expense (GAAP)

 $97,424  $81,486  $73,192 
             

Net interest income (GAAP)

 $116,065  $94,517  $76,296 

Noninterest income (GAAP)

  30,482   31,037   24,363 

Total income

 $146,547  $125,554  $100,659 
             

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

  66.48%  64.90%  72.71%

*Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 35%.

NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS) (Non-GAAP)

Net interest income, on a tax equivalent basis, grew $24.7increased 9% to $162.3 million or 25%, in 2017.for the year ended December 31, 2019, as compared to the prior year. Excluding the tax equivalent adjustments, net interest income increased 9% for the year ended December 31, 2019 compared to the prior year. Net interest income improved due to several factors:

●·

The acquisitionmerger with Springfield Bancshares in the third quarter of CSB, whose strong net interest margin has significantly contributed to the Company’s results;2018; and

●

Organic·

Strong organic loan and leasedeposit growth was strong throughoutover the year. Average gross loans/leases grew 28% in 2017 (including the acquisition of Guaranty Bank); andpast 12 months.

●

The Company’s strategy to grow the Company’s portfolio of tax exempt municipal securities. This has contributed to the 24 basis point increase in the investment securities yield in 2017.

A comparison of yields, spreadsspread and margins from 2016 to 2017 shows the following (onmargin on a tax equivalent basis):and GAAP basis is as follows:

●

The average yield on interest-earning assets increased 17 basis points from 4.20% to 4.37%.

●

The average cost of interest-bearing liabilities increased 16 basis points from 0.65% to 0.81%.

●

The net interest spread improved 1 basis point from 3.55% to 3.56%.

●

The NIM improved 3 basis points from 3.75% to 3.78%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Equivalent Basis

 

GAAP

 

 

For the Year Ended

 

For the Year Ended

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

 

 

2019

    

 

2018

    

 

2019

    

 

2018

    

 

Average Yield on Interest-Earning Assets

 

4.74

%  

 

4.60

%  

 

4.46

%  

 

4.44

%  

 

Average Cost of Interest-Bearing Liabilities

 

1.66

%  

 

1.29

%  

 

1.44

%  

 

1.29

%  

 

Net Interest Spread

 

3.08

%  

 

3.31

%  

 

3.02

%  

 

3.15

%  

 

NIM

 

3.45

%  

 

3.62

%  

 

3.31

%  

 

3.46

%  

 

NIM Excluding Acquisition Accounting Net Accretion

 

3.36

%  

 

3.48

%  

 

3.28

%  

 

3.32

%  

 

 

NetAcquisition 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 Year Ended

 

 

December 31,

 

 

December 31,

 

 

    

2019

    

 

2018

    

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Acquisition Accounting Net Accretion in NIM

$

4,344

 

$

5,527

 

NIM on a tax equivalent basis grew $19.4 million, or 24%,was down 17 basis points on a linked-year basis.  Excluding acquisition accounting net accretion, NIM was down 12 basis points on a linked-year basis.  The decrease in 2016 comparedNIM during the year was due to 2015. Neta 14 basis point increase in the yield on interest earning assets offset by a 37 basis point increase in the total cost of funds (due to both mix and rate).

Historically, the Company has had an interest rate risk profile of liability sensitivity, meaning the interest-bearing liabilities reprice faster and farther than interest-earning assets.  Thus, in rising rate enviroments, the Company may have less growth in net interest income improved dueand may experience NIM compression.  Alternatively, in falling rate environments, the Company may grow more net interest income and may experience NIM expansion.  During 2018 and the first half of 2019, there was a rising rate environment and the Company experienced NIM compression.  For the second half of 2019, the interest rate environment turned to several factors:a falling rate environment, and the Company experienced NIM expansion.

●

The acquisition of CSB resulted in an additional $10.2In an effort to shift its interest rate risk position closer to neutral, the Company purchased interest rate caps on $375 million for the period ending December 31, 2016;

●

The Company’s strategy to redeploy funds from the taxable securities portfolio into higher yielding loans and leases;

●

Organic loan and lease growth was strong throughout the year. Average gross loans/leases grew 19.6% in 2016 (including the acquisition of CSB); and

●

Continued balance sheet restructuring, as further described in Notes 10 and 11 to the Consolidated Financial Statements.

A comparison of yields, spreadsvariable rate deposits and marginsshort-term fixed rate brokered CDs.  See Note 7 of the Company’s Consolidated Financial Statements for details on the interest rate caps purchased.  The result shifted the Company’s interest rate risk position from 2015liability sensitive to 2016 showsmodestly asset sensitive.  The Company is now better positioned to withstand shifts in interest rates including both rising and falling rates as well as other shapes of the following (on a tax equivalent basis):

●

The average yield on interest-earning assets increased 26 basis points from 3.94% to 4.20%.

●

The average cost of interest-bearing liabilities decreased 16 basis points from 0.81% to 0.65%.

●

The net interest spread improved 42 basis points from 3.13% to 3.55%.

●

The NIM improved 38 basis points from 3.37% to 3.75%.

yield curve.  Refer to Item 7A for further discussion on the Company’s interest rate risk position.

The Company’sCompany's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company’sCompany's subsidiary banks and leasing company is focusing on quality growth in conjunction with  the improvement of their net interest margins.NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies.strategies which included better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate increases and finding additional ways to manage cost of funds through derivatives.

The improvement in NIM in 2017 and 2016 was partially the result of the acquisition of CSB. CSB’s margin will fluctuate based on the amortization and accretion of purchase accounting adjustments, most notably the discount on the acquired loan portfolio. This benefit can fluctuate based on prepayments of both PCI and performing loans. As loans prepay, the associated discount/premium is accelerated.

The Company continues to place an emphasis on shifting its balance sheet mix. With a stated goal of maintaining loans/leases as a percentage of assets in a range of 73%-78%, the Company funded its loan/lease growth with a mixture of core deposits and cash from the investment securities portfolio. Cash from called securities and the targeted sales of securities was redeployed into the loan portfolio, resulting in a significant increase in yield, while minimizing any extension of duration. Additionally, the Company recognized net gains on these sales due to the previous rate environment. As rates rise, the Company should also have less market volatility in the investment securities portfolio, as this becomes a smaller portion of the balance sheet.

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There still exists some higher cost legacy borrowings and the Company continues to monitor and evaluate both prepayment and debt restructuring opportunities as executing on such a strategy could potentially increase NIM at a much quicker pace than holding the debt until maturity.

The Company’sCompany’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

 

2019

 

2018

 

2017

 

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

 

 

Interest

 

Average

 

 

Average

 

Earned

 

Yield or

 

Average

 

Earned

 

Yield or

 

Average

 

Earned

 

Yield or

 

 

Balance

    

or Paid

    

Cost

    

Balance

    

or Paid

    

Cost

    

Balance

    

or Paid

    

Cost

 

 

(dollars in thousands)

 

ASSETS

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest earning assets:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Federal funds sold

$

8,898

 

$

203

 

 

2.29

%  

$

20,472

 

$

338

 

1.65

%  

$

17,577

 

$

149

 

0.85

%

Interest-bearing deposits at financial institutions

 

179,635

 

 

3,910

 

 

2.18

 

 

66,275

 

 

1,267

 

1.91

 

 

78,842

 

 

874

 

1.11

 

Investment securities (1)

 

635,650

 

 

24,151

 

 

3.80

 

 

659,017

 

 

23,621

 

3.58

 

 

590,761

 

 

22,460

 

3.80

 

Restricted investment securities

 

21,559

 

 

1,174

 

 

5.45

 

 

22,023

 

 

1,093

 

4.96

 

 

15,768

 

 

631

 

4.00

 

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

 

3,857,547

 

 

193,365

 

 

5.01

 

 

3,352,357

 

 

163,197

 

4.87

 

 

2,611,888

 

 

120,618

 

4.62

 

Total interest earning assets

$

4,703,289

 

 

222,803

 

 

4.74

 

$

4,120,144

 

 

189,516

 

4.60

 

$

3,314,836

 

 

144,732

 

4.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Cash and due from banks

$

81,645

 

 

 

 

 

 

 

$

72,920

 

 

 

 

 

 

$

67,559

 

 

 

 

 

 

Premises and equipment

 

78,189

 

 

 

 

 

 

 

 

68,602

 

 

 

 

 

 

 

62,719

 

 

 

 

 

 

Less allowance

 

(40,953)

 

 

 

 

 

 

 

 

(38,200)

 

 

 

 

 

 

 

(33,193)

 

 

 

 

 

 

Other

 

280,810

 

 

 

 

 

 

 

 

168,655

 

 

 

 

 

 

 

107,927

 

 

 

 

 

 

Total assets

$

5,102,980

 

 

 

 

 

 

 

$

4,392,121

 

 

 

 

 

 

$

3,519,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing liabilities:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing deposits

$

2,443,989

 

 

29,898

 

 

1.22

%  

$

2,043,314

 

 

18,651

 

0.91

%  

$

1,622,723

 

 

7,992

 

0.49

%

Time deposits

 

966,745

 

 

20,977

 

 

2.17

 

 

766,020

 

 

12,024

 

1.57

 

 

528,834

 

 

5,020

 

0.95

 

Short-term borrowings

 

16,837

 

 

363

 

 

2.16

 

 

19,458

 

 

293

 

1.51

 

 

22,596

 

 

114

 

0.50

 

FHLB advances

 

108,536

 

 

2,895

 

 

2.67

 

 

202,715

 

 

4,768

 

2.35

 

 

120,206

 

 

1,981

 

1.65

 

Other borrowings

 

13,563

 

 

512

 

 

3.77

 

 

69,623

 

 

2,749

 

3.95

 

 

73,394

 

 

2,879

 

3.92

 

Subordinated notes

 

60,883

 

 

3,564

 

 

5.85

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

Junior subordinated debentures

 

37,751

 

 

2,308

 

 

6.11

 

 

37,578

 

 

1,999

 

5.32

 

 

34,030

 

 

1,466

 

4.31

 

Total interest-bearing liabilities

$

3,648,304

 

 

60,517

 

 

1.66

 

$

3,138,708

 

 

40,484

 

1.29

 

$

2,401,783

 

 

19,452

 

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

$

817,473

 

 

 

 

 

 

 

$

792,885

 

 

 

 

 

 

$

765,019

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

129,794

 

 

 

 

 

 

 

 

54,555

 

 

 

 

 

 

 

42,836

 

 

 

 

 

 

Total liabilities

$

4,595,571

 

 

 

 

 

 

 

$

3,986,148

 

 

 

 

 

 

$

3,209,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

507,409

 

 

 

 

 

 

 

 

405,973

 

 

 

 

 

 

 

310,210

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

5,102,980

 

 

 

 

 

 

 

$

4,392,121

 

 

 

 

 

 

$

3,519,848

 

 

 

 

 

 

Net interest income

 

 

 

$

162,286

 

 

 

 

 

 

 

$

149,032

 

 

 

 

 

 

$

125,280

 

 

 

Net interest spread

 

 

 

 

 

 

 

3.08

%  

 

 

 

 

 

 

3.31

%  

 

 

 

 

 

 

3.56

%

Net interest margin

 

 

 

 

 

 

 

3.31

%  

 

 

 

 

 

 

3.46

%  

 

 

 

 

  

 

3.50

%

Net interest margin (TEY)(Non-GAAP)

 

 

 

 

 

 

 

3.45

%  

 

 

 

 

 

 

3.62

%  

 

 

 

 

  

 

3.78

%

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

 

 

 

 

 

 

 

3.36

%

 

 

 

 

 

 

3.48

%

 

 

 

 

 

 

3.64

%

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

 

128.92

%  

 

 

 

 

 

 

 

131.27

%  

 

 

 

 

 

 

138.02

%  

 

  

 

  

 

 

  Years Ended December 31, 
  

2017

  

2016

  

2015

 
      

Interest

  

Average

      

Interest

  

Average

      

Interest

  

Average

 
  

Average

  

Earned

  

Yield or

  

Average

  

Earned

  

Yield or

  

Average

  

Earned

  

Yield or

 
  

Balance

  

or Paid

  

Cost

  

Balance

  

or Paid

  

Cost

  

Balance

  

or Paid

  

Cost

 
  

(dollars in thousands)

 

ASSETS

                                    

Interest earning assets:

                                    

Federal funds sold

 $17,577  $149   0.85

%

 $15,142  $45   0.30

%

 $17,418  $25   0.14

%

Interest-bearing deposits at financial institutions

  78,842   874   1.11   70,757   393   0.56   66,897   304   0.45 

Investment securities (1) 

  590,761   22,460   3.80   535,912   19,054   3.56   599,648   18,380   3.07 

Restricted investment securities

  15,768   631   4.00   13,993   522   3.73   14,727   504   3.42 

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

  2,611,888   120,618   4.62   2,042,555   92,475   4.53   1,707,523   75,671   4.43 

Total interest earning assets

 $3,314,836   144,732   4.37  $2,678,359   112,489   4.20  $2,406,213   94,884   3.94 
                                     

Noninterest-earning assets:

                                    

Cash and due from banks

 $67,559          $53,650          $45,178         

Premises and equipment, net

  62,719           44,773           38,162         

Less allowance for estimated losses on loans/leases

  (33,193)          (28,686)          (25,027)        

Other

  107,927           98,603           85,395         

Total assets

 $3,519,848          $2,846,699          $2,549,921         
                                     

LIABILITIES AND STOCKHOLDERS' EQUITY

                                    

Interest-bearing liabilities:

                                    

Interest-bearing demand deposits

 $1,622,723   7,992   0.49

%

 $1,092,687   3,843   0.35

%

 $821,043   1,836   0.22

%

Time deposits

  528,834   5,020   0.95   436,070   2,175   0.50   388,691   2,660   0.68 

Short-term borrowings

  22,596   114   0.50   50,899   94   0.18   151,141   210   0.14 

Federal Home Loan Bank advances

  120,206   1,981   1.65   114,797   1,284   1.12   154,268   3,511   2.28 

Other borrowings

  73,394   2,879   3.92   98,105   3,318   3.38   126,902   4,234   3.34 

Junior subordinated debentures

  34,030   1,466   4.31   33,735   1,237   3.67   40,364   1,256   3.11 

Total interest-bearing liabilities

 $2,401,783   19,452   0.81  $1,826,293   11,951   0.65  $1,682,409   13,707   0.81 
                                     

Noninterest-bearing demand deposits

 $765,019          $714,867          $641,848         

Other noninterest-bearing liabilities

  42,836           43,464           33,175         

Total liabilities 

 $3,209,638          $2,584,624          $2,357,432         
                                     

Stockholders' equity

  310,210           262,075           192,489         

Total liabilities and stockholders' equity

 $3,519,848          $2,846,699          $2,549,921         
                                     

Net interest income

     $125,280          $100,538          $81,177     

Net interest spread

          3.56%          3.55%          3.13%

Net interest margin

          3.50%          3.53%          3.17%

Net interest margin (TEY)(Non-GAAP)

          3.78%          3.75%          3.37%

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

  138.02%          146.66%          143.02%        

(1)

Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 35%21% tax rate in each year presented.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.

 

35

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Table of Contents

The Company’sCompany’s components of change in net interest income are presented in the following table:

  

For the years ended December 31, 2017, 2016 and 2015

 
                         
  

Inc./(Dec.)

  

Components

  

Inc./(Dec.)

  

Components

 
  

from

  

of Change (1)

  

from

  

of Change (1)

 
  

Prior Year

  

Rate

  

Volume

  

Prior Year

  

Rate

  

Volume

 
  

2017 vs. 2016

  

2016 vs. 2015

 
  

(dollars in thousands)

  

(dollars in thousands)

 

INTEREST INCOME

                        

Federal funds sold

 $104  $96  $8  $20  $23  $(3)

Interest-bearing deposits at other financial institutions

  481   431   50   89   70   19 

Investment securities (2)

  3,406   1,376   2,030   674   2,753   (2,079)

Restricted investment securities

  109   40   69   18   44   (26)

Gross loans/leases receivable (2) (3)

  28,143   1,886   26,257   16,804   1,669   15,135 
                         

Total change in interest income

 $32,243  $3,829  $28,414  $17,605  $4,559  $13,046 
                         

INTEREST EXPENSE

                        

Interest-bearing demand deposits

 $4,149  $1,876  $2,273  $2,007  $1,273  $734 

Time deposits

  2,845   2,302   543   (485)  (782)  297 

Short-term borrowings

  20   94   (74)  (116)  54   (170)

Federal Home Loan Bank advances

  697   634   63   (2,227)  (1,482)  (745)

Other borrowings

  (439)  478   (917)  (916)  58   (974)

Junior subordinated debentures

  229   218   11   (19)  205   (224)
                         

Total change in interest expense

 $7,501  $5,602  $1,899  $(1,756) $(674) $(1,082)
                         

Total change in net interest income

 $24,742  $(1,773) $26,515  $19,361  $5,233  $14,128 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31, 2019 and 2018

 

 

Inc./(Dec.)

 

Components

 

 

 

from

 

of Change (1)

 

 

 

Prior Year

    

Rate

    

Volume

    

 

 

2019 vs. 2018

 

 

 

(dollars in thousands)

 

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

Federal funds sold

 

$

(134)

 

$

101

 

$

(235)

 

Interest-bearing deposits at financial institutions

 

 

2,643

 

 

199

 

 

2,444

 

Investment securities (2)

 

 

529

 

 

1,386

 

 

(857)

 

Restricted investment securities

 

 

81

 

 

104

 

 

(23)

 

Gross loans/leases receivable (2) (3)

 

 

30,168

 

 

4,965

 

 

25,203

 

Total change in interest income

 

$

33,287

 

$

6,755

 

$

26,532

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

Interest-bearing deposits

 

$

11,247

 

$

7,135

 

$

4,112

 

Time deposits

 

 

8,953

 

 

5,312

 

 

3,641

 

Short-term borrowings

 

 

70

 

 

113

 

 

(43)

 

Federal Home Loan Bank advances

 

 

(1,873)

 

 

573

 

 

(2,446)

 

Other borrowings

 

 

(2,237)

 

 

(116)

 

 

(2,121)

 

Subordinated notes

 

 

3,564

 

 

 —

 

 

3,564

 

Junior subordinated debentures

 

 

309

 

 

 —

 

 

309

 

Total change in interest expense

 

$

20,033

 

$

13,017

 

$

7,016

 

 

 

 

 

 

 

 

 

 

 

 

Total change in net interest income

 

$

13,254

 

$

(6,262)

 

$

19,516

 

(1)

The column "Inc/(Dec) from Prior Year" 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 loans are determined on a tax equivalent basis using a 35%21% tax rate in each year presented.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’sCompany’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, 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’sCompany’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.

CRITICALCRITICAL ACCOUNTING POLICIES

The Company’sCompany’s financial statements are prepared in accordance with accounting principles generally accepted in the United StatesU.S. of America. 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.

ALLOWANCE FOR LOAN AND LEASE LOSSES

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

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 relatedwould more likely than not reduce the fair value of a reporting unit below its carrying amount.

The initial recognition of goodwill and subsequent impairment analysis requires us to make subjective judgments concerning estimates of how the allowance.acquired assets will perform in the future using valuation methods, which may include using the current market price of stock or discounted cash flow analyses. Additionally, estimated cash flows may extend beyond five years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may

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significantly affect the estimates include, among others, competitive forces, customer behaviors, changes in revenue growth trends, cost structures, technology, changes in discount rates and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.

In assessing the fair value of reporting units, we may consider the stage of the current business cycle and potential changes in market conditions. We may also utilize other information to validate the reasonableness of our valuations, including public market comparables and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on tangible capital ratios of comparable companies and business segments. These multiples may be adjusted to consider competitive differences, including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the capital required to support the reporting unit’s activities, including its tangible and intangible assets. The determination of a reporting unit’s capital allocation requires judgment and considers many factors, including the regulatory capital regulations and capital characteristics of comparably situated companies in relevant industry sectors. In certain circumstances, the Company will engage a third-party to independently validate our assessment of the fair value of our reporting units.

 

The Company assesses the impairment of goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following:

·

Significant under-performance relative to expected historical or projected future operating results;

·

Significant changes in the manner of use of the acquired asets or the strategy for the overall business;

·

Significant negative industry or economic trends;

·

Significant decline in the market price for our common stock over a sustained period; or

·

Market capitalization relative to net book value.

’sThe Company engaged an external specialist to assess the goodwill at the reporting unit level for the banks in 2019. As of November 30, 2019, the Company’s management performed an internal assessment of the goodwill for the Bates Companies reporting unit.  As the Bates Companies is located in Rockford, Illinois, the Company had intended to achieve synergies and cross-selling opportunities that significantly enhanced the value of the Bates Companies.  With the sale of the assets and liabilities of RB&T, which was the Company’s bank subsidiary located in Rockford, Illinois, the Company’s valuation analysis determined the value had declined and the goodwill was impaired.  Specifically, the Company determined a goodwill impairment charge of $3 million was required for the Bates Companies.  The Company used a combination of methods to determine the value and related goodwill impairment charge.  The methods included prices of comparable businesses as well as recent discussions with existing wealth management providers in the surrounding Rockford market. 

The Company conducted an internal assessment of the goodwill, both collectively and at its subsidiaries in 2018 and determined no goodwill impairement charges were required.

ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.

Qualitative factors include the general economic environment in the Company’sCompany’s markets, including economic conditions both locally and nationally, and in particular the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly.

Management may report a materially different amount for the provision in the statement of operations to change the allowance if its assessment of the above factors were different. The discussion regarding the Company’sCompany’s allowance should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this

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Annual Report on Form 10-K,10‑K, as well as the portion of this MD&A section entitled “Financial Condition – Allowance for Estimated Losses on Loans/Leases.”

Although management believesbelieves the level of the allowance as of December 31, 20172019 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, 2019 and 20152018

INTEREST INCOMEINTEREST INCOME

For 2017,2019, interest income grew $29.0$33.3 million, or 27%18%. In total, the Company’s average interest-earning assets increased $636.5$583.1 million, or 14%, year-over-year. Average loans/leases grew 15%, while average securities decreased 3%.

For 2018, interest income grew $47.4 million, or 35%. In total, the Company’s average interest-earning assets increased $805.3 million, or 24%, year-over-year. Average loans/leases grew 28%, while average securities grew 10%12%. The acquisition of CSBGuaranty Bank occurred in the thirdfourth quarter of 2016,2017, therefore 20172018 was the first full year that CSBGuaranty Bank was included in the Company’s financial results. The acquisition of GuarantySFC Bank in the fourththird quarter of 2017contributed to the increase in interest income and average interest-earning assets.

For 2016, interest income grew $16.5 million, or 18%. In total, the Company’s average interest-earning assets increased $272.1 million, or 11%, year-over-year. Average loans/leases grew 20%, while average securities declined 11%. This shift was part of the Company’s strategy to shift the mix of earning assets from lower yielding securities to higher yielding loans/leases. The acquisition of CSB2018 also contributed to the increase in interest income and average interest-earning assets.

Additionally,In 2019, the Company continued to diversify its securities portfolio, includingincluding by increasing its portfolio of tax exempt municipal securities. The large majority of these securities are privately placed debt issuances by municipalities located in the Midwest and require a thorough underwriting process before investment. Execution of this strategy has led to increased interest income on a tax equivalent basis over the past several years. Management understands that this strategy has extended the duration of its securities portfolio and continually evaluates the combined benefit of increased interest income and reduced effective income tax rate and the impact on interest rate risk.

The Company intends to continue to grow quality loans and leases as well as diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.

INTEREST EXPENSEINTEREST EXPENSE

Comparing 20172019 to 2016,2018, interest expense increased $7.5$20.0 million, or 63%49%, year-over-year. Average interest-bearing liabilities increased 32%16% in 2017.2019. The acquisition of CSBSFC Bank occurred in the third quarter of 2016, therefore 20172018. Therefore 2019 was the first full year that CSBSFC Bank was included in the Company’s financial resultsresults. The Company has grown organically at a significant pace over the past several years. Loan growth has been funded in larger part by bigger depositor relationships with higher rate sensitivity, many of which contributedhave pricing tied to a certain index.  As a result, the increase incost of these funds is higher than the rest of the Company’s core deposit portfolio, and the cost rises at a higher rate (beta) as market interest expenserates rise.  The beta on the balance of the Company’s core deposit portfolio has performed well and average interest-bearing liabilities. Guaranty Bank, acquiredis much lower than the beta on relationships with pricing tied to a certain index.  Additionally, loan growth has outpaced deposit growth. Therefore, short-term borrowings have increased to temporarily fill in the fourth quarterfunding gap and the cost of 2017, also contributed tothese funds has increased with the increaserising rate environment experienced in interest expense2018 and average interest-bearing liabilities. Thethe first half of 2019.  In the second half of  2019, the Company’s cost of funds increased becausedeclined in conjunction with the now declining rate environment.  In addition, the Company haspurchased interest rate sensitive deposits that have repriced withcaps of $375 million of variable-rate deposit and fixed-rate short-term brokered CDs.  These will help minimize the increase in certain market rates.

Comparing 2016 to 2015, interest expense declined $1.8 million, or 13%, year-over-year. Average interest-bearing liabilities increased 9% in 2016. The Company was successful in continuing to manage down its cost of funds through continued growthexpansion in noninterest bearing deposit accounts (average noninterest bearing balances grew 11% in 2016, primarily due to successful growth in the correspondent banking area) and continued shift of funding from high-cost borrowings to deposits and/or low-cost borrowings. Average interest bearing deposits increased 26%, while average borrowings decreased 37% during 2016.

future rising rate environments.

The Company’sCompany’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.

PROVISIONPROVISION FOR LOAN/LEASE LOSSES

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

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The Company’sCompany’s provision totaled $8.5$7.1 million for 2017, an increase2019, a derease of $992 thousand$5.6 million from 2016. Notably, CSB incurred $2.8 million of provision expense for the full year. As acquired loans renew, the discount associated with those loans is accreted and the Company must re-establish a loan loss reserve. When comparing 20162018. The decrease in 2019 was primarily attributable to 2015, the Company’s provision increased by $607 thousand. In 2016, CSB incurred $1.5 million of provision expense for the partial year since acquisition.improved asset quality.

TheThe Company had an allowance of 1.16%0.98% of total gross loans/leases at December 31, 2017,2019, compared to 1.28%1.07% of total gross loans/leases at December 31, 2016,2018.  Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $7.0 million and compared to 1.45% of total gross loans/leases$11.6 million at December 31, 2015.2019 and 2018, respectively.

TheThe Company’s allowance to total NPLs was 184.28%403.87% at December 31, 2017,2019, which was up from 144.85%214.79% at December 31, 2016, and down from 223.33% at December 31, 2015.

2018.

The fluctuations in these ratios were the result of the acquisitions of CSB and Guaranty Bank.recent acquisitions. In accordance with GAAP for acquisition accounting, acquired loans must be recorded at fair value; therefore, no accreted allowance was associated with these loans. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance.

For 2020, the Company expects the provision for credit losses to adjust with changes to risk grade, other indications of credit quality, and loan volume. On January 1, 2020, the Company adopted ASU 2016-13 (CECL). The initial impact of CECL is expected to be an increase of 5-20% of the December 31, 2019 allowance for estimated losses on loans/leases.  The after-tax charge will result in a decrease to the stockholders' equity as of January 1, 2020. See Note 1 Summary of Significant Accounting Policies of the notes to consolidated financial statements for additional information on the Company’s impact of adoption.

 

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NONINTEREST INCOMETable of Contents

NONINTEREST INCOME.The following tables set forth the various categories of noninterest income for the years ended December 31, 2017, 2016,2019 and 2015.2018.

  

Years Ended

         
  

December 31,

2017

  

December 31,

2016

  

$ Change

  

% Change

 
                 

Trust department fees

 $7,187,820  $6,164,137  $1,023,683   16.6

%

Investment advisory and management fees

  3,869,699   2,992,811   876,888   29.3 

Deposit service fees

  5,919,317   4,439,455   1,479,862   33.3 

Gains on sales of residential real estate loans, net

  408,655   431,313   (22,658)  (5.3)

Gains on sales of government guaranteed portions of loans, net

  1,163,741   3,159,073   (1,995,332)  (63.2)

Swap fee income

  3,094,939   1,708,204   1,386,735   81.2 

Securities gains, net

  (87,885)  4,592,398   (4,680,283)  (101.9)

Earnings on bank-owned life insurance

  1,802,443   1,771,396   31,047   1.8 

Debit card fees

  2,941,703   1,814,488   1,127,215   62.1 

Correspondent banking fees

  915,647   1,050,142   (134,495)  (12.8)

Other

  3,266,213   2,913,458   352,755   12.1 

Total noninterest income

 $30,482,292  $31,036,875  $(554,583)  (1.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

 

 

 

 

Years Ended

         

 

2019

    

2018

    

$ Change

    

% Change

 

 

December 31,

2016

  

December 31,

2015

  

$ Change

  

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

                

 

 

 

 

 

 

 

 

 

 

 

 

Trust department fees

 $6,164,137  $6,131,209  $32,928   0.5

%

 

$

9,559

 

$

8,707

 

$

852

 

9.8

%

Investment advisory and management fees

  2,992,811   2,971,964   20,847   0.7 

 

 

6,995

 

 

4,726

 

 

2,269

 

48.0

 

Deposit service fees

  4,439,455   3,784,935   654,520   17.3 

 

 

6,812

 

 

6,420

 

 

392

 

6.1

 

Gains on sales of residential real estate loans, net

  431,313   322,872   108,441   33.6 

 

 

2,571

 

 

901

 

 

1,670

 

185.3

 

Gains on sales of government guaranteed portions of loans, net

  3,159,073   1,304,575   1,854,498   142.2 

 

 

748

 

 

405

 

 

343

 

84.7

 

Swap fee income

  1,708,204   1,717,552   (9,348)  (0.5)

 

 

28,295

 

 

10,787

 

 

17,508

 

162.3

 

Securities gains, net

  4,592,398   798,983   3,793,415   474.8 

Securities losses, net

 

 

(30)

 

 

 —

 

 

(30)

 

100.0

 

Earnings on bank-owned life insurance

  1,771,396   1,762,107   9,289   0.5 

 

 

1,973

 

 

1,632

 

 

341

 

20.9

 

Debit card fees

  1,814,488   1,244,912   569,576   45.8 

 

 

3,357

 

 

3,263

 

 

94

 

2.9

 

Correspondent banking fees

  1,050,142   1,190,411   (140,269)  (11.8)

 

 

773

 

 

852

 

 

(79)

 

(9.3)

 

Gain on sale of assets and liabilities of subsidiary

 

 

12,286

 

 

 —

 

 

12,286

 

100.0

 

Other

  2,913,458   3,133,801   (220,343)  (7.0)

 

 

5,429

 

 

3,848

 

 

1,581

 

41.1

 

Total noninterest income

 $31,036,875  $24,363,321  $6,673,554   27.4

%

 

$

78,768

 

$

41,541

 

$

37,227

 

89.6

%

 

 

In recent years, the Company has been successful in expanding its wealthwealth management customer base. Trust department fees continue to be a significant contributor to noninterest income and, due to favorable market conditions, coupled withincome. With strong growth in assets under management, trust department fees increased 17%10% in the current year. Comparatively, trust fee income increased 1% when comparing 2016 to 2015.  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. Additionally, the Company recently started offering trust operations services to correspondent banks.

ManagementManagement has placed a stronger emphasis on growing its investment advisory and management services. Part of this initiative has been to restructurestructure the Company’s Wealth Management Division to allow for more efficient delivery of products and services through selective additions of talent as well as leverage of and collaboration among existing resources (including the aforementioned trust department).resources. Similar to trust department fees, fees from these services are largely determined based on the value of the investments managed. And, similar to the trust department,On October 1, 2018 the Company has had some successacquired the Bates Companies, headquartered in expanding its customer base. Due to this growth and favorable market conditions in 2017, investmentRockford, Illinois.  The acquisition enhanced the wealth management services of the Company by adding approximately $704 million of assets under management as of the acquisition date.  Investment advisory and management fees increased 29%48% in 2017. Comparatively, investment advisory and management fees increased 1% in 2016. The acquisition of CSB also contributed2019 compared to this increase, as it had an established investment advisory and management services department at acquisition.2018.

39

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Table of Contents

Deposit service fees expanded 33%6% in 2017 and 17% in 2016.2019 as compared to 2018. The increases in both years wereincrease was the result of the addition of CSB.recent acquistions. Additionally, the Company continueshas continued its emphasis on shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, decreased 5%net, increased 185% in 2017, while increasing 34%2019 as compared to 2018. The increase was largely due to the addition of SFC Bank in 2016. Overall, with the continued low interest rate environment, refinancing activity has slowed, as many2018 which recognized gains on sales of the Company’s existing and prospective customers have already executed a refinancing. Therefore, this area has become a much smaller contributor to overall noninterest income.

residential real estate of $1.7 million in 2019. 

The Company’sCompany’s gains on the sale of government-guaranteed portions of loans for 2017 decreased 63%, while increasing 142% in the prior year.2019 increased 85% as compared to 2018. Given the nature of these gains, large fluctuations can happen from quarter-to-quarter and year-to-year. As one of its core strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. The Company’s portfolio of government-guaranteed loans has grown as a direct result of the Company’s strong expertise in SBA and USDA lending. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary.  Lastly,Recently, competitors have been offering SBA loan candidates traditional financing without such a strategy for improved pricing is packaging loans together for sale. From time to time,guarantee and the Company may execute on this strategy, which may delay the gains on sales of some loansis not willing to achieve better pricing.

relax its structure for those lending opportunities.

As a result of the continuedrelatively low interest rate environment, the Company was able to execute numerous interest rate swaps on select commercial loans, over the past two years.including tax credit project loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from year to year. Swap fee income totaled $3.1$28.3 million in 2017,2019 as compared to $1.7$10.8 million in 20162018. The increase in swap fee income was due to both the volume and $1.7 million in 2015.the size of the transactions executed. Future levels of swap fee income are dependent upon prevailing interest rates.

Securities losses, (net) were $88net of gains totaled $30 thousand for the current year,in 2019 as compared to no securities gains (net) of $4.6 millionor losses for the prior year and $799 thousand in 2015. In 2016, the Company took advantage of market opportunities by selling approximately $130.2 million of investments that were low-yielding. Proceeds were then used to purchase higher-yielding tax-exempt municipal bonds and to fund loan and lease growth. Additionally, in the third quarter of 2016, the Company sold an equity investment and recognized a gain of $4.0 million, which was then used to reduce wholesale borrowings and further de-lever the balance sheet.

2018.

Earnings on BOLI increased 2%21% in 2017 and 1% in 2016.2019. There were no purchases of BOLI in 2016 or 2017.2019. Yields on BOLI (based on a simple average and excluding the impact of the federal income tax exemption) were 3.05%2.10% for 2017, 3.09%2019 and 2.57% for 2016, and 3.23% for 2015.2018. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. 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 62%3% in 2017, compared to 46% in the prior year.2019. The primary reason for the increase in both years was the addition of CSB, which has a large retail customer base and therefore generates significant interchange revenue.recent acquisitions. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a modestly higher interest rate that incentivizes debit card activity.

Correspondent banking fees decreased 13%9% in 2017 and decreased 12%2019. The fees are generally included in the prior year. As interestearnings credit rates rise,which incent the correspondent bank deposit accounts receive ato maintain higher earnings credit, which then reduceslevels of noninterest bearing deposits to offset the direct fees that the Company receives.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 noninterest bearing deposits that can be used to fund loan growth as well as a steady source of fee income.  The Company now serves approximately 187193 banks in Iowa, Illinois, Missouri and Wisconsin.

Other noninterest income increased 12%Gain on sale of assets and liabilities of subsidiary totaled $12.3 million in 2017, while decreasing 7% in 2016. The primary reason for the increase was rental income2019 due to the acquisitionsale of Guarantythe assets and liabilities of RB&T on November 30, 2019.  See Note 2 of the Consolidated Financial Statements for further detail.

Other noninterest income increased 41% in 2019. The increase was driven by fluctuations in net gains recognized on the disposal of leased assets, fee income and the addition of SFC Bank. Rental income totaled $176 thousand in 2017 as compared to no rental income in 2016.

 

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NONINTEREST EXPENSESNONINTEREST EXPENSES.

The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2017, 2016,2019 and 2015.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

 

 

 

 

 

2019

    

2018

    

$ Change

    

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

92,063

 

$

68,994

 

$

23,069

 

33.4

%

Occupancy and equipment expense

 

 

15,106

 

 

12,884

 

 

2,222

 

17.2

 

Professional and data processing fees

 

 

13,381

 

 

11,452

 

 

1,929

 

16.8

 

Acquisition costs

 

 

 —

 

 

1,795

 

 

(1,795)

 

(100.0)

 

Post-acquisition compensation, transition and integration costs

 

 

3,582

 

 

2,086

 

 

1,496

 

71.7

 

Disposition costs

 

 

3,325

 

 

 —

 

 

3,325

 

100.0

 

FDIC insurance, other insurance and regulatory fees

 

 

2,955

 

 

3,594

 

 

(639)

 

(17.8)

 

Loan/lease expense

 

 

1,097

 

 

1,544

 

 

(447)

 

(29.0)

 

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

 

 

3,789

 

 

2,489

 

 

1,300

 

52.2

 

Advertising and marketing

 

 

4,548

 

 

3,552

 

 

996

 

28.0

 

Bank service charges

 

 

2,009

 

 

1,838

 

 

171

 

9.3

 

Loss on debt extinguishment

 

 

436

 

 

 —

 

 

436

 

100.0

 

Correspondent banking expense

 

 

836

 

 

821

 

 

15

 

1.8

 

Intangibles amortization

 

 

2,266

 

 

1,692

 

 

574

 

33.9

 

Goodwill Impairment

 

 

3,000

 

 

 —

 

 

3,000

 

100.0

 

Other

 

 

6,841

 

 

6,402

 

 

439

 

6.9

 

Total noninterest expense

 

$

155,234

 

$

119,143

 

$

36,091

 

30.3

%

 

  

Years Ended

         
  

December 31,

2017

  

December 31,

2016

  

$ Change

  

% Change

 
                 

Salaries and employee benefits

 $55,722,288  $46,317,060  $9,405,228   20.3

%

Occupancy and equipment expense

  10,938,037   8,404,605   2,533,432   30.1 

Professional and data processing fees

  10,757,057   7,113,443   3,643,614   51.2 

Acquisition costs

  1,068,918   1,400,004   (331,086)  (23.6)

Post-acquisition compensation, transition and integration costs

  4,309,565   1,041,169   3,268,396   313.9 

FDIC insurance, other insurance and regulatory fees

  2,752,270   2,549,314   202,956   8.0 

Loan/lease expense

  1,163,708   662,299   501,409   75.7 

Net cost of operations of other real estate

  1,599   591,303   (589,704)  (99.7)

Advertising and marketing

  2,624,951   2,127,566   497,385   23.4 

Bank service charges

  1,770,942   1,692,957   77,985   4.6 

Losses on debt extinguishment, net

  -   4,577,668   (4,577,668)  (100.0)

Correspondent banking expense

  807,077   750,646   56,431   7.5 

CDI amortization

  1,000,561   442,850   557,711   125.9 

Other

  4,507,724   3,815,028   692,696   18.2 

Total noninterest expense

 $97,424,697  $81,485,912  $15,938,785   19.6

%

  

Years Ended

         
  

December 31,

2016

  

December 31,

2015

  

$ Change

  

% Change

 
                 

Salaries and employee benefits

 $46,317,060  $42,967,915  $3,349,145   7.8

%

Occupancy and equipment expense

  8,404,605   7,042,706   1,361,899   19.3 

Professional and data processing fees

  7,113,443   5,523,447   1,589,996   28.8 

Acquisition costs

  1,400,004   -   1,400,004   100.0 

Post-acquisition compensation, transition and integration costs

  1,041,169   -   1,041,169   100.0 

FDIC insurance, other insurance and regulatory fees

  2,549,314   2,724,968   (175,654)  (6.4)

Loan/lease expense

  662,299   882,591   (220,292)  (25.0)

Net cost of (income from) operations of other real estate

  591,303   (1,092,401)  1,683,704   (154.1)

Advertising and marketing

  2,127,566   1,900,539   227,027   11.9 

Bank service charges

  1,692,957   1,486,265   206,692   13.9 

Losses on debt extinguishment

  4,577,668   7,185,601   (2,607,933)  (36.3)

Correspondent banking expense

  750,646   703,495   47,151   6.7 

CDI amortization

  442,850   199,512   243,338   122.0 

Other

  3,815,028   3,667,384   147,644   4.0 

Total noninterest expense

 $81,485,912  $73,192,022  $8,293,890   11.3

%

 

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

One-time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2019.

Salaries and employee benefits, which is the largest component of noninterest expense, increased 20% and 8%33% in 2017 and 2016, respectively.2019 as compared to 2018. This increase was primarily related to the acquisition of CSB late in the third quarter of 2016bonuses and commissions on elevated swap fee income, improved financial results and the acquisitionrelated incentives, the addition of GuarantySFC Bank and Bates Companies employees and the addition to operational infrastructure and investment in additional staffing both at the fourth quartercorporate level and at some of 2017.

the bank charters.

Occupancy and equipment expenseexpense increased 30%17% in 2017 and increased 19% in 2016. These increases were largely2019 as compared to 2018. This increase was due to the addition of CSB latehigher information technology service costs, increases in 2016repairs and maintenance costs, renovations to existing buildings, and the acquisitionadditions of GuarantySFC Bank inand the fourth quarter of 2017.

Bates Companies.

Professional and data processing fees increased 51%17% in 2017 and increased 29% in 2016.2019 as compared to 2018. This increased expense was mostly due to the additions of Guaranty Bankthe Bates Companies and CSB.SFC Bank. Legal expense was elevated due to a legal matter at RBTRB&T where two employees havehad been charged with wrongdoing in connection with an SBA loan application. The Company anticipates these legal expenses will continue until the court proceedings are completed, which the Company expects to be sometime in late 2018. Neither RB&T, nor the Company, have been charged in the case. The charges were dismissed in December 2019. 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.

AcquisitionThere were no acquisition costs totaled $1.1in 2019. There were $1.8 million of acquisition costs in 2018 related to the acquisitions of the Bates Companies and $1.4 million for 2017 and 2016, respectively.SFC Bank. These costs were comprised primarily of legal, accounting and investment banking costs related to the acquisitions described in Note 2 to the Consolidated Financial Statements.

Post-acquisition compensation, transition and integration costs totaled $4.3$3.6 million and $1.0$2.1 million for 20172019 and 2016,2018, respectively. These costs were comprised primarily of personnel costs, IT integration, and conversion costs related to the acquisitions described in Note 2 to the Consolidated Financial Statements.

Disposition costs totaled $3.3 million for 2019. The costs were comprised primarily of legal, accounting, disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of RB&T.  There were no disposition costs for 2018.

FDIC andinsurance, other insurance and regulatory fee expense increased 8%decreased 18% in 2017 and decreased 6% in 2016.2019.  The increasedecrease in expense was due to the acquisitionaward of CSB, partially offset by a decrease in the assessment rate designatedcredits by the FDIC.FDIC in September 2019 and December 2019.

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Table of Contents

Loan/lease expense increased 76%decreased 29% in 2017 and decreased 25% in 2016. The Company incurred elevated levels of expense during 2017 for certain existing NPLs in connection with the work-out of these loans.2019 as compared to 2018. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost ofand gains/losses on operations of other real estate includesincludes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net costs of operations totaled $2 thousand$3.8 million for 2017 and $591 thousand for 2016. Occupancy rates for2019. The increase in 2019 is due primarily to $3.4 million of subsequent write-down of one of the OREO properties managed by the Company have improved over the past year, increasing cash flow from the property and reducing net operating costs.property.

AdvertisingAdvertising and marketing expense increased 23%28% in 2017 and increased 12% in 2016.2019 as compared to 2018. The increase in expense was primarily due to the additionsaddition of CSB and GuarantySFC Bank.

Bank service charges, a large portion of which include indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased over the past two years (5%9% in 2017 and 14% in 2016). The increases were due, in large part,2019 as compared to the success QCBT has had in growing its correspondent banking customer portfolio.2018. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.

In 2016, the Company incurred $4.6 million in lossesLosses on debt extinguishment (net), while in 2015, the Company incurred $7.2 million of losses on debt extinguishment (net).were $436 thousand in 2019 as compared to 2018. These losses relate to the prepayment of certain FHLB advances and wholesale structured repurchase agreements. Additionally, the Company recognized gainsThere were no losses on debt extinguishment related to the repurchase of junior subordinated debentures that were acquired at a discount through auction.

in 2018.

Correspondent banking expense increased 8%2% in 2017 and 7% in 2016.2019. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services. The increases in both years wereincrease was due, in large part, to the success QCBT has had in growing its correspondent banking customer portfolio.

Core deposit intangibleIntangible amortization expense increased 126%34% in 2017 and 122% in 2016. Increases were2019 as compared to 2018. The increase was due to the acquisitionaddition of GuarantySFC Bank and CSB.the Bates Companies in 2018.

Goodwill impairment expense totaled $3.0 million in 2019 related to the Bates Companies.  See Note 7 to the Consolidated Financial Statements for further discussion.  There was no goodwill impairment expense in 2018.

Other noninterest expense increased 18%7% in 2017 and 4% in 2016.2019 as compared to 2018. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management. A portionThe majority of this increase is also related to the additionsaddition of CSB and GuarantySFC Bank.

INCOMEINCOME TAX EXPENSE

The provision for income taxes was $4.9$14.6 million for 2017,2019, or an effective tax rate of 12.2%20.3%, compared to $8.9$9.0 million for 2016,2018, or an effective tax rate of 24.3%, and compared to $3.7 million for 2015, or an effective tax rate of 17.8%17.3%.  The effective tax rate for 2017 was significantly impacted by a $2.9 million income tax benefit for the re-valuation of deferred taxes at the lower federal income tax rate as a result of the Tax Act. See Note 13 to the Consolidated Financial Statements for additional information regarding the impact of Tax Act on deferred tax assets and income tax.

Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 1314 to the Consolidated Financial Statements for additional details.

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FINANCIAL CONDITION, AS OF THE YEARS ENDED DECEMBER 31, 20172019 AND 20162018

OVERVIEWOVERVIEW

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

  

As of December 31,

 
  

2017

  

2016

 
  

(dollars in thousands)

 
  

Amount

  

%

  

Amount

  

%

 

Cash, federal funds sold, and interest-bearing deposits

 $161,684   4% $156,776   5%

Securities

  652,382   16%  574,022   17%

Net loans/leases

  2,930,130   74%  2,374,730   72%

Other assets

  238,469   6%  196,416   6%

Total assets

 $3,982,665   100% $3,301,944   100%
                 

Total deposits

 $3,266,655   82% $2,669,261   81%

Total borrowings

  309,480   8%  290,952   9%

Other liabilities

  53,243   1%  55,690   2%

Total stockholders' equity

  353,287   9%  286,041   8%

Total liabilities and stockholders' equity

 $3,982,665   100% $3,301,944   100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

 

 

2019

 

 

 

2018

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

    

%

    

 

Amount

    

%

 

Cash, federal funds sold, and interest-bearing deposits

 

$

233,945

 

 5

%

 

$

245,119

 

 5

%

Securities

 

 

611,341

 

12

%

 

 

662,969

 

13

%

Net loans/leases

 

 

3,654,204

 

75

%

 

 

3,692,907

 

75

%

Other assets

 

 

397,594

 

 8

%

 

 

348,715

 

 7

%

Assets held for sale

 

 

11,966

 

 -

%

 

 

 —

 

 -

%

Total assets

 

$

4,909,050

 

100

%

 

$

4,949,710

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

3,911,051

 

80

%

 

$

3,977,031

 

80

%

Total borrowings

 

 

278,955

 

 5

%

 

 

404,968

 

 8

%

Other liabilities

 

 

178,690

 

 4

%

 

 

94,573

 

 2

%

Liabilities held for sale

 

 

5,003

 

 -

%

 

 

 —

 

 -

%

Total stockholders' equity

 

 

535,351

 

11

%

 

 

473,138

 

10

%

Total liabilities and stockholders' equity

 

$

4,909,050

 

100

%

 

$

4,949,710

 

100

%

 

In 2017,2019, total assets grew $680.7decreased $40.7 million, or 21%1%. This included $259.6$454.0 million in assets acquired and new goodwill of $15.2 millionsold as part of the Guaranty Bank acquisitionRB&T sale (further described in Note 2 to the Consolidated Financial Statements). The Company organically grew its netCompany’s loan/lease portfolio $362.9 million, which was primarily funded by deposit growth. Deposits grew $384.9decreased $38.7 million, or 14%1%, during 2017, excluding2019. The decrease in the $212.5 millionloan/lease portfolio was related to the sale of deposits acquired. Borrowings decreased $2.5 million, or 1% during 2017, excluding the $21.1 million of borrowings acquired.

In 2016, total assets grew $708.7 million, or 27%. This included $581.7 million in assets acquired and new goodwill of $9.9 millionloans as part of the CSB acquisitionRB&T sale (further described in Note 2 to the Consolidated Financial Statements). The Company organically grew its netExcluding the sale of loans as part of the RB&T sale, the Company’s loan/lease portfolio $183.8grew organically $319.2 million, or 10.9%, during 2019, which was partlyprimarily funded by cash from the securities portfolio, as it decreased $105.7deposit growth. Deposits grew $335.3 million, or 18%,10% during 2019, excluding the $102.6 million of securities acquired in 2016. Deposits grew $302.3 million, or 16% during 2016, excluding the $486.3$401.3 million of deposits acquired.sold as part of the RB&T sale. Borrowings decreased $153.2$109.9 million, or 34%27% during 2016, mostly due2019, excluding the balance sheet restructuring activities$16.2 million of borrowings sold in the RB&T sale.

As of December 31, 2019, there were $12.0 million of assets held for sale, primarily comprised of bank-owned life insurance that took place throughout 2016,was retained from the detailsRB&T sale.  There were $5.0 million of whichliabilities held for sale, primarily comprised of deferred compensation obligations to former RB&T employees as part of the sale transaction. These assets and liabilities are in Notes 10 and 11expected to the Consolidated Financial Statements.be liquidated by June 30, 2020.

INVESTMENT SECURITIES

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

 

43

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Table of Contents

Following is a breakdown of the Company’sCompany’s securities portfolio by type, the percentage of net unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration as of December 31, 2017, 2016,2019 and 2015.2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

    

 

 

 

Amount

    

%  

    

 

Amount

    

%  

    

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 

$

20,078

 

 3

%  

 

$

36,411

 

 5

%  

 

Municipal securities

 

 

447,853

 

73

%  

 

 

459,409

 

70

%  

 

Residential mortgage-backed and related securities

 

 

120,587

 

20

%  

 

 

159,249

 

24

%  

 

Other securities

 

 

22,823

 

 4

%  

 

 

7,900

 

 1

%  

 

 

 

$

611,341

 

100

%  

 

$

662,969

 

100

%  

 

 

 

 

  

 

  

 

 

 

  

 

  

 

 

Securities as a % of Total Assets

 

 

12.45

%  

  

 

 

 

13.39

%  

  

 

 

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

 

 

4.88

%  

  

 

 

 

(1.01)

%  

  

 

 

Duration (in years)

 

 

6.7

 

  

 

 

 

6.8

 

  

 

 

Yield on investment securities (tax equivalent)

 

 

3.80

%  

 

 

 

 

3.58

%  

 

 

 

 

  

2017

  

2016

  

2015

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

U.S. govt. sponsored agency securities

 $38,097   6% $46,084   8% $213,537   37%

Municipal securities

  445,049   68%  374,463   65%  280,203   49%

Residential mortgage-backed and related securities

  163,301   25%  147,702   26%  80,670   14%

Other securities

  5,935   1%  5,773   1%  2,699   0%
  $652,382   100% $574,022   100% $577,109   100%
                         

As a % of total assets

  16.38%      17.38%      22.25%    

Net unrealized losses as a % of amortized cost

  (0.18)%      (0.87)%      (0.03)%    

Duration (in years)

  7.0       6.0       6.2     

Yield on investment securities (tax equivalent)

  3.80%      3.56%      3.07%    

Notably, the net decline in total securities is mostly due to the sale of RB&T.

Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in 2017, 20162019 or 2015.

In 2017, the duration of the securities portfolio increased due, in large part, to the continued shift in mix. Duration was extended from the strong growth in longer term fixed rate municipal securities.

In 2016, the duration of the securities portfolio stayed relatively flat. Duration was extended from the strong growth in longer term fixed rate municipal securities, but was partially offset by the duration shortening of agency and mortgage-backed securities portfolios resulting from targeted sales of longer duration investments and as the remaining agency portfolio rolled closer to maturities or call dates.

2018.

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. Additionally, the Company has not invested in the types of securities subject to the Volcker Rule (a provision of the Dodd-Frank Act).

SeeSee Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.

LOANS/LEASES

LOANS/LEASES

The Company’s organic loan/lease portfolio grew $366.5 million, or 15%, during 2017. The remaining growth in the loan/lease portfolio was related to the acquisition of Guaranty Bank (further described in Note 2 to the Consolidated Financial Statements). Notably, C&IExcluding RB&T loans increased $306.9 million, or 37% and CREsold, total loans grew $210.0 million, or 19%.

The Company’s organic loan/lease portfolio grew $188.4 million, or 11%, during 2016. The remaining growth10.9% in the loan/lease portfolio was related to the acquisition of CSB (further described in Note 2 to the Consolidated Financial Statements). Notably, C&I loans increased $179.5 million, or 28% and CRE loans grew $369.1 million, or 51%. CSB’s loan portfolio was heavily reliant on high-quality CRE, with that category representing 63% of their total loan portfolio as of December 31, 2016. This reliance increased the Company’s overall reliance on CRE.

2019 over 2018. The mix of loan/lease types within the Company’sCompany’s loan/lease portfolio is presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

As of December 31,

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

2017

  

2016

  

2015

  

2014

  

2013

 

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

    

 

Amount

    

%

 

 

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 $1,134,516   38% $827,637   34% $648,160   36% $523,927   32% $431,688   30%

 

$

1,507,825

 

41

%  

 

$

1,429,410

 

38

%  

 

$

1,134,516

 

38

%  

 

$

827,637

 

34

%  

 

$

648,160

 

36

%

CRE loans

  1,303,492   44%  1,093,459   46%  724,369   41%  702,140   43%  671,753   46%

 

 

1,736,396

 

47

%  

 

 

1,766,111

 

48

%  

 

 

1,303,492

 

44

%  

 

 

1,093,459

 

46

%  

 

 

724,369

 

41

%

Direct financing leases

  141,448   5%  165,419   7%  173,656   10%  166,032   10%  128,902   9%

 

 

87,869

 

 2

%  

 

 

117,969

 

 3

%  

 

 

141,448

 

 5

%  

 

 

165,419

 

 7

%  

 

 

173,656

 

10

%

Residential real estate loans

  258,646   9%  229,233   10%  170,433   9%  158,633   10%  147,356   10%

 

 

239,904

 

 7

%  

 

 

290,759

 

 8

%  

 

 

258,646

 

 9

%  

 

 

229,233

 

10

%  

 

 

170,433

 

 9

%

Installment and other consumer loans

  118,611   4%  81,666   3%  73,669   4%  72,607   5%  76,034   5%

 

 

109,352

 

 3

%  

 

 

119,381

 

 3

%  

 

 

118,611

 

 4

%  

 

 

81,666

 

 3

%  

 

 

73,669

 

 4

%

                                        

Total loans/leases

 $2,956,713   100% $2,397,414   100% $1,790,287   100% $1,623,339   100% $1,455,733   100%

 

$

3,681,346

 

100

%  

 

$

3,723,630

 

100

%  

 

$

2,956,713

 

100

%  

 

$

2,397,414

 

100

%  

 

$

1,790,287

 

100

%

                                        

Plus deferred loan/lease origination costs, net of fees

 7,773       8,073       7,736       6,664       4,547     

 

 

8,859

 

 

 

 

9,124

 

 

 

 

7,773

 

  

 

 

8,073

 

  

 

 

7,736

 

  

 

Less allowance

  (34,356)      (30,757)      (26,141)      (23,074)      (21,448)    

 

 

(36,001)

 

 

 

 

(39,847)

 

 

 

 

(34,356)

 

  

 

 

(30,757)

 

  

 

 

(26,141)

 

  

 

Net loans/leases

 $2,930,130      $2,374,730      $1,771,882      $1,606,929      $1,438,832     

 

$

3,654,204

 

 

 

$

3,692,907

 

 

 

$

2,930,130

 

  

 

$

2,374,730

 

  

 

$

1,771,882

 

  

 

 

Historically, the Company structures most residential real estate loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell the loans on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans and recognizing noninterest income from the gain on sale. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the table above. Historically, the subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. The Company holds a limited amount of 15-year15‑year fixed rate residential real estate loans originated in prior years that met certain credit guidelines. In addition, the Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

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Table of Contents

The following tablestables set forth the remaining maturities by loan/lease type as of December 31, 20172019 and 2016.2018. Maturities are based on contractual dates.

  

As of December 31, 2017

 
              

Maturities After One Year

 
  

Due in one

  

Due after one

  

Due after

  

Predetermined

  

Adjustable

 
  

year or less

  

through 5 years

  

5 years

  

interest rates

  

interest rates

 
  

(dollars in thousands)

 

C&I loans

 $378,849  $427,347  $328,320  $505,345  $250,322 

CRE loans

  225,712   715,661   362,119   734,844   342,936 

Direct financing leases

  8,504   127,853   5,091   132,944   - 

Residential real estate loans

  6,793   7,546   244,307   184,284   67,569 

Installment and other consumer loans

  28,908   54,565   35,138   43,817   45,886 
  $648,766  $1,332,972  $974,975  $1,601,234  $706,713 
                     

Percentage of total loans/leases

  22%  45%  33%  69%  31%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Maturities After One Year

 

             

Maturities After One Year

 

 

Due in one

 

Due after one

 

Due after

 

Predetermined

 

Adjustable

 

 

Due in one

  

Due after one

  

Due after

  

Predetermined

  

Adjustable

 

    

year or less

    

through 5 years

    

5 years

    

interest rates

    

interest rates

 

 

year or less

  

through 5 years

  

5 years

  

interest rates

  

interest rates

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 $280,778  $326,656  $220,203  $354,499  $192,360 

 

$

448,045

 

$

660,687

 

$

399,093

 

$

701,633

 

$

358,147

 

CRE loans

  183,027   581,650   328,782   625,806   284,626 

 

 

269,687

 

 

876,481

 

 

590,228

 

 

890,149

 

 

576,560

 

Direct financing leases

  5,999   154,002   5,418   159,420   - 

 

 

7,612

 

 

76,297

 

 

3,960

 

 

80,257

 

 

 —

 

Residential real estate loans

  7,018   6,432   215,783   166,069   56,146 

 

 

16,352

 

 

15,143

 

 

208,409

 

 

186,853

 

 

36,699

 

Installment and other consumer loans

  17,040   44,727   19,899   28,439   36,187 

 

 

28,786

 

 

44,534

 

 

36,032

 

 

38,970

 

 

41,596

 

 $493,862  $1,113,467  $790,085  $1,334,233  $569,319 

 

$

770,482

 

$

1,673,142

 

$

1,237,722

 

$

1,897,862

 

$

1,013,002

 

                    

Percentage of total loans/leases

  21%  46%  33%  70%  30%

 

 

21

%  

 

45

%  

 

34

%  

 

65

%  

 

35

%

 

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Maturities After One Year

 

 

 

Due in one

 

Due after one

 

Due after

 

Predetermined

 

Adjustable

 

 

    

year or less

    

through 5 years

    

5 years

    

interest rates

    

interest rates

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 

$

567,593

 

$

465,514

 

$

396,303

 

$

583,819

 

$

277,998

 

CRE loans

 

 

275,540

 

 

1,010,093

 

 

480,478

 

 

1,054,286

 

 

436,285

 

Direct financing leases

 

 

7,897

 

 

104,318

 

 

5,753

 

 

110,071

 

 

 —

 

Residential real estate loans

 

 

10,430

 

 

23,373

 

 

256,956

 

 

207,344

 

 

72,985

 

Installment and other consumer loans

 

 

21,652

 

 

59,760

 

 

37,970

 

 

47,067

 

 

50,663

 

 

 

$

883,112

 

$

1,663,058

 

$

1,177,460

 

$

2,002,587

 

$

837,931

 

Percentage of total loans/leases

 

 

24

%  

 

45

%  

 

31

%  

 

71

%  

 

29

%

 

As CRE loans have historically been the Company’sCompany’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 20172019 and 2016,2018, respectively, approximately 26% and 30%28% of the CRE loan portfolio was owner-occupied. The decrease in this percentage in 2017 was mostly due to the addition of Guaranty Bank, which had a slightly lower owner-occupied percentage as compared to the legacy charters. Guaranty Bank’s percentage of owner-occupied loans was 18% of their CRE portfolio.

Over the past several years, the Company has been successful in shifting the mix of its commercial loan portfolio by adding more C&I loans. C&I loans grew $306.9 million, or 37% over the past twelve months. A portion of this growth was attributable to the acquisition of Guaranty Bank, which had $44.7 million of C&I loans at acquisition.

A syndicated loan is a commercial loan provided by a group of lenders and is structured, arranged and administered by one or several commercial or investment banks known as arrangers. The nationally syndicated loans invested in by the Company consist of fully funded, highly liquid term loans for which there is a liquid secondary market. The amount of nationally syndicated loans totaled $51.2$38.2 million and $46.5$40.8 million as of December 31, 20172019 and 2016,2018, respectively.

The Company also has several loans that are syndicated to borrowers in our existing markets or purchased from peer banks that we have a relationship with. These loans were immaterial as of December 31, 20172019 and 2016.

2018.

See Note 4 to the Consolidated Financial Statements for additional information on the Company’s loan/lease portfolio.

ALLOWANCE FOR ESTIMATEDESTIMATED LOSSES ON LOANS/LEASESLEASES

The allowance totaled $34.4$36.0 million at December 31, 2017,2019, which was an increasea decrease of $3.6$3.8 million, or 12%10%, from $30.8$39.8 million at December 31, 2016.2018. Provision (excluding provision related to assets held for sale during the year) totaled $8.5$6.6 million for 20172019 and outpaced net charge-offs of $4.9$4.4 million (or 1911 basis points of average loans/leases outstanding).

The allowance totaled $30.8 million at December 31, 2016, which was an increase of $4.6 million, or 18%, from $26.1 million at December 31, 2015. Provision totaled $7.5 million for 2016 and outpaced net charge-offs of $2.9 million (or 14 basis points of average loans/leases outstanding).

The increasedecrease in allowance in both 2017 and 20162019 was primarily dueattributable to a combinationthe sale of general allocations related to loan growth,loans and leases of RB&T as well as changes in qualitative and quantitative factors. Additionally, a portion of the increase in both years was due to the acquisition of CSB. Although purchase accounting eliminates the allowance at acquisition, as acquired loans refinance and new loans are originated, an allowance must be established.continued asset quality improvements.

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The following table summarizes the activity in the allowance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Years ended December 31,

 

 

2019

    

2018

    

2017

    

2016

    

2015

 

 

2017

  

2016

  

2015

  

2014

  

2013

 

 

(dollars in thousands)

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average amount of loans/leases outstanding, before allowance

 $2,611,888  $2,042,555  $1,707,523  $1,540,382  $1,425,364 

 

$

3,857,547

 

$

3,352,357

 

$

2,611,888

 

$

2,042,555

 

$

1,707,523

 

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance:

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of fiscal year

 $30,757  $26,141  $23,074  $21,448  $19,925 

 

$

39,847

 

$

34,356

 

$

30,757

 

$

26,141

 

$

23,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of allowance related to held for sale loans

 

 

(6,122)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

  (1,150)  (527)  (454)  (1,476)  (963)

 

 

(1,476)

 

 

(5,359)

 

 

(1,150)

 

 

(527)

 

 

(454)

 

CRE

  (1,795)  (24)  (2,560)  (2,756)  (3,573)

 

 

(1,722)

 

 

(387)

 

 

(1,795)

 

 

(24)

 

 

(2,560)

 

Direct financing leases

  (2,285)  (2,503)  (1,789)  (1,504)  (917)

 

 

(1,647)

 

 

(2,002)

 

 

(2,285)

 

 

(2,503)

 

 

(1,789)

 

Residential real estate

  (102)  (77)  (170)  (131)  (162)

 

 

(191)

 

 

(127)

 

 

(102)

 

 

(77)

 

 

(170)

 

Installment and other consumer

  (41)  (113)  (252)  (269)  (229)

 

 

(98)

 

 

(44)

 

 

(41)

 

 

(113)

 

 

(252)

 

Subtotal charge-offs

  (5,373)  (3,244)  (5,225)  (6,136)  (5,844)

 

 

(5,134)

 

 

(7,919)

 

 

(5,373)

 

 

(3,244)

 

 

(5,225)

 

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

  191   109   634   363   626 

 

 

276

 

 

295

 

 

191

 

 

109

 

 

634

 

CRE

  43   33   502   418   574 

 

 

208

 

 

50

 

 

43

 

 

33

 

 

502

 

Direct financing leases

  186   93   136   68   12 

 

 

190

 

 

344

 

 

186

 

 

93

 

 

136

 

Residential real estate

  29   1   4   10   17 

 

 

47

 

 

23

 

 

29

 

 

 1

 

 

 4

 

Installment and other consumer

  53   146   145   96   208 

 

 

51

 

 

40

 

 

53

 

 

146

 

 

145

 

Subtotal recoveries

  502   382   1,421   955   1,437 

 

 

772

 

 

752

 

 

502

 

 

382

 

 

1,421

 

Net charge-offs

  (4,871)  (2,862)  (3,804)  (5,181)  (4,407)

 

 

(4,362)

 

 

(7,167)

 

 

(4,871)

 

 

(2,862)

 

 

(3,804)

 

Provision charged to expense

  8,470   7,478   6,871   6,807   5,930 

 

 

6,638

 

 

12,658

 

 

8,470

 

 

7,478

 

 

6,871

 

Balance, end of fiscal year

 $34,356  $30,757  $26,141  $23,074  $21,448 

 

$

36,001

 

$

39,847

 

$

34,356

 

$

30,757

 

$

26,141

 

                    

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

Net charge-offs to average loans/leases outstanding

  0.19%  0.14%  0.22%  0.34%  0.31%

 

 

0.11

%  

 

0.21

%  

 

0.19  

%  

 

0.14

%  

 

0.22

%

 

TheThe adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management'smanagement’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on the increase/decrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance was monitored by the credit administration staff and reported to management and the board of directors.

The following is a table that reports the historical trends of criticized and classified loan totals as of December 31, 2017, 20162019 and 2015.2018.

 

 

 

 

 

 

 As of December 31, 

 

As of December 31, 

 

Internally Assigned Risk Rating *

 

2017

  

2016

  

2015

 

 

2019

    

2018

    

 

(dollars in thousands)

 

   (dollars in thousands)

 

 

 

 

 

 

 

Special Mention (Rating 6)

 $31,024  $20,082  $37,289 

 

$

19,952

 

$

42,058

 

Substandard (Rating 7)

  43,435   49,035   27,962 

 

33,649

 

 

28,593

 

Doubtful (Rating 8)

  271   -   - 

 

 

 —

 

 

 —

 

 $74,730  $69,117  $65,251 

 

$

53,601

 

$

70,651

 

            

 

 

 

 

 

 

Criticized Loans **

 $74,730  $69,117  $65,251 

 

$

53,601

 

$

70,651

 

Classified Loans ***

 $43,706  $49,035  $27,962 

 

$

33,649

 

$

28,593

 

 

 

 

 

 

 

Criticized Loans as a % of Total Loans/Leases

 

1.47

%

 

1.91

%

Classified Loans as a % of Total Loans/Leases

 

0.92

%

 

0.77

%

 

*    Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government

      guaranteed portion.

**   Criticized loans are defined as C&I and CRE loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

*** Classified loans are defined as C&I and CRE loans with internally assigned risk ratings of 7 or 8, regardless of performance.

Criticized loans decreased 24% and classified loans increased 18% in 2019 as compared to 2018.  The changes were primarily due to the sale of RB&T in addition to the downgrading of $5.4 million of loans from criticized to classified during the year.

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Criticized loans increased 8% in 2017 and 6% in 2016. Classified loans decreased 11% in 2017 after increasing 75% in 2016.

NPLs (consisting(consisting of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing TDRs) decreased $2.6$9.6 million, or 12%52%, during 2017. NPLs increased $9.5 million, or 81%, during 2016.2019. See the table in the following section for further detail on NPLs and NPAs.

In 2017 and 2016, allowance as a percentage of gross loans/leases decreased due to the acquisitions of CSB and Guaranty Bank. In accordance with GAAP for acquisition accounting, acquired loans were recorded at fair value; therefore, there was no allowance associated with these loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($8.17.0 million and $11.6 million at December 31, 2017). When factoring this remaining discount into the Company’s allowance to total loans2019 and leases calculation, the Company’s allowance as a percentage of total loans and leases increases from 1.16% to 1.43%2018, respectively).

The following table summarizes the trend in allowance as a percentage of gross loans/leases and as a percentage of NPLs as of December 31, 2017, 2016,2019 and 2015.2018.

 

As of December 31,

 

 

 

 

 

 

 

2017

  

2016

  

2015

 

 

As of December 31, 

            

 

2019

    

2018

    

Allowance / Gross Loans/Leases

  1.16%  1.28%  1.45%

 

0.98

%  

1.07

%  

Allowance / NPLs

  184.28%  144.85%  223.33%

 

403.87

%  

214.79

%  

 

The following table presents the allowance by type and the percentage of loan/lease type to total loans/leases.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

 

2019

 

2018

 

2017

 

2016

 

2015

 

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I loans

 

 

16,072

 

45

%  

 

16,420

 

38

%  

 

14,323

 

38

%  

 

12,545

 

34

%  

 

10,484

 

36

%

CRE loans

 

 

15,379

 

43

%  

 

17,719

 

48

%  

 

13,963

 

44

%  

 

11,671

 

46

%  

 

9,375

 

41

%

Direct financing leases

 

 

1,464

 

 4

%  

 

1,792

 

 3

%  

 

2,382

 

 5

%  

 

3,112

 

 7

%  

 

3,395

 

10

%

Residential real estate loans

 

 

1,948

 

 5

%  

 

2,557

 

 8

%  

 

2,466

 

 9

%  

 

2,342

 

10

%  

 

1,790

 

 9

%

Installment and other consumer loans

 

 

1,138

 

 3

%  

 

1,359

 

 3

%  

 

1,222

 

 4

%  

 

1,087

 

 3

%  

 

1,097

 

 4

%

 

 

$

36,001

 

100

%  

$

39,847

 

100

%  

$

34,356

 

100

%  

$

30,757

 

100

%  

$

26,141

 

100

%

  

As of December 31,

 
  

2017

  

2016

  

2015

  

2014

  

2013

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

C&I loans

  14,323   38%  12,545   34%  10,484   36%  8,834   32%  5,649   30%

CRE loans

  13,963   44%  11,671   46%  9,375   41%  8,353   43%  10,705   46%

Direct financing leases

  2,382   5%  3,112   7%  3,395   10%  3,359   10%  2,517   9%

Residential real estate loans

  2,466   9%  2,342   10%  1,790   9%  1,526   10%  1,396   10%

Installment and other consumer loans

  1,222   4%  1,087   3%  1,097   4%  1,002   5%  1,181   5%
  $34,356   100% $30,757   100% $26,141   100% $23,074   100% $21,448   100%

% - Represents the percentage of the certain type of loan/lease to total loans/leases

Although management believesbelieves that the allowance at December 31, 20172019 is at a level adequate to absorb probable 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 for loan/lease losses 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 additional increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and its leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.

See Note 4 to the Consolidated Financial Statements for additional information on the Company’s allowance.

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NONPERFORMING ASSETS

The table below presents the amounts of NPAs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

 

2019

    

2018

    

2017

    

2016

    

2015

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans/leases (1) (2)

 

$

7,902

    

$

14,260

    

$

11,441

    

$

13,919

    

$

10,648

 

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

 

 

33

 

 

632

 

 

89

 

 

967

 

 

 3

 

TDRs - accruing

 

 

979

 

 

3,659

 

 

7,113

 

 

6,347

 

 

1,054

 

Total NPLs

 

 

8,914

 

 

18,551

 

 

18,643

 

 

21,233

 

 

11,705

 

OREO

 

 

4,129

 

 

9,378

 

 

13,558

 

 

5,523

 

 

7,151

 

Other repossessed assets

 

 

41

 

 

 8

 

 

80

 

 

202

 

 

246

 

Total NPAs

 

$

13,084

 

$

27,937

 

$

32,281

 

$

26,958

 

$

19,102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NPLs to total loans/leases

 

 

0.24

%  

 

0.50

%  

 

0.63

%  

 

0.88

%  

 

0.65

%

NPAs to total loans/leases plus repossessed property

 

 

0.35

%  

 

0.75

%  

 

1.08

%  

 

1.12

%  

 

1.06

%

NPAs to total assets

 

 

0.27

%  

 

0.56

%  

 

0.81

%  

 

0.82

%  

 

0.74

%

 

  

As of December 31,

 
  

2017

  

2016

  

2015

  

2014

  

2013

 
  

(dollars in thousands)

 

Nonaccrual loans/leases (1) (2)

 $11,441  $13,919  $10,648  $18,588  $17,878 

Accruing loans/leases past due 90 days or more

  89   967   3   93   84 

TDRs - accruing

  7,113   6,347   1,054   1,421   2,523 

NPLs

  18,643   21,233   11,705   20,102   20,485 

OREO

  13,558   5,523   7,151   12,768   9,729 

Other repossessed assets

  80   202   246   155   346 

NPAs

 $32,281  $26,958  $19,102  $33,025  $30,560 
                     

NPLs to total loans/leases

  0.63%  0.88%  0.65%  1.23%  1.40%

NPAs to total loans/leases plus repossessed property

  1.08%  1.12%  1.06%  2.01%  2.08%

NPAs to total assets

  0.81%  0.82%  0.74%  1.31%  1.28%

(1)

Includes government guaranteed portionsportions of loans, if applicable.

(2)

Includes

Includes TDRs of $747 thousand at December 31, 2019 and $2.3 million at December 31, 2017, $2.3 million2018.

(3)

Includes TDRs of $496 thousand at December 31, 2016, $1.5 million at December 31, 2015, $5.0 million at December 31, 2014, and $10.9 million at December 31, 2013.2018.

TheThe large majority of the Company’s NPAs consists of nonaccrual loans/leases, accruing TDRs and OREO. For nonaccrual loans/leases, management thoroughly reviewed these loans/leases and provided specific allowances as appropriate. OREO is carried at the lower of carrying amount or fair value less costs to sell.

The policy of the Company is to place a loan/lease on nonaccrual status if:  (a) payment in full of interest or principal is not expected;expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured.  A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.

In 2017,2019, the Company’sCompany’s NPAs increased $5.3decreased $14.9 million, or 20%.53% as compared to $27.9 million in 2018. OREO increased $8.0decreased $5.2 million as compared to $9.4 million in 2018 primarily due to the addition$3.4 million in subsequent writedowns of one large non owner-occupied CRE relationship.

In 2016, the Company’s NPAs increased $7.9 million, or 41%. Nonaccrual loans increased $3.3 million as a result of one large credit that was added in the fourth quarter, partially offset by paydowns of nonaccrual loans. Accruing loans/leases past due 90 days or more increased $964 thousand, mostly due to loans acquired through the purchase of CSB. TDRs increased $5.3 million due to one large credit that was restructured in the fourth quarter of 2016. OREO decreased $1.6 million during the year.

property. 

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

DEPOSITS

DEPOSITS

Deposits grew $597.3 million during 2017 ($384.8 million of organic growth, excludingExcluding the $212.5 millionimpact of deposits acquired throughsold as part of the purchasesale of Guaranty Bank). For 2016,RB&T, deposits grew $788.6$335.3 million ($302.3 million of organic growth, excluding the $486.3 million of deposits acquired through the purchase of CSB).or 10.3% during 2019.  The table below presents the composition of the Company’s deposit portfolio.

  

As of December 31,

 
  

2017

  

2016

  

2015

 
  

Amount

  

%

  

Amount

  

%

  

Amount

  

%

 
  

(dollars in thousands)

 

Noninterest-bearing demand deposits

 $789,548   24% $797,415   30% $615,292   33%

Interest-bearing demand deposits

  1,855,893   57%  1,369,226   51%  886,294   47%

Time deposits

  516,058   16%  439,169   17%  309,974   16%

Brokered deposits*

  105,156   3%  63,451   2%  69,106   4%
  $3,266,655   100% $2,669,261   100% $1,880,666   100%

*Includes brokered money market balances of $25.1 million, $22.0 million and $16.0 million as of December 31, 2017, 2016 and 2015, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

 

 

2019

    

2018

    

 

 

Amount

    

%

    

Amount

    

%

    

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest bearing demand deposits

 

$

777,224

 

20

%  

$

791,102

 

20

%  

Interest bearing demand deposits

 

 

2,407,502

 

61

%  

 

2,204,205

 

55

%  

Time deposits

 

 

571,343

 

15

%  

 

704,903

 

18

%  

Brokered deposits

 

 

154,982

 

 4

%  

 

276,821

 

 7

%  

 

 

$

3,911,051

 

100

%  

$

3,977,031

 

100

%  

 

The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 7%3% in 2017 and 11% in 2016.2019. Year-end balances can fluctuate a great deal due to large customer and correspondent bank activity. Trends have shown that this fluctuation is generally temporary.

Management will continue to focus on growing its noninterest bearingcore 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

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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 committee. See discussion regarding policy limits on bank stock loans in the Lending/Leasing section under Item 1 – Business in Part I of this Annual Report on Form 10-K.10‑K.

SHORT-TERM BORROWINGS

SHORT-TERM BORROWINGS

The subsidiary banks offer overnight repurchase agreements to some of their major customers. Also, 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 December 31,

 

 

 

 

 

 

 

 

 

 

2017

  

2016

  

2015

 

 

As of, December 31, 

 

 

(dollars in thousands)

 

 

2019

    

2018

    

 

Overnight repurchase agreements with customers

 $7,003  $8,131  $73,873 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Overnight repurchase agreements

 

$

2,193

 

$

2,084

 

 

Federal funds purchased

  6,990   31,840   70,790 

 

 

11,230

 

 

26,690

 

 

 $13,993  $39,971  $144,663 

 

$

13,423

 

$

28,774

 

 

 

In 2016, the Company shifted overnight customer repurchase agreement funds to insured deposit products which do not require collateral, helping to free up additional liquidity for the Company. This also allowed the Company to further execute on the strategy of rotating out of investment securities into loans and leases.

Regarding the Company’sThe Company’s federal funds purchased this fluctuates based on the short-term funding needs of the Company’s subsidiary banks. See Note 9 to the Consolidated Financial Statements for additional information on the Company’s short-term borrowings.

FHLB ADVANCES ADVANCES AND OTHER BORROWINGS

As a result of their membershipsmembership in the FHLB of Des Moines, and Chicago, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs.programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provide a less costly source of funds than customer deposits. For 2017,2019, FHLB advances increased $54.5decreased $107.2 million, or 40%, primarily due to the timing of strong loan and leasedeposit growth which temporarily outpaced the Company’s depositloan growth. The FHLB advance increases were overnight advances. There were no increases in term advances. See Note 10 of the Consolidated Financial Statements for additional details. For 2016, FHLB advances decreased $13.5 million, or 9%, as several prepayments of advances were included in balance sheet restructurings throughout the year. See Note 10 of the Consolidated Financial Statements for additional details.

 

As of December 31,

 

 

 

 

 

 

 

 

 

 

2017

  

2016

  

2015

 

 

As of December 31, 

 

(dollars in thousands)

 

    

2019

 

2018

Amount Due

 $192,000  $137,500  $151,000 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

FHLB Advances

 

$

159,300

 

 

$

266,492

 

Weighted Average Interest Rate at Year-End

  1.82%  1.25%  1.37%

 

 

1.74

%  

 

 

2.55

%  

 

Other borrowings consist largely of wholesale structured repurchase agreements which the subsidiary banks utilize as an alternative funding source to FHLB advances and customer deposits. The table below presents the composition of the Company’s other borrowings.

 

 

 

 

 

 

 

 

As of, December 31, 

 

As of December 31,

 

 

2019

    

2018

    

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Wholesale structured repurchase agreements

 $35,000  $45,000  $110,000 

 

$

 —

 

$

35,000

 

Term notes

  31,000   30,000   - 

 

 

 —

 

 

23,250

 

Revolving line of credit

  -   5,000   - 

 

 

 —

 

 

9,000

 

 $66,000  $80,000  $110,000 

 

$

 —

 

$

67,250

 

 

In 2017,During 2019, the Company prepaid $25 million of wholesale structured repurchase agrements and the other borrowings decreased $14$10 million withmatured without replacement.  For the paydown of $5.0 millionterm notes and revolving line of credit, andthese were paid off with the maturityproceeds from the issuance of $10.0 million wholesale structured repurchase agreement. In 2016, other borrowings decreased $30 million.

subordinated notes in the first quarter of 2019. See Notes 10 and 11 to the Consolidated Financial Statements for additional information regarding FHLB advances, and other borrowings and the balance sheet restructurings that occurred in 2015 and 2016.

borrowings.

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

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STOCKHOLDERS’ EQUITYSUBORDINATED NOTES

During 2019, the Company issued subordinated notes of $65.0 million.  Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million.  Immediately following the issuance, the Company repaid term notes totaling $21.3 million and the outstanding balance of $9.0 million on its revolving line of credit.  The term notes and revolving line of credit had been used to fund acquisitions as described in Note 2 to the Consolidated Financial Statements. See Note 12 to the Consolidated Financial Statements for additional information regarding subordinated notes.

STOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

As of December 31,

 

 

As of December 31, 

 

2017

  

2016

  

2015

 

 

2019

    

2018

    

 

Amount

  

Amount

  

Amount

 

 

(dollars in thousands)

 

(dollars in thousands)

 

 

 

 

 

 

 

 

Common stock

 $13,918  $13,107  $11,761 

 

$

15,828

 

$

15,718

 

Additional paid in capital

  189,078   156,777   123,283 

 

 

274,785

 

 

270,761

 

Retained earnings

  151,962   118,617   92,966 

 

 

245,836

 

 

192,203

 

AOCI

  (1,671)  (2,460)  (2,124)

AOCI (loss)

 

 

(1,098)

 

 

(5,544)

 

Total stockholders' equity

 $353,287  $286,041  $225,886 

 

$

535,351

 

$

473,138

 

            

 

 

 

 

 

 

 

TCE/TA ratio (non-GAAP)

  8.01%  8.04%  8.55%

TCE / TA ratio (non-GAAP)

 

 

9.25

%  

 

7.78

%  

 

*TCE/TA ratio is a non-GAAP measure. Refer to the GAAP to Non-GAAP Reconciliations section of this report for more information.

As of December 31, 2017, 20162019 and 2015,2018, no preferred stock was outstanding.

In connection with the acquisition of Guaranty Bankmerger with Springfield Bancshares in the fourththird quarter of 2017,2018, the Company issued 678,6701,699,414 shares of its common stock at a price of $45.50 per share.stock. This issuance significantly increased common stock and additional paid in capital in comparison to the prior year. Refer to Note 2 of the Consolidated Financial Statements for additional information.

In connection with the acquisition of CSB in the third quarter of 2016, the Company sold 1,215,000 shares of its common stock at a price of $24.75 per share, for net proceeds of $29.8 million, after deducting expenses. This offering significantly increased common stock and additional paid in capital in comparison to the prior year. Refer to Note 2 of the Consolidated Financial Statements for additional information.

The following table presents the rollforward of stockholders’stockholders’ equity for the years ended December 31, 20172019 and 2016,2018, respectively.

 

 

 

 

 

 

 

For the Year Ended December 31, 

 

For the Years Ended December 31,

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

 

(dollars in thousands)

 

 

 

 

 

 

 

Beginning balance

 $286,041  $225,886 

 

$

473,138

 

$

353,287

Net income

  35,707   27,686 

 

 

57,408

 

 

43,120

Other comprehensive income (loss), net of tax

  1,093   (336)

 

 

4,446

 

 

(3,206)

Common cash dividends declared

  (2,665)  (2,036)

 

 

(3,775)

 

 

(3,546)

Proceeds from issuance of 678,670 shares of common stock, net of costs

  30,741   - 

Proceeds from issuance of 1,215,000 shares of common stock, net of costs

  -   29,829 

Proceeds from issuance of 23,501 shares of common stock

 

 

 —

 

 

1,000

Proceeds from issuance of 1,699,414 shares of common stock, net of costs

 

 

 —

 

 

80,531

Other *

  2,370   5,012 

 

 

4,134

 

 

1,952

Ending balance

 $353,287  $286,041 

 

$

535,351

 

$

473,138

 

*Includes mostly common stock issued for options exercised and the employee stock purchase plans, as well as stock-based compensation.

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On February 18, 2020, the Company announced a share repurchase program, permitting the repurchase of up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the SEC.  The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requiremets and other factors.  The repurchase program does not obligate the Company to purchase any particular number of shares.

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’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, cash and due from banks and federal funds sold, which averaged $164.0$270.2 million and $159.7 million during 2017, $139.5 million during 20162019 and $129.5 million during 2015.2018, respectively. 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 liquidityliquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, structured repos, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale, 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 principal payments on its securities portfolio.

At December 31, 2017,2019, the subsidiary banks had 3427 lines of credit totaling $375.0$380.6 million, of which $3.0$45.3 million was secured and $372.0$335.3 million was unsecured. At December 31, 2017,2019, all of the full $375.0$380.6 million was available.

At December 31, 2016,2018, the subsidiary banks had 33 lines of credit totaling $381.4$363.7 million, of which $34.4$1.7 million was secured and $347.0$362.0 million was unsecured. At December 31, 2016, $361.42018, $343.7 million of the $363.7 million was available as $20.0 million was utilized for short-term borrowing needs at QCBT.

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 $10.0$20.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2018.2020. At December 31, 2017,2019, the full $10.0$20.0 million was available. See Note 11 to the Consolidated Financial Statements for additional information.

Investing activities used cash of $410.5$308.7 million during 20172019 compared to $169.0$333.6 million during 2016, and $66.1 million during 2015.2018. Proceeds from calls, maturities, pay downs, and sales of securities were $152.6$106.1 million for 20172019 compared to $285.2$70.2 million for 2016, and $308.8 million for 2015.2018. Purchases of securities used cash of $179.8$72.0 million for 20172019 compared to $179.6$84.0 million for 2016, and $232.1 million for 2015.2018. The net increase in loans/leases used cash of $375.2$320.4 million for 20172019 compared to $187.5$292.7 million for 2016,2018. The Company received net cash of $46.6 million related to the sale of RB&T assets and $172.8liabilities for 2019. Purchases of interest rate caps used cash of $4.3 million for 2015.2019. There were no purchases of interest rate caps in 2018. The Company paid net cash of $3.4 million and $69.9$5.2 million related to the acquisition of Guaranty Bankthe Bates Companies and CSB, respectively.

the merger with Springfield Bancshares in 2018.

Financing activities provided cash of $382.0$222.9 million for 20172019 compared to $154.4$279.2 million for 2016, and $39.5 million for 2015.2018. Net increases in deposits totaled $385.1 million, $302.4 million, and $201.0$355.6 million for 2017, 2016, and 2015, respectively.2019 as compared to $271.3 million for 2018. Net short-term borrowings decreased $39.1$14.2 million $104.7for 2019 and increased $13.6 million and $123.7 million in 2017 and 2016 and 2015, respectively.for 2018. In 2017, 2016, and 2015, respectively,2019 the Company used $4.1 million, $104.7 million, and $120.7$30.3 million to prepay select FHLB advances and $46.3 million to prepay other borrowings. In 2016,2018 the Company received $29.8 million of proceeds from the common stock offering of 1.2 million shares of common stock.did not prepay any FHLB advances and other borrowings.  Short-term FHLB advances increased $60.9 million, $20.5 million. and $47.0decreased $52.5 million in 2017, 2016,2019 and 2015, respectively.

increased $24.8 million in 2018.

Total cash provided by operating activities was $33.7$76.5 million for 2017,2019 compared to $43.4$64.3 million for 2016, and $30.1 million for 2015.

2018.

Throughout its history,, the Company has secured additional capital through various resources, including common and preferred stock and the issuance of trust preferred securities.

The Company filed a universal shelf registration statement on Form S-3 with the SEC on October 27, 2016, as amended on January 11, 2017. Declared effective by the SEC on January 31, 2017, the registration statement allows the Company to offersecurities and sell various types of securities, including common stock, preferred stock, debt securities and/or warrants, from time to time up to an aggregate amount of $100 million. The Company utilized $30.1 million of its previous $100 million shelf registration filing through the offer and sale of its common stock in the second quarter of 2016 to help fund the acquisition of CSB (see Note 2 to the Consolidated Financial Statements). This Form S-3 filing replenished the amount available to the previous level of $100 million. The specific terms and prices of any securities offered pursuant to the registration statement will be determined at the time of any future offering and described in a separate prospectus supplement, which would be filed with the SEC at the time of the particular offering, if any. There were no securities issued under this shelf registration statement during 2017.subordinated notes.

 

As of December 31, 20172019 and 2016,2018, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 1617 to the Consolidated Financial Statements for detail of the capital amounts and ratios for the Company and its subsidiary banks.

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COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTSARRANGEMENTS

In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements.Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer'scustomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management'smanagement’s credit evaluation of the counter-party.counter-party. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer.customer. At December 31, 20172019 and 2016,2018, no amounts had been recorded as liabilities for the banks'banks’ potential obligations under these guarantees.

As of December 31, 20172019 and 2016,2018, commitments to extend credit aggregated $791,550,060 and $666,778,085, respectively.$1.2 billion. As of December 31, 20172019 and 2016,2018, standby letters of credit aggregated $17,283,025$23.8 million and $15,697,469,$20.3 million, respectively. Management does not expect that all of these commitments will be funded.

Additional information regarding commitments, contingencies, and off-balance sheet arrangementsarrangements is described in Note 1819 to the Consolidated Financial Statements.

TheThe Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2017,2019, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.Consolidated Financial Statements.

  

Financial

  

Payments Due by Period

 
  

Statement

      

One Year

             

Description

 

Note Reference

  

Total

  

or Less

  

2 - 3 Years

  

4 - 5 Years

  

After 5 Years

 
      

(dollars in thousands)

 

Deposits without a stated maturity

  N/A  $2,670,583  $2,670,583  $-  $-  $- 

Certificates of deposit

  8   596,072   478,334   104,375   13,296   67 

Short-term borrowings

  9   13,993   13,993   -   -   - 

FHLB advances

  10   192,000   190,400   1,600   -   - 

Other borrowings

  11   66,000   7,750   50,500   7,750   - 

Junior subordinated debentures

  12   37,486   -   -   -   37,486 

Rental commitments

  5   1,294   364   615   252   63 

Operating contracts

  N/A   34,363   11,752   11,424   5,891   5,296 

Total contractual cash obligations

     $3,611,791  $3,373,176  $168,514  $27,189  $42,912 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial

 

Payments Due by Period

 

    

Statement

    

 

 

    

One Year

    

 

 

    

 

 

    

 

 

Description

 

Note Reference

 

Total

 

or Less

 

2 - 3 Years

 

4 - 5 Years

 

After 5 Years

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits without a stated maturity

 

N/A

 

$

3,184,726

 

$

3,184,726

 

$

 —

 

$

 —

 

$

 —

Certificates of deposit

 

8

 

 

726,325

 

 

523,631

 

 

181,194

 

 

21,431

 

 

69

Short-term borrowings

 

9

 

 

13,423

 

 

13,423

 

 

 —

 

 

 —

 

 

 —

FHLB advances

 

10

 

 

159,300

 

 

110,900

 

 

28,400

 

 

20,000

 

 

 —

Other borrowings

 

11

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Subordinated debentures

 

12

 

 

68,394

 

 

 —

 

 

 —

 

 

 —

 

 

68,394

Junior subordinated debentures

 

13

 

 

37,838

 

 

 —

 

 

 —

 

 

 —

 

 

37,838

Rental commitments

 

5

 

 

2,320

 

 

541

 

 

578

 

 

344

 

 

857

Operating contracts

 

N/A

 

 

32,584

 

 

8,669

 

 

15,739

 

 

5,489

 

 

2,687

Total contractual cash obligations

 

 

 

$

4,224,910

 

$

3,841,890

 

$

225,911

 

$

47,264

 

$

109,845

 

The Company'sCompany’s operating contract obligations represent short and long-term contractual payments for data processing equipment and services, software, and other equipment and professional services.

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IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements of the Company and the accompanying notes have been prepared in accordance with U.S. GAAP, which requirerequires the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

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’sCompany’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’sCompany’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Annual Report on Form 10-K.10‑K. In addition to the risk factors described in that section, there are other factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

●·

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

●·

Changes in the interest rate environment.

●·

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

●·

The impact of cybersecurity risks.

●·

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

●·

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

●·

Unexpected results of acquisitions (including the acquisition of Guaranty Bank and CSB), which may include failure to realize the anticipated benefits of the acquisition.

●·

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

●·

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

 

·

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Item 7A.    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’sCompany’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’sCompany’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, as necessary, for consideration by the full board of each bank.

Internal asset/liability management teams consisting of members of the subsidiary banks’banks’ management meet weeklybi-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'sboard’s objectives in the most 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’sCompany’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’sCompany’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, 300 400, and 500400 basis point upward shifts; and a 100 and 200 basis point downward shiftshifts 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 shift.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. For the 500 basis point upward shift, the model assumes a flattening and pro rata shift in interest rates over a twelve-month period where the short-end of the yield curve shifts upward greater than the long-end of the yield curve.

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

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

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Application of the simulation model analysis for select interest rate scenarios at December 31, 2017, 20162019 and 20152018 demonstrated the following:

  

 

  NET INTEREST INCOME EXPOSURE in YEAR 1 

INTEREST RATE SCENARIO

 

POLICY LIMIT

  

As of December 31,

2017

  

As of December 31,

2016

  

As of December 31,

2015

 
                 

100 basis point downward shift

  -10.0%  0.3%  -1.7%  -2.1%

200 basis point upward shift

  -10.0%  -3.7%  -1.2%  -2.7%

300 basis point upward shock

  -25.0%  -8.4%  -1.4%  -7.1%

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME EXPOSURE in YEAR 1

 

    

 

    

As of December 31, 

    

As of December 31, 

    

INTEREST RATE SCENARIO

 

POLICY LIMIT

 

2019

 

2018

 

 

 

 

 

 

 

 

 

100 basis point downward shift

 

(10.0)

%  

0.5

%  

0.7

%  

200 basis point upward shift

 

(10.0)

%  

1.2

%  

(2.7)

%  

300 basis point upward shock

 

(25.0)

%  

4.9

%  

(9.0)

%  

 

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 December 31, 20172019 were well 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’sCompany’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 8.    Financial Statements

 

QCR Holdings, Inc.

HOLDINGS, INC.

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

Financial Statements

Consolidated Balance Sheets as of December 31, 20172019 and 2016 2018

Consolidated Statements of Income for the years ended December 31, 2017, 2016,2019, 2018, and 2015 2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016,2019, 2018, and 20152017

Consolidated Statements of Changes in Stockholders'Stockholders’ Equity for the years ended December 31, 2017, 2016,2019, 2018, and 20152017

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2019, 2018, and 20152017

Notes to consolidated financial statements:Consolidated Financial Statements:

●

Note 1:

Nature of Business and Significant Accounting Policies

●

Note 2:

  Sales/Mergers/Acquisitions

●

Note 3:

Investment Securities

●

Note 4:

Loans/Leases Receivable

●

Note 5:

Premises and Equipment

●

Note 6:

Goodwill and Intangibles

●

Note 7:

Derivatives and Hedging Activities

●

Note 8:

Deposits

●

Note 9:

Short-Term Borrowings

●

Note 10:

FHLB Advances

●

Note 11:

Other Borrowings and Unused Lines of Credit

●

Note 12: Subordinated Notes

    Note 13: Junior Subordinated Debentures

●

Note 13:

14: Federal and State Income Taxes

●

Note 14:

15: Employee Benefit Plans

●

Note 15:

16: Stock-Based Compensation

●

Note 16:

17: Regulatory Capital Requirements and Restrictions on Dividends

●

Note 17:

18: Earnings Per Share

●

Note 18:

19: Commitments and Contingencies

●

Note 19:

20: Quarterly Results of Operations (Unaudited)

●

Note 20:

21: Parent Company Only Financial Statements

●

Note 21:

22: Fair Value

●

Note 22:

23: Business Segment Information

 

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Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and the Board of Directors of QCR Holdings, Inc.

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and its

subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three

years in the period ended December 31, 2017,2019, and the related notes to the consolidated financial

statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in

all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight

Board (United States) (PCAOB), the Company's internal control over financial reporting as of

December 31, 2017,2019, based on criteria established in Internal Control—Control — Integrated Framework issued by

the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 9, 201813, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control

over financial reporting.

 

Basis for Opinion

These financial statements are the responsibility of the Company’sCompany’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public

accounting firm registered with the PCAOB and are required to be independent with respect to the

Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that

we plan and perform the audits to obtain reasonable assurance about whether the financial statements

are free of material misstatement, whether due to error or fraud. Our audits included performing

procedures to assess the risks of material misstatement of the financial statements, whether due to error

or fraud, and performing procedures that respond to those risks. Such procedures included examining, on

a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as

well as evaluating the overall presentation of the financial statements. We believe that our audits provide

a reasonable basis for our opinion.

 

mcgsign

We have served as the Company's auditor since 1993.

 

Davenport, Iowa

March 9, 201813, 2020

 

57

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QCR Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2017 and 2016

Assets

 

2017

  

2016

 

Cash and due from banks

 $75,721,663  $70,569,993 

Federal funds sold

  30,197,000   22,257,000 

Interest-bearing deposits at financial institutions

  55,765,012   63,948,925 
         

Securities held to maturity, at amortized cost

  379,474,205   322,909,056 

Securities available for sale, at fair value

  272,907,907   251,113,139 

Total securities

  652,382,112   574,022,195 
         

Loans receivable, held for sale

  645,001   1,135,500 

Loans/leases receivable, held for investment

  2,963,840,399   2,404,351,485 

Gross loans/leases receivable

  2,964,485,400   2,405,486,985 

Less allowance for estimated losses on loans/leases

  (34,355,728)  (30,757,448)

Net loans/leases receivable

  2,930,129,672   2,374,729,537 
         

Bank-owned life insurance

  59,059,494   57,257,051 

Premises and equipment, net

  62,838,255   60,643,508 

Restricted investment securities, at cost

  19,782,525   14,997,025 

Other real estate owned, net

  13,558,308   5,523,104 

Goodwill

  28,334,092   13,110,913 

Core deposit intangible

  9,078,953   7,381,213 

Other assets

  45,817,687   37,503,284 

Total assets

 $3,982,664,773  $3,301,943,748 
         

Liabilities and Stockholders' Equity

        

Liabilities:

        

Deposits:

        

Noninterest-bearing

 $789,547,696  $797,415,090 

Interest-bearing

  2,477,107,360   1,871,846,183 

Total deposits

  3,266,655,056   2,669,261,273 
         

Short-term borrowings

  13,993,122   39,971,387 

Federal Home Loan Bank advances

  192,000,000   137,500,000 

Other borrowings

  66,000,000   80,000,000 

Junior subordinated debentures, net

  37,486,487   33,480,202 

Other liabilities

  53,242,979   55,690,087 

Total liabilities

  3,629,377,644   3,015,902,949 
         

Commitments and Contingencies

        
         

Stockholders' Equity:

        

Preferred stock, $1 par value; shares authorized 250,000

        

December 2017 and 2016 - No shares issued or outstanding

  -   - 

Common stock, $1 par value; shares authorized 20,000,000

  13,918,168   13,106,845 

December 2017 - 13,918,168 shares issued and outstanding

        

December 2016 - 13,106,845 shares issued and outstanding

        

Additional paid-in capital

  189,077,550   156,776,642 

Retained earnings

  151,962,661   118,616,901 

Accumulated other comprehensive loss:

        

Securities available for sale

  (866,223)  (1,527,433)

Interest rate cap derivatives

  (805,027)  (932,156)

Total stockholders' equity

  353,287,129   286,040,799 

Total liabilities and stockholders' equity

 $3,982,664,773  $3,301,943,748 

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2017, 2016, and 2015

  

2017

  

2016

  

2015

 

Interest and dividend income:

            

Loans/leases, including fees

 $117,465,275  $91,235,049  $74,615,499 

Securities:

            

Taxable

  5,144,336   4,585,300   6,772,244 

Nontaxable

  11,253,351   9,686,844   7,782,370 

Interest-bearing deposits at financial institutions

  873,988   393,048   304,602 

Restricted investment securities

  631,049   522,047   503,764 

Federal funds sold

  149,319   45,447   24,774 

Total interest and dividend income

  135,517,318   106,467,735   90,003,253 
             

Interest expense:

            

Deposits

  13,011,906   6,018,366   4,495,538 

Short-term borrowings

  113,981   93,934   210,306 

Federal Home Loan Bank advances

  1,981,593   1,284,212   3,511,541 

Other borrowings

  2,878,879   3,317,513   4,233,193 

Junior subordinated debentures

  1,465,678   1,236,933   1,255,951 

Total interest expense

  19,452,037   11,950,958   13,706,529 

Net interest income

  116,065,281   94,516,777   76,296,724 

Provision for loan/lease losses

  8,469,919   7,478,166   6,870,900 

Net interest income after provision for loan/lease losses

  107,595,362   87,038,611   69,425,824 
             

Noninterest income:

            

Trust department fees

  7,187,820   6,164,137   6,131,209 

Investment advisory and management fees

  3,869,699   2,992,811   2,971,964 

Deposit service fees

  5,919,317   4,439,455   3,784,935 

Gains on sales of residential real estate loans, net

  408,655   431,313   322,872 

Gains on sales of government guaranteed portions of loans, net

  1,163,741   3,159,073   1,304,575 

Swap fee income

  3,094,939   1,708,204   1,717,552 

Securities gains (losses), net

  (87,885)  4,592,398   798,983 

Earnings on bank-owned life insurance

  1,802,443   1,771,396   1,762,107 

Debit card fees

  2,941,703   1,814,488   1,244,912 

Correspondent banking fees

  915,647   1,050,142   1,190,411 

Other

  3,266,213   2,913,458   3,133,801 

Total noninterest income

  30,482,292   31,036,875   24,363,321 
             

Noninterest expenses:

            

Salaries and employee benefits

  55,722,288   46,317,060   42,967,915 

Occupancy and equipment expense

  10,938,037   8,404,605   7,042,706 

Professional and data processing fees

  10,757,057   7,113,443   5,523,447 

Acquisition costs

  1,068,918   1,400,004   - 

Post-acquisition compensation, transition and integration costs

  4,309,565   1,041,169   - 

FDIC insurance, other insurance and regulatory fees

  2,752,270   2,549,314   2,724,968 

Loan/lease expense

  1,163,708   662,299   882,591 

Net cost of (income from) operations of other real estate

  1,599   591,303   (1,092,401)

Advertising and marketing

  2,624,951   2,127,566   1,900,539 

Bank service charges

  1,770,942   1,692,957   1,486,265 

Losses on debt extinguishment, net

  -   4,577,668   7,185,601 

Correspondent banking expense

  807,077   750,646   703,495 

CDI amortization

  1,000,561   442,850   199,512 

Other

  4,507,724   3,815,028   3,667,384 

Total noninterest expenses

  97,424,697   81,485,912   73,192,022 

Income before income taxes

  40,652,957   36,589,574   20,597,123 

Federal and state income tax expense

  4,946,450   8,902,787   3,669,242 

Net income

 $35,706,507  $27,686,787  $16,927,881 
             
             

Basic earnings per common share

 $2.68  $2.20  $1.64 

Diluted earnings per common share

 $2.61  $2.17  $1.61 
             

Weighted average common shares outstanding

  13,325,128   12,570,767   10,345,286 

Weighted average common and common equivalent shares outstanding

  13,680,472   12,766,003   10,499,841 
             

Cash dividends declared per common share

 $0.20  $0.16  $0.08 

See Notes to Consolidated Financial Statements.

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2017, 2016, and 2015

  

2017

  

2016

  

2015

 

Net income

 $35,706,507  $27,686,787  $16,927,881 
             

Other comprehensive income (loss):

            
             

Unrealized gains on securities available for sale:

            

Unrealized holding gains arising during the period before tax

  1,257,289   4,258,154   1,144,314 

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

  (87,885)  4,592,398   798,983 
   1,345,174   (334,244)  345,331 

Unrealized losses on interest rate cap derivatives:

            

Unrealized holding losses arising during the period before tax

  (69,827)  (279,497)  (631,363)

Less reclassification adjustment for ineffectiveness and caplet amortization before tax

  (484,891)  (75,290)  (15,895)
   415,064   (204,207)  (615,468)
             

Other comprehensive income (loss), before tax

  1,760,238   (538,451)  (270,137)

Tax expense (benefit)

  668,085   (202,691)  (81,524)

Other comprehensive income (loss), net of tax

  1,092,153   (335,760)  (188,613)
             

Comprehensive income

 $36,798,660  $27,351,027  $16,739,268 

See Notes to Consolidated Financial Statements

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2017, 2016, and 2015

              

Accumulated

         
      

Additional

      

Other

         
  

Common

  

Paid-In

  

Retained

  

Comprehensive

  

Treasury

     
  

Stock

  

Capital

  

Earnings

  

Income (Loss)

  

Stock

  

Total

 
                         

Balance, December 31, 2014

 $8,074,443  $61,668,968  $77,876,824  $(1,935,216) $(1,606,510) $144,078,509 

Net income

  -   -   16,927,881   -   -   16,927,881 

Other comprehensive loss, net of tax

  -   -   -   (188,613)  -   (188,613)

Common cash dividends declared, $0.08 per share

  -   -   (934,682)  -   -   (934,682)

Issuance of 3,680,000 shares of common stock, net of issuance costs

  3,680,000   59,804,123   -   -   -   63,484,123 

Issuance of 24,033 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

  24,033   375,120   -   -   -   399,153 

Issuance of 79,638 shares of common stock as s result of stock options exercised

  79,638   1,091,402   -   -   -   1,171,040 

Stock-based compensation expense

  -   941,469   -   -   -   941,469 

Tax benefit of nonqualified stock options exercised

  -   93,096   -   -   -   93,096 

Retirement of treasury stock, 121,246 shares of common stock

  (121,246)  (580,886)  (904,378)  -   1,606,510   - 

Restricted stock awards - 28,846 shares of common stock

  28,846   (28,846)  -   -   -   - 

Exchange of 4,631 shares of common stock in connection with stock options exercised and restricted stock vested

  (4,631)  (81,595)  -   -   -   (86,226)

Balance, December 31, 2015

 $11,761,083  $123,282,851  $92,965,645  $(2,123,829) $-  $225,885,750 

Net income

  -   -   27,686,787   -   -   27,686,787 

Other comprehensive loss, net of tax

  -   -   -   (335,760)  -   (335,760)

Common cash dividends declared, $0.16 per share

  -   -   (2,035,531)  -   -   (2,035,531)

Issuance of 1,215,000 shares of common stock, net of issuance costs

  1,215,000   28,613,916   -   -   -   29,828,916 

Issuance of 20,192 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

  20,192   417,336   -   -   -   437,528 

Issuance of 111,423 shares of common stock as a result of stock options exercised

  111,423   1,556,823   -   -   -   1,668,246 

Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds

  -   2,132,415   -   -   -   2,132,415 

Stock-based compensation expense

  -   947,174   -   -   -   947,174 

Tax benefit of nonqualified stock options exercised

  -   394,149   -   -   -   394,149 

Restricted stock awards - 21,882 shares of common stock

  21,882   (21,882)  -   -   -   - 

Exchange of 22,735 shares of common stock in connection with stock options exercised and restricted stock vested

  (22,735)  (546,140)  -   -   -   (568,875)

Balance, December 31, 2016

 $13,106,845  $156,776,642  $118,616,901  $(2,459,589) $-  $286,040,799 

Net income

  -   -   35,706,507   -   -   35,706,507 

Other comprehensive loss, net of tax

  -   -   -   1,092,153   -   1,092,153 

Reclassification of certain tax effects from accumulated other comprehensive income

  -   -   303,814   (303,814)  -   - 

Common cash dividends declared, $0.20 per share

  -   -   (2,664,561)  -   -   (2,664,561)

Issuance of 678,670 shares of common stock as a result of the acquisition of Guaranty Bank & Trust, net of issuance cost

  678,670   30,062,744   -   -   -   30,741,414 

Issuance of 13,318 shares of common stock as a result of stock purchased under the Employee Stock Purchase Plan

  13,318   454,822   -   -   -   468,140 

Issuance of 114,100 shares of common stock as a stock as a result of stock options exercised

  114,100   1,611,338   -   -   -   1,725,438 

Stock-based compensation expense

  -   1,187,036   -   -   -   1,187,036 

Restricted stock awards - 28,289 shares of common stock

  28,289   (28,289)  -   -   -   - 

Exchange of 23,054 shares of common stock in connection with stock options exercised and restricted stock vested

  (23,054)  (986,743)  -   -   -   (1,009,797)

Balance, December 31, 2017

 $13,918,168  $189,077,550  $151,962,661  $(1,671,250) $-  $353,287,129 

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2017, 2016, and 2015

  

2017

  

2016

  

2015

 

Cash Flows from Operating Activities:

            

Net income

 $35,706,507  $27,686,787  $16,927,881 

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

            

Depreciation

  3,948,934   3,424,140   3,065,031 

Provision for loan/lease losses

  8,469,919   7,478,166   6,870,900 

Deferred income taxes

  (6,029,555)  (3,066,407)  (2,004,532)

Stock-based compensation expense

  1,187,036   947,174   941,469 

Deferred compensation expense accrued

  1,425,717   1,171,406   1,023,827 

Losses (gains) on sale of other real estate owned, net

  (151,211)  243,858   (1,021,242)

Amortization of premiums on securities, net

  1,839,196   1,302,962   1,040,275 

Securities (gains) losses, net

  87,885   (4,592,398)  (798,983)

Loans originated for sale

  (49,578,773)  (74,329,667)  (38,748,100)

Proceeds on sales of loans

  51,641,668   77,850,553   40,362,697 

Gains on sales of residential real estate loans, net

  (408,655)  (431,313)  (322,872)

Gains on sales of government guaranteed portions of loans, net

  (1,163,741)  (3,159,073)  (1,304,575)

Losses on debt extinguishment, net

  -   4,577,668   7,185,601 

Amortization of core deposit intangible

  1,000,561   442,849   199,512 

Accretion of acquisition fair value adjustments, net

  (5,040,873)  (3,718,160)  (367,009)

Increase in cash value of bank-owned life insurance

  (1,802,443)  (1,771,396)  (1,762,107)

(Increase) decrease in other assets

  826,449   (943,891)  (3,910,486)

Increase (decrease) in other liabilities

  (8,245,340)  10,269,563   2,721,335 

Net cash provided by operating activities

  33,713,281   43,382,821   30,098,622 
             

Cash Flows from Investing Activities:

            

Net decrease (increase) in federal funds sold

  (7,940,000)  (1,709,000)  26,930,000 

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

  12,137,820   (12,904,803)  (979,283)

Proceeds from sales of other real estate owned

  1,138,520   2,084,696   7,696,026 

Activity in securities portfolio:

            

Purchases

  (179,785,944)  (179,598,630)  (232,092,732)

Calls, maturities and redemptions

  43,010,478   117,876,284   211,942,737 

Paydowns

  38,495,801   33,169,638   15,476,369 

Sales

  71,091,580   134,188,737   81,410,368 

Activity in restricted investment securities:

            

Purchases

  (4,824,000)  (1,098,200)  (3,752,450)

Redemptions

  515,000   2,450,000   4,476,100 

Net increase in loans/leases originated and held for investment

  (375,226,301)  (187,496,180)  (172,786,032)

Purchase of premises and equipment

  (5,760,802)  (6,032,416)  (4,394,255)

Net cash paid for acquisitions

  (3,368,909)  (69,905,355)  - 

Net cash used in investing activities

  (410,516,757)  (168,975,229)  (66,073,152)
             

Cash Flows from Financing Activities:

            

Net increase in deposits

  385,082,234   302,390,928   200,988,645 

Net decrease in short-term borrowings

  (39,080,308)  (104,691,329)  (123,688,954)

Activity in Federal Home Loan Bank advances:

            

Term advances

  1,600,000   -   5,000,000 

Calls and maturities

  (8,000,000)  (24,000,000)  (26,000,000)

Net change in short-term and overnight advances

  60,900,000   20,500,000   47,000,000 

Prepayments

  (4,108,027)  (31,008,668)  (84,401,601)

Activity in other borrowings:

            

Proceeds from other borrowings

  7,000,000   35,000,000   - 

Calls, maturities and scheduled principal payments

  (21,000,000)  -   (7,350,000)

Prepayments

  -   (69,769,000)  (34,559,000)

Retirement of junior subordinated debentures

  -   (3,955,000)  (1,762,000)

Payment of cash dividends on common and preferred stock

  (2,494,260)  (1,981,541)  (782,054)

Net proceeds from common stock offering

  -   29,828,916   63,484,123 

Proceeds from issuance of common stock, net

  2,055,507   2,105,774   1,552,673 

Net cash provided by financing activities

  381,955,146   154,420,080   39,481,832 

Net increase in cash and due from banks

  5,151,670   28,827,672   3,507,302 

Cash and due from banks, beginning

  70,569,993   41,742,321   38,235,019 

Cash and due from banks, ending

 $75,721,663  $70,569,993  $41,742,321 

Continued

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Continued

Years Ended December 31, 2017, 2016, and 2015

  

2017

  

2016

  

2015

 

Supplemental Disclosures of Cash Flow Information, cash payments for:

            

Interest

 $19,053,645  $11,926,012  $14,027,512 

Income and franchise taxes

  13,039,516   10,758,611   2,619,288 
             

Supplemental Schedule of Noncash Investing and Financing Activities:

            

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

  1,092,153   (335,760)  (188,613)

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

  (1,009,797)  (568,875)  (68,706)

Tax benefit of nonqualified stock options exercised

  -   394,149   93,096 

Transfers of loans to other real estate owned

  9,022,514   51,000   1,577,060 

Due to broker for purchases of securities

  -   2,655,492   - 

Tax basis adjustment related to the acquisition of noncontrolling interest in m2 Lease Funds

  -   2,132,415   - 

Increase (decrease) in the fair market value of interest rate swap assets and liabilities

  2,058,957   (706,244)  1,568,548 

Dividends payable

  692,874   522,573   468,583 
             

Supplemental disclosure of cash flow information for acquisitions:

            

Fair value of assets acquired:

            

Cash and due from banks *

 $4,434,511  $10,094,645  $- 

Federal funds sold

  -   698,000   - 

Interest-bearing deposits at financial institutions

  3,953,907   14,730,157   - 

Securities

  49,703,419   102,640,029   - 

Loans receivable, net

  192,517,677   419,029,277   - 

Premises and equipment, net

  4,808,343   20,684,880   - 

Restricted investment securities

  476,500   1,512,900   - 

Other real estate owned

  -   650,000   - 

Core deposit intangible

  2,698,301   6,352,653   - 

Other assets

  997,810   5,283,937   - 

Total assets acquired

 $259,590,468  $581,676,478  $- 
             

Fair value of liabilities assumed:

            

Deposits

 $212,467,514  $486,298,262  $- 

Short-term borrowings

  13,102,043   -   - 

FHLB advances

  4,108,027   20,368,877   - 

Junior subordinated debentures

  3,857,275   -   - 

Other liabilities

  2,595,883   4,897,564   - 

Total liabilities assumed

  236,130,742   511,564,703   - 

Net assets acquired

 $23,459,726  $70,111,775  $- 

Consideration paid:

            

Cash paid *

 $7,803,420  $80,000,000  $- 

Common stock

  30,879,485   -   - 

Total consideration paid

  38,682,905   80,000,000   - 

Goodwill

 $15,223,179  $9,888,225  $- 

* Net cash paid at closing totaled $3,368,909 for acquisition of Guaranty Bank in 2017.

   Net cash paid at closing totaled $69,905,355 for acquisition of CSB in 2016.

See Notes to Consolidated Financial Statements.

QCR Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2019 and 2018

 

 

 

 

 

 

 

 

    

December 31, 

    

December 31, 

 

 

2019

 

2018

 

 

(dollars in thousands)

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

76,254

 

$

85,523

Federal funds sold

 

 

9,800

 

 

26,398

Interest-bearing deposits at financial institutions

 

 

147,891

 

 

133,198

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost

 

 

400,646

 

 

401,913

Securities available for sale, at fair value

 

 

210,695

 

 

261,056

Total securities

 

 

611,341

 

 

662,969

 

 

 

  

 

 

  

Loans receivable held for sale

 

 

3,673

 

 

1,295

Loans/leases receivable held for investment

 

 

3,686,532

 

 

3,731,459

Gross loans/leases receivable

 

 

3,690,205

 

 

3,732,754

Less allowance for estimated losses on loans/leases

 

 

(36,001)

 

 

(39,847)

Net loans/leases receivable

 

 

3,654,204

 

 

3,692,907

 

 

 

  

 

 

  

Bank-owned life insurance

 

 

58,834

 

 

67,783

Premises and equipment, net

 

 

73,859

 

 

75,582

Restricted investment securities

 

 

23,252

 

 

25,689

Other real estate owned, net

 

 

4,129

 

 

9,378

Goodwill

 

 

74,748

 

 

77,832

Intangibles

 

 

14,970

 

 

17,450

Assets held for sale

 

 

11,966

 

 

 —

Other assets

 

 

147,802

 

 

75,001

Total assets

 

$

4,909,050

 

$

4,949,710

 

 

 

  

 

 

  

Liabilities and Stockholders' Equity

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Noninterest-bearing

 

$

777,224

 

$

791,102

Interest-bearing

 

 

3,133,827

 

 

3,185,929

Total deposits

 

 

3,911,051

 

 

3,977,031

 

 

 

  

 

 

  

Short-term borrowings

 

 

13,423

 

 

28,774

Federal Home Loan Bank advances

 

 

159,300

 

 

266,492

Other borrowings

 

 

 —

 

 

67,250

Subordinated notes

 

 

68,394

 

 

4,782

Junior subordinated debentures

 

 

37,838

 

 

37,670

Liabilities held for sale

 

 

5,003

 

 

 —

Other liabilities

 

 

178,690

 

 

94,573

Total liabilities

 

 

4,373,699

 

 

4,476,572

 

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders' Equity:

 

 

  

 

 

  

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

 

 

 —

 

 

 —

Common stock, $1 par value; shares authorized 20,000,000 December 2019 - 15,828,098 shares issued and outstanding December 2018 - 15,718,208 shares issued and outstanding

 

 

15,828

 

 

15,718

Additional paid-in capital

 

 

274,785

 

 

270,761

Retained earnings

 

 

245,836

 

 

192,203

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Securities available for sale

 

 

2,817

 

 

(4,268)

Derivatives

 

 

(3,915)

 

 

(1,276)

Total stockholders' equity

 

 

535,351

 

 

473,138

Total liabilities and stockholders' equity

 

$

4,909,050

 

$

4,949,710

 

See Notes to Consolidated Financial Statements.

58

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2019, 2018, and 2017

 

 

 

 

 

 

 

 

 

 

 

 

2019

    

2018

    

2017

 

 

(dollars in thousands)

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Loans/leases, including fees

 

$

190,324

 

$

160,160

 

$

117,465

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

 

6,607

 

 

6,353

 

 

5,145

Nontaxable

 

 

13,858

 

 

13,668

 

 

11,253

Interest-bearing deposits at financial institutions

 

 

3,910

 

 

1,267

 

 

874

Restricted investment securities

 

 

1,174

 

 

1,093

 

 

631

Federal funds sold

 

 

203

 

 

338

 

 

149

Total interest and dividend income

 

 

216,076

 

 

182,879

 

 

135,517

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

 

50,875

 

 

30,675

 

 

13,012

Short-term borrowings

 

 

363

 

 

271

 

 

114

Federal Home Loan Bank advances

 

 

2,894

 

 

4,193

 

 

1,981

Other borrowings

 

 

513

 

 

3,207

 

 

2,879

Subordinated notes

 

 

3,564

 

 

139

 

 

 —

Junior subordinated debentures

 

 

2,308

 

 

1,999

 

 

1,466

Total interest expense

 

 

60,517

 

 

40,484

 

 

19,452

Net interest income

 

 

155,559

 

 

142,395

 

 

116,065

Provision for loan/lease losses

 

 

7,066

 

 

12,658

 

 

8,470

Net interest income after provision for loan/lease losses

 

 

148,493

 

 

129,737

 

 

107,595

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Trust department fees

 

 

9,559

 

 

8,707

 

 

7,188

Investment advisory and management fees

 

 

6,995

 

 

4,726

 

 

3,870

Deposit service fees

 

 

6,812

 

 

6,420

 

 

5,919

Gains on sales of residential real estate loans, net

 

 

2,571

 

 

901

 

 

409

Gains on sales of government guaranteed portions of loans, net

 

 

748

 

 

405

 

 

1,164

Swap fee income

 

 

28,295

 

 

10,787

 

 

3,095

Securities losses, net

 

 

(30)

 

 

 —

 

 

(88)

Earnings on bank-owned life insurance

 

 

1,973

 

 

1,632

 

 

1,802

Debit card fees

 

 

3,357

 

 

3,263

 

 

2,942

Correspondent banking fees

 

 

773

 

 

852

 

 

916

Gain on sale of assets and liabilities of subsidiary

 

 

12,286

 

 

 —

 

 

 —

Other

 

 

5,429

 

 

3,848

 

 

3,265

Total noninterest income

 

 

78,768

 

 

41,541

 

 

30,482

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

92,063

 

 

68,994

 

 

55,722

Occupancy and equipment expense

 

 

15,106

 

 

12,884

 

 

10,938

Professional and data processing fees

 

 

13,381

 

 

11,452

 

 

10,757

Acquisition costs

 

 

 —

 

 

1,795

 

 

1,069

Post-acquisition compensation, transition and integration costs

 

 

3,582

 

 

2,086

 

 

4,310

Disposition costs

 

 

3,325

 

 

 —

 

 

 —

FDIC insurance, other insurance and regulatory fees

 

 

2,955

 

 

3,594

 

 

2,752

Loan/lease expense

 

 

1,097

 

 

1,544

 

 

1,164

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

 

 

3,789

 

 

2,489

 

 

 2

Advertising and marketing

 

 

4,548

 

 

3,552

 

 

2,625

Bank service charges

 

 

2,009

 

 

1,838

 

 

1,771

Losses on debt extinguishment

 

 

436

 

 

 —

 

 

 —

Correspondent banking expense

 

 

836

 

 

821

 

 

807

Intangibles amortization

 

 

2,266

 

 

1,692

 

 

1,001

Goodwill impairment

 

 

3,000

 

 

 —

 

 

 —

Other

 

 

6,841

 

 

6,402

 

 

4,506

Total noninterest expense

 

 

155,234

 

 

119,143

 

 

97,424

Net income before income taxes

 

 

72,027

 

 

52,135

 

 

40,653

Federal and state income tax expense

 

 

14,619

 

 

9,015

 

 

4,946

Net income

 

$

57,408

 

$

43,120

 

$

35,707

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

3.65

 

$

2.92

 

$

2.68

Diluted earnings per common share

 

$

3.60

 

$

2.86

 

$

2.61

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

15,730,016

 

 

14,768,687

 

 

13,325,128

Weighted average common and common equivalent shares outstanding

 

 

15,967,775

 

 

15,064,730

 

 

13,680,472

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.24

 

$

0.24

 

$

0.20

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

59

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2019, 2018, and 2017

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

57,408

 

$

43,120

 

$

35,707

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale:

 

 

 

 

 

 

 

 

 

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

 

 

8,761

 

 

(4,464)

 

 

1,257

Less reclassification adjustment for losses included in net income before tax

 

 

(30)

 

 

 —

 

 

(88)

Less reclassification adjustment for adoption of ASU 2016-01

 

 

 —

 

 

855

 

 

 —

 

 

 

8,791

 

 

(3,609)

 

 

1,345

Unrealized losses on derivatives:

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the period before tax

 

 

(3,806)

 

 

(1,199)

 

 

(70)

Less reclassification adjustment for caplet amortization before tax

 

 

 —

 

 

(602)

 

 

(485)

 

 

 

(3,806)

 

 

(597)

 

 

415

Unrealized gains (losses) on assets held for sale:

 

 

 

 

 

 

 

 

 

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

 

 

587

 

 

 —

 

 

 —

Less realized holding gains on securities sold

 

 

(61)

 

 

 —

 

 

 —

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

 

 

(446)

 

 

 —

 

 

 —

Less reclassification adjustment for caplet amortization before tax

 

 

422

 

 

 —

 

 

 —

Less realized holding losses on derivatives sold

 

 

392

 

 

 —

 

 

 —

 

 

 

894

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

5,879

 

 

(4,206)

 

 

1,760

Tax expense (benefit)

 

 

1,433

 

 

(1,000)

 

 

668

Other comprehensive income (loss), net of tax

 

 

4,446

 

 

(3,206)

 

 

1,092

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

61,854

 

$

39,914

 

$

36,799

See Notes to Consolidated Financial Statements.

 

60

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

Years Ended December 31, 2019, 2018, and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

 

 

 

    

Stock

    

Capital

    

Earnings

    

(Loss)

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2016

 

$

13,107

 

$

156,777

 

$

118,617

 

$

(2,460)

 

$

286,041

Net income

 

 

 —

 

 

 —

 

 

35,707

 

 

 —

 

 

35,707

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

1,092

 

 

1,092

Reclassification of certain tax effects from accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 other comprehensive income

 

 

 —

 

 

 —

 

 

303

 

 

(303)

 

 

 —

Common cash dividends declared, $0.20 per share

 

 

 —

 

 

 —

 

 

(2,665)

 

 

 —

 

 

(2,665)

Issuance of 678,000 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 the acquisition of Guaranty Bank & Trust, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 issuance costs of $138,071

 

 

679

 

 

30,063

 

 

 —

 

 

 —

 

 

30,742

Issuance of 13,318 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

13

 

 

455

 

 

 —

 

 

 —

 

 

468

Issuance of 114,100 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

114

 

 

1,611

 

 

 —

 

 

 —

 

 

1,725

Stock-based compensation expense

 

 

 —

 

 

1,187

 

 

 —

 

 

 —

 

 

1,187

Restricted stock awards - 28,289 shares of common stock

 

 

28

 

 

(28)

 

 

 —

 

 

 —

 

 

 —

Exchange of 23,054 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(23)

 

 

(987)

 

 

 —

 

 

 —

 

 

(1,010)

Balance, December 31, 2017

 

$

13,918

 

$

189,078

 

$

151,962

 

$

(1,671)

 

$

353,287

Net income

 

 

 —

 

 

 —

 

 

43,120

 

 

 —

 

 

43,120

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(3,206)

 

 

(3,206)

Impact of adoption of ASU 2016-01

 

 

 —

 

 

 —

 

 

667

 

 

(667)

 

 

 —

Common cash dividends declared, $0.24 per share

 

 

 —

 

 

 —

 

 

(3,546)

 

 

 —

 

 

(3,546)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       of merger with Springfield Bancshares, net of issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       costs of $106,237

 

 

1,699

 

 

78,832

 

 

 —

 

 

 —

 

 

80,531

     Issuance of 23,501 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       acquisition of Bates Companies

 

 

24

 

 

976

 

 

 —

 

 

 —

 

 

1,000

Issuance of 15,528 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

15

 

 

576

 

 

 —

 

 

 —

 

 

591

Issuance of 60,127 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

60

 

 

734

 

 

 —

 

 

 —

 

 

794

Stock-based compensation expense

 

 

 —

 

 

1,443

 

 

 —

 

 

 —

 

 

1,443

Restricted stock awards - 22,660 shares of common stock

 

 

23

 

 

(23)

 

 

 —

 

 

 —

 

 

 —

Exchange of 21,190 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock vested and in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   connection with stock options exercised

 

 

(21)

 

 

(855)

 

 

 —

 

 

 —

 

 

(876)

Balance, December 31, 2018

 

$

15,718

 

$

270,761

 

$

192,203

 

$

(5,544)

 

$

473,138

Net income

 

 

 —

 

 

 —

 

 

57,408

 

 

 —

 

 

57,408

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

4,446

 

 

4,446

Common cash dividends declared, $0.24 per share

 

 

 —

 

 

 —

 

 

(3,775)

 

 

 —

 

 

(3,775)

Issuance of 9,400 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   acquisition of Bates Companies

 

 

 9

 

 

390

 

 

 —

 

 

 —

 

 

399

Issuance of 28,775 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock purchased under the Employee Stock Purchase Plan

 

 

29

 

 

779

 

 

 —

 

 

 —

 

 

808

Issuance of 59,393 shares of common stock as a result of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  stock options exercised

 

 

59

 

 

660

 

 

 —

 

 

 —

 

 

719

Stock-based compensation expense

 

 

 —

 

 

2,469

 

 

 —

 

 

 —

 

 

2,469

Restricted stock awards and restricted stock units- 19,869 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   of common stock , net of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   withheld for payment for taxes

 

 

20

 

 

(63)

 

 

 —

 

 

 —

 

 

(43)

Exchange of 7,547 shares of common stock in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with payroll taxes for restricted stock and in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   with stock options exercised

 

 

(7)

 

 

(211)

 

 

 —

 

 

 —

 

 

(218)

Balance December 31, 2019

 

$

15,828

 

$

274,785

 

$

245,836

 

$

(1,098)

 

$

535,351

 

See Notes to Consolidated Financial Statements.

61

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2019, 2018, and 2017

 

 

 

 

 

 

 

 

 

 

 

 

2019

    

2018

    

2017

 

 

(dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

 

  

Net income

 

$

57,408

 

$

43,120

 

$

35,707

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

 

 

  

 

 

  

 

 

  

Depreciation

 

 

5,225

 

 

4,451

 

 

3,949

Provision for loan/lease losses

 

 

7,066

 

 

12,658

 

 

8,470

Deferred income taxes

 

 

6,364

 

 

6,292

 

 

(6,030)

Stock-based compensation expense

 

 

2,469

 

 

1,443

 

 

1,187

Deferred compensation expense accrued

 

 

2,773

 

 

1,824

 

 

1,426

Losses on other real estate owned, net

 

 

3,361

 

 

2,585

 

 

(151)

Amortization of premiums on securities, net

 

 

1,561

 

 

1,614

 

 

1,839

Securities losses, net

 

 

30

 

 

 —

 

 

88

Loans originated for sale

 

 

(151,692)

 

 

(57,698)

 

 

(49,579)

Proceeds on sales of loans

 

 

152,633

 

 

58,353

 

 

51,642

Gains on sales of residential real estate loans

 

 

(2,571)

 

 

(901)

 

 

(409)

Gains on sales of government guaranteed portions of loans

 

 

(748)

 

 

(405)

 

 

(1,164)

Loss on debt extinguishment, net

 

 

436

 

 

 —

 

 

 —

Gains on sales of premises and equipment

 

 

753

 

 

 —

 

 

 —

Amortization of intangibles

 

 

2,266

 

 

1,692

 

 

1,001

Accretion of acquisition fair value adjustments, net

 

 

(4,344)

 

 

(5,527)

 

 

(4,941)

Increase in cash value of bank-owned life insurance

 

 

(1,973)

 

 

(1,632)

 

 

(1,802)

Gain on sale of assets and liabilities of subsidiary

 

 

(12,286)

 

 

 —

 

 

 —

Goodwill impairment

 

 

3,000

 

 

 —

 

 

 —

Decrease (increase) in other assets

 

 

(19,152)

 

 

(11,137)

 

 

726

Increase (decrease)  in other liabilities

 

 

23,915

 

 

7,539

 

 

(8,246)

Net cash provided by operating activities

 

 

76,494

 

 

64,271

 

 

33,713

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

 

  

Net decrease (increase) in federal funds sold

 

 

16,598

 

 

3,799

 

 

(7,940)

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

 

 

(69,984)

 

 

(14,508)

 

 

12,138

Proceeds from sales of other real estate owned

 

 

840

 

 

2,539

 

 

1,138

Activity in securities portfolio:

 

 

 

 

 

 

 

 

  

Purchases

 

 

(71,963)

 

 

(84,045)

 

 

(179,786)

Calls, maturities and redemptions

 

 

25,193

 

 

23,931

 

 

43,010

Paydowns

 

 

50,830

 

 

44,287

 

 

38,496

Sales

 

 

30,055

 

 

1,938

 

 

71,092

Activity in restricted investment securities:

 

 

  

 

 

  

 

 

  

Purchases

 

 

(5,859)

 

 

(5,409)

 

 

(4,824)

Redemptions

 

 

7,621

 

 

3,157

 

 

515

Net increase in loans/leases originated and held for investment

 

 

(320,368)

 

 

(292,697)

 

 

(375,226)

Purchase of premises and equipment

 

 

(12,429)

 

 

(11,457)

 

 

(5,761)

Proceeds from sales of premises and equipment

 

 

2,562

 

 

 —

 

 

 —

Purchase of derivatives

 

 

(4,347)

 

 

 —

 

 

 —

Net cash received for sale of assets and liabilities of subsidiary

 

 

42,587

 

 

 —

 

 

 —

Net cash paid for acquisition

 

 

 —

 

 

(5,183)

 

 

(3,369)

Net cash (used in) investing activities

 

 

(308,664)

 

 

(333,648)

 

 

(410,517)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

 

 

  

Net increase in deposit accounts

 

 

335,580

 

 

271,266

 

 

385,082

Net increase (decrease)  in short-term borrowings

 

 

(14,193)

 

 

13,638

 

 

(39,080)

Activity in Federal Home Loan Bank advances:

 

 

  

 

 

  

 

 

 

Term advances

 

 

25,000

 

 

15,080

 

 

1,600

Calls and maturities

 

 

(35,000)

 

 

(40,000)

 

 

(8,000)

Net change in short-term and overnight advances

 

 

(52,465)

 

 

24,765

 

 

60,900

Prepayments

 

 

(30,323)

 

 

 —

 

 

(4,108)

Activity in other borrowings:

 

 

  

 

 

  

 

 

  

Proceeds from other borrowings

 

 

 —

 

 

9,000

 

 

7,000

Calls, maturities and scheduled principal payments

 

 

(11,937)

 

 

(12,550)

 

 

(21,000)

Prepayments

 

 

(46,313)

 

 

 —

 

 

 —

Paydown of revolving line of credit

 

 

(9,000)

 

 

 —

 

 

 —

Proceeds from subordinated notes

 

 

63,393

 

 

 

 

 

 

Payment of cash dividends on common stock

 

 

(3,767)

 

 

(3,300)

 

 

(2,494)

Proceeds from issuance of common stock, net

 

 

1,926

 

 

1,279

 

 

2,056

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

222,901

 

 

279,178

 

 

381,956

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and due from banks

 

 

(9,269)

 

 

9,801

 

 

5,152

 

 

 

 

 

 

 

 

 

 

Cash and due from banks, beginning

 

 

85,523

 

 

75,722

 

 

70,570

Transfer of held for sale cash

 

 

 

 

 

 

 

 

 

Cash and due from banks, ending

 

$

76,254

 

$

85,523

 

$

75,722

62

Table of Contents

QCR Holdings, Inc. and Subsidiaries - Continued

Consolidated Statements of Cash Flows

Years Ended December 31, 2019, 2018, and 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

 

  

 

 

  

Interest

 

$

59,292

 

$

38,782

 

$

19,054

Income/franchise taxes

 

 

2,719

 

 

30

 

 

13,040

 

 

 

  

 

 

  

 

 

  

Supplemental schedule of noncash investing activities:

 

 

  

 

 

  

 

 

  

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

 

 

4,446

 

 

(3,206)

 

 

1,092

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

 

 

(218)

 

 

(877)

 

 

(1,010)

Transfers of loans to other real estate owned

 

 

1,086

 

 

943

 

 

9,023

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

 

 

62,483

 

 

17,798

 

 

2,059

Dividends payable

 

 

947

 

 

939

 

 

693

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

 

 

 —

 

 

2,614

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information for sale of certain assets and certain liabilities of RB&T:

 

 

 

 

 

 

 

 

 

Cash proceeds**

 

$

46,560

 

$

 —

 

$

 —

Assets Sold:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

3,973

 

$

 —

 

$

 —

Interest-bearing deposits at financial institutions

 

 

55,291

 

 

 —

 

 

 —

Securities held to maturity, at amortized cost

 

 

3,243

 

 

 —

 

 

 —

Securities available for sale, at fair value

 

 

21,874

 

 

 —

 

 

 —

Loans/leases receivable held for investment, net

 

 

357,931

 

 

 —

 

 

 —

Premises and equipment, net

 

 

5,612

 

 

 —

 

 

 —

Restricted investment securities

 

 

675

 

 

 —

 

 

 —

Other real estate owned, net

 

 

2,134

 

 

 —

 

 

 —

Other assets

 

 

3,228

 

 

 —

 

 

 —

Total assets sold

 

$

453,961

 

$

 —

 

$

 —

Liabilities Sold:

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

69,802

 

$

 —

 

$

 —

Interest-bearing deposits

 

 

331,486

 

 

 —

 

 

 —

Short-term borrowings

 

 

1,158

 

 

 —

 

 

 —

Federal Home Loan Bank advances

 

 

15,000

 

 

 —

 

 

 —

Other liabilities

 

 

2,241

 

 

 —

 

 

 —

Total liabilities sold

 

$

419,687

 

$

 —

 

$

 —

Gain on sale of certain assets and certain liabilities of RB&T:

 

$

12,286

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information for acquisitions:

 

 

  

 

 

  

 

 

  

Fair value of assets acquired:

 

 

  

 

 

  

 

 

  

Cash and due from banks

 

$

 —

 

$

4,651

 

$

4,435

Interest-bearing deposits at financial institutions

 

 

 —

 

 

62,924

 

 

3,954

Securities

 

 

 —

 

 

4,845

 

 

49,703

Loans receivable, net

 

 

 —

 

 

477,337

 

 

192,518

Bank-owned life insurance

 

 

 —

 

 

7,092

 

 

 —

Premises and equipment, net

 

 

 —

 

 

6,092

 

 

4,808

Restricted investment securities

 

 

 —

 

 

3,654

 

 

477

Intangibles

 

 

 —

 

 

10,064

 

 

2,698

Other assets

 

 

 —

 

 

2,255

 

 

998

Total assets acquired

 

$

 —

 

$

578,914

 

$

259,591

 

 

 

  

 

 

  

 

 

  

Fair value of liabilities assumed:

 

 

  

 

 

  

 

 

  

Deposits

 

$

 —

 

$

439,579

 

$

212,468

Short-term borrowings

 

 

 —

 

 

1,143

 

 

13,102

FHLB advances

 

 

 —

 

 

74,540

 

 

4,108

Other borrowings

 

 

 —

 

 

9,544

 

 

 —

Junior subordinated debentures

 

 

 —

 

 

 —

 

 

3,857

Other liabilities

 

 

 —

 

 

8,878

 

 

2,596

Total liabilities assumed

 

 

 —

 

 

533,684

 

 

236,131

Net assets acquired

 

$

 —

 

$

45,230

 

$

23,460

 

 

 

 

 

 

 

 

 

 

Consideration paid:

 

 

  

 

 

  

 

 

  

Cash paid *

 

$

 —

 

$

9,834

 

$

7,803

Promissory note

 

 

 —

 

 

1,500

 

 

 —

Contingent commitment

 

 

 —

 

 

2,000

 

 

 —

Common stock

 

 

 —

 

 

81,637

 

 

30,880

Total consideration paid

 

 

 —

 

 

94,971

 

 

38,683

Goodwill

 

$

 —

 

$

49,741

 

$

15,223

 

 

 

 

 

 

 

 

 

 

*  Net cash paid at closing totaled $1,435,595 for acquisition of the Bates Companies in 2018.

   Net cash paid at closing totaled $3,747,209 for merger with Springfield Bancshares in 2018.

   Net cash paid at closing totaled $3,368,909 for acquisition of Guaranty Bank in 2017.

**Net cash received at closing totaled $42,587 for the sale of certain assets and certain liabilities of RB&T in 2019.

                                                                            See Notes to Consolidated Financial Statements.

63

Table of Contents

Note 1.Nature of Business and Significant Accounting Policies

Basis of presentation:

presentation:

The acronyms and abbreviations identified below are used in the Notes to the Consolidated Financial Statements,, as well as in the other sections of this Annual Report on Form 10-K10‑K (including appendices). It may be helpful to refer back to this page as you read this report.

Allowance: Allowance for estimated losses on loans/leases

Goldman Sachs: Goldman Sachs and CompanyHTM: Held to maturity

AOCI: Accumulated other comprehensive income (loss)

HTM: Held to maturityIB&T: Illinois Bank & Trust

AFS: Available for sale

IDFPR: Illinois Department of Financial & Professional

ASC: Accounting Standards Codification

  Regulation

ASC 805: Business Combination Standard

Iowa Superintendent: Iowa Superintendent of Banking

ASC:ASU: Accounting Standards CodificationUpdate

Bates Companies: Bates Financial Advisors, Inc., Bates

LCR: Liquidity Coverage Ratio

LIBOR: London Inter-Bank Offered Rate

ASC 805: Business Combination Standard  Financial Services, Inc., Bates Securities, Inc. and Batess

m2:m2 Lease Funds, LLC

ASU: Accounting Standards Update  Financial Group, Inc.

MD&A: Management'sManagement’s Discussion & Analysis

BBA: British Bankers’ Association.

Missouri Division of Finance: Missouri Department of

BHCA: Bank Holding Company Act of 1956

    Commerce and Insurance

BOLI: Bank-owned life insurance

MSA: Metropolitan Statistical Area

BOLI: Bank-owned life insuranceCaps: Interest rate cap derivatives

NIM: Net interest margin

Caps: Interest rate cap derivativesCECL: Current Expected Credit Losses

NPA: Nonperforming asset

CFPB: Bureau of Consumer Financial Protection

NPL: Nonperforming loan

Community National: Community National Bancorporation

NSFR: Net Stable Funding Ratio

CNB: Community National BankCDI: Core deposit intangible

OREO: Other real estate owned

Community National: Community National Bancorporation

OTTI: Other-than-temporary impairment

CNB: Community National Bank

PCAOB: Public Company Accounting Oversight Board

CRA: Community Reinvestment Act

OTTI: Other-than-temporary impairmentPCI: Purchased credit impaired

CRBT: Cedar Rapids Bank & Trust Company

PCAOB: Public Company Accounting Oversight BoardProvision: Provision for loan/lease losses

CRE: Commercial real estate

PCI: Purchased credit impaired

CRE Guidance: Interagency Concentrations in Commercial Real Estate

Provision: Provision for loan/lease losses

     Lending, Sound Risk Management Practices guidance

PUD LOC: Public Unit Deposit Letter of Credit

CSB: Community State BankCRE Guidance: Interagency Concentrations in Commercial

QCBT: Quad City Bank & Trust Company

C&I: Commercial and industrial    Real Estate Lending, Sound Risk Management Practices

QCIA: Quad Cities Investment Advisors

  guidance

RB&T: Rockford Bank & Trust Company

CSB: Community State Bank

ROAA: Return on Average Assets

C&I: Commercial and industrial

ROACE: Return on Average Common Equity

Dodd-Frank Act: Dodd-Frank Wall Street Reform and

ROAA:ROAE: Return on Average AssetsEquity

   Consumer Protection Act

ROACE: Return on Average Common Equity

IDFPR: Illinois Department of Financial & Professional Regulation

ROAE: Return on Average EquitySBA: U.S. Small Business Administration

DGCL: Delaware General Corporation Law

SBA: U.S. Small Business AdministrationSEC: Securities and Exchange Commission

DIF: Deposit Insurance Fund

SBLF: Small Business Lending FundSFC Bank: Springfield First Community Bank

EPS: Earnings per share

SEC: Securities and Exchange Commission

Exchange Act: Securities Exchange Act of 1934, as amended

SERPs: Supplemental Executive Retirement Plans

FASB: Financial Accounting Standards BoardExchange Act: Securities Exchange Act of 1934, as

Springfield Bancshares: Springfield Bancshares, Inc.

   amended

TA: Tangible assets

FDIC: Federal Deposit Insurance CorporationFASB: Financial Accounting Standards Board

Tax Act: Tax Cuts and Jobs Act

FDIC: Federal Deposit Insurance Corporation

TCE: Tangible common equity

Federal Reserve: Board of Governors of the Federal Reserve

TDRs: Troubled debt restructurings

   System

TCE: Tangible common equityTEY: Tax equivalent yield

FHLB: Federal Home Loan Bank

TDRs: Troubled debt restructuringsThe Company: QCR Holdings, Inc.

FICO: Financing Corporation

TEY: Tax equivalent yieldTreasury: U.S. Department of the Treasury

FRB: Federal Reserve Bank of Chicago

The Company: QCR Holdings, Inc.USA Patriot Act: Uniting and Strengthening America by  

FTEs: Full-time equivalents

Treasury: U.S. Department of the Treasury   Providing Appropriate Tools Required to Intercept

GAAP: Generally Accepted Accounting Principles

USA Patriot Act: Uniting   and Strengthening America byObstruct Terrorism Act of 2001

Guaranty: Guaranty Bankshares, Ltd.

     Providing Appropriate Tools Required to Intercept andUSDA: U.S. Department of Agriculture

Guaranty Bank: Guaranty Bank and Trust Company

 Obstruct Terrorism Act of 2001

 

USDA: U.S. Department of Agriculture

 

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Notes to Consolidated Financial Statements

 

Note 1.Nature of Business and Significant AccountingAccount Policies (continued)

Nature of business:

business:

QCR Holdings, Inc. is a bank holding company that has elected to operate as a financial holding company under the BHCA. The Company provides bank and bank-related services through its banking subsidiaries, QCBT, CRBT, CSB and RB&T.SFC Bank. The Company also engages in direct financing lease contracts through its wholly-owned equity investment by QCBT in m2, headquartered in Milwaukee, Wisconsin.

  The Company also engages in wealth management services through its banking subsidiaries and its subsidiary, the Bates Companies, headquartered in Rockford, Illinois.

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T.  On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois. On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri.  On October 1, 2017 the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty.Guaranty. On December 2, 2017, the Company merged Guaranty Bank with and into CRBT, with CRBT as the surviving bank.On August 31, 2016, the Company acquired Community State Bank in Ankeny, Iowa (Des Moines MSA).The financial results of the acquisitionsRB&T prior to its sale are included in this report.  The financial results of both Guaranty Bank and CSBacquired/merged entities for the periods since acquisitionacquisition/merger are included in this report. See Note 2 to the Consolidated Financial Statements for additional information.

QCBT is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. CRBT is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities including Cedar Falls and Waterloo, Iowa. CSB is a commercial bank that serves Des Moines, Iowa, and adjacent communities. RB&TSFC Bank is a commercial bank that serves Rockford, Illinois, and adjacent communities.

Springfield, Missouri.

QCBT,, CRBT, and CSB are chartered and regulated byunder the laws of the state of Iowa, and RB&TIowa. SFC Bank is chartered and regulated byunder the laws of the state of Illinois.Missouri. All four subsidiary banks are insured and subject to regulation by the FDIC and allFDIC.  All four subsidiary bank are members of and regulated by the Federal Reserve System.

 

The remaining subsidiaries of the Company consist ofsix non-consolidated subsidiaries formed for the issuance of trust preferred securities. See Note 1213 for a listing of these subsidiaries and additional information.

Significant accounting policies:

Accounting estimates: 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, OTTI of securities, impairment of goodwill, the fair value of financial instruments, and the fair value of assets acquired/liabilities assumed in a business combination.

Principles of consolidation: The accompanying consolidated financial statementsConsolidated Financial Statements include the accounts of the Company and its subsidiaries, except those six subsidiaries formed for the issuance of trust preferred securities which do not meet the criteria for consolidation. See Note 1213 for a detailed listing of these subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

 

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Notes to Consolidated Financial Statements

 

Note 1.Nature of Business and Significant AccountingAccount Policies (continued)

Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and noninterest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, short-term borrowings and overnight and short-term borrowingsFHLB advances are treated as net increases or decreases.

Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. The reserve requirement was approximately $41,803,000$38,060,000 and $42,233,000$33,372,000 as of December 31, 2017 2019 and 2016,2018, respectively.

Investment securities: Investment securities held to maturityHTM are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered AFS as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company'sCompany’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities AFS are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in AOCI. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

All debt securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary.

In estimating OTTI losses on AFS debt securities, management considers a number of factors including, but not limited to, (1)(1) the length of time and extent to which the fair value has been less than amortized cost, (2)(2) the financial condition and near-term prospects of the issuer, (3)(3) the current market conditions, and (4)(4) the lack of intent of the Company to sell the security prior to recovery and whether it is not more-likely-than-not more-likely-than-not that it will be required to sell the security prior to recovery.

If the Company lacks the intent to sell the debt security, and it is not more-likely-than-not more-likely-than-not the entity will be required to sell the security before recovery of its amortized cost basis, the Company will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.

The Company discloses the allowance for credit losses (also known as the allowance) by portfolio segment, and credit quality information, impaired financing receivables, nonaccrual status, and TDRs by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its allowance for credit losses. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 4.

The Company’sCompany’s portfolio segments are as follows:

●·

C&I

●·

CRE

●·

Residential real estate

●·

Installment and other consumer

Direct financing leases are considered a segment within the overall loan/lease portfolio.

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

●·

C&I

●·

Owner-occupied CRE

●·

Commercial construction, land development, and other land loans that are not owner-occupied CRE

●·

Other non-owner-occupied CRE

●·

Residential real estate

●·

Installment and other consumer

Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio. The accounting policies for direct financing leases are disclosed below.

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

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

●·

It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan;loan;

●·

When full repayment of principal and interest is not expected; expected;

●·

When the loan is graded “doubtful”;

●·

When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future;future; or

●·

When foreclosure action is initiated.

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Notes to Consolidated Financial Statements

 

Note 1. Nature of Business and Significant Account Policies (continued)

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

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

●·

The loan is current, and all principal and interest amounts contractually due have been made;made;

●·

All principal and interest amounts contractually due, including past due payments, are reasonablyreasonably assured of repayment within a reasonable period; and

●·

There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:

○

oSix months of repayment performance for contractual monthly payments, or

○

One year of repayment performance for contractual quarterly or semi-annual payments.

oOne year of repayment performance for contractual quarterly or semi-annual payments.

Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.

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

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

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. TheseIn periods prior to and including December 31, 2018, these initial direct leasing costs  generally approximate approximated 5.5% of the leased asset’s cost. With the adoption of ASU 2016-02 on January 1, 2019, a portion of these costs were expensed instead of deferred.  Initial direct leasing costs were 3.9% of the leased asset’s cost in 2019. The unamortized direct costs are recorded as a reduction of unearned lease income.

 

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

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

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

●·

A modification of terms of a debt such as one or a combination of:

oThe reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.

oThe extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

oThe reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

oThe reduction of accrued interest.

○

The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.·

○

The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.

○

The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

○

The reduction of accrued interest.

●

A transfer from the borrower/borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.

●·

The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.

Allowance:For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Loan/lease losses, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

For all portfolio segments,, the allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $250 thousand. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

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

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

●·

Ability and stability of current management of the borrower;

●·

Stable earnings with positive financial trends;

●·

Sufficient cash flow to support debt repayment;

●·

Earnings projections based on reasonable assumptions;

●·

Financial strength of the industry and business; and

●·

Value and marketability of collateral.

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Notes to Consolidated Financial Statements

 

Note 1. Nature of Business and Significant Account Policies (continued)

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

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

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

CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.

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

In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2017 2019 and 2016,2018, approximately 26% and 30%28%, respectively, of the CRE loan portfolio was owner-occupied.

The Company’sCompany’s lending policy incorporates regulatory guidelines which stipulate that non-owner occupied CRE lending in excess of 300% of total risk-based capital, and construction, land development, and other land loans in excess of 100% of total risk-based capital warrant the use of heightened risk management practices. As of December 31, 2017 2019 and 2016,2018, QCBT  CRBT and RB&TCRBT were in compliance with these limits. Although the CSB’s and SFC Bank’s loan portfolio hashave historically been real estate dominated and itsthe real estate portfolio levels at each bank exceed these policy limits, it has established a Credit Risk Committee has been established to routinely monitor its real estate loan portfolio. CSB’s real estate levels, while still elevated at December 31, 2017, 2019, have declined since December 31, 2016.

2018.

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above and below. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the Company’s lending policy and, if there are exceptions, they are clearly noted as such and specifically identified in loan/lease approval documents.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

For C&I and CRE loans, the allowance consists of specific and general components.

The specific component relates to loans that are classified as impaired,, as defined below. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan.

 

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

For C&I loans and all classes of CRE loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. See below for a detailed description of the Company’s internal risk rating scale. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

For C&I and CRE loans, the Company utilizes the following internal risk rating scale:

1.

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

2.

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

3.

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

4.

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

5.

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

 

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

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

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

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

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Notes to Consolidated Financial Statements

 

Note 1.Nature of Business and Significant AccountingAccount Policies (continued)

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

6. Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

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

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

6.

Special Mention – loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.

7.

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

8.

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

The Company has certain loans risk-rated 7 (substandard), which are not classified as impaired based on the facts of the credit. For these non-impaired and risk-rated 7 loans, the Company does notfollow the same allowance methodology as it does for all other non-impaired, collectively evaluated loans. Rather, the Company performs a more detailed analysis including evaluation of the cash flow and collateral valuations. Based upon this evaluation, an estimate of the probable loss in this portfolio is collectively evaluated under ASC 450-450‑20. These non-impaired risk-rated 7 loans exist primarily in the C&I and CRE segments.

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

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

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

For direct financing leases, the allowance consists of specific and general components.

 

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

The specific component relates to leases that are classified as impaired, as defined for commercial loans above. For those leases that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired lease is lower than the carrying value of that lease.

The general component consists of quantitative and qualitative factors and covers nonimpaired leases. The quantitative factors are based on historical charge-off experience for the entire lease portfolio. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data.

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

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

For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans, and/or installment or other consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

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

Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1)(1) the assets have been isolated from the Company, (2)(2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3)(3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan receivables), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale. Following are the characteristics of a “participating interest”:

●·

Pro-rata ownership in an entire financial asset.asset.

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

●·

From the date of the transfer, all cash flows received from entire financial assets are divided proportionately among the participating interest holders in an amount equal to their share of ownership.

●·

The rights of each participating interest holder have the same priority, and no participating interest holder’sholder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.

●

·

No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.

BOLI: BOLI is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.

Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.

Restricted investment securities: Restricted investment securities represent FHLB and FRB common stock. The stock is carried at cost. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.

OREO: Real estate acquired through, or in lieu of, loan foreclosures, is held for sale and initially recorded at fair value less costs to sell, establishing a new cost basis. Any writedown to fair value taken at the time of foreclosure is charged to the allowance. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Subsequent write-downs to fair value are charged to earnings.

Repossessed assets: Equipment or other non-real estate property acquired through, or in lieu of foreclosure, is held for sale and initially recorded at fair value less costs to sell. Repossessed assets are included in other assets on the consolidated balance sheets.

Goodwill: The Company has recorded goodwill totaling $3,222,688from QCBT’s purchase of 80% of m2 in August 2005. Goodwill totaling $9,888,225 was also recognized as part of the acquisition of CSB in 2016.various business combinations. The goodwill is not being amortized, but is evaluated at least annually for impairment. In 2019 and prior years, the goodwill evaluation was performed as of September 30th.  In 2019, that September 30th evaluation was then reassessed at November 30th to facilitate a change in the annual impairment testing date going forward.  In future years, the annual evaluation will be performed as of November 30th.  An impairment charge is recognized when the calculated fair value of the reporting unit, including goodwill, is less than its carrying amount. Based onThe Company engaged an external specialist to assess the annual analysis completed asgoodwill at the reporting unit level for the Banks in 2019.  As of SeptemberNovember 30, 2017, 2019, the Company performed an internal assessment of the goodwill for the Bates Companies reporting unit.  As a result of this internal assessment, the Company determined thatan impairment charge of $3 million was required for the goodwillBates Companies reporting unit.  See further discussion in Note 6. Based upon internal assessments, there was not impaired. Goodwill totaling $15,223,179 was alsono impairment recognized as part of the acquisition of Guaranty Bank in 2017. See Note 2 to the Consolidated Financial Statements for additional information. This goodwill is not being amortized,during 2018 and will be evaluated annually for impairment beginning in 2018.2017.

 

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

Core deposit intangible: The Company has recorded a core deposit intangible from historical acquisitions including CNB, CSB and Guaranty Bank.Bank, and from its merger with Springfield Bancshares. The core deposit intangible was the portion of the acquisition purchase price which represented the value assigned to the existing deposit base at

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

acquisition. See Notes 2 and 76 to the Consolidated Financial Statements for additional information. The core deposit intangibles have a finite life and are amortized over the estimated useful life of the deposits (estimated to be ten years).

Customer list intangible: The Company has recorded a customer list intangible from the Bates Companies acquisition.  The customer list intangible was the portion of the acquisition purchase price which represented the value assigned to the existing customer base at acquisition.  See Notes 2 and 6 to the Consolidated Financial Statements for addition information.  The customer list intangible has a finite life and will be amortized over the estimated useful life (estimated to be fifteen years).

Assets and liabilities held for sale: Assets and liabilities held for sale are carried at the lower of cost or estimated market value in the aggregate.  See Note 2 for further information.

Swap transactions: The Company offers a loan swap program to certain commercial loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the swap customer will then enter into a fixed interest rate swap. Lastly,Separately, an identical offsetting swap is entered into by the Company with a counterparty. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Additionally, the Company receives an upfront fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Swap fee income totaled $3.1 million, $1.7 million and $1.7 million for the years ending December 31,2017,2016 and 2015, respectively.

Derivatives and hedging activities: The Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.

Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying index (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying index.

The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1)(1) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market (although this type of derivative is negligible); and (2)(2) interest rate caps to manage the interest rate risk of certain variable rate deposits and short-term fixed rate liabilities.

liabilities; and (3) interest rate swaps on variable rate trust preferred securities.

Interest rate caps and interest rate swaps are valued by the transaction counterparty on a third party monthly basis and corroborated by a third party annually.the transaction counterparty. The companyCompany uses the hypothetical derivative method to assess and measure effectiveness in accordance with ASC 815, Derivatives Derivative and Hedging.

Preferred stock: The Company currently has 250,000 shares of preferred stock authorized, but none outstanding as of December 31, 2017 2019 and 2016.2018. Should the Company have preferred stock outstanding in the future, dividends declared on those shares would be deducted from net income to arrive at net income available to common stockholders. Net income available to common stockholders would then be used in the earnings per share computations.computation

 

Treasury stock: Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. When treasury stock is reissued, any difference between the sales proceeds, or fair value when issued for business combinations, and the cost is recognized as a charge or credit to additional paid-in capital. The Company’s then outstanding treasury stock was retired in 2015.

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Notes to Consolidated Financial Statements

 

Note 1.Nature of Business and Significant AccountingAccount Policies (continued)

Stock-based compensation plans: The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.

As discussed in Note 15,16, during the years ended December 31, 2017,2016,2019, 2018, and 2015,2017, the Company recognized stock-based compensation expense for the grant-date fair value of stock based awards that are expected to vest over the requisite service period of $1,187,035,$947,174$2.5 million, $1.4 million and $941,469,$1.2 million, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

The Company usesuses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:

 

 

 

 

 

 

 

 

 

 

 

2017

  

2016

  

2015

 

    

2019

    

2018

    

2017

 

Dividend yield

  0.36%to0.47%   0.35%to0.51%   0.37%to0.46% 

 

 

0.67%

 

 

0.45% to 0.48%

 

 

0.36% to 0.47%

 

Expected volatility

  29.64%to29.95%   29.32%to29.37%   28.92%to29.32% 

Expected volatility

 

 

28.28%

 

 

29.51% to 29.59%

 

 

29.64% to 29.95%

 

Risk-free interest rate

  2.50%to2.81%   1.73%to2.18%   1.89%to2.37% 

 

 

2.90%

 

 

2.60% to 2.94%

 

 

2.50% to 2.81%

 

Expected life of option grants (in years)

   6     6     6  

Expected life of option grants

 

 

6.25 years

 

 

6 years

 

 

6 years

 

Weighted-average grant date fair value

   $14.75     $7.31     $5.11  

 

$

11.29

 

$

14.68

 

$

14.75

 

 

The CompanyCompany also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:

 

 

 

 

 

 

 

 

 

 

 2017  

2016

  

2015

 

    

2019

    

2018

    

2017

 

Dividend yield

  0.37%to0.42%   0.33%to0.59%   0.37%to0.45% 

 

    

0.69% to 0.75%

 

 

0.37% to 0.51%

 

 

0.37% to 0.42%

 

Expected volatility

  19.80%to19.86%   12.70%to15.60%   8.81%to13.10% 

Expected volatility

 

 

20.15% to 21.06%

 

 

20.90% to 21.40%

 

 

19.80% to 19.86%

 

Risk-free interest rate

  0.67%to1.18%   0.39%to0.57%   0.09%to.016% 

 

 

2.02 % to 2.46%

 

 

1.59% to 2.22%

 

 

0.67% to 1.18%

 

Expected life of purchase grants (in months)

  3to6   3to6   3to6 

Expected life of purchase grants

 

 

3 to 6 months

 

 

3 to 6 months

 

 

3 to 6 months

 

Weighted-average grant date fair value

   $6.42     $3.28     $2.39  

 

$

4.81

 

$

6.63

 

$

6.42

 

 

The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company'sCompany’s current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company'sCompany’s common stock price. The risk-free interest rate for periods within the contractual life of the option or purchase is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the option and purchase grants is derived using the “simplified” method and represents the period of time that options and purchases are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.

As of December 31, 2017,2019, there was $961,972$475 thousand of unrecognized compensation cost related to stock options granted, which is expected to be recognized over a weighted average period of 1.921.54 years.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company'sCompany’s common stock for the 495,004394,592 options that were in-the-money at December 31, 2017. 2019. The aggregate intrinsic value at December 31, 2017 2019 was $13.2$10.2 million on options outstanding and $10.5$9.7 million on options exercisable. During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the aggregate intrinsic value of

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Notes to Consolidated Financial Statements

Note 1. Nature of Business and Significant Account Policies (continued)

options exercised under the Company's stock option plansCompany’s Equity Plans was $1,055,193,$1,525,902,$303 thousand, $365 thousand, and $480,354,$1.0 million, respectively, and determined as of the date of the option exercise.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and Significant Accounting Policies (continued)

Restricted stock awards grantedmay not be sold or otherwise transferred until the service periods have lapsed. During the vesting periods, participants have voting rights and receive dividends. Upon termination of employment, common shares upon which the service periods have not lapsed must be returned to the Company.

All restricted share awards are classified as equity awards. The grant-date fair value of equity-classified restricted stock awards is amortized as compensation expense on a straight-line basis over the period restrictions lapse.

As of December 31, 2017, 2019, there was $1,210,425$3.1 million of unrecognized compensation cost related to nonvested restricted stock awards expected to be recognized over a period of 2.602.2 years.

Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.

Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effectseffects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of thebenefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statementsstatements of income.

Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying consolidated financial statementsConsolidated Financial Statements since such items are not assets of the subsidiary banks.

Earnings per share: See Note 1718 for a complete description and calculation of basic and diluted earnings per share.

Revenue Recognition: As of January 1, 2018, the Company adopted ASU 2014‑09 using the modified retrospective approach. The adoption of the guidance had no material impact on the measurement or recognition of revenue as

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Notes to Consolidated Financial Statements

 

Note 1. Nature of Business and Significant Account Policies (continued)

approximately 89% of the Company's revenue (based on 2017 audited financial results) is outside the scope of this guidance; however, additional disclosures have been added in accordance with the ASU.

Descriptions of our revenue-generating contracts with customers that are within the scope of ASU 2014‑09, which are presented in our income statements as components of non-interest income are as follows:

Trust department and Investment advisory and management fees: This is a contract between the Company and its customers for fiduciary and/or investment administration services on trust and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

Deposit service fees: The deposit contract obligates the Company to serve as a custodian of the customer's deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Deposit account related fees, including analysis charges, overdraft/nonsufficient fund charges, service charges, debit card usage fees, overdraft fees and wire transfer fees are within the scope of the guidance; however, revenue recognition practices did not change under the guidance, as deposit agreements are considered day-to-day contracts. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

Correspondent banking fees: A contract between the Company and its correspondent banks for corresponding banking services. 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. Correspondent banking fee income is tied to transaction activity and revenue is recognized monthly as earned for services provided.

Reclassifications: Certain amounts in the prior year financial statementsyear’s Consolidated Financial Statements have been reclassified, with no effect on net income, comprehensive income or stockholders’ equity, to conform with the current period presentation.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1.Nature of Business and SignificantNew Accounting Policies (continued)Prounouncement:

New accounting pronouncements:

In May 2014, FASB issued ASU 2014-09,Revenue from Contracts with Customers. ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally effective for the Company on January 1, 2017, however, FASB issued ASU 2015-14 which deferred the effective date in order to provide additional time for both public and private entities to evaluate the impact. ASU 2014-09 was adopted by the Company on January 1, 2018 and had no significant financial impact on the Company’s consolidated financial statements. Under the standard, additional disclosures related to non-interest income will be required.

In January 2016, FASB issued ASU 2016-01,Financial Instruments – Overall. ASU 2016-01 makes targeted adjustments to GAAP by eliminating the available for sale classification for equity securities and requiring equity investments to be measured at fair value with changes in fair value recognized in net income. The standard also requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes. The standard clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. It also requires an entity to present separately (within other comprehensive income) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, the standard eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01was adopted by the Company on January 1, 2018 and had no significant impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2016‑02,Leases. Under ASU 2016-2016‑02, lessees will be required to recognize a lease liability measured on a discounted basis and a right-of-use asset for all leases (with the exception of short-term leases). Lessor accounting is largely unchanged under ASU 2016-2016‑02. However, the definition of initial direct costs was updated to include only initial direct costs that are considered incremental. This change in definition will change the manner in which the Company recognizes the costs associated with originating leases. ASU 2016-2016‑02 is was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. The standard was adopted by the Company is in the process of analyzing theon January 1, 2019 and had no significant impact of adoption on the Company’s consolidated financial statements. The Company is in the process of analyzing the impact of adoption on the Company’s consolidated financial statements.

Effective January 1, 2017. The Company adopted ASU 2016-09,Compensation – Stock Compensation. Under the standard, the excess tax benefit (deficiency) related to stock options exercised and restricted stock awards vested is recorded as an adjustment to income tax expense. In the past, this tax benefit (deficiency) was recorded directly to equity. This change in accounting resulted in $1.2 million of reduced income tax expense for 2017.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial StatementsStatements.

Note 1.Nature of Business and Significant Accounting Policies (continued)

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

In February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under the standard, entities are allowed to make a one-time reclassification from AOCI to retained earnings for the effect of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a resultlife of the change inloan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the federal tax rate as defined by the Tax Act. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Companies may choose to early adopt for fiscal years or interim periods that have not been issued or made available for issuance asexisting probability of February 14, 2018. default and loss given default framework. The Company chose to early adopt ASU 2018-02will utilize economic and apply the guidance to the consolidated financial statements for the year ended December 31, 2017. The reclassification from AOCI to retained earnings for 2017 totaled $304 thousandother forecasts over a four quarter reasonable and is presented in the Consolidated Statements of Changes in Stockholders’ Equity.

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Notes to Consolidated Financial Statements

 

Note 2. Acquisitions1. Nature of Business and Significant Account Policies (continued)

supportable forecast period. In the beginning of the second year, the Company will fully revert back to average historical losses. The Company’s credit administration team will periodically refine the model as needed. The Company expects to incur an increase of 5-20% of the December 31, 2019 allowance for estimated losses on loans/leases and the after-tax charge will result in a decrease to the opening stockholders' equity balance as of January 1, 2020. A majority of the increase to the allowance is the result of economic uncertainty and unfunded commitments. The Company anticipates increases in the allowance for credit losses on longer dated portfolios and decreases in the shorter dated portfolios. The Company is in the process of finalizing the review of the most recent model run as of the implementation date and finalizing assumptions including qualitative adjustments and economic forecasts.

 

Guaranty BankIn January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and TrustOther (Topic 350).

On October 1,2017 ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty.Guaranty Bank is an Iowa-chartered bank that operates five banking locations throughout the Cedar Rapids metropolitan area.

The acquisition of Guaranty Bank allowed the Company to grow its market share in the Cedar Rapids market. Guaranty Bank has a strong core deposit base and retail franchise. Although Guaranty already has strong earnings, the Company has identified several opportunities for enhanced future earnings performance. Lastly, financial metrics related to the transaction were favorable, as measured by EPS accretion, ROAA accretion and earn back of tangible book value dilution.

In the acquisition, the Company acquired 100% of Guaranty Bank’s outstanding common stock and purchased certain assets and assumed certain liabilities of Guaranty for aggregate consideration consisting of 79% QCR Holdings common stock (678,670 shares) and 21% cash ($7.8 million). On September 29, 2017, the last trading date before the closing, the Company’s common stock closed at $45.50, resulting in stock consideration valued at $30.9 million and total consideration paid by the Company of $38.7 million.

To help fund the cash portionsecond step of the purchase price, on September 27, 2017, the Company executed a $7.0 million four-year term note with principal and interest due quarterly. See further information in Note 11. This note is included within other borrowings on the December 31, 2017 Consolidated Balance Sheets. The remaining cash consideration paidanalysis. ASU 2017-04 requires entities to Guaranty came from operating cash.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.

The excess of the consideration paid overcompare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the net assets acquiredcarrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. The Company early adopted ASU 2017-04 effective for the period beginning January 1, 2019.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815).  ASU 2017-12 is recorded as goodwill. This goodwill is deductible over 15 yearsintended to simplify and expand the eligible hedging strategies for tax purposes.financial and nonfinancial risks and enhance the transparency of how hedging results are presented and disclosed.  The new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings. The standard was adopted by the Company on January 1, 2019 and had no significant impact on the Company’s Consolidated Financial Statements.

 

Note 2. Sales/Mergers/Acquisitions

Sale of Assets and Liabilities of Rockford Bank & Trust

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc., for a cash payment.  The Company has several areascash payment amount was determined substantially by the following formula: (i) the “Purchase Price Premium”, plus (ii) the aggregate net book value of specialization, including government guaranteed lending, C&I lending, interest rate swaps, leasing, wealth management, private bankingthe acquired assets, minus (iii) the aggregate book value of the assumed liabilities.  The Purchase Price Premium is equal to: (a) 8% of RB&T’s tangible assets, multiplied by (b) 0.345.  The Purchase Price Premium totaled $12.5 million and municipal bond offerings that will be offered in this expanded market, increasing future earnings potential. Guaranty Bank has a strong core deposit base. There is also value addedthe total payment by IB&T to the Company through having an expanded footprint in a market that has strong growth potential. The experience and value of the personnel at Guaranty Bank and their knowledge of the expanded market is also beneficial.closing was $46.6 million.

 

On December 2, 2017, the Company merged Guaranty Bank with and into CRBT, with CRBT as the surviving bank. As part of the merger, the Guaranty Bank branches located at 3023rd Avenue SE, Cedar Rapids, Iowa and 181942nd Street NE, Cedar Rapids, Iowa, permanently closed. These locations (with a cost basis (based upon acquisition date fair value) totaling $3.6 million) are now held for sale and are included in Other Assets in the December 31, 2017 consolidated balance sheet. The three remaining Guaranty Bank branches have become banking offices of CRBT.

 

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Notes to Consolidated Financial Statements

 

Note 2. Sales/Mergers/Acquisitions (continued)

Assets and liabilities of RB&T sold are summarized as follows as of the date of closing:

 

 

 

 

 

 

 

As of

 

 

    

November 30, 2019

    

 

 

(dollars in thousands)

 

 

 

 

 

 

ASSETS

 

 

 

 

Cash and due from banks

 

$

3,973

 

Interest-bearing deposits at financial institutions

 

 

55,291

 

  Securities held to maturity, at amortized cost

 

 

3,243

 

  Securities available for sale, at fair value

 

 

21,874

 

  Loans/leases receivable held for investment, net

 

 

357,931

 

  Premises and equipment, net

 

 

5,612

 

  Restricted investment securities

 

 

675

 

  Other real estate owned, net

 

 

2,134

 

Other assets

 

 

3,228

 

  Total assets sold

 

$

453,961

 

 

 

 

  

 

LIABILITIES 

 

 

 

 

Noninterest-bearing deposits

 

$

69,802

 

Interest-bearing deposits

 

 

331,486

 

Short-term borrowings

 

 

1,158

 

Federal Home Loan Bank advances

 

 

15,000

 

Other liabilities

 

 

2,241

 

  Total liabilities sold

 

$

419,687

 

 

 

 

 

 

Net assets sold

 

$

34,274

 

 

 

 

 

 

Cash consideration received

 

$

46,560

 

Gain on sale of assets and liabilities

 

$

12,286

 

The Company retained certain assets, mainly comprised of BOLI, and certain liabilities, mainly comprised of deferred compensation and income tax accruals. These assets and liabilities totaling $12.0 million and $5.0 million, respectively, as of December 31, 2019, are expected to be liquidated by June 30, 2020 and are included within assets and liabilities held for sale on the consolidated balance sheets.

Disposition costs related to the sale totaled $3.3 million and were comprised primarily of legal and accounting costs, costs in connection with the disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of RB&T.

General – Mergers/Acquisitions

The fair values of the assets acquirednarrative in this subsection applies to all mergers and liabilities assumed including the consideration paid and resulting goodwill is as follows:

  

As of

 
  

October 1, 2017

 

ASSETS

    

Cash and due from banks

 $4,434,511 

Interest-bearing deposits at financial institutions

  3,953,907 

Securities

  49,703,419 

Loans/leases receivable, net

  192,517,677 

Premises and equipment

  4,808,343 

Restricted investment securities

  476,500 

Core deposit intangible

  2,698,301 

Other assets

  997,810 

Total assets acquired

 $259,590,468 
     

LIABILITIES

    

Deposits

 $212,467,514 

Short-term borrowings

  13,102,043 

FHLB advances

  4,108,027 

Junior subordinated debentures

  3,857,275 

Other liabilities

  2,595,883 

Total liabilities assumed

  236,130,742 

Net assets acquired

 $23,459,726 
     

CONSIDERATION PAID:

    

Cash

 $7,803,420 

Common stock

  30,879,485 

Total consideration paid

  38,682,905 

Goodwill

 $15,223,179 

acquisitions detailed throughout this footnote.

Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. A third party valuation consultant assisted with the determination of fair value.

Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans. PCI loans are accounted for in accordance with ASC 310-310‑30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower. Performing loans are accounted for in accordance with ASC 310-310‑20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2.Acquisitions (continued)

For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

remaining life of the loan. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for loan and lease losses and provision for loan losses.

For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loansloans.

Bates Companies

On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois. The acquisition  enhanced the wealth management services of the Company by adding approximately $704 million of assets under management at acquisition.   In the acquisition, the Company acquired 100% of the Bates Companies’ outstanding common stock for aggregate consideration of $3.0 million cash and up to $3.0 million of the Company’s common stock.  Of the total cash consideration, $1.5million in cash was paid at closing funded through operating cash.  The additional $1.5 million was recorded as a promissory note and will be repaid in five equal, annual installments of $300,000 each on the first through fifth anniversaries of the closing date.  Interest will be paid at a rate of 2.18% per annum, based on the applicable federal rate as of the closing date.  This $1.5 million promissory note is included in Other Liabilities on the Consolidated Balance Sheet.  Additionally, in a private placement exempt from registration with the SEC, the Company issued 23,501 shares of Company stock in December 2018.  Assuming all future performance based targets are met, total stock consideration can reach $3.0 million, which would result in the Company issuing approximately 47,003 additional common shares based on the 10-day volume weighted average of the closing stock price of the Company ending five days prior to closing.  The contingent consideration for the additional common shares, totaling $2.0 million, as of December 31, 2018, is included in Other Liabilities on the Consolidated Balance Sheet. Required performance targets were met during 2019 and the Company issued 9,400 shares of common stock in December 2019 as described above.

During 2018, the Company incurred $394 thousand of expenses related to the acquisition, comprised primarily of legal and accounting costs.

The Company recorded a customer list intangible totaling $1.6 million which is the portion of the acquisition purchase price which represents the value assigned to the existing customer base. The customer list intangible has a finite life and is amortized over the estimated useful life of the customer base. The Company recorded goodwill totaling $3.7 million which is the excess of the consideration paid over the fair value of the net assets acquired. This goodwill is not deductible for tax purposes.  See Note 6 to the Consolidated Financial Statements for additional information.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects.The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

Unaudited pro forma combined operating results for the years ended December 31, 2018 and 2017, giving effect to the Bates Companies acquisition as if it had occurred as of January 1, 2017, are as follows:

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 

 

    

2018

    

2017

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

Net interest income

 

$

142,368

 

$

116,029

Noninterest income

 

$

44,455

 

$

33,044

Net income

 

$

44,032

 

$

35,627

 

 

 

  

 

 

  

Earnings per common share:

 

 

  

 

 

  

  Basic

 

$

2.98

 

$

2.67

  Diluted

 

$

2.92

 

$

2.60

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2017 or of future results of operations of the consolidated entities.

Springfield Bancshares, Inc.

On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri.  The Company acquired 100% of Springfield Bancshares common stock in the merger.  SFC Bank is a Missouri-chartered bank that operates one location in the Springfield, Missouri market.  As a result of the transaction, SFC Bank became an independent charter of the Company.

The merger with Springfield Bancshares allowed the Company to enter the Springfield, Missouri market which is consistent with the Company’s strategic plan to selectively acquire other high-performing financial institutions in vibrant mid-sized metropolitan markets with a high concentration of commercial clients.  Financial metrics related to the transaction were favorable, as measured by EPS and ROAA accretion.

Stockholders of Springfield Bancshares received 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held.  On June 29, 2018, the last trading date before the closing, the Company’s common stock closed at $47.45, resulting in stock consideration valued at $80.6 million and total consideration paid by the Company of $89.0 million.  To help fund the cash portion of the purchase price, on June 29, 2018, the Company borrowed $4.1 million on its existing $10.0 million revolving line of credit.  The Company also borrowed $4.9 million on this same revolving line of credit to fund the repayment of certain debt assumed in the merger shortly after closing.  This note is included within Other Borrowings on the Consolidated Balance Sheets. The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the merger date, net of applicable income tax effects.  The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes. During the fourth quarter of 2018, various measurement period adjustments were made.  The result of these adjustments was an increase to goodwill of $447 thousand.

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

The fair values of the assets acquired and liabilities assumed, after measurement period adjustments to date, including the consideration paid and resulting goodwill is as follows.

 

 

 

 

 

    

As of

 

 

July 1, 2018

 

 

(dollars in thousands)

ASSETS

 

 

  

Cash and due from banks

 

$

4,586

Interest-bearing deposits at financial institutions

 

 

62,924

Securities

 

 

4,845

Loans/leases receivable, net

 

 

477,337

Bank-owned life insurance

 

 

7,092

Premises and equipment

 

 

6,092

Restricted investment securities

 

 

3,654

Intangibles

 

 

8,209

Other assets

 

 

1,471

Total assets acquired

 

$

576,210

 

 

 

  

LIABILITIES

 

 

  

Deposits

 

$

439,579

Short-term borrowings

 

 

1,143

FHLB advances

 

 

74,539

Other borrowings

 

 

9,544

Other liabilities

 

 

8,409

Total liabilities assumed

 

$

533,214

Net assets acquired

 

$

42,996

 

 

 

  

CONSIDERATION PAID:

 

 

  

Cash

 

$

8,334

Common stock

 

 

80,637

Total consideration paid

 

$

88,971

Goodwill

 

$

45,975

The following table presents the purchased loans as of the merger date:

 

 

 

 

 

 

 

 

 

 

 

    

PCI

    

Performing

    

    

 

 

 

Loans

 

Loans

 

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Contractually required principal payments

 

$

7,553

 

$

479,440

 

$

486,993

Nonaccretable discount

 

 

(1,563)

 

 

 —

 

 

(1,563)

Principal cash flows expected to be collected

 

$

5,990

 

$

479,440

 

$

485,430

Accretable discount

 

 

(293)

 

 

(7,800)

 

 

(8,093)

Fair Value of acquired loans

 

$

5,697

 

$

471,640

 

$

477,337

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

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

PCI

 

Performing

 

 

 

 

    

Loans

    

Loans

    

Total

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(659)

 

$

(5,849)

 

$

(6,508)

Reclassification of nonaccretable discount to accretable

 

 

(159)

 

 

 —

 

 

(159)

Accretion recognized

 

 

767

 

 

2,325

 

 

3,092

Balance at the end of the period

 

$

(51)

 

$

(3,524)

 

$

(3,575)

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2018

 

 

PCI

 

Performing

 

 

 

    

Loans

    

Loans

    

Total

Balance at the beginning of the period

 

$

 —

 

$

 —

 

$

 —

Discount added at acquisition

 

 

(293)

 

 

(7,800)

 

 

(8,093)

Reclassification of nonaccretable discount to accretable

 

 

(892)

 

 

 —

 

 

(892)

Accretion recognized

 

 

526

 

 

1,951

 

 

2,477

Balance at the end of the period

 

$

(659)

 

$

(5,849)

 

$

(6,508)

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

During 2019, there was no nonaccretable discount that was recognized due to the repayment of PCI loans.  However, $159 thousand of nonaccretable discount was reclassified to accretable due to significant improvement on one specific credit subsequent to the merger date.  Of this amount, $153 thousand was accreted to income in 2019, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.

During 2018, there was no nonaccretable discount that was recognized due to the repayment of PCI loans.  However, $892 thousand of nonaccretable discount was reclassified to accretable during the third quarter of 2018 due to significant improvement on one specific credit subsequent to the merger date.  Of this amount, $396 thousand was accreted to income in 2018, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.

Premises and equipment acquired with a fair value of $6.1million includes one branch location. The fair value was determined with the assistance of a third party appraiser. The buildings and building write-ups will be recognized in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $8.2 million which is the portion of the merger purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years). See Note 6 to the Consolidated Financial Statements for additional information.

FHLB advances and other borrowings assumed with a fair value of $84.1 million included $40.0 million in overnight FHLB advances, $34.5 million of FHLB term advances, $4.7 million in subordinated debentures and a $4.8 million bank stock loan.  The $4.8 million bank stock loan was paid off immediately after the merger date on July 2, 2018, at its book value.  See Note 10 and 11 to the Consolidated Financial Statements for additional information.

During 2018, the Company incurred $1.4 million of expenses related to the merger comprised primarily of legal, accounting, and investment banking costs. These costs are presented on their own line within the consolidated statements of income. SFC Bank results are included in the consolidated statements of income effective on the merger date. For the period July 1, 2018 to December 31, 2018, SFC Bank reported revenues of $15.2 million and net income of $4.8 million, which included $391 thousand of after tax post-acquisition, compensation, transition and integration costs.

Unaudited pro forma combined operating results for the years ended December 31, 2018 and 2017, giving effect to the merger with Springfield Bancshares as if it had occurred as of January 1, 2017, are as follows:

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 

 

    

2018

    

2017

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

Net interest income

 

$

153,229

 

$

136,190

Noninterest income

 

$

42,538

 

$

32,395

Net income

 

$

49,542

 

$

42,316

 

 

 

  

 

 

  

Earnings per common share:

 

 

  

 

 

  

Basic

 

$

3.17

 

$

2.82

Diluted

 

$

3.11

 

$

2.75

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the merger occurred on January 1, 2017 or of future results of operations of the consolidated entities.

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Note 2. Sales/Mergers/Acquisitions (continued)

Guaranty Bank and Trust

On October 1, 2017 the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa, from Guaranty. Guaranty Bank is an Iowa-chartered bank that operates five banking locations throughout the Cedar Rapids metropolitan area.

The acquisition of Guaranty Bank allowed the Company to grow its market share in the Cedar Rapids market. Guaranty Bank has a strong core deposit base and retail franchise. Although Guaranty already had strong earnings, the Company has identified several opportunities for enhanced future earnings performance. Lastly, financial metrics related to the transaction were favorable, as measured by EPS accretion, ROAA accretion and earn back of tangible book value dilution.

In the acquisition, the Company acquired 100% of Guaranty Bank’s outstanding common stock and purchased certain assets and assumed certain liabilities of Guaranty for aggregate consideration consisting of 79% QCR Holdings common stock (678,670 shares) and 21% cash ($7.8 million). On September 29, 2017, the last trading date before the closing, the Company’s common stock closed at $45.50, resulting in stock consideration valued at $30.9 million and total consideration paid by the Company of $38.7 million.

To help fund the cash portion of the purchase price, on September 27, 2017, the Company executed a $7.0 million four-year term note with principal and interest due quarterly. See further information in Note 11. This note is included within other borrowings on the December 31, 2017 Consolidated Balance Sheets. The remaining cash consideration paid to Guaranty came from operating cash.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The Company considers all purchase accounting adjustments to be finalized.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is deductible over 15 years for tax purposes.

The Company has several areas of specialization, including government guaranteed lending, C&I lending, interest rate swaps, leasing, wealth management, private banking and municipal bond offerings that will be offered in this expanded market, increasing future earnings potential. Guaranty Bank has a strong core deposit base. There is also value added to the Company through having an expanded footprint in a market that has strong growth potential. The experience and value of the personnel at Guaranty Bank and their knowledge of the expanded market is also beneficial.

On December 2, 2017, the Company merged Guaranty Bank with and into CRBT, with CRBT as the surviving bank. As part of the merger, the Guaranty Bank branches located at 302 3rd Avenue SE, Cedar Rapids, Iowa and 1819 42nd Street NE, Cedar Rapids, Iowa, permanently closed. The three remaining Guaranty Bank branches have become banking offices of CRBT.

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

 

 

 

 

 

    

As of

 

 

October 1, 2017

 

 

(dollars in thousands)

ASSETS

 

 

 

Cash and due from banks

 

$

4,435

Interest-bearing deposits at financial institutions

 

 

3,954

Securities

 

 

49,703

Loans/leases receivable, net

 

 

192,518

Premises and equipment

 

 

4,808

Restricted investment securities

 

 

477

Core deposit intangible

 

 

2,698

Other assets

 

 

998

Total assets acquired

 

$

259,591

 

 

 

 

LIABILITIES

 

 

  

Deposits

 

$

212,468

Short-term borrowings

 

 

13,102

FHLB advances

 

 

4,108

Junior subordinated debentures

 

 

3,857

Other liabilities

 

 

2,596

Total liabilities assumed

 

$

236,131

Net assets acquired

 

$

23,460

 

 

 

 

CONSIDERATION PAID:

 

 

  

Cash

 

$

7,803

Common stock

 

 

30,880

Total consideration paid

 

$

38,683

Goodwill

 

$

15,223

The following table presents the purchased loans as of the acquisition date:

 

 

 

 

 

 

 

 

 

    

PCI

    

Performing

    

��   

 

 

Loans

 

Loans

 

Total

 

PCI

  

Performing

     

 

(dollars in thousands)

 

Loans

  

Loans

  

Total

 

 

 

 

 

 

 

 

 

 

Contractually required principal payments

 $3,126,327  $192,982,439  $196,108,766 

 

$

3,126

 

$

192,983

 

$

196,109

Nonaccretable discount

  (1,147,198)  -   (1,147,198)

 

 

(1,147)

 

 

 —

 

 

(1,147)

Principal cash flows expected to be collected

  1,979,129   192,982,439   194,961,568 

 

$

1,979

 

$

192,983

 

$

194,962

Accretable discount

  (219,902)  (2,223,989)  (2,443,891)

 

 

(220)

 

 

(2,224)

 

 

(2,444)

Fair Value of acquired loans

 $1,759,227  $190,758,450  $192,517,677 

 

$

1,759

 

$

190,759

 

$

192,518

 

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Notes to Consolidated Financial Statements

Note 2. Sales/Mergers/Acquisitions (continued)

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

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2019

 

PCI

 

Performing

 

 

 

For the year ended December 31, 2017

 

 

Loans

    

Loans

    

Total

 

PCI

  

Performing

     

 

(dollars in thousands)

 

Loans

  

Loans

  

Total

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 $-  $-  $- 

 

$

(8)

 

$

(1,613)

 

$

(1,621)

Discount added at acquisition

  (219,902)  (2,223,989)  (2,443,891)

Reclassification of nonaccretable discount to accretable

 

 

(5)

 

 

 —

 

 

(5)

Accretion recognized

  54,070   26,836   80,906 

 

 

 7

 

 

518

 

 

525

Balance at the end of the period

 $(165,832) $(2,197,153) $(2,362,985)

 

$

(6)

 

$

(1,095)

 

$

(1,101)

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2018

 

PCI

 

Performing

 

 

    

Loans

    

Loans

    

Total

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(166)

 

$

(2,197)

 

$

(2,363)

Accretion recognized

 

 

158

 

 

584

 

 

742

Balance at the end of the period

 

$

(8)

 

$

(1,613)

 

$

(1,621)

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2017

 

PCI

 

Performing

 

 

    

Loans

    

Loans

    

Total

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(220)

 

$

(2,224)

 

$

(2,444)

Accretion recognized

 

 

54

 

 

27

 

 

81

Balance at the end of the period

 

$

(166)

 

$

(2,197)

 

$

(2,363)

 

 

 

 

 

 

 

 

 

 

During 2018 and 2017, there was also $158$137 thousand and $158 thousand, respectively, of nonaccretable discount that was recognized due to the repayment of PCI loans.

Premises and equipment acquired with a fair value of $4,808,343$4.8  million includes five branch locations with a fair value of $4,614,604, including a write-down of $998,343.$4.6 million. The fair value was determined with the assistance of a third party appraiser. The buildings and related fair value adjustments will be recognized in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $2,698,301$2.7 million which is the portion of the acquisition purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years). See Note 6 to the Consolidated Financial Statements for additional information.

During the current year,2017, the Company incurred $1.1 million$805  thousand of  expenses related to the acquisition, comprised primarily of legal, accounting and investment banking costs. These acquisition costs are presented on their own line within the consolidated statements of income. Also during 2017, the Company incurred $3.1$3.1 million of post-acquisition expenses, comprised primarily of personnel costs, IT integration, and conversion costs. Guaranty Bank results are included in the consolidated statements of income effective on the acquisition date.

87

90

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 2. Sales/Mergers/Acquisitions (continued)

Unaudited pro forma combined operating results for the years ended December 31, 2017 and 2016, giving effect to the Guaranty Bank acquisition as if it had occurred as of January 1, 2016, are as follows:

 

 

 

 

 

 

 

Year Ended December 31, 

 

Year Ended December 31,

 

    

2017

    

2016

 

2017

  

2016

 

 

(dollars in thousands, except per share data)

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

Net interest income

 $122,923  $102,902 

 

$

122,923

 

$

102,902

Noninterest income

 $32,703  $34,238 

 

$

32,703

 

$

34,238

Net income

 $38,728  $27,103 

 

$

38,728

 

$

27,103

        

 

 

  

 

 

  

Earnings per common share:

        

 

 

  

 

 

  

Basic

 $2.80  $2.05 

 

$

2.80

 

$

2.05

Diluted

 $2.73  $2.02 

 

$

2.73

 

$

2.02

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2016 or of future results of operations of the consolidated entities.

Community State Bank

On August 31, 2016 the Company acquired Community State Bank from Van Diest Investment Company. CSB is headquartered in Ankeny, Iowa and is an Iowa-chartered bank that operates ten banking locations throughout the Des Moines metropolitan area. The Company purchased 100% of the outstanding common stock of CSB for cash consideration of $80.0 million.

The acquisition of CSB allowed the Company to expand its footprint into the Des Moines market. CSB has an experienced and capable leadership team that is committed to leading the Company’s efforts in the Des Moines area. CSB has demonstrated significant improvement in earnings and asset quality during the last three years. Additionally, CSB has a strong core deposit base and retail franchise. Although CSB already has strong earnings, the Company has identified several opportunities for enhanced future earnings performance. With $581 million of assets acquired, the Company believes this acquisition is large enough to provide meaningful impact on the financial results, but is not too large to overstrain existing infrastructure. Lastly, financial metrics related to the transaction were favorable, as measured by EPS accretion and earn-back of tangible book value dilution.

In connection with the acquisition, during the second quarter of 2016, the Company sold 1,215,000 shares of its common stock at a price of $24.75 per share, for net proceeds of $29.8 million, after deducting expenses. The shares were offered to institutional investors in a registered direct offering conducted without an underwriter or placement agent. The offering was a partial take-down of a previously filed shelf registration and closed on May 23, 2016.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2.Acquisitions (continued)

Cash received from the common stock offering was used to help finance the purchase price of the acquisition. Additionally, the Company drew $5.0 million on its $10.0 million revolving line of credit and fully funded its $30.0 million term facility. Both of these facilities are described further in Note 11 to the Consolidated Financial Statements. Cash dividends of $15.2 million from QCBT and CRBT were used to fund the remainder of the purchase price.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes.

The Company has several areas of specialization, including government guaranteed lending, C&I lending, interest rate swaps, leasing, wealth management, private banking and municipal bond offerings that will be offered in this new market, increasing future earnings potential. There is also value added to the Company through having a footprint in a market that has strong growth potential. Additionally, there are qualitative benefits gained through the addition of a new charter including better leverage of centralized operations and increased lending limits. The experience and value of the personnel at CSB and their knowledge of the Des Moines MSA is also beneficial.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2.Acquisitions(continued)

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

  

As of

 
  

August 31, 2016

 

ASSETS

    

Cash and due from banks

 $10,094,645 

Federal funds sold

  698,000 

Interest-bearing deposits at financial institutions

  14,730,157 

Securities

  102,640,029 

Loans/leases receivable, net

  419,029,277 

Premises and equipment

  20,684,880 

Core deposit intangible

  6,352,653 

Restricted investment securities

  1,512,900 

Other real estate owned

  650,000 

Other assets

  5,283,937 

Total assets acquired

 $581,676,478 
     

LIABILITIES

    

Deposits

 $486,298,262 

FHLB advances

  20,368,877 

Other liabilities

  4,897,564 

Total liabilities assumed

 $511,564,703 

Net assets acquired

 $70,111,775 
     

CONSIDERATION PAID:

    

Cash

 $80,000,000 

Total consideration paid

 $80,000,000 

Goodwill

 $9,888,225 

Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. A third party valuation consultant assisted with the determination of fair value.

Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans. PCI loans are accounted for in accordance with ASC 310-30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower. Performing loans are accounted for in accordance with ASC 310-20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.

For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount. Further, any excess cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected remaining life of the loan. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for loan and lease losses and provision for loan losses.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2.Acquisitions (continued)

For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loans.

The following table presents the purchased loans as of the acquisition date:

  

PCI

  

Performing

     
  

Loans

  

Loans

  

Total

 

Contractually required principal payments

 $8,349,688  $427,398,400  $435,748,088 

Nonaccretable discount

  (4,525,223)  -   (4,525,223)

Principal cash flows expected to be collected

 $3,824,465  $427,398,400  $431,222,865 

Accretable discount

  (277,579)  (11,916,009)  (12,193,588)

Fair Value of acquired loans

 $3,546,886  $415,482,391  $419,029,277 

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

  

For the year ended December 31, 2017

 
  

PCI

  

Performing

     
  

Loans

  

Loans

  

Total

 

Balance at the beginning of the period

 $(194,306) $(9,115,614) $(9,309,920)

Accretion recognized

  169,006   5,032,692   5,201,698 

Balance at the end of the period

 $(25,300) $(4,082,922) $(4,108,222)

  

For the year ended December 31, 2016

 
  

PCI

  

Performing

     
  

Loans

  

Loans

  

Total

 

Balance at the beginning of the period

 $-  $-  $- 

Discount added at acquisition

  (277,579)  (11,916,009)  (12,193,588)

Accretion recognized

  83,273   2,800,395   2,883,668 

Balance at the end of the period

 $(194,306) $(9,115,614) $(9,309,920)

During 2017 and 2016, there was also $198 thousand and $186 thousand, respectively, of nonaccretable discount that was recognized due to the repayment of PCI loans.

Premises and equipment acquired with a fair value of $20,684,880 includes ten branch locations with a fair value of $19,735,000, including a write-up of $8,334,437. The fair value was determined with the assistance of a third party appraiser. The buildings and building write-ups will be recognized in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $6,352,653 which is the portion of the acquisition purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years). See Note 6 to the Consolidated Financial Statements for additional information.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 2. Acquisitions (continued)

During 2016, the Company incurred $1.4 million of expenses related to the acquisition, comprised primarily of legal, accounting, and investment banking costs. These acquisition costs are presented on their own line within the consolidated statements of income. Also during 2016, the Company incurred $1.0 million of post-acquisition expenses, comprised primarily of personnel costs, IT integration, and conversion costs. CSB results are included in the consolidated statements of income effective on the acquisition date. For the period August 31, 2016 to December 31, 2016, CSB reported revenues of $11.4 million and net income of $2.1 million, which included $473 thousand of after tax acquisition costs.

During the current year, the Company incurred $1.2 million of post-acquisition compensation, transition and integration costs, comprised entirely of a fee that was paid for a core processor conversion of CSB.

Unaudited pro forma combined operating results for the years ended December 31, 2016 and 2015, giving effect to the CSB acquisition as if it had occurred as of January 1, 2015, are as follows:

  

Year Ended December 31,

 
  

2016

  

2015

 
   (dollars in thousands, except per share data) 

Net interest income

 $110,035  $98,483 

Noninterest income

 $34,773  $31,051 

Net income

 $34,137  $22,118 
         

Earnings per common share:

        

Basic

 $2.62  $1.91 

Diluted

 $2.58  $1.89 

The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on January 1, 2015 or of future results of operations of the consolidated entities.

 

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities

The amortized cost and fair value of investment securities as of December 31, 20172019 and 20162018 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

399,596

 

$

26,042

 

$

(143)

 

$

425,495

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

$

400,646

 

$

26,042

 

$

(143)

 

$

426,545

 

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

19,872

 

$

283

 

$

(77)

 

$

20,078

Residential mortgage-backed and related securities

 

 

118,724

 

 

2,045

 

 

(182)

 

 

120,587

Municipal securities

 

 

46,659

 

 

1,602

 

 

(4)

 

 

48,257

Other securities

 

 

21,707

 

 

138

 

 

(72)

 

 

21,773

 

 

$

206,962

 

$

4,068

 

$

(335)

 

$

210,695

 

     

Gross

  

Gross

     

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Cost

  

Gains

  

(Losses)

  

Value

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2017:

                

Securities held to maturity:

                

    

Cost

    

Gains

    

(Losses)

    

Value

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 $378,424,205  $2,763,718  $(2,488,119) $378,699,804 

 

$

400,863

 

$

5,661

 

$

(6,803)

 

$

399,721

Other securities

  1,050,000   -   -   1,050,000 

 

 

1,050

 

 

 —

 

 

(1)

 

 

1,049

 $379,474,205  $2,763,718  $(2,488,119) $379,749,804 

 

$

401,913

 

$

5,661

 

$

(6,804)

 

$

400,770

                

 

 

  

 

 

  

 

 

  

 

 

  

Securities available for sale:

                

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $38,409,157  $37,344  $(349,967) $38,096,534 

 

$

37,150

 

$

39

 

$

(778)

 

$

36,411

Residential mortgage-backed and related securities

  165,459,470   155,363   (2,313,529)  163,301,304 

 

 

163,698

 

 

182

 

 

(4,631)

 

 

159,249

Municipal securities

  66,176,364   660,232   (211,100)  66,625,496 

 

 

59,069

 

 

180

 

 

(703)

 

 

58,546

Other securities

  4,014,004   896,384   (25,815)  4,884,573 

 

 

6,754

 

 

100

 

 

(4)

 

 

6,850

 $274,058,995  $1,749,323  $(2,900,411) $272,907,907 

 

$

266,671

 

$

501

 

$

(6,116)

 

$

261,056

                

December 31, 2016:

                

Securities held to maturity:

                

Municipal securities

 $321,859,056  $2,200,577  $(4,694,734) $319,364,899 

Other securities

  1,050,000   -   -   1,050,000 
 $322,909,056  $2,200,577  $(4,694,734) $320,414,899 
                

Securities available for sale:

                

U.S. govt. sponsored agency securities

 $46,281,306  $132,886  $(330,585) $46,083,607 

Residential mortgage-backed and related securities

  150,465,222   174,993   (2,938,088)  147,702,127 

Municipal securities

  52,816,541   425,801   (637,916)  52,604,426 

Other securities

  4,046,332   703,978   (27,331)  4,722,979 
 $253,609,401  $1,437,658  $(3,933,920) $251,113,139 

 

88

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

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

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31,2017 2019 and 2016,2018, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(dollars in thousands)

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

509

 

$

(1)

 

$

10,047

 

$

(142)

 

$

10,556

 

$

(143)

Other securities

 

 

550

 

 

 —

 

 

 —

 

 

 —

 

 

550

 

 

 —

 

 

$

1,059

 

$

(1)

 

$

10,047

 

$

(142)

 

$

11,106

 

$

(143)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

1,431

 

$

(21)

 

$

2,117

 

$

(56)

 

$

3,548

 

$

(77)

Residential mortgage-backed and related securities

 

 

2,263

 

 

(17)

 

 

17,862

 

 

(165)

 

 

20,125

 

 

(182)

Municipal securities

 

 

 —

 

 

 —

 

 

724

 

 

(4)

 

 

724

 

 

(4)

Other securities

 

 

17,135

 

 

(72)

 

 

 —

 

 

 —

 

 

17,135

 

 

(72)

 

 

$

20,829

 

$

(110)

 

$

20,703

 

$

(225)

 

$

41,532

 

$

(335)

 

 

Less than 12 Months

  

12 Months or More

  

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Gross

      

Gross

      

Gross

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

December 31, 2017:

                        

Securities held to maturity:

                        

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

(dollars in thousands)

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Securities HTM:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 $23,750,826  $(354,460) $72,611,780  $(2,133,659) $96,362,606  $(2,488,119)

 

$

114,201

 

$

(2,187)

 

$

69,412

 

$

(4,616)

 

$

183,613

 

$

(6,803)

Other securities

 

 

549

 

 

(1)

 

 

 —

 

 

 —

 

 

549

 

 

(1)

                        

 

$

114,750

 

$

(2,188)

 

$

69,412

 

$

(4,616)

 

$

184,162

 

$

(6,804)

Securities available for sale:

                        

Securities AFS:

 

 

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 $28,576,258  $(200,022) $3,640,477  $(149,945) $32,216,735  $(349,967)

 

$

1,565

 

$

(34)

 

$

29,605

 

$

(744)

 

$

31,170

 

$

(778)

Residential mortgage-backed and related securities

  88,927,779   (871,855)  57,931,731   (1,441,674)  146,859,510   (2,313,529)

 

 

12,810

 

 

(148)

 

 

133,535

 

 

(4,483)

 

 

146,345

 

 

(4,631)

Municipal securities

  10,229,337   (41,151)  9,997,433   (169,949)  20,226,770   (211,100)

 

 

28,356

 

 

(394)

 

 

15,932

 

 

(309)

 

 

44,288

 

 

(703)

Other securities

  923,535   (25,815)  -   -   923,535   (25,815)

 

 

4,249

 

 

(4)

 

 

 —

 

 

 —

 

 

4,249

 

 

(4)

 $128,656,909  $(1,138,843) $71,569,641  $(1,761,568) $200,226,550  $(2,900,411)

 

$

46,980

 

$

(580)

 

$

179,072

 

$

(5,536)

 

$

226,052

 

$

(6,116)

                        

December 31, 2016:

                        

Securities held to maturity:

                        

Municipal securities

 $122,271,533  $(4,076,647) $13,010,803  $(618,087) $135,282,336  $(4,694,734)
                        

Securities available for sale:

                        

U.S. govt. sponsored agency securities

 $21,788,139  $(257,640) $5,499,012  $(72,945) $27,287,151  $(330,585)

Residential mortgage-backed and related securities

  121,506,582   (2,641,664)  7,437,615   (296,424)  128,944,197   (2,938,088)

Municipal securities

  34,152,822   (618,462)  338,099   (19,454)  34,490,921   (637,916)

Other securities

  3,177,414   (27,331)  -   -   3,177,414   (27,331)
 $180,624,957  $(3,545,097) $13,274,726  $(388,823) $193,899,683  $(3,933,920)

 

At December 31, 2017,2019, the investment portfolio included 613541 securities. Of this number, 22335 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.8%0.1% of the total aggregate amortized cost. Of these 22335 securities, 11020 securities had an unrealized loss for 12 months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and/orand it is not more-likely-than-not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. At

The Company did not recognize OTTI on any investment securities for the years ended December 31, 2017 and 2016, the Company’s equity securities represent less than 1% of the total portfolio.2019, 2018 or 2017.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 3. Investment Securities (continued)

The Company did not recognize OTTI on any debt or equityAll sales of securities for the years ended December 31, 2017, 2016 or 2015.

All sales of securities for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, were from securities identified as AFS. Information on proceeds received, as well as the gains and losses from the sale of those securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

 

(dollars in thousands)

 

2017

  

2016

  

2015

 

 

 

 

 

 

 

 

 

 

 

 

            

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of securities

 $71,091,580  $134,188,737  $81,410,368 

 

 

 

$

30,055

 

$

1,938

 

$

71,092

Gross gains from sales of securities

  67,351   4,845,009   1,045,444 

 

 

 

 

176

 

 

 —

 

 

67

Gross losses from sales of securities

  (155,236)  (252,611)  (246,461)

 

 

 

 

(206)

 

 

 —

 

 

(155)

In September 2016, the Company sold an equity security and recognized a pre-tax gross gain on the sale of $4,010,877. The equity security was acquired by the Company at no cost as part of a membership in the invested company in 2002.

 

The amortized cost and fair value of securities as of December 31, 2017,2019, by contractual maturity are shown below. Expected maturities of mortgage-backed and related securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary. “Other securities” available for sale are excluded from the maturity categories as there is no fixed maturity date for those securities.

  

Amortized Cost

  

Fair Value

 

Securities held to maturity:

        

Due in one year or less

 $2,912,158  $2,909,816 

Due after one year through five years

  20,838,734   20,896,388 

Due after five years

  355,723,313   355,943,600 
  $379,474,205  $379,749,804 

Securities available for sale:

        

Due in one year or less

 $1,991,755  $1,996,584 

Due after one year through five years

  26,984,843   26,986,584 

Due after five years

  75,608,923   75,738,862 
  $104,585,521  $104,722,030 

Residential mortgage-backed and related securities

  165,459,470   163,301,304 

Other securities

  4,014,004   4,884,573 
  $274,058,995  $272,907,907 

98

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

 

(dollars in thousands)

Securities HTM:

 

 

  

 

 

  

Due in one year or less

 

$

3,220

 

$

3,234

Due after one year through five years

 

 

33,088

 

 

33,865

Due after five years

 

 

364,338

 

 

389,446

 

 

$

400,646

 

$

426,545

Securities AFS:

 

 

  

 

 

  

Due in one year or less

 

$

1,084

 

$

1,084

Due after one year through five years

 

 

17,089

 

 

17,320

Due after five years

 

 

70,065

 

 

71,704

 

 

 

88,238

 

 

90,108

Residential mortgage-backed and related securities

 

 

118,724

 

 

120,587

 

 

$

206,962

 

$

210,695

 

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

PortionsPortions of the U.S. government sponsored agencies and municipal securities contain call options, at the discretion of the issuer, to terminate the security at predetermined dates prior to the stated maturity, summarized as follows:

  

Amortized Cost

  

Fair Value

 

Securities held to maturity:

        

Municipal securities

 $208,103,672  $208,961,233 
         

Securities available for sale:

        

U.S. govt. sponsored agency securities

  5,048,756   4,988,073 

Municipal securities

  57,554,280   57,817,498 
  $62,603,036  $62,805,571 

 

 

 

 

 

 

 

 

    

Amortized Cost

    

Fair Value

 

 

(dollars in thousands)

Securities HTM:

 

 

  

 

 

  

Municipal securities

 

$

182,653

 

$

186,631

 

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

Municipal securities

 

 

39,674

 

 

40,990

Other securities

 

 

4,500

 

 

4,638

 

 

$

44,174

 

$

45,628

 

 

90

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

As of December 31, 20172019 and 2016,2018, investment securities with a carrying value of $78,642,843$113.3 million and $118,811,905,$100.9 million, respectively, were pledged on FHLB advances, customer and wholesale repurchase agreements, derivative liabilities and for other purposes as required or permitted by law.

As of December 31, 2017, 2019, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 13193 issuers with fair values totaling $108.077.2 million and revenue bonds issued by 145154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $337.3$396.6 million. The Company held investments in general obligation bonds in 2622 states, including 6six states in which the aggregate fair value exceeded $5.0$5.0 million. The Company held investments in revenue bonds in 1617 states, including 7seven states in which the aggregate fair value exceeded $5.0$5.0 million.

As of December 31, 2016, 2018, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 116110 issuers with fair values totaling $116.5$86.4 million and revenue bonds issued by 120160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $255.5$371.9 million. The Company held investments in general obligation bonds in 2126 states, including 56 states in which the aggregate fair value exceeded $5.0$5.0 million. The Company held investments in revenue bonds in 1219 states, including 67 states in which the aggregate fair value exceeded $5.0$5.0 million.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuer’s state:

December 31, 2017:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer (Fair Value)

 
                 

Illinois

  20  $19,328,700  $19,514,024  $975,701 

Iowa

  16   13,881,689   13,969,512   873,095 

Missouri

  17   9,243,355   9,308,287   547,546 

North Dakota

  7   21,626,574   21,724,197   3,103,457 

Ohio

  9   8,002,705   7,938,028   882,003 

Texas

  17   11,253,775   11,308,848   665,226 

Other

  45   24,000,278   24,215,119   538,114 

Total general obligation bonds

  131  $107,337,076  $107,978,015  $824,260 

December 31, 2016:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer (Fair Value)

 
                 

Illinois

  19  $29,214,559  $29,308,438  $1,542,549 

Iowa

  27   32,258,612   32,231,936   1,193,775 

Missouri

  14   8,291,192   8,323,245   594,518 

North Dakota

  7   22,169,050   21,499,075   3,071,296 

Ohio

  8   6,790,398   6,651,897   831,487 

Other

  41   18,481,496   18,458,044   450,196 

Total general obligation bonds

  116  $117,205,307  $116,472,635  $1,004,074 

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 3. Investment Securities (continued)

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuer’s state:

December 31, 2017:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer (Fair Value)

 
                 

Illinois

  2  $17,211,441  $17,408,544  $8,704,272 

Indiana

  26   51,171,818   50,861,336   1,956,205 

Iowa

  29   68,724,899   69,079,470   2,382,051 

Kansas

  6   12,873,329   12,877,087   2,146,181 

Missouri

  56   106,259,015   106,232,837   1,897,015 

North Dakota

  5   11,451,560   11,351,676   2,270,335 

Ohio

  10   55,766,091   55,820,203   5,582,020 

Other

  11   13,805,340   13,716,132   1,246,921 

Total revenue bonds

  145  $337,263,493  $337,347,285  $2,326,533 

December 31, 2016:

                

U.S. State:

 

Number of

Issuers

  

Amortized Cost

  

Fair Value

  

Average

Exposure Per

Issuer (Fair Value)

 
                 

Indiana

  22  $47,994,737  $47,582,138  $2,162,824 

Iowa

  31   70,788,393   71,142,393   2,294,916 

Kansas

  6   13,476,366   13,427,491   2,237,915 

Missouri

  47   90,784,441   89,664,013   1,907,745 

North Dakota

  4   8,089,067   7,796,381   1,949,095 

Ohio

  3   13,650,000   13,405,222   4,468,407 

Other

  7   12,687,286   12,479,052   1,782,722 

Total revenue bonds

  120  $257,470,290  $255,496,690  $2,129,139 

As of December 31, 20172019 and 2016,2018, the Company did not hold general obligation orheld revenue bonds of anyone single issuer, located in Ohio, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity.  The issuer’s financial condition is strong and the source of repayment is diversified.  The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company’s portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).

The Company’sCompany’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually and as of December 31, 2017, 2019, all were well-within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of total risk-based capital.

As of December 31, 2017, 2019, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable

The composition of the loan/lease portfolio as of December 31, 20172019 and 20162018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

C&I loans *

 

$

1,507,825

 

$

1,429,410

CRE loans

 

 

  

 

 

 

Owner-occupied CRE

 

 

443,989

 

 

500,654

Commercial construction, land development, and other land

 

 

378,797

 

 

236,787

Other non owner-occupied CRE

 

 

913,610

 

 

1,028,670

 

 

 

1,736,396

 

 

1,766,111

 

 

 

 

 

 

 

Direct financing leases **

 

 

87,869

 

 

117,969

Residential real estate loans ***

 

 

239,904

 

 

290,759

Installment and other consumer loans

 

 

109,352

 

 

119,381

 

 

 

3,681,346

 

 

3,723,630

Plus deferred loan/lease origination costs, net of fees

 

 

8,859

 

 

9,124

 

 

 

3,690,205

 

 

3,732,754

Less allowance

 

 

(36,001)

 

 

(39,847)

 

 

$

3,654,204

 

$

3,692,907

** Direct financing leases:

 

 

  

 

 

  

Net minimum lease payments to be received

 

$

97,025

 

$

130,371

Estimated unguaranteed residual values of leased assets

 

 

547

 

 

828

Unearned lease/residual income

 

 

(9,703)

 

 

(13,230)

 

 

 

87,869

 

 

117,969

Plus deferred lease origination costs, net of fees

 

 

1,892

 

 

3,642

 

 

 

89,761

 

 

121,611

Less allowance

 

 

(1,464)

 

 

(1,792)

 

 

$

88,297

 

$

119,819

 

 

 

 

 

 

 

*   Includes equipment financing agreements outstanding at m2, totaling $142.0 million and $103.4 million as of December 31, 2019 and 2018, respectively.

 

  

2017

  

2016

 
         

C&I loans

 $1,134,516,315  $827,637,263 

CRE loans

        

Owner-occupied CRE

  332,742,477   332,387,621 

Commercial construction, land development, and other land

  186,402,404   165,149,491 

Other non owner-occupied CRE

  784,347,000   595,921,748 
   1,303,491,882   1,093,458,860 
         

Direct financing leases *

  141,448,232   165,419,360 

Residential real estate loans **

  258,646,265   229,233,104 

Installment and other consumer loans

  118,610,799   81,665,695 
   2,956,713,493   2,397,414,282 

Plus deferred loan/lease origination costs, net of fees

  7,771,907   8,072,703 
   2,964,485,400   2,405,486,985 

Less allowance

  (34,355,728)  (30,757,448)
  $2,930,129,672  $2,374,729,537 
         

* Direct financing leases:

        

Net minimum lease payments to be received

 $156,583,887  $184,274,802 

Estimated unguaranteed residual values of leased assets

  929,932   1,085,154 

Unearned lease/residual income

  (16,065,587)  (19,940,596)
   141,448,232   165,419,360 

Plus deferred lease origination costs, net of fees

  4,624,027   5,881,778 
   146,072,259   171,301,138 

Less allowance

  (2,382,098)  (3,111,898)
  $143,690,161  $168,189,240 

**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 and management’smanagement’s expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

At December 31, 2017,2019, the Company had 10six leases remaining with residual values totaling $929,932547 thousand that were not protected with a lease end options rider. At December 31, 2016, 2018, the Company had 13nine leases remaining with residual values totaling $1,085,164approximately $828 thousand that were not protected with a lease end options rider. Management has performed specific evaluations of these unguaranteed residual values and determined that the valuations are appropriate. There were no losses related to unguaranteed residual values during the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017.

***Includes residential real estate loans held for sale totaling $645,0013.7 million and $1,135,500$1.3 million as of December 31, 2017 2019 and 2016,2018, respectively.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

Changes in accretable yield for the loans acquired in the CSBmergers and Guaranty Bank acquisitions are as follows:

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2019

 

PCI

    

Performing

    

 

 

 

For the year ended December 31, 2017

 

 

Loans

 

Loans

 

Total

 

PCI

  

Performing

     

 

(dollars in thousands)

 

Loans

  

Loans

  

Total

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 $(194,306) $(9,115,614) $(9,309,920)

 

$

(667)

 

$

(10,127)

 

$

(10,794)

Discount added at acquisition

  (219,902)  (2,223,989)  (2,443,891)

Reclassification of nonaccretable discount to accretable

 

 

(275)

 

 

 —

 

 

(275)

Accretion recognized

  223,076   5,059,528   5,282,604 

 

 

885

 

 

3,749

 

 

4,634

Balance at the end of the period

 $(191,132) $(6,280,075) $(6,471,207)

 

$

(57)

 

$

(6,378)

 

$

(6,435)

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2018

 

PCI

    

Performing

    

 

 

 

Loans

 

Loans

 

Total

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

(191)

 

$

(6,280)

 

$

(6,471)

Discount added at acquisition

 

 

(293)

 

 

(7,800)

 

 

(8,093)

Reclassification of nonaccretable discount to accretable

 

 

(892)

 

 

(470)

 

 

(1,362)

Accretion recognized

 

 

709

 

 

4,423

 

 

5,132

Balance at the end of the period

 

$

(667)

 

$

(10,127)

 

$

(10,794)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

��

 

For the year ended December 31, 2017

 

PCI

    

Performing

    

 

 

 

For the year ended December 31, 2016

 

 

Loans

 

Loans

 

Total

 

PCI

  

Performing

     

 

(dollars in thousands)

 

Loans

  

Loans

  

Total

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 $-  $-  $- 

 

$

(194)

 

$

(9,116)

 

$

(9,310)

Discount added at acquisition

  (277,579)  (11,916,009)  (12,193,588)

 

 

(220)

 

 

(2,224)

 

 

(2,444)

Accretion recognized

  83,273   2,800,395   2,883,668 

 

 

223

 

 

5,060

 

 

5,283

Balance at the end of the period

 $(194,306) $(9,115,614) $(9,309,920)

 

$

(191)

 

$

(6,280)

 

$

(6,471)

 

93

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

 

The aging of the loan/lease portfolio by classes of loans/loans/leases as of December 31, 2017 2019 and 20162018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

2017

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

 

Current

  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases

  

Total

 

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $1,124,734,486  $8,306,829  $243,647  $-  $1,231,353  $1,134,516,315 

 

$

1,499,891

 

$

6,126

 

$

572

 

$

 —

 

$

1,236

 

$

1,507,825

 

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Owner-Occupied CRE

  331,868,142   540,435   -   -   333,900   332,742,477 

 

 

443,707

 

 

177

 

 

71

 

 

 —

 

 

34

 

 

443,989

 

Commercial Construction, Land Development, and Other Land

  181,558,092   -   -   -   4,844,312   186,402,404 

 

 

375,940

 

 

2,857

 

 

 —

 

 

 —

 

 

 —

 

 

378,797

 

Other Non Owner-Occupied CRE

  782,526,249   572,877   4,146   -   1,243,728   784,347,000 

 

 

909,684

 

 

73

 

 

 —

 

 

 —

 

 

3,853

 

 

913,610

 

Direct Financing Leases

  137,708,397   1,305,191   259,600   -   2,175,044   141,448,232 

 

 

85,636

 

 

463

 

 

253

 

 

 —

 

 

1,517

 

 

87,869

 

Residential Real Estate

  253,261,821   3,552,709   393,410   74,519   1,363,806   258,646,265 

 

 

235,845

 

 

2,939

 

 

414

 

 

 —

 

 

706

 

 

239,904

 

Installment and Other Consumer

  117,773,259   517,537   56,760   14,152   249,091   118,610,799 

 

 

108,750

 

 

 3

 

 

10

 

 

33

 

 

556

 

 

109,352

 

 $2,929,430,446  $14,795,578  $957,563  $88,671  $11,441,234  $2,956,713,493 

 

$

3,659,453

 

$

12,638

 

$

1,320

 

$

33

 

$

7,902

 

$

3,681,346

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

As a percentage of total loan/lease portfolio

  99.08%  0.50%  0.03%  0.00%  0.39%  100.00%

 

 

99.41

%  

 

0.34

%  

 

0.04

%  

 

0.00

%  

 

0.21

%  

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

Accruing Past

 

 

 

 

 

 

2016

 

 

 

 

30-59 Days

 

60-89 Days

 

Due 90 Days or

 

Nonaccrual

 

 

 

Classes of Loans/Leases

 

Current

  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases

  

Total

 

    

Current

    

Past Due

    

Past Due

    

More

    

Loans/Leases

    

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $821,637,507  $1,455,185  $10,551  $346,234  $4,187,786  $827,637,263 

 

$

1,423,406

 

$

930

 

$

597

 

$

389

 

$

4,088

 

$

1,429,410

 

CRE

                        

 

 

  

 

 

 

 

 

  

 

 

  

 

 

 

 

 

  

 

Owner-Occupied CRE

  331,812,571   -   242,902   -   332,148   332,387,621 

 

 

500,138

 

 

 —

 

 

193

 

 

107

 

 

216

 

 

500,654

 

Commercial Construction, Land Development, and Other Land

  160,760,034   35,638   -   -   4,353,819   165,149,491 

 

 

234,704

 

 

1,764

 

 

 —

 

 

 —

 

 

319

 

 

236,787

 

Other Non Owner-Occupied CRE

  594,384,926   100,673   -   -   1,436,149   595,921,748 

 

 

1,022,664

 

 

484

 

 

 —

 

 

 —

 

 

5,522

 

 

1,028,670

 

Direct Financing Leases

  161,452,627   730,627   574,700   215,225   2,446,181   165,419,360 

 

 

114,078

 

 

1,642

 

 

488

 

 

 —

 

 

1,761

 

 

117,969

 

Residential Real Estate

  227,023,552   473,478   365,581   294,854   1,075,639   229,233,104 

 

 

284,844

 

 

3,877

 

 

206

 

 

89

 

 

1,743

 

 

290,759

 

Installment and Other Consumer

  81,199,766   204,973   63,111   110,501   87,344   81,665,695 

 

 

118,343

 

 

356

 

 

24

 

 

47

 

 

611

 

 

119,381

 

 $2,378,270,983  $3,000,574  $1,256,845  $966,814  $13,919,066  $2,397,414,282 

 

$

3,698,177

 

$

9,053

 

$

1,508

 

$

632

 

$

14,260

 

$

3,723,630

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a percentage of total loan/lease portfolio

  99.20%  0.13%  0.05%  0.04%  0.58%  100.00%

 

 

99.32

%  

 

0.24

%  

 

0.04

%  

 

0.02

%  

 

0.38

%  

 

100.00

%

 

94

103

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. 4. Loans/Leases Receivable (continued)(continued)

 

NPLs by classes of loans/leases as of December 31, 2017 2019 and 20162018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

2017

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases *

  

Accruing TDRs

  

Total NPLs

  

Percentage of

Total NPLs

 

    

More

    

Loans/Leases*

    

Accruing TDRs

    

Total NPLs

    

Total NPLs

 

 

(dollars in thousands)

 

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $-  $1,231,353  $5,224,182  $6,455,535   34.63%

 

$

 —

 

$

1,236

 

$

646

 

$

1,882

 

21.12

%

CRE

                    

 

 

 

 

 

 

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

  -   333,900   107,322   441,222   2.37%

 

 

 —

 

 

34

 

 

 —

 

 

34

 

0.38

%

Commercial Construction, Land Development, and Other Land

  -   4,844,312   -   4,844,312   25.99%

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 -

%

Other Non Owner-Occupied CRE

  -   1,243,728   -   1,243,728   6.67%

 

 

 —

 

 

3,853

 

 

 —

 

 

3,853

 

43.22

%

Direct Financing Leases

  -   2,175,044   1,494,448   3,669,492   19.68%

 

 

 —

 

 

1,517

 

 

333

 

 

1,850

 

20.75

%

Residential Real Estate

  74,519   1,363,806   272,493   1,710,818   9.18%

 

 

 —

 

 

706

 

 

 —

 

 

706

 

7.92

%

Installment and Other Consumer

  14,152   249,091   14,027   277,270   1.49%

 

 

33

 

 

556

 

 

 —

 

 

589

 

6.61

%

 $88,671  $11,441,234  $7,112,472  $18,642,377   100.00%

 

$

33

 

$

7,902

 

$

979

 

$

8,914

 

100.00

%

 

*At December 31, 2017, 2019, nonaccrual loans/leases included $2,282,495$747 thousand of TDRs, including $122,598$98 thousand in C&I loans, $1,336,871$269 thousand in CRE loans, $700,255$294 thousand in direct financing leases, $115,190$31 thousand in residential real estate loans, and $7,581$55 thousand in installment loans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

Accruing Past

 

 

 

 

 

 

 

 

 

 

2016

 

 

Due 90 Days or

 

Nonaccrual

 

 

 

 

 

Percentage of

 

Classes of Loans/Leases

 

Accruing Past

Due 90 Days or

More

  

Nonaccrual

Loans/Leases

**

  

Accruing TDRs

  

Total NPLs

  

Percentage of

Total NPLs

 

    

More*

    

Loans/Leases **

    

Accruing TDRs *

    

Total NPLs

    

Total NPLs

 

 

 

(dollars in thousands)

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&I

 $346,234  $4,187,786  $4,733,997  $9,268,017   43.65%

 

$

389

 

$

4,088

 

$

454

 

$

4,931

 

26.58

%

CRE

                    

 

 

  

 

 

  

 

 

  

 

 

  

 

  

 

Owner-Occupied CRE

  -   332,148   -   332,148   1.56%

 

 

107

 

 

216

 

 

 —

 

 

323

 

1.74

%

Commercial Construction, Land Development, and Other Land

  -   4,353,819   -   4,353,819   20.51%

 

 

 —

 

 

319

 

 

 —

 

 

319

 

1.72

%

Other Non Owner-Occupied CRE

  -   1,436,149   -   1,436,149   6.77%

 

 

 —

 

 

5,522

 

 

2,985

 

 

8,507

 

45.86

%

Direct Financing Leases

  215,225   2,446,181   1,008,244   3,669,650   17.28%

 

 

 —

 

 

1,761

 

 

111

 

 

1,872

 

10.09

%

Residential Real Estate

  294,854   1,075,639   585,541   1,956,034   9.21%

 

 

89

 

 

1,743

 

 

100

 

 

1,932

 

10.41

%

Installment and Other Consumer

  110,501   87,344   18,746   216,591   1.02%

 

 

47

 

 

611

 

 

 9

 

 

667

 

3.60

%

 $966,814  $13,919,066  $6,346,528  $21,232,408   100.00%

 

$

632

 

$

14,260

 

$

3,659

 

$

18,551

 

100.00

%

 

** At December 31, 2016, 2018 accruing past due 90 days or more included $496 thousand of TDRs, including $389 thousand in C&I loans and $107

       thousand in CRE loans.

**     At December 31, 2018, nonaccrual loans/leases included $2,300,479$2.3 million of TDRs, including $48,501$265 thousand in C&I loans, $1,380,047$1.4 million in CRE loans, $816,149$321 thousand in direct financing leases, $43,579$344 thousand in residential real estate loans, and $12,203$3 thousand in installment loans.

 

95

104

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

Changes in the allowance by portfolio segment for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 are presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2019

 

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

Reclassification of allowance related to held for sale loans

 

 

(2,814)

 

 

(2,392)

 

 

 —

 

 

(628)

 

 

(288)

 

 

(6,122)

 

Provisions charged to expense *

 

 

3,666

 

 

1,566

 

 

1,129

 

 

163

 

 

114

 

 

6,638

 

Loans/leases charged off

 

 

(1,476)

 

 

(1,722)

 

 

(1,647)

 

 

(191)

 

 

(98)

 

 

(5,134)

 

Recoveries on loans/leases previously charged off

 

 

276

 

 

208

 

 

190

 

 

47

 

 

51

 

 

772

 

Balance, ending

 

$

16,072

 

$

15,379

 

$

1,464

 

$

1,948

 

$

1,138

 

$

36,001

 

*Excludes provision related to loans included in assets held for sale during the year of $428 thousand for the year ending December 31, 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2018

 

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

 

Year Ended December 31, 2017

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 $12,545,110  $11,670,609  $3,111,898  $2,342,344  $1,087,487  $30,757,448 

 

$

14,323

 

$

13,963

 

$

2,382

 

$

2,466

 

$

1,222

 

$

34,356

 

Provisions charged to expense

  2,736,296   4,044,460   1,369,624   197,034   122,505   8,469,919 

 

 

7,161

 

 

4,094

 

 

1,068

 

 

193

 

 

142

 

 

12,658

 

Loans/leases charged off

  (1,149,790)  (1,795,229)  (2,284,910)  (102,088)  (41,196)  (5,373,213)

 

 

(5,359)

 

 

(387)

 

 

(2,002)

 

 

(127)

 

 

(44)

 

 

(7,919)

 

Recoveries on loans/leases previously charged off

  191,420   42,848   185,486   29,141   52,679   501,574 

 

 

295

 

 

49

 

 

344

 

 

25

 

 

39

 

 

752

 

Balance, ending

 $14,323,036  $13,962,688  $2,382,098  $2,466,431  $1,221,475  $34,355,728 

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

    

 

 

    

 

 

    

Direct Financing

    

Residential Real

    

Installment and

    

 

 

 

Year Ended December 31, 2016

 

 

C&I

 

CRE

 

Leases

 

Estate

 

Other Consumer

 

Total

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 $10,484,080  $9,375,117  $3,395,088  $1,790,150  $1,096,471  $26,140,906 

 

$

12,545

 

$

11,671

 

$

3,112

 

$

2,342

 

$

1,087

 

$

30,757

Provisions (credits) charged to expense

  2,478,912   2,286,953   2,127,463   628,114   (43,276)  7,478,166 

Provisions charged to expense

 

 

2,736

 

 

4,044

 

 

1,370

 

 

197

 

 

123

 

 

8,470

Loans/leases charged off

  (527,152)  (24,304)  (2,503,417)  (76,820)  (112,490)  (3,244,183)

 

 

(1,150)

 

 

(1,795)

 

 

(2,285)

 

 

(102)

 

 

(41)

 

 

(5,373)

Recoveries on loans/leases previously charged off

  109,270   32,843   92,764   900   146,782   382,559 

 

 

192

 

 

43

 

 

185

 

 

29

 

 

53

 

 

502

Balance, ending

 $12,545,110  $11,670,609  $3,111,898  $2,342,344  $1,087,487  $30,757,448 

 

$

14,323

 

$

13,963

 

$

2,382

 

$

2,466

 

$

1,222

 

$

34,356

 

  

Year Ended December 31, 2015

 
  

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 
                         

Balance, beginning

 $8,833,832  $8,353,386  $3,359,400  $1,525,952  $1,001,795  $23,074,365 

Provisions charged to expense

  1,470,526   3,080,611   1,688,031   430,087   201,645   6,870,900 

Loans/leases charged off

  (453,782)  (2,560,749)  (1,788,772)  (169,996)  (251,838)  (5,225,137)

Recoveries on loans/leases previously charged off

  633,504   501,869   136,429   4,107   144,869   1,420,778 

Balance, ending

 $10,484,080  $9,375,117  $3,395,088  $1,790,150  $1,096,471  $26,140,906 

 

96

105

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

:

The allowance by impairment evaluation and by portfolio segment as of December 31, 2017 2019 and 20162018 is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

2017

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 $715,627  $1,429,460  $504,469  $355,167  $38,596  $3,043,319 

 

$

170

 

$

125

 

$

270

 

$

15

 

$

80

 

$

660

 

Allowance for nonimpaired loans/leases

  13,607,409   12,533,228   1,877,629   2,111,264   1,182,879   31,312,409 

 

 

15,902

 

 

15,254

 

 

1,194

 

 

1,933

 

 

1,058

 

 

35,341

 

 $14,323,036  $13,962,688  $2,382,098  $2,466,431  $1,221,475  $34,355,728 

 

$

16,072

 

$

15,379

 

$

1,464

 

$

1,948

 

$

1,138

 

$

36,001

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 $6,248,209  $6,529,262  $3,669,492  $1,704,846  $202,354  $18,354,163 

 

$

1,846

 

$

3,585

 

$

2,025

 

$

649

 

$

556

 

$

8,661

 

Nonimpaired loans/leases

  1,128,268,106   1,296,962,620   137,778,740   256,941,419   118,408,445   2,938,359,330 

 

 

1,505,979

 

 

1,732,811

 

 

85,844

 

 

239,255

 

 

108,796

 

 

3,672,685

 

 $1,134,516,315  $1,303,491,882  $141,448,232  $258,646,265  $118,610,799  $2,956,713,493 

 

$

1,507,825

 

$

1,736,396

 

$

87,869

 

$

239,904

 

$

109,352

 

$

3,681,346

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

  11.45%  21.89%  13.75%  20.83%  19.07%  16.58%

 

 

9.21

%  

 

3.49

%  

 

13.33

%  

 

2.31

%  

 

14.39

%  

 

7.62

%

Allowance as a percentage of nonimpaired loans/leases

  1.21%  0.97%  1.36%  0.82%  1.00%  1.07%

 

 

1.06

%  

 

0.88

%  

 

1.39

%  

 

0.81

%  

 

0.97

%  

 

0.96

%

Total allowance as a percentage of total loans/leases

  1.26%  1.07%  1.68%  0.95%  1.03%  1.16%

 

 

1.07

%  

 

0.89

%  

 

1.67

%  

 

0.81

%  

 

1.04

%  

 

0.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

 

2016

 

    

C&I

    

CRE

    

Leases

    

Estate

    

Other Consumer

    

Total

 

 

C&I

  

CRE

  

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans/leases

 $1,771,537  $693,919  $848,919  $289,112  $39,481  $3,642,968 

 

$

973

 

$

2,124

 

$

194

 

$

257

 

$

111

 

$

3,659

 

Allowance for nonimpaired loans/leases

  10,773,573   10,976,690   2,262,979   2,053,232   1,048,006   27,114,480 

 

 

15,447

 

 

15,595

 

 

1,598

 

 

2,300

 

 

1,248

 

 

36,188

 

 $12,545,110  $11,670,609  $3,111,898  $2,342,344  $1,087,487  $30,757,448 

 

$

16,420

 

$

17,719

 

$

1,792

 

$

2,557

 

$

1,359

 

$

39,847

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Impaired loans/leases

 $8,936,451  $6,112,114  $3,256,264  $1,661,180  $106,090  $20,072,099 

 

$

4,499

 

$

10,447

 

$

2,249

 

$

2,110

 

$

898

 

$

20,203

 

Nonimpaired loans/leases

  818,700,812   1,087,346,746   162,163,096   227,571,924   81,559,605   2,377,342,183 

 

 

1,424,911

 

 

1,755,664

 

 

115,720

 

 

288,649

 

 

118,483

 

 

3,703,427

 

 $827,637,263  $1,093,458,860  $165,419,360  $229,233,104  $81,665,695  $2,397,414,282 

 

$

1,429,410

 

$

1,766,111

 

$

117,969

 

$

290,759

 

$

119,381

 

$

3,723,630

 

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Allowance as a percentage of impaired loans/leases

  19.82%  11.35%  26.07%  17.40%  37.21%  18.15%

 

 

21.62

%  

 

20.33

%  

 

8.63

%  

 

12.18

%  

 

12.38

%  

 

18.11

%

Allowance as a percentage of nonimpaired loans/leases

  1.32%  1.01%  1.40%  0.90%  1.28%  1.14%

 

 

1.08

%  

 

0.89

%  

 

1.38

%  

 

0.80

%  

 

1.05

%  

 

0.98

%

Total allowance as a percentage of total loans/leases

  1.52%  1.07%  1.88%  1.02%  1.33%  1.28%

 

 

1.15

%  

 

1.00

%  

 

1.52

%  

 

0.88

%  

 

1.14

%  

 

1.07

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97

106

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

 

InformationLoans/leases, by classes of financing receivable, considered to be impaired as of and for impaired loans/leases isthe years ended December 31, 2019, 2018, and 2017 are presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

 

(dollars in thousands)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,607

 

$

1,647

 

$

 —

 

$

970

 

$

27

 

$

27

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

34

 

 

50

 

 

 —

 

 

24

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

684

 

 

686

 

 

 —

 

 

738

 

 

29

 

 

29

Direct Financing Leases

 

 

1,642

 

 

1,642

 

 

 —

 

 

1,322

 

 

30

 

 

30

Residential Real Estate

 

 

469

 

 

614

 

 

 —

 

 

481

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

476

 

 

476

 

 

 —

 

 

474

 

 

 —

 

 

 —

 

 

$

4,912

 

$

5,115

 

$

 —

 

$

4,009

 

$

86

 

$

86

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

239

 

$

239

 

$

170

 

$

124

 

$

 —

 

$

 —

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

2,867

 

 

2,867

 

 

125

 

 

1,958

 

 

 —

 

 

 —

Direct Financing Leases

 

 

383

 

 

383

 

 

270

 

 

196

 

 

 2

 

 

 2

Residential Real Estate

 

 

180

 

 

180

 

 

15

 

 

72

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

80

 

 

80

 

 

80

 

 

62

 

 

 —

 

 

 —

 

 

$

3,749

 

$

3,749

 

$

660

 

$

2,412

 

$

 2

 

$

 2

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,846

 

$

1,886

 

$

170

 

$

1,094

 

$

27

 

$

27

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

34

 

 

50

 

 

 —

 

 

24

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

3,551

 

 

3,553

 

 

125

 

 

2,696

 

 

29

 

 

29

Direct Financing Leases

 

 

2,025

 

 

2,025

 

 

270

 

 

1,518

 

 

32

 

 

32

Residential Real Estate

 

 

649

 

 

794

 

 

15

 

 

553

 

 

 —

 

 

 —

Installment and Other Consumer

 

 

556

 

 

556

 

 

80

 

 

536

 

 

 —

 

 

 —

 

 

$

8,661

 

$

8,864

 

$

660

 

$

6,421

 

$

88

 

$

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans/leases, by classes

98

Table of financing receivable, consideredContents

QCR Holdings, Inc. and Subsidiaries

Notes to be impaired as of and for the years ended December 31, 2017, 2016, and 2015 are presented as follows:Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

Recognized for

 

2017

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 

    

Investment

    

Balance

    

Allowance

    

Investment

    

Recognized

    

Received

 

(dollars in thousands)

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 $1,634,269  $1,644,706  $-  $1,406,310  $71,183  $71,183 

 

$

1,846

 

$

4,540

 

$

 —

 

$

2,346

 

$

210

 

$

210

CRE

                        

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

  289,261   289,261   -   79,317   11,902   11,902 

 

 

106

 

 

106

 

 

 —

 

 

107

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

 

 

507

 

 

507

 

 

 —

 

 

101

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  1,171,565   1,171,565   -   1,176,738   -   - 

 

 

1,804

 

 

1,804

 

 

 —

 

 

540

 

 

 —

 

 

 —

Direct Financing Leases

  2,944,540   2,944,540   -   2,879,695   132,167   132,167 

 

 

1,929

 

 

1,929

 

 

 —

 

 

2,193

 

 

60

 

 

60

Residential Real Estate

  943,388   1,018,167   -   685,807   1,161   1,161 

 

 

984

 

 

1,058

 

 

 —

 

 

723

 

 

 9

 

 

 9

Installment and Other Consumer

  134,245   134,245   -   126,474   -   - 

 

 

762

 

 

762

 

 

 —

 

 

198

 

 

 —

 

 

 —

 $7,117,268  $7,202,484  $-  $6,354,341  $216,413  $216,413 

 

$

7,938

 

$

10,706

 

$

 —

 

$

6,208

 

$

279

 

$

279

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

C&I

 $4,613,940  $4,617,879  $715,627  $4,584,142  $203,221  $203,221 

 

$

2,653

 

$

2,653

 

$

973

 

$

1,118

 

$

43

 

$

43

CRE

                        

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Owner-Occupied CRE

  151,962   151,962   48,462   221,260   -   - 

 

 

304

 

 

660

 

 

39

 

 

177

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235   4,447,831   -   - 

 

 

149

 

 

149

 

 

33

 

 

159

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  72,163   72,163   1,763   44,667   -   - 

 

 

7,577

 

 

7,577

 

 

2,052

 

 

3,055

 

 

58

 

 

58

Direct Financing Leases

  724,953   724,953   504,469   625,107   -   - 

 

 

320

 

 

320

 

 

194

 

 

273

 

 

 —

 

 

 —

Residential Real Estate

  761,458   761,458   355,167   549,286   14,990   14,990 

 

 

1,126

 

 

1,126

 

 

257

 

 

553

 

 

12

 

 

12

Installment and Other Consumer

  68,109   68,109   38,596   40,152   410   410 

 

 

136

 

 

136

 

 

111

 

 

125

 

 

 —

 

 

 —

 $11,236,897  $11,240,836  $3,043,319  $10,512,445  $218,621  $218,621 

 

$

12,265

 

$

12,621

 

$

3,659

 

$

5,460

 

$

113

 

$

113

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 $6,248,209  $6,262,585  $715,627  $5,990,452  $274,404  $274,404 

 

$

4,499

 

$

7,193

 

$

973

 

$

3,464

 

$

253

 

$

253

CRE

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

  441,222   441,222   48,462   300,577   11,902   11,902 

 

 

410

 

 

766

 

 

39

 

 

284

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

  4,844,312   4,844,312   1,379,235   4,447,831   -   - 

 

 

656

 

 

656

 

 

33

 

 

260

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

  1,243,728   1,243,728   1,763   1,221,405   -   - 

 

 

9,381

 

 

9,381

 

 

2,052

 

 

3,595

 

 

58

 

 

58

Direct Financing Leases

  3,669,492   3,669,492   504,469   3,504,802   132,167   132,167 

 

 

2,249

 

 

2,249

 

 

194

 

 

2,466

 

 

60

 

 

60

Residential Real Estate

  1,704,846   1,779,625   355,167   1,235,093   16,151   16,151 

 

 

2,110

 

 

2,184

 

 

257

 

 

1,276

 

 

21

 

 

21

Installment and Other Consumer

  202,354   202,354   38,596   166,626   410   410 

 

 

898

 

 

898

 

 

111

 

 

323

 

 

 —

 

 

 —

 $18,354,163  $18,443,318  $3,043,319  $16,866,786  $435,034  $435,034 

 

$

20,203

 

$

23,327

 

$

3,659

 

$

11,668

 

$

392

 

$

392

99

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

    

 

 

    

 

 

    

 

 

    

 

    

 

    

Interest Income

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Recognized for

 

 

Recorded

 

Unpaid Principal

 

Related

 

Recorded

 

Interest Income

 

Cash Payments

Classes of Loans/Leases

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Received

 

 

(dollars in thousands)

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with No Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

1,634

 

$

1,645

 

$

 —

 

$

1,406

 

$

71

 

$

71

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

289

 

 

289

 

 

 —

 

 

79

 

 

12

 

 

12

Commercial Construction, Land Development, and Other Land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

1,172

 

 

1,172

 

 

 —

 

 

1,177

 

 

 —

 

 

 —

Direct Financing Leases

 

 

2,945

 

 

2,945

 

 

 —

 

 

2,880

 

 

132

 

 

132

Residential Real Estate

 

 

943

 

 

1,018

 

 

 —

 

 

686

 

 

 1

 

 

 1

Installment and Other Consumer

 

 

134

 

 

134

 

 

 —

 

 

126

 

 

 —

 

 

 —

 

 

$

7,117

 

$

7,203

 

$

 —

 

$

6,354

 

$

216

 

$

216

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Impaired Loans/Leases with Specific Allowance Recorded:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

4,615

 

$

4,618

 

$

716

 

$

4,584

 

$

203

 

$

203

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

152

 

 

152

 

 

48

 

 

221

 

 

 —

 

 

 —

Commercial Construction, Land Development, and Other Land

 

 

4,844

 

 

4,844

 

 

1,379

 

 

4,448

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

72

 

 

72

 

 

 2

 

 

45

 

 

 —

 

 

 —

Direct Financing Leases

 

 

725

 

 

725

 

 

504

 

 

625

 

 

 —

 

 

 —

Residential Real Estate

 

 

761

 

 

761

 

 

355

 

 

549

 

 

15

 

 

15

Installment and Other Consumer

 

 

68

 

 

68

 

 

39

 

 

41

 

 

 1

 

 

 1

 

 

$

11,237

 

$

11,240

 

$

3,043

 

$

10,513

 

$

219

 

$

219

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total Impaired Loans/Leases:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

C&I

 

$

6,249

 

$

6,263

 

$

716

 

$

5,990

 

$

274

 

$

274

CRE

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Owner-Occupied CRE

 

 

441

 

 

441

 

 

48

 

 

300

 

 

12

 

 

12

Commercial Construction, Land Development, and Other Land

 

 

4,844

 

 

4,844

 

 

1,379

 

 

4,448

 

 

 —

 

 

 —

Other Non Owner-Occupied CRE

 

 

1,244

 

 

1,244

 

 

 2

 

 

1,222

 

 

 —

 

 

 —

Direct Financing Leases

 

 

3,670

 

 

3,670

 

 

504

 

 

3,505

 

 

132

 

 

132

Residential Real Estate

 

 

1,704

 

 

1,779

 

 

355

 

 

1,235

 

 

16

 

 

16

Installment and Other Consumer

 

 

202

 

 

202

 

 

39

 

 

167

 

 

 1

 

 

 1

 

 

$

18,354

 

$

18,443

 

$

3,043

 

$

16,867

 

$

435

 

$

435

 

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

  

2016

 

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

C&I

 $841,895  $951,600  $-  $2,858,343  $16,748  $16,748 

CRE

                        

Owner-Occupied CRE

  -   93,774   -   312,242   -   - 

Commercial Construction, Land Development, and Other Land

  -   -   -   -   -   - 

Other Non Owner-Occupied CRE

  1,196,549   1,196,549   -   1,322,654   -   - 

Direct Financing Leases

  1,690,121   1,690,121   -   1,731,982   43,461   43,461 

Residential Real Estate

  853,294   892,495   -   964,590   9,903   9,903 

Installment and Other Consumer

  55,734   55,734   -   321,175   4,475   4,475 
  $4,637,593  $4,880,273  $-  $7,510,986  $74,587  $74,587 
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                        

C&I

 $8,094,556  $8,098,395  $1,771,537  $2,959,495  $17,742  $17,742 

CRE

                        

Owner-Occupied CRE

  322,148   322,148   57,398   385,269   -   - 

Commercial Construction, Land Development, and Other Land

  4,353,817   4,353,819   577,611   1,022,930   -   - 

Other Non Owner-Occupied CRE

  239,600   239,600   58,910   47,920   -   - 

Direct Financing Leases

  1,566,143   1,566,143   848,919   841,733   36,303   36,303 

Residential Real Estate

  807,886   882,018   289,112   573,211   11,675   11,675 

Installment and Other Consumer

  50,356   50,356   39,481   40,384   527   527 
  $15,434,506  $15,512,479  $3,642,968  $5,870,942  $66,247  $66,247 
                         

Total Impaired Loans/Leases:

                        

C&I

 $8,936,451  $9,049,995  $1,771,537  $5,817,838  $34,490  $34,490 

CRE

                        

Owner-Occupied CRE

  322,148   415,922   57,398   697,511   -   - 

Commercial Construction, Land Development, and Other Land

  4,353,817   4,353,819   577,611   1,022,930   -   - 

Other Non Owner-Occupied CRE

  1,436,149   1,436,149   58,910   1,370,574   -   - 

Direct Financing Leases

  3,256,264   3,256,264   848,919   2,573,715   79,764   79,764 

Residential Real Estate

  1,661,180   1,774,513   289,112   1,537,801   21,578   21,578 

Installment and Other Consumer

  106,090   106,090   39,481   361,559   5,002   5,002 
  $20,072,099  $20,392,752  $3,642,968  $13,381,928  $140,834  $140,834 

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

  

2015

 

Classes of Loans/Leases

 

Recorded

Investment

  

Unpaid Principal

Balance

  

Related Allowance

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Interest Income

Recognized for

Cash Payments

Received

 
                         

Impaired Loans/Leases with No Specific Allowance Recorded:

                        

C&I

 $234,636  $346,072  $-  $380,495  $7,436  $7,436 

CRE

                        

Owner-Occupied CRE

  256,761   350,535   -   447,144   -   - 

Commercial Construction, Land Development, and Other Land

  -   228,818   -   117,406   -   - 

Other Non Owner-Occupied CRE

  1,578,470   1,578,470   -   2,953,888   -   - 

Direct Financing Leases

  871,884   871,884   -   892,281   4,142   4,142 

Residential Real Estate

  613,486   649,064   -   1,047,001   3,929   3,929 

Installment and Other Consumer

  377,304   377,304   -   817,854   9,563   9,563 
  $3,932,541  $4,402,147  $-  $6,656,069  $25,070  $25,070 
                         

Impaired Loans/Leases with Specific Allowance Recorded:

                        

C&I

 $5,051,846  $5,055,685  $2,592,270  $4,811,046  $-  $- 

CRE

                        

Owner-Occupied CRE

  -   -   -   -   - �� - 

Commercial Construction, Land Development, and Other Land

  193,804   205,804   76,934   195,986   -   - 

Other Non Owner-Occupied CRE

  -   -   -   -   -   - 

Direct Financing Leases

  829,457   829,457   306,193   474,458   -   - 

Residential Real Estate

  805,301   805,301   185,801   712,085   7,913   7,913 

Installment and Other Consumer

  210,438   210,438   143,089   189,539   5,693   5,693 
  $7,090,846  $7,106,685  $3,304,287  $6,383,114  $13,606  $13,606 
                         

Total Impaired Loans/Leases:

                        

C&I

 $5,286,482  $5,401,757  $2,592,270  $5,191,541  $7,436  $7,436 

CRE

                        

Owner-Occupied CRE

  256,761   350,535   -   447,144   -   - 

Commercial Construction, Land Development, and Other Land

  193,804   434,622   76,934   313,392   -   - 

Other Non Owner-Occupied CRE

  1,578,470   1,578,470   -   2,953,888   -   - 

Direct Financing Leases

  1,701,341   1,701,341   306,193   1,366,739   4,142   4,142 

Residential Real Estate

  1,418,787   1,454,365   185,801   1,759,086   11,842   11,842 

Installment and Other Consumer

  587,742   587,742   143,089   1,007,393   15,256   15,256 
  $11,023,387  $11,508,832  $3,304,287  $13,039,183  $38,676  $38,676 

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

For C&I and CRE loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. See Note 1 for further discussion on the Company’s risk ratings.

100

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

 

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

For each class of financing receivable, the following presents the recorded investment by credit quality indicatorindicator as of December 31, 2017 2019 and 2016:

2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

     

CRE

         

 

 

 

 

 

Land

 

 

 

 

 

 

 

         

Non Owner-Occupied

         

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

 

C&I

  

Owner-Occupied

CRE

  

Commercial

Construction,

Land

Development,

and Other Land

  

Other CRE

  

Total

  

As a % of

Total

 

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 $1,098,722,101  $318,293,608  $179,142,839  $767,119,909  $2,363,278,457   96.94%

 

$

1,334,446

 

$

439,418

 

$

378,572

 

$

896,206

 

$

3,048,642

 

98.28

%

Special Mention (Rating 6)

  10,944,924   8,230,060   1,780,000   10,068,870   31,023,854   1.27%

 

 

12,962

 

 

3,044

 

 

41

 

 

3,905

 

 

19,952

 

0.64

%

Substandard (Rating 7)

  24,578,731   6,218,809   5,479,565   7,158,221   43,435,326   1.78%

 

 

18,439

 

 

1,527

 

 

184

 

 

13,499

 

 

33,649

 

1.08

%

Doubtful (Rating 8)

  270,559   -   -   -   270,559   0.01%

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 $1,134,516,315  $332,742,477  $186,402,404  $784,347,000  $2,438,008,197   100.00%

 

$

1,365,847

 

$

443,989

 

$

378,797

 

$

913,610

 

$

3,102,243

 

100.00

%

 

2017

Delinquency Status *

Direct Financing

Leases

Residential Real

Estate

Installment and

Other Consumer

Total

As a % of

Total

Performing

$137,778,740$256,935,448$118,333,529$513,047,71698.91%

Nonperforming

3,669,4921,710,818277,2705,657,5801.09%
$141,448,232$258,646,265$118,610,799$518,705,296100.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

140,992

 

$

86,019

 

$

239,198

 

$

108,763

 

$

574,972

 

99.29

%

Nonperforming

 

 

986

 

 

1,850

 

 

706

 

 

589

 

 

4,131

 

0.71

%

 

 

$

141,978

 

$

87,869

 

$

239,904

 

$

109,352

 

$

579,103

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

CRE

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Owner Occupied

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

Construction,

 

 

 

 

 

 

 

     

CRE

         

 

 

 

 

 

Land

 

 

 

 

 

 

 

         

Non Owner-Occupied

         

 

 

 

Owner-Occupied

 

Development,

 

 

 

 

 

As a % of

 

Internally Assigned Risk Rating

 

C&I

  

Owner-Occupied

CRE

  

Commercial

Construction,

Land

Development,

and Other Land

  

Other CRE

  

Total

  

As a % of

Total

 

    

C&I

    

CRE

    

and Other Land

    

Other CRE

    

Total

    

Total

 

 

(dollars in thousands)

 

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass (Ratings 1 through 5)

 $796,568,451  $314,447,662  $158,108,465  $582,854,048  $1,851,978,626   96.40%

 

$

1,294,418

 

$

487,949

 

$

230,473

 

$

1,008,626

 

$

3,021,466

 

97.72

%

Special Mention (Rating 6)

  6,305,772   7,559,380   1,780,000   4,437,122  $20,082,274   1.05%

 

 

23,302

 

 

9,599

 

 

3,848

 

 

5,309

 

 

42,058

 

1.36

%

Substandard (Rating 7)

  24,763,040   10,380,369   5,261,026   8,630,578  $49,035,013   2.55%

 

 

8,286

 

 

3,106

 

 

2,466

 

 

14,735

 

 

28,593

 

0.92

%

Doubtful (Rating 8)

  -   210   -   -  $210   0.00%

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

 $827,637,263  $332,387,621  $165,149,491  $595,921,748  $1,921,096,123   100.00%

 

$

1,326,006

 

$

500,654

 

$

236,787

 

$

1,028,670

 

$

3,092,117

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2016

 

 

 

 

Direct Financing

 

Residential Real

 

Installment and

 

 

 

As a % of

 

Delinquency Status *

 

Direct Financing

Leases

  

Residential Real

Estate

  

Installment and

Other Consumer

  

Total

  

As a % of

Total

 

    

C&I

    

Leases

    

Estate

    

Other Consumer

    

Total

    

Total

 

 

(dollars in thousands)

 

                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 $161,749,710  $227,277,070  $81,449,104  $470,475,884   98.77%

 

$

102,713

 

$

116,097

 

$

288,827

 

$

118,714

 

$

626,351

 

99.18

%

Nonperforming

  3,669,650   1,956,034   216,591  $5,842,275   1.23%

 

 

691

 

 

1,872

 

 

1,932

 

 

667

 

 

5,162

 

0.82

%

 $165,419,360  $229,233,104  $81,665,695  $476,318,159   100.00%

 

$

103,404

 

$

117,969

 

$

290,759

 

$

119,381

 

$

631,513

 

100.00

%

 

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

101

110

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

AsTDRs totaled $1.7 million and $6.5 million as of  December 31, 2017 2019 and 2016, TDRs totaled $9,394,967 and $8,647,007,2018, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the years ended December 31, 2017 2019 and 2016.2018. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of restructuring. The specific allowance is as of December 31, 2017 2019 and 2016,2018, respectively. The following excludes any TDRs that were restructured and paid off or charged off in the same year.

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

Modification

 

Modification

 

 

 

 

2017

 

 

Number of

 

Recorded

 

Recorded

 

Specific

Classes of Loans/Leases

 

Number of

Loans / Leases

  

Pre-

Modification

Recorded

Investment

  

Post-

Modification

Recorded

Investment

  

Specific

Allowance

 

 

Loans / Leases

 

Investment

 

Investment

 

Allowance

                

 

(dollars in thousands)

CONCESSION - Extension of Maturity

                

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

C&I

 

 3

 

$

112

 

$

112

 

$

 —

Direct Financing Leases

  3  $115,236  $115,236  $- 

 

10

 

 

388

 

 

388

 

 

35

  3  $115,236  $115,236  $- 

 

13

 

$

500

 

$

500

 

$

35

                

 

  

 

 

  

 

 

  

 

 

  

CONCESSION - Significant Payment Delay

                

CONCESSION - Foregiveness of Principal

 

  

 

 

  

 

 

  

 

 

  

C&I

  7  $826,531  $826,531  $62,596 

 

 1

 

$

587

 

$

537

 

$

 —

CRE - Owner Occupied

  1  $107,322  $107,322   - 

Direct Financing Leases

  24   1,703,255   1,703,255   - 
  32  $2,637,108  $2,637,108  $62,596 

 

 

 

 

 

 

 

 

 

 

 

CONCESSION - Extension of Maturity

 

 

 

 

 

 

 

 

 

 

 

Installment and Other Consumer

 

 1

 

$

56

 

$

56

 

$

54

                

 

 

 

 

 

 

 

 

 

 

 

TOTAL

  35  $2,752,344  $2,752,344  $62,596 

 

15

 

$

1,143

 

$

1,093

 

$

89

 

  

 

 

  

 

 

  

 

 

  

 

  

2016

 

Classes of Loans/Leases

 

Number of

Loans/Leases

  

Pre-

Modification

Recorded

Investment

  

Post-

Modification

Recorded

Investment

  

Specific Allowance

 
                 

CONCESSION - Extension of Maturity

                

C&I

  3  $247,476  $247,476  $60,767 

Direct Financing Leases

  4   410,653   410,653   38,476 

Residential Real Estate

  1   277,092   277,092   187,492 
   8  $935,221  $935,221  $286,735 
                 

CONCESSION - Significant Payment Delay

                

C&I

  7  $4,562,427  $4,562,427  $813,041 

Direct Financing Leases

  13   1,149,493   1,149,493   125,940 
   20  $5,711,920  $5,711,920  $938,981 
                 

CONCESSION - Interest Rate Adjusted Below Market

                

CRE - Other

  1  $1,233,740  $1,233,740  $- 
   1  $1,233,740  $1,233,740  $- 
                 

TOTAL

  29  $7,880,881  $7,880,881  $1,225,716 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

    

Pre-

    

Post-

    

 

 

 

 

 

 

Modification

 

Modification

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Specific

Classes of Loans/Leases

 

Loans/Leases

 

Investment

 

Investment

 

Allowance

 

 

(dollars in thousands)

CONCESSION - Significant Payment Delay

 

  

 

 

  

 

 

  

 

 

  

C&I

 

 5

 

$

426

 

$

426

 

$

250

Other Non Owner-Occupied CRE

 

 1

 

 

500

 

 

500

 

 

60

Residential Real Estate

 

 1

 

 

46

 

 

46

 

 

 —

Direct Financing Leases

 

 3

 

 

75

 

 

75

 

 

 —

 

 

10

 

$

1,047

 

$

1,047

 

$

310

 

 

  

 

 

  

 

 

  

 

 

  

CONCESSION - Extension of Maturity

 

  

 

 

  

 

 

  

 

 

  

Other Non Owner-Occupied CRE

 

 2

 

$

2,976

 

$

2,976

 

$

1,492

Residential Real Estate

 

 2

 

$

100

 

$

100

 

$

 8

 

 

 4

 

$

3,076

 

$

3,076

 

$

1,500

 

 

  

 

 

  

 

 

  

 

 

  

TOTAL

 

14

 

$

4,123

 

$

4,123

 

$

1,810

 

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 4. Loans/Leases Receivable (continued)

Of the TDRs reported above, seventhree with a post-modification recorded investment totaling $279,245121 thousand were on nonaccrual as of December 31, 2017 2019 and eightthree with a post-modification recorded investment totaling $2,008,424 was$796 thousand were on nonaccrual as of December 31, 2016.2018.

For the year ended December 31, 2017, 2019, the Company had sixtwoTDRs totaling $251,940$66 thousand that redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. For the year ended December 31, 2016, 2018, the Company had nofive TDRs totaling $399 thousand that redefaulted within 12 months subsequent to restructure.restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.

Not included in the table above, thethe Company had two TDRsone TDR that werewas restructured and charged off in 2017,2019, totaling $65,623.$52 thousand. There were three13 TDRs that were both restructured and charged off in 2016,2018, totaling $341,952.$896 thousand.

102

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 4. Loans/Leases Receivable (continued)

Loans are made in the normal course of business to directors, executive officers, and their related interests. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions with other persons. An analysis of the changes in the aggregate committed amount of loans greater than or equal to $60,000$60,000 during the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, is as follows:

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

            

 

 

 

 

 

 

 

 

 

Balance, beginning

 $61,608,976  $42,012,313  $42,469,111 

 

$

125,496

 

$

66,442

 

$

61,609

Net increase (decrease) due to change in related parties

  11,926,759   19,945,960   (3,606,418)

 

 

(12,161)

 

 

41,797

 

 

11,927

Advances

  13,090,798   4,806,616   19,040,675 

 

 

98,708

 

 

43,453

 

 

13,091

Repayments

  (20,184,585)  (5,155,913)  (15,891,055)

 

 

(99,213)

 

 

(26,196)

 

 

(20,185)

Balance, ending

 $66,441,948  $61,608,976  $42,012,313 

 

$

112,830

 

$

125,496

 

$

66,442

 

The Company’sCompany’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio includes a concentration of loans in certain industries as of December 31, 2017 2019 and 20162018 as follows:

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

Percentage of

 

 

 

 

Percentage of

 

 

2017

  

2016

 

 

 

 

 

Total

 

 

 

 

Total

 

Industry Name

 

Balance

  

Percentage of

Total

Loans/Leases

  

Balance

  

Percentage of

Total

Loans/Leases

 

    

Balance

    

Loans/Leases

    

Balance

    

Loans/Leases

 

                

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Lessors of Residential Buildings

 

$

745,770

 

22

%  

$

594,346

 

16

%

Lessors of Non-Residential Buildings

 $400,622,681   14% $359,040,649   15%

 

 

574,058

 

17

%  

 

632,534

 

17

%

Lessors of Residential Buildings

  370,353,561   12%  166,036,201   7%

Administration of Urban Planning & Community & Rural Development

  83,343,541   3%  37,097,000   2%

 

 

133,157

 

 4

%  

 

111,579

 

 3

%

Bank Holding Companies

  66,950,294   2%  66,069,612   3%

 

 

92,185

 

 3

%  

 

75,601

 

 2

%

Nonresidential Property Managers

  51,984,722   2%  76,504,076   3%

 

Concentrations within the leasing portfolio are monitored by equipment type – none of which represent a concentration within the total loans/leases portfolio. Within the leasing portfolio, diversification is spread among construction, manufacturing and the service industries. Geographically, the lease portfolio is diversified across all 50 states. No individual state represents a concentration within the total loan/lease portfolio.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5. Premises and Equipment

The following summarizes the components of premises and equipment as of December 31, 20172019 and 2016:

2018:

 

 

 

 

 

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Land

 $13,466,930  $12,936,223 

 

$

13,632

 

$

15,582

Buildings (useful lives 15 to 50 years)

  53,633,788   51,546,499 

 

 

66,070

 

 

64,299

Furniture and equipment (useful lives 3 to 10 years)

  31,984,631   28,458,946 

 

 

40,228

 

 

36,399

Premises and equipment

  99,085,349   92,941,668 

 

 

119,930

 

 

116,280

Less accumulated depreciation

  36,247,094   32,298,160 

 

 

46,071

 

 

40,698

Premises and equipment, net

 $62,838,255  $60,643,508 

 

$

73,859

 

$

75,582

 

Certain facilities are leased under operating leases. Rental expense was $348,467,$334,977, and $339,839 for the years ended December 31, 2017, 2016, and 2015, respectively.

Future minimum rental commitments under noncancelable leases are as follows as of December 31, 2017:

Year ending December 31:

    

2018

  363,791 

2019

  355,727 

2020

  259,798 

2021

  159,708 

2022

  91,969 

Thereafter

  62,858 
  $1,293,851 

103

During 2016, the Company entered into a material related party transaction with an entity that is owned and controlled by a CRBT director. That business was chosen as the general contractor for the remodel of the Waterloo branch. The business was the original contractor for the branch and is recognized as a leader in Iowa and the Midwest market for the design and construction of financial services and professional office buildings. Based on the entity’s expertise, its experience as the original designer/builder of the branch location and a decline to bid from two other contractors, management chose the entity as the general contractor. Management determined that the bids received from the entity were at market rates.

The project total was estimated at $3.7 million. This was the full contract price, as subcontractors will be utilized to complete the work. It is estimated that the entity received $2.2 million for its work as the general contractor, including payments for a portion of the actual construction costs as the entity completed a portion of the subcontracting work in addition to being the general contractor. As of December 31, 2017, the project was complete and there was no outstanding commitment remaining.

113

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 5. Premises and Equipment (continued)

As a lessee, the Company has entered into operating leases for certain branch locations.  Total lease expenses were $732 thousand for the year ended December 31, 2019.

At December 31, 2019, the Company’s Right of Use “(ROU)” assets (included in other assets on the consolidated balance sheets) and operating lease liabilities (included in other liabilities on the consolidated balance sheets) were both $1.9 million. No new ROU assets were capitalized during the year ended December 31, 2019.

At December 31, 2019, the contractual maturities of operating lease liabilities were as follows:

 

 

 

 

 

    

Amount

Year ending December 31:

    

(dollars in thousands)

2020

 

 

541

2021

 

 

327

2022

 

 

251

2023

 

 

200

2024

 

 

144

Thereafter

 

 

857

 

 

$

2,320

As a lessor, the Company leases certain types of commercial vehicles and industrial equipment to its customers.  The Company recognized lease-related revenue, primarily interest income from direct financing leases of $6.1 million for the year ended December 31, 2019.  At December 31, 2019 the Company’s net investment in direct financing leases was $88.3 million.

As of December 31, 2019, the contractual maturities of sales-type and direct financing lease receivables were as follows:

 

 

 

 

 

    

Amount

Year ending December 31:

    

(dollars in thousands)

2020

 

 

12,123

2021

 

 

18,464

2022

 

 

23,520

2023

 

 

22,845

2024

 

 

16,065

  Thereafter

 

 

4,008

    Total lease payments receivable

 

$

97,025

    Unguaranteed residual values

 

 

547

    Unearned lease/residual income

 

 

(9,703)

 

 

$

87,869

    Plus deferred origination costs, net of fees

 

 

1,892

 

 

$

89,761

    Less allowance

 

 

(1,464)

  Total lease payments receivable

 

$

88,297

104

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The The

Note 6.6. Goodwill and Intangibles

The following table presents the changes in the carrying amount of goodwill as of for the years ended December 31, 20172019, 2018 and 2016:2017:

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

77,832

 

$

28,334

 

$

13,111

Goodwill from merger with Springfield Bancshares

 

 

 —

 

 

45,975

 

 

 —

Goodwill from acquisition of Bates Companies

 

 

 —

 

 

3,766

 

 

 —

Goodwill from acquisition of Guaranty Bank

 

 

 —

 

 

 —

 

 

15,223

Goodwill from acquisition of Guaranty Bank - measurement period adjustment

 

 

 —

 

 

(243)

 

 

 —

Goodwill from acquisition of Bates Companies - measurement period adjustment

 

 

(84)

 

 

 —

 

 

 —

Goodwill impairment - Bates Companies

 

 

(3,000)

 

 

 —

 

 

 —

Balance at the end of period

 

$

74,748

 

$

77,832

 

$

28,334

The following table presents the goodwill by reportable segment:

 

  

2017

  

2016

 

Balance at the beginning of period

 $13,110,913  $3,222,688 

Goodwill from acquisition of Guaranty Bank

  15,223,179   - 

Goodwill from acquisition of CSB

  -   9,888,225 

Balance at the end of period

 $28,334,092  $13,110,913 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

    

December 31, 2017

 

 

(dollars in thousands)

Commercial banking:

 

 

 

 

 

 

 

 

 

     QCBT

 

$

3,223

 

$

3,223

 

$

3,223

     CRBT

 

 

14,980

 

 

14,980

 

 

15,223

     CSB

 

 

9,888

 

 

9,888

 

 

9,888

     SFC Bank

 

 

45,975

 

 

45,975

 

 

 —

Other, Parent Company Only

 

 

682

 

 

3,766

 

 

 —

 

 

$

74,748

 

$

77,832

 

$

28,334

As of November 30, 2019, the Company’s management performed an internal assessment of the goodwill for the Bates Companies reporting unit.  As the Bates Companies is located in Rockford, Illinois, the Company had intended to achieve synergies and cross-selling opportunities that significantly enhanced the value of the Bates Companies.  With the sale of the assets and liabilities of RB&T, which was the Company’s bank subsidiary located in Rockford, Illinois, the Company’s valuation analysis determined the value had declined and the goodwill was impaired.  Specifically, the Company determined a goodwill impairment charge of $3 million was required for the Bates Companies.  The Company used a combination of methods to determine the value and related goodwill impairment charge.  The methods included prices of comparable businesses as well as recent discussions with existing wealth management providers in the surrounding Rockford market. 

105

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 6. Goodwill and Intangibles (continued)

The following table presents the changes in core deposit intangibles (included in Intangibles on the consolidated balance sheets) during the years ended December 31, 2019, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

    

2019

 

2018

 

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

15,595

 

$

9,079

 

$

7,381

Core deposit intangible from merger with Springfield Bancshares

 

 

 —

 

 

8,208

 

 

 —

Core deposit intangible from acquisition of Guaranty Bank

 

 

 —

 

 

 —

 

 

2,699

Amortization expense

 

 

(2,129)

 

 

(1,692)

 

 

(1,001)

Balance at the end of the period

 

$

13,466

 

$

15,595

 

$

9,079

 

 

 

  

 

 

  

 

 

  

Gross carrying amount

 

$

19,255

 

$

19,255

 

$

11,046

Accumulated amortization

 

 

(5,789)

 

 

(3,660)

 

 

(1,967)

Net book value

 

$

13,466

 

$

15,595

 

$

9,079

The following table presents the core deposit intangibles by reportable segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

December 31, 2018

 

December 31, 2017

 

 

(dollars in thousands)

Commercial Banking:

 

 

 

 

 

 

 

 

 

   CRBT

 

$

2,684

 

$

3,186

 

$

3,694

   CSB

 

 

3,980

 

 

4,675

 

 

5,385

   SFC Bank

 

 

6,802

 

 

7,734

 

 

 —

 

 

$

13,466

 

$

15,595

 

$

9,079

 

 

 

 

 

 

 

 

 

 

The following table presents the estimated amortization of the core deposit intangibles:

 

 

 

 

 

    

Amount

Years ending December 31,

 

(dollars in thousands)

2020

 

$

2,085

2021

 

 

2,032

2022

 

 

1,971

2023

 

 

1,776

2024

 

 

1,623

Thereafter

 

 

3,979

 

 

$

13,466

 

The following table presents the changes in customer list intangible (included in Intangibles on the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value as of consolidated balance sheets) during the years ended December 31, 2017 2019 and 2016:

2018:

  

2017

  

2016

 

Balance at the beginning of the period

 $7,381,213  $1,471,410 

Core deposit intangible from acquisition of Guaranty Bank

  2,698,301   - 

Core deposit intangible from acquisition of CSB

  -   6,352,653 

Amortization expense

  (1,000,561)  (442,850)

Balance at the end of the period

 $9,078,953  $7,381,213 
         
         

Gross carrying amount

 $11,046,081  $8,347,780 

Accumulated amortization

  (1,967,128)  (966,567)

Net book value

 $9,078,953  $7,381,213 

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

(dollars in thousands)

Balance at the beginning of period

 

$

1,855

 

$

 —

Customer list intangible from acquisition of Bates Companies

 

 

 —

 

 

1,855

Customer list intangible from acquisition of Bates Companies - measurement period adjustment

 

 

(214)

 

 

 —

Amortization

 

 

(137)

 

 

 —

Balance at the end of period

 

 

1,504

 

 

1,855

 

 

 

 

 

 

 

The customer list intangible relates to the Parent Company Only (“All Other”) reportable segment.

 

 

The following table presents the estimated amortization of the core deposit intangible:

Years ending December 31,

 

Amount

 

2018

 $1,218,202 

2019

  1,196,331 

2020

  1,169,934 

2021

  1,139,012 

2022

  1,103,565 

Thereafter

  3,251,909 
  $9,078,953 

106

See Note 2 to the Consolidated Financial Statements for additional information regarding the acquisitions of CSB and Guaranty Bank and the related goodwill and core deposit intangible.

114

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 6. Goodwill and Intangibles (continued)

The following table presents the estimated amortization of the customer list intangible:

 

 

 

 

 

    

Amount

Years ending December 31,

 

(dollars in thousands)

2020

 

$

109

2021

 

 

109

2022

 

 

109

2023

 

 

109

2024

 

 

109

Thereafter

 

 

959

 

 

$

1,504

 

Note 7. Derivatives and Hedging Activities

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

Below is a summaryThe Company entered into interest rate caps in December 2019 to hedge against the risk of rising interest rates on liabilities.  The liabilities consist of $375.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and Prime. The Company entered into interest rate caps in June 2014 to hedge against the risk of rising interest rates on short-term liabilities.  The short-term liabilities consisted of $30.0 million of 1-month FHLB advances, and the benchmark rate hedged was 1-month LIBOR.  In 2019, short-term liabilities of $15 million matured, and the remaining short-term liabilities as well as caps were sold as part of the RB&T asset sale in the fourth quarter of 2019.  The interest rate cap derivatives held by the Companycaps are designated as of December 31, 2017 and 2016.cash flow hedges in accordance with ASC 815. An initial premium of $2.1$4.3 million was paid upfront for the two caps.caps executed in 2019. The fair value of these instruments will fluctuate with market value changes, as well as amortizationdetails of the initial premiuminterest rate caps are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

Fair Value as of

 

 

Hedged Item

 

Effective Date

 

Maturity Date

 

Location

 

Notional Amount

 

Strike Rate

 

December 31, 2019

 

 

December 31, 2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

$

25,000

 

1.75

%  

 

$

112

 

 

$

 -

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

50,000

 

1.57

 

 

 

218

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

25,000

 

1.90

 

 

 

96

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2023

 

Other Assets

 

 

25,000

 

1.80

 

 

 

109

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

25,000

 

1.75

 

 

 

214

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

50,000

 

1.57

 

 

 

401

 

 

 

 -

 

 

Deposits

 

2/1/2020

 

2/1/2024

 

Other Assets

 

 

25,000

 

1.90

 

 

 

202

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2024

 

Other Assets

 

 

25,000

 

1.80

 

 

 

201

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

25,000

 

1.75

 

 

 

337

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

50,000

 

1.57

 

 

 

617

 

 

 

 -

 

 

Deposits

 

3/1/2020

 

3/1/2025

 

Other Assets

 

 

25,000

 

1.90

 

 

 

332

 

 

 

 -

 

 

Deposits

 

1/1/2020

 

1/1/2025

 

Other Assets

 

 

25,000

 

1.80

 

 

 

309

 

 

 

 -

 

 

1-month FHLB Advance

 

6/3/2014

 

6/5/2019

 

Other Assets

 

 

15,000

 

N/A

 

 

 

 -

 

 

 

117

 

 

1-month FHLB Advance

 

6/5/2014

 

6/5/2021

 

Other Assets

 

 

15,000

 

N/A

 

 

 

 -

 

 

 

342

 

 

 

 

 

 

 

 

 

 

$

405,000

 

 

 

 

$

3,148

 

 

$

459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 7. Derivatives and Hedging Activities (continued)

In June 2018, the Company entered into interest expense.rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities.  The variable rate trust preferred securities are tied to 3-month LIBOR, and the interest rate swaps utilize 3-month LIBOR, so the hedge is effective.  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:

 

Effective Date

Maturity Date

Balance Sheet
Location

 

Notional

Amount

 

Accounting Treatment

 

December 31, 2017
Fair Value

  

December 31, 2016
Fair Value

 

June 5, 2014

June 5, 2019

Other Assets

 $15,000,000 

Cash Flow Hedging

 $190,085  $179,939 

June 5, 2014

June 5, 2021

Other Assets

  15,000,000 

Cash Flow Hedging

  316,615   396,588 
    $30,000,000   $506,700  $576,527 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of

Hedged Item

 

Effective Date

 

Maturity Date

 

Location

 

Notional Amount

 

Receive Rate

 

 

Pay Rate

 

December 31, 2019

 

December 31, 2018

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

$

10,000

 

4.79

%  

 

 

5.85

%  

 

$

(971)

 

$

(298)

QCR Holdings Statutory Trust III

 

9/30/2018

 

9/30/2028

 

Other Liabilities

 

 

8,000

 

4.79

%  

 

 

5.85

%  

 

 

(777)

 

 

(239)

QCR Holdings Statutory Trust V

 

7/7/2018

 

7/7/2028

 

Other Liabilities

 

 

10,000

 

3.54

%  

 

 

4.54

%  

 

 

(944)

 

 

(288)

Community National Statutory Trust II

 

9/20/2018

 

9/20/2028

 

Other Liabilities

 

 

3,000

 

4.08

%  

 

 

5.17

%  

 

 

(291)

 

 

(89)

Community National Statutory Trust III

 

9/15//2018

 

9/15/2028

 

Other Liabilities

 

 

3,500

 

3.64

%  

 

 

4.75

%  

 

 

(339)

 

 

(104)

Guaranty Bankshares Statutory Trust I

 

9/15/2018

 

9/15/2028

 

Other Liabilities

 

 

4,500

 

3.64

%  

 

 

4.75

%  

 

 

(436)

 

 

(133)

 

 

  

 

 

 

 

 

$

39,000

 

4.18

%  

 

 

5.24

%  

 

$

(3,758)

 

$

(1,151)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are effective hedges,included in the assessment of effectiveness, are recorded as a component of accumulated other comprehensive income.AOCI. The following is a summary of how AOCI was impacted during the reporting periods:

 

 

 

 

 

 

 

Year Ended

    

December 31, 2019

    

December 31, 2018

 

Year Ended

 

 

(dollars in thousands)

 

December 31, 2017

  

December 31, 2016

 

 

 

 

 

 

 

Unrealized loss at beginning of period, net of tax

 $(932,156) $(799,421)

 

$

(1,276)

 

$

(805)

Amount reclassified from accumulated other comprehensive income to noninterest income related to hedge ineffectiveness

  -   (76,797)

Amount reclassified from accumulated other comprehensive income to noninterest expense related to hedge ineffectiveness

  79,757   - 

 

 

 —

 

 

27

Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization

  405,134   152,087 

 

 

422

 

 

575

Amount of loss recognized in other comprehensive income, net of tax

  (357,762)  (208,025)

 

 

(3,061)

 

 

(1,073)

Unrealized loss at end of period, net of tax

 $(805,027) $(932,156)

 

$

(3,915)

 

$

(1,276)

 

ChangesThe 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 offsetting interest rate swap with a third party financial institution. Additionally, the Company receives an upfront fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value related to the ineffective portion of cash flow hedges, are reported in noninterest income during the period of the change. As shownunderlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

The Company may be exposed to credit risk in the table above, $79,757event of expensenon-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 $76,797financial information.  The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of incomeISDA master agreements, central clearing mechanisms and counterparty limits.  The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.  The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures.  The Company does not currently anticipate any losses from the change in fair value for the years ending December 31, 2017 and 2016, respectively, was duefailure of interest rate derivative counterparties to ineffectiveness.honor their obligations.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Notional Amount

 

Estimated Fair Value

 

Notional Amount

 

Estimated Fair Value

 

 

 

(dollars in thousands)

Non-Hedging Interest Rate Derivatives Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

787,221

 

$

84,679

 

$

445,022

 

$

22,196

Non-Hedging Interest Rate Derivatives Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swap contracts

 

 

$

787,221

 

$

84,679

 

$

445,022

 

$

22,196

115

108

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 7. Derivatives and Hedging Activities (continued)

 

Note 8. DepositsSwap fee income totaled $28.3 million, $10.8 million and $3.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.

 

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

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

U.S govt. sponsored agency securities

 

$

3,541

 

$

 —

Municipal securities

 

 

22,924

 

 

 —

Residential mortgage-backed and related securities

 

 

72,090

 

 

 —

 

 

$

98,555

 

$

 —

 

 

 

 

 

 

 

In addition to the pledged investment securities, the Company collateralized the interest rate swaps with cash totaling $10.0 million and $18.5 million as of December 31, 2019 and 2018, respectively.

Note 8. Deposits

The aggregate amount of certificates of deposit, each with a minimum denomination of $250,000,$250,000, was $364,329,340$448.6 million and $300,852,485$592.7 million as of December 31, 2017 2019 and 2016,2018, respectively.

As of December 31, 2017,2019, the scheduled maturities of certificates of deposit were as follows:

 

 

 

Year ending December 31:

    

    

(dollars in thousands)

2018

 $478,334,220 

2019

  86,231,955 

2020

  18,143,039 

 

$

523,631

2021

  8,223,919 

 

 

130,895

2022

  5,071,695 

 

 

50,299

2023

 

 

9,162

2024

 

 

12,269

Thereafter

  67,050 

 

 

69

 $596,071,878 

 

$

726,325

 

The Company has public entity interest-bearing demand deposits and certificates of deposit that are collateralized by investment securities with carrying values as follows:

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

(dollars in thousands)

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 

$

6,135

 

$

980

Residential mortgage-backed and related securities

 

 

3,782

 

 

9,883

 

 

$

9,917

 

$

10,863

 

 

 

 

 

 

 

The Company had a $35.0$47.4 million PUD LOC with the FHLB of Des Moines and a $10.1 million PUD LOC with the FHLB of Chicago for the purpose of providing additional collateral on public deposits as of December 31, 2017. 2019. As of December 31, 2016, 2018, the Company had a $40.0$80.8 million PUD LOC with the FHLB of Des Moines and a $7.0$11.0 million PUD LOC with the FHLB of Chicago. There were no amounts outstanding under these letters of credit as of December 31, 2017 2019 or 2016.2018.

109

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note9. Short-Term Borrowings

Short-term borrowings as of December 31, 20172019 and 20162018 are summarized as follows:

 

 

 

 

 

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Overnight repurchase agreements with customers

 $7,003,122  $8,131,387 

 

$

2,193

 

$

2,084

Federal funds purchased

  6,990,000   31,840,000 

 

 

11,230

 

 

26,690

 $13,993,122  $39,971,387 

 

$

13,423

 

$

28,774

 

The Company’sCompany’s overnight repurchase agreements with customers are collateralized by investment securities with carrying values as follows:

 

 

 

 

 

 

    

2019

    

2018

 

(dollars in thousands)

 

2017

  

2016

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 $2,077,702  $630,077 

 

$

1,964

 

$

3,662

Residential mortgage-backed and related securities

  18,816,280   19,090,261 

 

 

1,456

 

 

20,654

Total securities pledged to overnight customer repurchase agreements

  20,893,982   19,720,338 

 

 

3,420

 

 

24,316

Less: overcollateralized position

  13,890,860   11,588,951 

 

 

1,227

 

 

22,232

 $7,003,122  $8,131,387 

 

$

2,193

 

$

2,084

 

Inherent in the overnight purchaserepurchase agreements is a risk that the fair value of the collateral pledged on the agreements could decline below the amount obligated under our customer repurchase agreements. The Company considers this risk minimal. The Company monitors balances daily to ensure that collateral is sufficient to meet obligations. Additionally, the Company maintains an overcollateralized position that is sufficient to cover any minor interest rate movements.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9. Short-Term Borrowings (continued)

The securities underlying the agreements as of December 31, 20172019 and 20162018 were under the Company'sCompany’s control in safekeeping at third-partythird-party financial institutions.

Information concerning overnight repurchase agreements with customers is summarized as follows as of December 31, 2017 2019 and 2016:

2018:

 

 

 

 

 

 

 

    

2019

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

 

Average daily balance during the period

 $7,475,824  $30,082,866 

 

$

4,231

 

$

7,831

 

Average daily interest rate during the period

  0.08%  0.07%

 

 

0.73

%  

 

0.38

%

Maximum month-end balance during the period

 $11,829,201  $59,833,229 

 

$

4,177

 

$

10,392

 

Weighted average rate as of end of period

  0.15%  0.02%

 

 

1.00

%  

 

0.90

%

 

 

110

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 9. Short-Term Borrowings (continued)

Information concerning federal funds purchased is summarized as follows as of December 31, 20172019 and 2016:

2018:

 

 

 

 

 

 

 

    

2019

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

 

Average daily balance during the period

 $13,486,239  $19,105,595 

 

$

12,594

 

$

13,059

 

Average daily interest rate during the period

  1.31%  0.56%

 

 

2.56

%  

 

2.18

%

Maximum month-end balance during the period

 $33,650,000  $51,750,000 

 

$

17,010

 

$

32,330

 

Weighted average rate as of end of period

  1.24%  0.70%

 

 

1.50

%  

 

2.46

%

 

 

Note 10. FHLB AdvancesNote 10.FHLB Advances

The subsidiary banks are members of the FHLB of Des Moines or Chicago. Moines. Maturity and interest rate information on advances from the FHLB as of December 31, 2017 2019 and 20162018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

December 31, 2018

 

 

December 31, 2017

  

December 31, 2016

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

     

Weighted

      

Weighted

 

 

 

 

 

Average

 

 

 

 

Average

 

     

Average

      

Average

 

 

 

 

 

Interest Rate

 

 

 

 

Interest Rate

 

     

Interest Rate

      

Interest Rate

 

    

Amount Due

    

at Year-End

    

Amount Due

    

at Year-End

 

 

Amount Due

  

at Year-End

  

Amount Due

  

at Year-End

 

 

(dollars in thousands)

Maturity:

                

 

 

 

 

 

 

 

 

 

 

 

Year ending December 31:

                

 

 

  

 

  

 

 

  

 

  

 

2017

 $-   -  $112,500,000   0.78%

2018

  190,400,000   1.82   25,000,000   3.35 

2019

 

$

 —

 

 —

%  

$

239,958

 

2.60

%

2020

  1,600,000   1.75   -   - 

 

 

110,900

 

1.73

 

 

11,484

 

1.74

 

2021

 

 

5,000

 

1.55

 

 

15,050

 

2.32

 

2022

 

 

23,400

 

1.73

 

 

 —

 

 —

 

2023

 

 

20,000

 

1.84

 

 

 —

 

 —

 

Total FHLB advances

 $192,000,000   1.82% $137,500,000   1.25%

 

$

159,300

 

1.74

%  

$

266,492

 

2.55

%

 

*OfThe Company prepaid FHLB advances in 2019 using excess funds generated by strong deposit growth. The loss on the advances outstanding, a portion have putable options which allowprepayment of the FHLB at its discretion, to terminate the advances and require the subsidiary banks to repay at predetermined dates prior to the stated maturity date of the advances.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 10. FHLB Advances (continued)

totaled $386 thousand.

Advances are collateralized by loans of $850,115,910$1.1 billion and $669,513,037$1.3 billion as of December 31, 2017 2019 and 2016,2018, respectively, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 125% to 333% based on the loan type. Advances are also collateralized by securities of $6,690,525$1.4 million and $26.9 million as of December 31, 2017, 2019 and 2018, respectively, in aggregate. As of December 31, 2016, there were no securities pledged to advances. The Company continues to pledge loans under blanket liens to provide off balance sheet liquidity.

As of December 31, 20172019 and included withwithin the 20182020 maturity grouping above are $165.4$109.3 million of short-term advances from the FHLB. These advances have maturities ranging from 1 day to 1 month. Short-term and overnight advances totaled $104.5$190.2 million as of December 31, 2016 2018 and had maturities ranging from 1 day to 1 month.

Throughout 2016, the Company executed several balance sheet restructuring strategies in an effort to reduce reliance on wholesale funding. These strategies will continue to be evaluated in the future. A summary of prepayments of FHLB advances related to these restructurings is summarized in the following table for the year ended December 31, 2016:

2016

 

Date of Restructuring

 

Amount

  

Weighted

Average

Interest Rate

 

Range of Maturity Dates

 

Prepayment

Fees

 
              

First Quarter of 2016

 $10,000,000   3.86%

December 2017

 $524,197 

Third Quarter of 2016

  5,000,000   2.84%

February 2018

  127,310 

Fourth Quarter of 2016

  15,000,000   3.14%

September 2017 to November 2017

  357,161 

Total for 2016

 $30,000,000   3.33%  $1,008,668 

All prepayment fees shown in the table above are included in losses on debt extinguishment in the statements of income.

As of December 31, 20172019 and 2016,2018, the subsidiary banks held $11,676,700$11.7 million and $9,271,300,$15.7 million, respectively, of FHLB stock, which is included in restricted investment securities on the consolidated balance sheet.

111

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Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 11. Other Borrowings and Unused Lines of Credit

Other borrowings as of December 31, 20172019 and 20162018 are summarized as follows:

 

 

 

 

 

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Wholesale structured repurchase agreements

 $35,000,000  $45,000,000 

 

$

 —

 

$

35,000

Term notes

  31,000,000   30,000,000 

 

 

 —

 

 

23,250

Revolving line of credit

  -   5,000,000 

 

 

 —

 

 

9,000

 $66,000,000  $80,000,000 

 

$

 —

 

$

67,250

 

The Company’s prepaid two wholesale structured repurchase agreements arein the second quarter of 2019 using excess funds generated by strong deposit growth.  The first wholesale structured repurchase agreement totaled $5.0 million and had an original maturity date of March 13, 2020 with a rate of 2.58%.  The second wholesalestructured

repurchase agreement totaled $20.0 million and had an original maturity of June 13, 2020 with a rate of 2.46%.  The loss on the prepayment of the wholesale structured repurchase agreements totaled $50 thousand. In addition, wholesale repurchase agreements totaling $10.0 million matured in the second quarter of 2019.  The wholesale structured repurchase agreements were utilized as an alternative funding source to FHLB advanes and customer deposits.  Wholesale structured repurchase agreements were collateralized by investmentcertain U.S. government agency securities and residential mortgage backed and related securities with carrying values as follows:

 

 

 

 

 

 

 

    

2019

    

2018

 

(dollars in thousands)

 

2017

  

2016

 

 

 

 

 

 

 

U.S. govt. sponsored agency securities

 $3,474,555  $20,798,703 

 

$

 —

 

$

 —

Residential mortgage-backed and related securities

  61,528,167   31,321,028 

 

 

 —

 

 

38,870

Total securities pledged to wholesale customer repurchase agreements

  65,002,722   52,119,731 

 

 

 —

 

 

38,870

Less: overcollateralized position

  30,002,722   7,119,731 

 

 

 —

 

 

3,870

 $35,000,000  $45,000,000 

 

$

 —

 

$

35,000

 

Inherent in the wholesale structured repurchase agreements is a risk that the fair value of the collateral pledged on the agreements could decline below the amount obligated under the agreements. The Company considers this risk minimal. The Company maintains an overcollateralized position that is sufficient to cover any minor interest rate movements.

Throughout 2016, the Company executed several balance sheet restructuring strategies in an effort to reduce reliance on wholesale funding. These strategies will continue to be evaluated in the future. A summary of prepayments of wholesale structured repurchase agreements related to those restructurings is summarized in the following table for the year ended had two term notes totaling $23.3 million at December 31, 2016:

2016

 

Date of Restructuring

 

Amount

  

Weighted

Average

Interest Rate

 

Range of Maturity Dates

 

Prepayment

Fees

 
              

First Quarter of 2016

 $10,000,000   3.97%

July 2018

 $759,000 

Third Quarter of 2016

  55,000,000   3.27%

February 2019 to September 2020

  4,010,000 

Total for 2016

 $65,000,000   3.38%  $4,769,000 

All prepayment fees shown in the table above are included in losses on debt extinguishment in the statements2018 with original maturity dates of income. There were no material modifications of borrowings during 2017 or 2016.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 11.        Other Borrowings and Unused Lines of Credit (continued)

Maturity and interest rate information concerning wholesale structured repurchase agreements is summarized as follows:

  

December 31, 2017

 

December 31, 2016

 
      

Weighted

     

Weighted

 
      

Average

     

Average

 
      

Interest Rate

     

Interest Rate

 
  

Amount Due

  

at Year-End

 

Amount Due

  

at Year-End

 

Maturity:

                

Year ending December 31:

                

2017

 $-   -  $10,000,000  3.00% 

2019

  10,000,000   3.44   10,000,000  3.44  

2020

  25,000,000   2.48   25,000,000  2.48  

Total Wholesale Structured Repurchase Agreements

 $35,000,000   2.76% $45,000,000  2.81% 

The Company has two term notes. The first is a term note with a maturity date of December 31, 2021.The outstanding balance on the term note totals $24.0 million and $30.0 million at December 31, 2017 and 2016, respectively. Interest on the term note isnotes were calculated at the effective LIBOR rate plus 3.00% per annum (4.56% and 3.77%(5.52% at December 31, 2017 and 2016, respectively)2018). The second is a $7.0 million term note originated in the third quarter of 2017 with a maturity date of December 31, 2021 and interest calculated at the effective LIBOR rate plus 3.00% per annum (4.56% at December 31, 2017). The proceeds from this note were used to fund a portion of the cash consideration for the acquisition of Guaranty Bank. The collateral on both borrowings iswas the original stock certificates and stock powers of all bank subsidiaries. In February 2019, immediately following the subordinated note issuance, the Company repaid the term notes.

TheIn the second quarter of 2019, the Company has a $10.0 millionrenewed its revolving line of credit note availablecredit.  At renewal, the line amount was increased from $10.0 million to $20.0 million for which there is no outstanding balance as of December 31, 2017. If used, interest2019. Interest on the revolving line of credit is calculated at the effective LIBOR rate plus 2.50%2.25% per annum (4.06%(4.01% at December 31, 2017)2019). The collateral on the revolving line of credit is 100% of the originaloutstanding capital stock certificates and stock powers of allthe Compnay’s bank subsidiaries.

For the term notes, the Company is required to make quarterly principal payments of $1,937,500 with maturity information as of December 31, 2017, summarized as follows:

  

As of December 31, 2017

 

2018

 $7,750,000 

2019

  7,750,000 

2020

  7,750,000 

2021

  7,750,000 
  $31,000,000 

112

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Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 11.Other Borrowings and Unused Lines of Credit (continued)

Unused lines of credit of the subsidiary banks as of December 31, 20172019 and 20162018 are summarized as follows:

 

 

 

 

 

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Secured

 $2,967,441  $34,409,192 

 

$

45,342

 

$

1,690

Unsecured

  372,000,000   347,000,000 

 

 

335,300

 

 

362,000

 $374,967,441  $381,409,192 

 

$

380,642

 

$

363,690

 

TheThe Company pledges the eligible portion of its municipal securities portfolio and select C&I and CRE loans to the Federal Reserve Bank of Chicago for borrowing as part of the Borrower-In-Custody program.

Note 12. Subordinated Notes

Subordinated notes as of December 31, 2019 and 2018 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Outstanding

Interest Rate

 

 

 

Amount Outstanding

Interest Rate

 

 

 

 

as of December 31, 2019

as of December 31, 2019

 

 

 

as of December 31, 2018

as of December 31, 2018

 

Maturity Date

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Subordinated debenture dated 2/1/19

$

65,000

5.375

%

 

$

 -

N/A

%

2/15/2029

Subordinated debenture dated 4/30/16

 

2,000

4.00

%

 

 

2,000

4.00

%

4/30/2026

Subordinated debenture dated 9/15/16

 

3,000

4.00

%

 

 

3,000

4.00

%

9/15/2026

Debt issuance costs

 

(1,606)

 

 

 

 

(218)

 

 

 

 Total Subordinated Debentures

$

68,394

 

 

 

$

4,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On February 12, 2019, the Company completed an underwritten public offering of $65.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on February 15, 2029. Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million.  The subordinated notes, which qualify as Tier 2 captial for the Company, are at a fixed rate of 5.375% per year until but excluding February 15, 2024.  On this date, the interest will change to an annual floating rate equal to three-month LIBOR plus 282 basis points until the maturity date.  The interest on the subordinated notes are payable semi-annually, commencing on August 15, 2019 during the five year fixed term and therafter quarterly, commencing on February 15, 2024.    The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after February 15, 2024.  The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.  Unamortized debt issuance costs related to the subordinated notes totaled $1.6 million at December 31, 2019.

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

As part of the merger with Springfield Bancshares, the Company assumed two subordinated debentures with a fair value of $4.8 million.  The interest rate on the subordinated debentures is fixed for the first five years of the term and then converts to floating for the remaining term, at a rate of Prime floating daily.  The debentures may be called after a minimum of five years following issuance and at the Discount Window.prior approval of the appropriate regulatory agencies. These subordinated debentures are unsecured.

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Notes to Consolidated Financial Statements

 

Note 12.13. Junior Subordinated Debentures

Junior subordinated debentures are summarized as of December 31, 20172019 and 20162018 as follows:

 

 

 

 

 

 

    

2019

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Note Payable to QCR Holdings Capital Trust II

 $10,310,000  $10,310,000 

 

$

10,310

 

$

10,310

Note Payable to QCR Holdings Capital Trust III

  8,248,000   8,248,000 

 

 

8,248

 

 

8,248

Note Payable to QCR Holdings Capital Trust V

  10,310,000   10,310,000 

 

 

10,310

 

 

10,310

Note Payable to Community National Trust II

  3,093,000   3,093,000 

 

 

3,093

 

 

3,093

Note Payable to Community National Trust III

  3,609,000   3,609,000 

 

 

3,609

 

 

3,609

Note Payable to Guaranty Bankshares Statutory Trust I*

  4,640,000   - 

 

 

4,640

 

 

4,640

Market Value Discount per ASC 805**

  (2,723,513)  (2,089,798)

 

 

(2,372)

 

 

(2,540)

 $37,486,487  $33,480,202 

 

$

37,838

 

$

37,670

 

  *

As part of the acquisition of Guaranty Bank, the Company assumed one junior subordinated debenture with a fair value of $3,857,275.

**

Discount

*     As part of the acquisition of Guaranty Bank, the Company assumed one junior subordinated debenture with a fair value of $3.9 million.

**   Market value discount includes discount on junior subordinated debt acquired in 2013 as part of the purchase of Community National and junior subordinated debt acquired in 2017 as part of the purchase of Guaranty Bank.

A schedule of the Company’sCompany’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including the amounts outstanding as of December 31, 2017 2019 and 2016,2018, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Amount

    

Amount

    

 

    

 

  

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

Interest Rate as of

 

Interest Rate as of

 

Name

 

Date Issued

 

Amount Outstanding December 31,

2017

  

Amount Outstanding December 31,

2016

 

Interest Rate

 

Interest

Rate as of
December 31,

2017

  

Interest

Rate as of
December 31,

2016

 

Date Issued

 

2019

 

2018

 

Interest Rate

 

December 31, 2019

 

December 31, 2018

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

                   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCR Holdings Statutory Trust II*

 

February 2004

 $10,310,000  $10,310,000 

2.85% over 3-month LIBOR

  4.54%   3.85% 

February 2004

 

$

10,310

 

$

10,310

 

2.85% over 3-month LIBOR

 

4.79

%  

5.65

%

QCR Holdings Statutory Trust III

 

February 2004

  8,248,000   8,248,000 

2.85% over 3-month LIBOR

  4.54%   3.85% 

February 2004

 

 

8,248

 

 

8,248

 

2.85% over 3-month LIBOR

 

4.79

%  

5.65

%

QCR Holdings Statutory Trust V

 

February 2006

  10,310,000   10,310,000 

1.55% over 3-month LIBOR

  2.91%   2.43% 

February 2006

 

 

10,310

 

 

10,310

 

1.55% over 3-month LIBOR

 

3.54

%  

3.99

%

Community National Statutory Trust II

 

September 2004

  3,093,000   3,093,000 

2.17% over 3-month LIBOR

  3.80%   3.17% 

September 2004

 

 

3,093

 

 

3,093

 

2.17% over 3-month LIBOR

 

4.08

%  

4.96

%

Community National Statutory Trust III

 

March 2007

  3,609,000   3,609,000 

1.75% over 3-month LIBOR

  3.32%   2.71% 

March 2007

 

 

3,609

 

 

3,609

 

1.75% over 3-month LIBOR

 

3.64

%  

4.54

%

Guaranty Bankshares Statutory Trust I

 

May 2005

  4,640,000   - 

1.75% over 3-month LIBOR

  3.34%   N/A 

May 2005

 

 

4,640

 

 

4,640

 

1.75% over 3-month LIBOR

 

3.64

%  

4.54

%

   $40,210,000  $35,570,000 

Weighted Average Rate

  3.82%   3.26% 

  

 

$

40,210

 

$

40,210

 

Weighted Average Rate

 

4.18

%  

4.94

%

 

*Original amount issued for QCR Holdings Statutory Trust II was $12,372,000.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 12. Junior Subordinated Debentures (continued)

$12,372,000.

Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but all are currently callable at par at any time. Interest rate reset dates vary by Trust.

During 2015,The Company uses interest rate swaps for the Company acquired and extinguished $2.1 millionpurpose of hedging interest rate risk on the QCR Holdings Statutory Trust IIvariable rate junior subordinated debentures and recorded a $300,000 gain ondebt.  See Note 7 to the extinguishment, which is included withinConsolidated Financial Statements for the overall net losses on debt extinguishments in the statementsdetails of income. The Company was able to acquire the related security at a discount through auction, which resulted in the gain. The interest rate on this debenture floated at LIBOR plus 2.85% and had a rate of 3.18% at the time of extinguishment.these instruments.

In 2016, the Company extinguished $5.1 million of the QCR Holdings Capital Trust IV junior subordinated debentures (the full balance outstanding) and recorded a $1.2 million gain on extinguishment (pre-tax), as the Company was able to acquire the related security at a discount through auction. This gain is included within the overall net losses on debt extinguishments in the statements of income for 2016. The interest rate on these debentures floated at 3-month LIBOR plus 1.80% and had a rate of 2.42% at the time of extinguishment. QCR Holdings Capital Trust IV was dissolved after the extinguishment.

Note 13.14. Federal and State Income Taxes

Federal and state income tax expense was comprised of the following components for the years ended December 31, 2017,2016,2019, 2018, and 2015:2017:

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Current

 

$

8,255

 

$

2,723

 

$

10,976

Deferred

 

 

6,364

 

 

6,292

 

 

(6,030)

 

 

$

14,619

 

$

9,015

 

$

4,946

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Notes to Consolidated Financial Statements

 

  

2017

  

2016

  

2015

 
             

Current

 $10,976,005  $11,969,194  $5,673,774 

Deferred

  (6,029,555)  (3,066,407)  (2,004,532)
  $4,946,450  $8,902,787  $3,669,242 

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2017,2016,2019, 2018, and 2015:

2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

 

Years Ended December 31,

 

 

2019

 

2018

 

2017

 

 

2017

  

2016

  

2015

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

% of

 

     

% of

      

% of

      

% of

 

 

 

 

 

Pretax

 

 

 

 

Pretax

 

 

 

 

Pretax

 

     

Pretax

      

Pretax

      

Pretax

 

    

Amount

    

Income

    

Amount

    

Income

    

Amount

    

Income

 

 

Amount

  

Income

  

Amount

  

Income

  

Amount

  

Income

 

 

(dollars in thousands)

                        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computed "expected" tax expense

 $14,228,535   35.0% $12,806,351   35.0% $7,208,993   35.0%

 

$

15,126

 

21.0

%  

$

10,948

 

21.0

%  

$

14,229

 

35

%

Effect of graduated tax rates

  -   -   (250,013)  (0.7)  (76,973)  (0.4)

Tax exempt income, net

  (5,653,979)  (13.9)  (4,343,270)  (11.9)  (3,461,438)  (16.8)

 

 

(4,470)

 

(6.2)

 

 

(3,958)

 

(7.6)

 

 

(5,654)

 

(13.9)

 

Bank-owned life insurance

  (630,855)  (1.5)  (619,988)  (1.7)  (616,737)  (3.0)

 

 

(360)

 

(0.5)

 

 

(343)

 

(0.6)

 

 

(631)

 

(1.5)

 

State income taxes, net of federal benefit, current year

  1,764,671   4.3   1,245,524   3.4   767,557   3.7 

 

 

3,668

 

5.1

 

 

2,681

 

5.2

 

 

1,765

 

4.3

 

Change in unrecognized tax benefits

  (53,699)  (0.1)  121,008   0.3   223,668   1.1 

 

 

(93)

 

(0.1)

 

 

(45)

 

(0.1)

 

 

(54)

 

(0.1)

 

New Markets Tax Credits and other credits

  (341,268)  (0.8)  (180,000)  (0.5)  (180,000)  (0.9)

Goodwill impairment

 

 

630

 

0.9

 

 

 —

 

 —

 

 

 —

 

 —

 

Intended liquidation of bank-owned life insurance

 

 

790

 

1.1

 

 

 —

 

 —

 

 

 —

 

 —

 

Tax credits

 

 

(705)

 

(1.0)

 

 

(154)

 

(0.3)

 

 

(341)

 

(0.8)

 

Acquisition costs

  -   -   176,050   0.5   -   - 

 

 

 —

 

 —

 

 

227

 

0.4

 

 

 —

 

 —

 

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

  (1,219,483)  (3.0)  -   -   -   - 

 

 

(287)

 

(0.4)

 

 

(425)

 

(0.8)

 

 

(1,220)

 

(3.0)

 

Re-measurement of deferred tax asset to incorporate newly enacted tax rates

  (2,918,606)  (7.2)  -   -   -   - 

 

 

 —

 

 —

 

 

 —

 

 —

 

 

(2,919)

 

(7.2)

 

Other

  (228,866)  (0.6)  (52,875)  (0.1)  (195,828)  (0.9)

 

 

320

 

0.4

 

 

84

 

0.1

 

 

(229)

 

(0.6)

 

 $4,946,450   12.2% $8,902,787   24.3% $3,669,242   17.8%

Federal and state income tax expense

 

$

14,619

 

20.3

%  

$

9,015

 

17.3

%  

$

4,946

 

12.2

%

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 13. Federal and State Income Taxes (continued)

 

Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2017 2019 and 2016:

2018:

 

 

 

 

 

 

    

2019

    

2018

 

2017

  

2016

 

 

(dollars in thousands)

        

 

 

 

 

 

 

Balance, beginning

 $1,346,967  $1,225,959 

 

$

1,249

 

$

1,293

Impact of tax positions taken during current year

  333,253   319,047 

 

 

375

 

 

287

Gross increase (decrease) related to tax positions of prior years

  (40,584)  17,789 

 

 

44

 

 

(178)

Reduction as a result of a lapse of the applicable statute of limitations

  (346,368)  (215,828)

 

 

(414)

 

 

(153)

Balance, ending

 $1,293,268  $1,346,967 

 

$

1,254

 

$

1,249

 

Included in the unrecognized tax benefits liability at December 31, 20172019 are potential benefits of approximately $1,143,000$1.1 million that, if recognized, would affect the effective tax rate.

The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-notmore-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit claimed or expected to be claimed on an income tax return. At December 31, 20172019 and 2016,2018, accrued interest on uncertain tax positions was approximately $150,000$232 thousand and $223,000,$205 thousand, respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income tax expense” in the statements of income.

The Company’sCompany’s federal income tax returns are open and subject to examination from the 20142016 tax return year and later. Various state franchise and income tax returns are generally open from the 20132015 and later tax return years based on individual state statutes of limitations.

The net deferred tax assets consisted of the following as of December 31, 2017 and 2016:

  

2017

  

2016

 

Deferred tax assets:

        

Alternative minimum tax credits

 $6,513,502  $6,513,502 

New markets tax credits

  2,164,727   1,797,587 

Net unrealized losses on securities available for sale and derivative instruments

  498,860   1,470,759 

Compensation

  6,282,603   8,737,976 

Loan/lease losses

  8,029,714   10,479,227 

Net operating loss carryforwards, federal and state

  959,627   1,879,746 

Other

  34,962   247,594 
   24,483,995   31,126,391 

Deferred tax liabilities:

        

Premises and equipment

  2,400,397   4,899,107 

Equipment financing leases

  15,367,705   22,050,540 

Acquisition fair value adjustments

  1,864,599   1,336,338 

Investment accretion

  30,656   46,581 

Deferred loan origination fees, net

  115,153   261,915 

Other

  430,125   456,219 
   20,208,635   29,050,700 

Net deferred tax assets

 $4,275,360  $2,075,691 

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Notes to Consolidated Financial Statements

 

Note 13.14. Federal and State Income Taxes (continued)

The net deferred tax liabilities consisted of the following as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

(dollars in thousands)

Deferred tax assets:

 

 

  

 

 

  

Alternative minimum tax credits

 

$

 —

 

$

2,911

Historic tax credits

 

 

68

 

 

1,937

Net unrealized losses on securities available for sale and derivative instruments

 

 

126

 

 

1,687

Compensation

 

 

8,433

 

 

6,772

Loan/lease losses

 

 

11,332

 

 

9,549

Net operating loss carryforwards, federal and state

 

 

739

 

 

849

Other

 

 

605

 

 

53

 

 

 

21,303

 

 

23,758

Deferred tax liabilities:

 

 

  

 

 

  

Premises and equipment

 

 

4,616

 

 

2,717

Equipment financing leases

 

 

16,252

 

 

18,329

Acquisition fair value adjustments

 

 

3,963

 

 

2,739

Intended liquidation of bank-owned life insurance

 

 

850

 

 

 —

Gain on sale of assets and liabilities of subsidiary

 

 

794

 

 

 —

Investment accretion

 

 

28

 

 

31

Deferred loan origination fees, net

 

 

704

 

 

482

Other

 

 

832

 

 

424

 

 

 

28,039

 

 

24,722

Net deferred tax liabilities

 

$

(6,736)

 

$

(964)

 

At December 31, 2017,2019, the Company had $4.6$3.5 million of federal tax net operating loss carryforwards which are set to expire in varying amounts between 2029 and 2033. At December 31, 2017, 2019, the Company had $2.1$2.1 million of state tax net operating loss carryforwards which are set to expire in varying amounts between 2023 and 2028. All of the federal tax net operating loss carryforwards and the state tax net operating loss carryforwards were acquired from Community National and CNB.

The change in deferred income taxes was reflected in the consolidated financial statementsConsolidated Financial Statements as follows for the years ended December 31, 2017,2016,2019, 2018, and 2015:

2017:

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

            

 

 

 

 

 

 

 

 

 

Provision for income taxes

 $(6,029,555) $(3,066,407) $(2,004,532)

 

$

6,364

 

$

6,292

 

$

(6,030)

Net deferred tax asset acquired

  -   (3,310,553)  - 

Net deferred tax asset resulting from market value adjustments of acquisitions

  243,195   5,110,015   - 

 

 

(381)

 

 

(52)

 

 

243

Net deferred tax liabilities resulting from sale of bank subsidiary

 

 

(1,644)

 

 

 —

 

 

 —

Re-measurement of deferred tax asset to incorporate newly enacted tax rates

  2,918,606   -   - 

 

 

 —

 

 

 —

 

 

2,919

Statement of stockholders' equity- Other comprehensive income (loss)

  668,085   (202,691)  (81,524)

 

 

1,433

 

 

(1,000)

 

 

668

 $(2,199,669) $(1,469,636) $(2,086,056)

 

$

5,772

 

$

5,240

 

$

(2,200)

 

The Tax Act was enacted on December 22, 2017 and reduces the federal corporate tax rate from 35% to 21%. As a result, the Company revalued the deferred tax assets and liabilities to reflect the lower federal corporate tax rate, which resulted in the Company recognizing a benefit of $2.9$2.9 million in the fourth quarter of 2017. Additionally, while the Tax Act eliminated the corporate alternative minimum tax, it did preserve the alternative minimum tax credit and the usability.  At this time, the Company projects full utilization of those credits.  Other relevant changes that resulted from tax reform are not expected to have a material impact on the Company’s financial results.

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Notes to Consolidated Financial Statements

 

Note 14.15. Employee Benefit Plans

The Company has a profit sharing plan which includes a provision designed to qualify under Section 401(k)401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. AllSubstantially all employees who are at least 18 years of age are eligible to participate in the plan. The Company matches 100% of the first3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% of an employee'semployee’s compensation. Additionally, at its discretion, the Company may make additional contributions to the plan which are allocated to the accounts of participants in the plan based on relative compensation. CompanyThere were no discretionary contributions for the years ended December 31, 2017,2016,2019, 2018 and 20152017. Company matching contributions for the years ended December 31, 2019, 2018, and 2017 were as follows:

  

2017

  

2016

  

2015

 
             

Matching contribution

 $1,663,198  $1,365,111  $1,314,276 
  $1,663,198  $1,365,111  $1,314,276 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Matching contribution

 

$

2,443

 

$

2,000

 

$

1,663

 

The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified plans. During the years ended December 31, 2017, 2016, and 2015, the Company expensed $400,784,$322,575, and $297,826, respectively, related to these plans. As of December 31, 2017 and 2016,retirement plan. Changes in the liability related to the SERPs, included in other liabilities, was $4,330,313are as follows for the years ended December 31, 2019, 2018 and $4,093,355, respectively. Payments to former executives in the amounts of $163,826,$163,825 and $163,824 were made in 2017,2016 and 2015, respectively.2017:

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

4,623

 

$

4,330

 

$

4,093

Expense accrued

 

 

701

 

 

457

 

 

401

Cash payments made

 

 

(164)

 

 

(164)

 

 

(164)

Balance, ending

 

$

5,160

 

$

4,623

 

$

4,330

 

The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements,, the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution varies by officer and is a maximum of between $8,000$8 thousand and $25,000 annually.$25 thousand annually as set forth in each officer’s participation agreement. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate subject to a minimum of 4% and a maximum of 12% with such limits differing by officer. The Company has also entered into deferred compensation agreements with certain other officers. Under the provisions of the agreements, the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution differs by officer and is a maximum between 4% and 10% of the officer’s compensation. Interest on the deferred amounts is earned at The Wall Street Journal’s prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%.

Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. As of December 31, 2017 2019 and 2016,2018, the liability related to the agreements totaled $12,346,935$19.5 million and $10,455,183,$15.0 million, respectively.

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Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 15. Employee Benefit Plans (continued)

Changes in the deferred compensation agreements,, included in other liabilities, are as follows for the years ended December 31, 2017, 2016,2019, 2018, and 2015:

2017:

  

2017

  

2016

  

2015

 
             

Balance, beginning

 $10,455,183  $8,875,025  $7,503,692 

Employee deferrals

  932,921   794,168   693,656 

Company match and interest

  1,024,933   848,831   726,001 

Cash payments made

  (66,102)  (62,841)  (48,324)

Balance, ending

 $12,346,935  $10,455,183  $8,875,025 

125

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Balance, beginning

 

$

15,029

 

$

12,347

 

$

10,455

Employee deferrals

 

 

2,474

 

 

1,407

 

 

933

Company match and interest

 

 

2,072

 

 

1,367

 

 

1,025

Cash payments made

 

 

(101)

 

 

(92)

 

 

(66)

Balance, ending

 

$

19,474

 

$

15,029

 

$

12,347

 

QCR Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 15. Stock-Based Compensation

 

Note 16. Stock-Based Compensation

The Company’sCompany’s Board of Directors adopted in January 2008, and the stockholders approved in May 2008, the QCR Holdings, Inc. 2008 Equity Incentive Plan (“(“2008 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2010, and the stockholders approved in May 2010, the QCR Holdings, Inc. 2010 Equity Incentive Plan (“(“2010 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2013, and the stockholders approved in May 2013, the QCR Holdings, Inc. 2013 Equity Incentive Plan (“(“2013 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2016, and the stockholders approved in May 2016, the QCR Holdings, Inc. 2016 Equity Incentive Plan (“(“2016 Equity Incentive Plan”). Up to 250,000,350,000,350,000, and 400,000 shares of common stock, respectively, may be issued to employees and directors of the Company and its subsidiaries pursuant to equity incentive awards granted under these plans.

The 2008 Equity Incentive Plan, the 2010 Equity Incentive Plan, the 2013 Equity Incentive Plan,, and the 2016 Equity Incentive Plan (collectively, the “Stock Option“Equity Plans”) are administered by the Compensation Committee of the Board of Directors (the “Committee”). As of December 31, 2017, 2019, there were 351,205219,305 remaining shares of common stock available for the grant of future awards under the Stock OptionEquity Plans; however, such additional shares future awards may be issuedgranted only under the 2016 Equity Incentive Plan.

The number and exercise price of options granted under the stock option plansEquity Plans are determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for stock options. All options have a 10-year10‑year life and will vest and become exercisable from 3-to-3‑to‑7 years after the date of the grant.

Stock-based compensation expense was reflected in the consolidated financial statementsConsolidated Financial Statements as follows for the years ended December 31, 2017, 2016,2019, 2018, and 2015.

2017.

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

            

 

 

 

 

 

 

 

 

 

Stock options

 $554,435  $424,904  $393,114 

 

$

475

 

$

472

 

$

554

Restricted stock awards

  552,907   460,853   492,410 

 

 

1,850

 

 

857

 

 

553

Stock purchase plan

  79,694   61,417   55,945 

 

 

144

 

 

114

 

 

80

 $1,187,036  $947,174  $941,469 

 

$

2,469

 

$

1,443

 

$

1,187

 

118

126

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 15.16. Stock-Based CompensationCompensastion (continued)

Stock options:

A summary of the stock option plans as of December 31, 2017,2016,2019, 2018, and 20152017 and changes during the years then ended is presented below:

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

  

2016

  

2015

 

 

December 31, 

     

Weighted

      

Weighted

      

Weighted

 

 

2019

 

2018

 

2017

     

Average

      

Average

      

Average

 

 

 

 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

Weighted

     

Exercise

      

Exercise

      

Exercise

 

 

 

 

 

Average

 

 

 

 

Average

 

 

 

 

Average

 

Shares

  

Price

  

Shares

  

Price

  

Shares

  

Price

 

 

 

 

 

Exercise

 

 

 

 

Exercise

 

 

 

 

Exercise

                        

    

Shares

    

Price

    

Shares

    

Price

    

Shares

    

Price

Outstanding, beginning

  587,961  $14.83   623,176  $13.88   661,771  $13.89 

 

 

469,572

 

$

18.52

 

 

513,554

 

$

17.13

 

 

587,961

 

$

14.83

Granted

  43,250   43.86   76,749   22.92   73,403   17.63 

 

 

20,200

 

 

36.00

 

 

16,315

 

 

44.02

 

 

43,250

 

 

43.86

Exercised

  (114,100)  15.12   (111,423)  14.97   (79,638)  14.70 

 

 

(59,393)

 

 

12.11

 

 

(60,127)

 

 

13.56

 

 

(114,100)

 

 

15.12

Forfeited

  (3,557)  26.74   (541)  18.36   (32,360)  20.69 

 

 

(3,466)

 

 

31.59

 

 

(170)

 

 

16.81

 

 

(3,557)

 

 

26.74

Outstanding, ending

  513,554   17.13   587,961   14.83   623,176   13.88 

 

 

426,913

 

 

20.14

 

 

469,572

 

 

18.52

 

 

513,554

 

 

17.13

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Exercisable, ending

  354,269       385,372       405,832     

 

 

365,084

 

 

  

 

 

358,270

 

 

  

 

 

354,269

 

 

  

                        

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Weighted average fair value per option granted

 $14.75      $7.31      $5.11     

 

$

11.29

 

 

  

 

$

14.68

 

 

  

 

$

14.75

 

 

  

 

A further summary of options outstanding as of December 31, 20172019 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Options Exercisable

 

 

 

 

Average

 

Weighted

 

 

 

Weighted

 

 

 

 

Remaining

 

Average

 

 

 

Average

Range of

 

Number

 

Contractual

 

Exercise

 

Number

 

Exercise

Exercise Prices

    

Outstanding

    

Life

    

Price

    

Exercisable

    

Price

$7.99 to $8.93

 

18,405

 

1.11

 

$

8.10

 

18,405

 

$

8.10

$9.00 to $9.30

 

88,490

 

1.47

 

 

9.21

 

88,490

 

 

9.21

$15.50 to $15.65

 

67,541

 

3.24

 

 

15.64

 

66,741

 

 

15.64

$17.10 to $18.00

 

115,645

 

4.56

 

 

17.31

 

114,633

 

 

17.30

$21.71 to $22.64

 

59,905

 

6.08

 

 

22.63

 

46,309

 

 

22.63

$36.00 to $48.50

 

76,927

 

7.91

 

 

41.84

 

30,506

 

 

43.73

 

 

426,913

 

  

 

 

  

 

365,084

 

 

  

Restricted stock awards:

A summary of changes in the Company’s nonvested restricted stock, restricted stock unit and performance stock unit awards as of December 31, 2019, 2018 and 2017 is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2019

    

2018

    

2017

Outstanding, beginning

 

 

64,099

 

 

46,389

 

 

39,438

Granted*

 

 

85,961

 

 

37,315

 

 

28,289

Released

 

 

(37,624)

 

 

(19,605)

 

 

(21,338)

Forfeited

 

 

(5,610)

 

 

 —

 

 

 —

Outstanding, ending

 

 

106,826

 

 

64,099

 

 

46,389

 

 

 

 

 

 

 

 

 

 

Weighted average fair value per share granted

 

$

20.14

 

$

43.50

 

$

44.44

*  At December 31, 2019, includes 18,634 shares of restricted stock, 49,269 restricted stock units and 18,058 performance share units.

   At December 31, 2018, includes 22,660 shares of restricted stock and 14,655 restricted stock units.

At December 31, 2017, includes 28,289 shares of restricted stock.

    

Options Outstanding

         
        

Weighted

      

Options Exercisable

 
        

Average

  

Weighted

      

Weighted

 
        

Remaining

  

Average

      

Average

 

Range of

 

Number

  

Contractual

  

Exercise

  

Number

  

Exercise

 

Exercise Prices

 

Outstanding

  

Life

  

Price

  

Exercisable

  

Price

 
                       

$7.99

to$8.93  27,850   3.06  $8.09   27,850  $8.09 

$9.00

to$9.30  148,755   2.77   9.22   147,955   9.22 

$15.00

to$16.85  90,668   4.59   15.63   79,369   15.64 

$17.10

to$18.00  132,816   6.57   17.31   81,521   17.26 

$21.71

to$31.53  70,215   8.08   22.63   16,273   22.64 

$42.65

to$48.50  43,250   9.20   43.86   1,301   42.75 
     513,554           354,269     

119

127

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 15.16. Stock-Based Compensation (continued)

Restricted stock awards:

A summary of changes in the Company’s nonvested restricted stock awards as of December 31, 2017, 2016 and 2015 is presented below:

  

December 31,

 
  

2017

  

2016

  

2015

 
             

Outstanding, beginning

 $39,438  $45,046  $49,833 

Granted

  28,289   22,382   28,846 

Released

  (21,338)  (27,490)  (33,633)

Forfeited

  -   (500)  - 

Outstanding, ending

 $46,389  $39,438  $45,046 
             

Weighted average fair value per share granted

 $44.44  $22.64  $17.80 

The total grant-date fairgrant value of restricted stock and restricted stock unit awards that were released during the years ended December 31, 2019, 2018 and 2017 2016was $1.3 million, $622 thousand and 2015 was $925,735,$632,255 and $598,341,$509 thousand, respectively.

Stock purchase plan:

The Company’sCompany’s Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the “Purchase Plan”). On May 2, 2012, the Company’s stockholders approved a complete amendment and restatement of the Purchase Plan. As of January 1, 2017, 2019, there were 187,921128,320 shares of common stock available for issuance under the Purchase Plan. For each six-monthsix-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 90%85% of the fair market value at the date of the grant or the investment date. The investment date, as established by the Board of Directors, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $10,000.$10 thousand. Additionally, the maximum percentage that any one participant can elect to contribute is 10%15% of his or her compensation for the year ended December 31, 2017. 2019.  The maximum percentage that any one participant could elect to contributecontributes was 8%10% of his or her compensation for the years ended December 31, 2016, 2018 and 2015.2017. Information for the stock purchase plan for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 is presented below:

  

2017

  

2016

  

2015

 
             

Shares granted

  12,414   18,711   23,408 

Shares purchased

  13,318   20,192   24,033 

Weighted average fair value per share granted

 $6.42  $3.28  $2.39 

128

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

Shares granted

 

 

29,882

 

 

17,305

 

 

12,414

Shares purchased

 

 

28,775

 

 

15,528

 

 

13,318

Weighted average fair value per share granted

 

$

4.81

 

$

6.63

 

$

6.42

 

QCR Holdings, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 16.17. Regulatory Capital Requirements and Restrictions on Dividends

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’banks’ financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of December 31, 2017 2019 and 2016,2018, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, toto 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 December 31, 2017 2019 and 20162018 are also presented in the following table (dollars in thousands). As of December 31, 2017 2019 and 2016,2018, the subsidiary banks met the requirements to be “well capitalized”.

                  

For Capital

  

To Be Well

 
                  

Adequacy Purposes

  Capitalized Under 
          

For Capital

  

With Capital

  Prompt Corrective 
  

Actual

  

Adequacy Purposes

  

Conservation Buffer*

  Action Provisions 
  

Amount

  

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

 

As of December 31, 2017:

                                

Company:

                                

Total risk-based capital

 $383,282   11.15% $275,090 

>

 8.00% $318,073 

>

 9.250% $343,862 

>

 10.00%

Tier 1 risk-based capital

  348,530   10.14%  206,317 

>

 6.00   249,300 

>

 7.250   275,090 

>

 8.00 

Tier 1 leverage

  348,530   8.98%  155,256 

>

 4.00   155,256 

>

 4.000   194,070 

>

 5.00 

Common equity Tier 1

  313,012   9.10%  154,738 

>

 4.50   197,721 

>

 5.750   223,510 

>

 6.50 

Quad City Bank & Trust:

                                

Total risk-based capital

 $160,112   12.35% $103,711 

>

 8.00% $119,916 

>

 9.250% $129,639 

>

 10.00%

Tier 1 risk-based capital

  147,472   11.38%  77,783 

>

 6.00   93,988 

>

 7.250   103,711 

>

 8.00 

Tier 1 leverage

  147,472   9.52%  61,985 

>

 4.00   61,985 

>

 4.000   77,481 

>

 5.00 

Common equity Tier 1

  147,472   11.38%  58,337 

>

 4.50   74,542 

>

 5.750   84,265 

>

 6.50 

Cedar Rapids Bank & Trust:

                                

Total risk-based capital

 $138,492   11.88% $93,272 

>

 8.00% $107,846 

>

 9.250% $116,590 

>

 10.00%

Tier 1 risk-based capital

  126,601   10.86%  69,954 

>

 6.00   84,528 

>

 7.250   93,272 

>

 8.00 

Tier 1 leverage

  126,601   11.68%  43,348 

>

 4.00   43,348 

>

 4.000   54,185 

>

 5.00 

Common equity Tier 1

  126,601   10.86%  52,465 

>

 4.50   67,039 

>

 5.750   75,783 

>

 6.50 

Community State Bank:

                                

Total risk-based capital

 $66,271   11.71% $45,293 

>

 8.00% $52,370 

>

 9.250% $56,616 

>

 10.00%

Tier 1 risk-based capital

  61,941   10.94%  33,970 

>

 6.00   41,047 

>

 7.250   45,293 

>

 8.00 

Tier 1 leverage

  61,941   9.77%  25,354 

>

 4.00   25,354 

>

 4.000   31,693 

>

 5.00 

Common equity Tier 1

  61,941   10.94%  25,477 

>

 4.50   32,554 

>

 5.750   36,801 

>

 6.50 

Rockford Bank & Trust:

                                

Total risk-based capital

 $45,684   11.28% $32,413 

>

 8.00% $37,477 

>

 9.250% $40,516 

>

 10.00%

Tier 1 risk-based capital

  40,615   10.02%  24,310 

>

 6.00   29,374 

>

 7.250   32,413 

>

 8.00 

Tier 1 leverage

  40,615   8.94%  18,177 

>

 4.00   18,177 

>

 4.000   22,721 

>

 5.00 

Common equity Tier 1

  40,615   10.02%  18,232 

>

 4.50   23,297 

>

 5.750   26,335 

>

 6.50 

120

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Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

Note 16.17. Regulatory Capital Requirements and Restrictions on Dividends (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Conservation Buffer*

 

Action Provisions

 

 

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

$

581,234

 

13.33

%  

$

348,937

> 

8.00

%  

$

457,980

> 

10.50

%  

$

436,171

> 

10.00

%

Tier 1 risk-based capital

 

 

481,702

 

11.04

 

 

261,703

> 

6.00

 

 

370,746

> 

8.50

 

 

348,937

> 

8.00

 

Tier 1 leverage

 

 

481,702

 

9.53

 

 

202,207

> 

4.00

 

 

202,207

> 

4.00

 

 

252,758

> 

5.00

 

Common equity Tier 1

 

 

443,864

 

10.18

 

 

196,277

> 

4.50

 

 

305,320

> 

7.00

 

 

283,511

> 

6.50

 

Quad City Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

183,855

 

11.83

%  

$

124,362

> 

8.00

%  

$

163,225

> 

10.50

%  

$

155,452

> 

10.00

%

Tier 1 risk-based capital

 

 

170,137

 

10.94

 

 

93,271

> 

6.00

 

 

132,134

> 

8.50

 

 

124,362

> 

8.00

 

Tier 1 leverage

 

 

170,137

 

9.94

 

 

68,479

> 

4.00

 

 

68,479

> 

4.00

 

 

85,598

> 

5.00

 

Common equity Tier 1

 

 

170,137

 

10.94

 

 

69,953

> 

4.50

 

 

108,817

> 

7.00

 

 

101,044

> 

6.50

 

Cedar Rapids Bank & Trust:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

175,498

 

11.90

%  

$

117,953

> 

8.00

%  

$

154,813

> 

10.50

%  

$

147,441

> 

10.00

%

Tier 1 risk-based capital

 

 

162,127

 

11.00

 

 

88,465

> 

6.00

 

 

125,325

> 

8.50

 

 

117,953

> 

8.00

 

Tier 1 leverage

 

 

162,127

 

10.41

 

 

62,286

> 

4.00

 

 

62,286

> 

4.00

 

 

77,857

> 

5.00

 

Common equity Tier 1

 

 

162,127

 

11.00

 

 

66,349

> 

4.50

 

 

103,209

> 

7.00

 

 

95,837

> 

6.50

 

Community State Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

92,095

 

12.32

%  

$

59,813

> 

8.00

%  

$

78,504

> 

10.50

%  

$

74,766

> 

10.00

%

Tier 1 risk-based capital

 

 

85,437

 

11.43

 

 

44,860

> 

6.00

 

 

63,551

> 

8.50

 

 

59,813

> 

8.00

 

Tier 1 leverage

 

 

85,437

 

10.39

 

 

32,902

> 

4.00

 

 

32,902

> 

4.00

 

 

41,128

> 

5.00

 

Common equity Tier 1

 

 

85,437

 

11.43

 

 

33,645

> 

4.50

 

 

52,336

> 

7.00

 

 

48,598

> 

6.50

 

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

71,074

 

12.72

%  

$

44,704

> 

8.00

%  

$

58,674

> 

10.50

%  

$

55,880

> 

10.00

%

Tier 1 risk-based capital

 

 

63,956

 

11.45

 

 

33,528

> 

6.00

 

 

47,498

> 

8.50

 

 

44,704

> 

8.00

 

Tier 1 leverage

 

 

63,956

 

9.70

 

 

26,379

> 

4.00

 

 

26,379

> 

4.00

 

 

32,974

> 

5.00

 

Common equity Tier 1

 

 

63,956

 

11.45

 

 

25,146

> 

4.50

 

 

39,116

> 

7.00

 

 

36,322

> 

6.50

 

 

                 

For Capital

Adequacy Purposes

  

To Be Well
Capitalized Under

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         

For Capital

  With Capital  Prompt Corrective 

 

 

 

 

 

 

 

 

 

 

 

For Capital

 

To Be Well

 

 

Actual

  

Adequacy Purposes

  Conservation Buffer*  Action Provisions 

 

 

 

 

 

 

 

 

 

 

 

Adequacy Purposes

 

Capitalized Under

 

 

Amount

  

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

  

Amount

 

Ratio

 

 

 

 

 

 

 

For Capital

 

With Capital

 

Prompt Corrective

 

As of December 31, 2016:

                                

 

Actual

 

Adequacy Purposes

 

Conservation Buffer

 

Action Provisions

 

    

Amount

    

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

    

Amount

 

Ratio

 

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company:

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 $327,440   11.56% $226,587 

>

 8.00% $244,289 

>

 8.625% $283,233 

>

 10.00%

 

$

460,416

 

10.69

%  

$

344,551

> 

8.00

%  

$

425,305

> 

9.875

%  

$

430,689

> 

10.00

%

Tier 1 risk-based capital

  296,366   10.46%  169,940 

>

 6.00   187,642 

>

 6.625   226,587 

>

 8.00 

 

 

420,569

 

9.77

 

 

258,413

> 

6.00

 

 

339,168

> 

7.875

 

 

344,551

> 

8.00

 

Tier 1 leverage

  296,366   9.10%  130,229 

>

 4.00   130,229 

>

 4.000   162,787 

>

 5.00 

 

 

420,569

 

8.87

 

 

189,858

> 

4.00

 

 

189,858

> 

4.000

 

 

237,322

> 

5.00

 

Common equity Tier 1

  266,419   9.41%  127,455 

>

 4.50   145,157 

>

 5.125   184,102 

>

 6.50 

 

 

382,899

 

8.89

 

 

193,810

> 

4.50

 

 

274,564

> 

6.375

 

 

279,948

> 

6.50

 

Quad City Bank & Trust:

                                

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 $142,990   12.27% $93,212 

>

 8.00% $100,494 

>

 8.625% $116,515 

>

 10.00%

 

$

162,009

 

11.38

%  

$

113,900

> 

8.00

%  

$

140,596

> 

9.875

%  

$

142,376

> 

10.00

%

Tier 1 risk-based capital

  129,524   11.12%  69,909 

>

 6.00   77,191 

>

 6.625   93,212 

>

 8.00 

 

 

148,529

 

10.43

 

 

85,425

> 

6.00

 

 

112,121

> 

7.875

 

 

113,900

> 

8.00

 

Tier 1 leverage

  129,524   9.18%  56,445 

>

 4.00   56,445 

>

 4.000   70,556 

>

 5.00 

 

 

148,529

 

9.04

 

 

65,744

> 

4.00

 

 

65,744

> 

4.000

 

 

82,180

> 

5.00

 

Common equity Tier 1

  129,524   11.12%  52,432 

>

 4.50   59,714 

>

 5.125   75,735 

>

 6.50 

 

 

148,529

 

10.43

 

 

64,069

> 

4.50

 

 

90,764

> 

6.375

 

 

92,544

> 

6.50

 

Cedar Rapids Bank & Trust:

                                

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 $106,791   12.82% $66,623 

>

 8.00% $71,828 

>

 8.625% $83,279 

>

 10.00%

 

$

146,292

 

11.55

%  

$

101,310

> 

8.00

%  

$

125,054

> 

9.875

%  

$

126,637

> 

10.00

%

Tier 1 risk-based capital

  96,369   11.57%  49,968 

>

 6.00   55,173 

>

 6.625   66,623 

>

 8.00 

 

 

133,982

 

10.58

 

 

75,982

> 

6.00

 

 

99,727

> 

7.875

 

 

101,310

> 

8.00

 

Tier 1 leverage

  96,369   10.69%  36,061 

>

 4.00   36,061 

>

 4.000   45,076 

>

 5.00 

 

 

133,982

 

9.98

 

 

53,682

> 

4.00

 

 

53,682

> 

4.000

 

 

67,103

> 

5.00

 

Common equity Tier 1

  96,369   11.57%  37,476 

>

 4.50   42,681 

>

 5.125   54,132 

>

 6.50 

 

 

133,982

 

10.58

 

 

56,987

> 

4.50

 

 

80,731

> 

6.375

 

 

82,314

> 

6.50

 

Community State Bank:

                                

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 $68,216   13.81% $39,521 

>

 8.00% $42,609 

>

 8.625% $49,402 

>

 10.00%

 

$

75,233

 

11.24

%  

$

53,567

> 

8.00

%  

$

66,122

> 

9.875

%  

$

66,959

> 

10.00

%

Tier 1 risk-based capital

  66,746   13.51%  29,641 

>

 6.00   32,729 

>

 6.625   39,522 

>

 8.00 

 

 

69,101

 

10.32

 

 

40,175

> 

6.00

 

 

52,730

> 

7.875

 

 

53,567

> 

8.00

 

Tier 1 leverage

  66,746   11.75%  22,726 

>

 4.00   22,726 

>

 4.000   28,408 

>

 5.00 

 

 

69,101

 

9.19

 

 

30,070

> 

4.00

 

 

30,070

> 

4.000

 

 

37,588

> 

5.00

 

Common equity Tier 1

  66,746   13.51%  22,231 

>

 4.50   25,319 

>

 5.125   32,111 

>

 6.50 

 

 

69,101

 

10.32

 

 

30,131

> 

4.50

 

 

42,686

> 

6.375

 

 

43,523

> 

6.50

 

Rockford Bank & Trust:

                                

Springfield First Community Bank:

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 $42,007   12.26% $27,410 

>

 8.00% $29,551 

>

 8.625% $34,262 

>

 10.00%

 

$

57,051

 

12.24

%  

$

37,278

> 

8.00

%  

$

46,016

> 

9.875

%  

$

46,598

> 

10.00

%

Tier 1 risk-based capital

  37,716   11.01%  20,558 

>

 6.00   22,699 

>

 6.625   27,410 

>

 8.00 

 

 

51,279

 

11.00

 

 

27,959

> 

6.00

 

 

36,696

> 

7.875

 

 

37,278

> 

8.00

 

Tier 1 leverage

  37,716   9.57%  15,772 

>

 4.00   15,772 

>

 4.000   19,716 

>

 5.00 

 

 

51,279

 

9.39

 

 

21,849

> 

4.00

 

 

21,849

> 

4.000

 

 

27,312

> 

5.00

 

Common equity Tier 1

  37,716   11.01%  15,418 

>

 4.50   17,559 

>

 5.125   22,270 

>

 6.50 

 

 

51,279

 

11.00

 

 

20,969

> 

4.50

 

 

29,706

> 

6.375

 

 

30,289

> 

6.50

 

Rockford Bank & Trust

 

 

 

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

  

 

 

Total risk-based capital

 

$

50,648

 

10.89

%  

$

37,208

> 

8.00

%  

$

45,929

> 

9.875

%  

$

46,511

> 

10.00

%

Tier 1 risk-based capital

 

 

44,821

 

9.64

 

 

27,906

> 

6.00

 

 

36,627

> 

7.875

 

 

37,208

> 

8.00

 

Tier 1 leverage

 

 

44,821

 

8.93

 

 

20,081

> 

4.00

 

 

20,081

> 

4.000

 

 

25,101

> 

5.00

 

Common equity Tier 1

 

 

44,821

 

9.64

 

 

20,930

> 

4.50

 

 

29,650

> 

6.375

 

 

30,232

> 

6.50

 

*TheDecember 31, 2019 minimums under Basel III phase in higher by .625% (thereflect the fully phased-in ratios (including the capital conservation buffer) for all ratios other than Tier 1 leverage annually until 2019.

The fully phased-in minimums are 10.5% (Total risk-based capital), 8.5% (Tier 1 risk-based capital), and 7.0% (Common equity Tier 1).

 

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 17. Regulatory Capital Requirements and Restrictions on Dividends (continued)

The Company’sCompany’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the subsidiary banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.

The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements and assumed twothree issues of junior subordinated debentures in connection with the Community National acquisition.acquisitions. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. These circumstances did not exist at December 31, 2017 2019 or 2016.2018.

QCR Holdings, Inc. and Subsidiaries

Notes tothe Consolidated Financial Statements for further information on this subordinated notes offering.

Note 16. Regulatory Capital RequirementsOn February 18, 2020, the Company announced a share repurchase program, permitting the repurchase of up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  The repurchase program permits shares to be repurchased in open market or private transactions, through block trades, and Restrictions on Dividends (continued)

The Company filed a universal shelf registration statement on Form S-3pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the SEC on October 27, 2016, as amended on January 11, 2017. Declared effectiveSEC.  The timing, manner, price and amount of any repurchases will be determined by the SEC on January 31, 2017, the registration statement allowsCompany in its discretion and will be subject to economic and market conditions, stock price, applicable legal requiremets and other factors.  The repurchase program does not obligate the Company to offer and sell various typespurchase any particular number of securities, including common stock, preferred stock, debt securities and/or warrants, from time to time up to an aggregate amount of $100 million. The Company utilized $30.1 million of its previous $100 million shelf registration filing through the offer and sale of its common stock in the second quarter of 2016 to help fund the acquisition of CSB (see shares.

Note 2 to the Consolidated Financial Statements). This Form S-3 filing replenishes the amount available to the previous level of $100 million. The specific terms and prices of any securities offered pursuant to the registration statement will be determined at the time of any future offering and described in a separate prospectus supplement, which would be filed with the SEC at the time of the particular offering, if any.

Note 17.18. Earnings per Share

The following information was used in the computation of basic and diluted EPS for the years ended December 31, 2017, 2016,2019, 2018, and 2015:

2017:

  

2017

  

2016

  

2015

 
             

Net income attributable to QCR Holdings, Inc. common stockholders

 $35,706,507  $27,686,787  $16,927,881 
             

EPS attributable to QCR Holdings, Inc. common stockholders

            

Basic

 $2.68  $2.20  $1.64 

Diluted

 $2.61  $2.17  $1.61 
             

Weighted average common shares outstanding*

  13,325,128   12,570,767   10,345,286 

Weighted average common shares issuable upon exercise of stock options and under the employee stock purchase plan**

  355,344   195,236   154,555 

Weighted average common and common equivalent shares outstanding

  13,680,472   12,766,003   10,499,841 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

    

2018

    

2017

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

57,408

 

$

43,120

 

$

35,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic EPS

 

$

3.65

 

$

2.92

 

$

2.68

  Diluted EPS

 

$

3.60

 

$

2.86

 

$

2.61

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding*

 

 

15,730,016

 

 

14,768,687

 

 

13,325,128

Weighted average common shares issuable upon exercise of stock options

 

 

 

 

 

 

 

 

 

    and under the employee stock purchase plan

 

 

237,759

 

 

296,043

 

 

355,344

Weighted average common and common equivalent shares outstanding**

 

 

15,967,775

 

 

15,064,730

 

 

13,680,472

 

 

 

 

 

 

 

 

 

 

 

*   The increase in weighted average common shares outstanding from 20152017 to 20162018 and 2019 was primarily due to the common stock issuance

     issuances that occurred in conjunction with the CSB acquisition.Springfield Bancshares merger and Guaranty Bank acquisition.

**                 **  Excludes anti-dilutive shares of 49,919,17,739,80,437, 91,954 and 36,57249,919  at December 31,2017,201631, 2019, 2018 and 2015, respectively.2017, respectively.

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 18.19. Commitments and Contingencies

In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements.Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer'scustomer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based upon management'smanagement’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the subsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the subsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31, 20172019 and 2016,2018, no amounts had been recorded as liabilities for the subsidiary banks’ potential obligations under these guarantees.

As of December 31, 20172019 and 2016,2018, commitments to extend credit aggregated $791,550,060 and $666,778,085, respectively.$1.2 billion. As of December 31, 2017 2019 and 2016,2018, standby letters of credit aggregated $17,283,025$23.8 million and $15,697,469,$20.3 million, respectively. Management does not expect that all of these commitments will be funded.

The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amount of $645,001$3.7 million and $1,135,500$1.3 million as of December 31, 2017 2019 and 2016,2018, respectively. These amounts are included in loans held for sale at the respective balance sheet dates.

Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates ofof insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company’s subsidiary banks, the Company had $300,000$24.5 million and $916,900$12.4 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2017 2019 and 2016,2018, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017. In the opinion of management, the risk of recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.

 

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Notes to Consolidated Financial Statements

 

Note 18.19. Commitments and Contingencies (continued)

Aside from cash on-hand and in-vault, the majority of the Company'sCompany’s cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $42.9$34.6 million and $48.5$52.6 million as of December 31, 2017 2019 and 2016,2018, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks.

In an arrangement with Goldman Sachs, CRBT offers a cash management program for select customers. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to an institutional money market fund administered by Goldman Sachs. At December 31, 2017 and 2016, the Company had $136,032,073 and $117,985,224, respectively of customer funds invested in this cash management program. In the opinion of management, no material risk of loss exists due to the financial condition of Goldman Sachs.

Note 19. 20. Quarterly Results of Operations (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2019

 

    

March

    

June

    

September

    

December

 

 

2019

 

2019

 

2019

 

2019

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

52,101

 

$

54,181

 

$

56,817

 

$

52,977

Total interest expense

 

 

15,193

 

 

16,168

 

 

16,098

 

 

13,058

Net interest income

 

 

36,908

 

 

38,013

 

 

40,719

 

 

39,919

Provision for loan/lease losses

 

 

2,134

 

 

1,941

 

 

2,012

 

 

979

Noninterest income

 

 

11,992

 

 

17,065

 

 

19,906

 

 

29,805

Noninterest expense

 

 

32,435

 

 

36,560

 

 

39,945

 

 

46,294

Income before taxes

 

 

14,331

 

 

16,577

 

 

18,668

 

 

22,451

Federal and state income tax expense (benefit)

 

 

1,413

 

 

3,073

 

 

3,573

 

 

6,560

Net income

 

$

12,918

 

$

13,504

 

$

15,095

 

$

15,891

 

 

 

  

 

 

  

 

 

  

 

 

  

EPS:

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 

$

0.82

 

$

0.86

 

$

0.96

 

$

1.01

Diluted

 

$

0.81

 

$

0.85

 

$

0.94

 

$

0.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2018

 

Year Ended December 31, 2017

 

    

March

    

June

    

September

    

December

 

March

  

June

  

September

  

December

 

 

2018

 

2018

 

2018

 

2018

 

2017

  

2017

  

2017

  

2017

 

 

(dollars in thousands)

                

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 $31,345,099  $32,453,268  $33,840,865  $37,878,086 

 

$

39,546

 

$

40,799

 

$

49,830

 

$

52,704

Total interest expense

  3,676,216   4,406,571   5,284,517   6,084,733 

 

 

7,143

 

 

8,714

 

 

11,516

 

 

13,109

Net interest income

  27,668,883   28,046,697   28,556,348   31,793,353 

 

 

32,403

 

 

32,085

 

 

38,314

 

 

39,595

Provision for loan/lease losses

  2,105,109   2,022,993   2,086,436   2,255,381 

 

 

2,540

 

 

2,301

 

 

6,206

 

 

1,612

Noninterest income

  7,283,754   6,782,518   6,701,303   9,714,717 

 

 

8,541

 

 

8,912

 

 

8,809

 

 

15,278

Noninterest expense

  21,273,117   21,404,629   23,395,747   31,351,204 

 

 

25,863

 

 

26,370

 

 

30,500

 

 

36,410

Income before taxes

  11,574,411   11,401,593   9,775,468   7,901,485 

 

 

12,541

 

 

12,326

 

 

10,417

 

 

16,851

Federal and state income tax expense (benefit)

  2,389,446   2,635,576   1,921,533   (2,000,105)

Federal and state income tax expense

 

 

1,991

 

 

1,881

 

 

1,608

 

 

3,535

Net income

 $9,184,965  $8,766,017  $7,853,935  $9,901,590 

 

$

10,550

 

$

10,445

 

$

8,809

 

$

13,316

                

 

 

  

 

 

  

 

 

  

 

 

  

EPS:

                

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 $0.70  $0.67  $0.60  $0.72 

 

$

0.76

 

$

0.75

 

$

0.56

 

$

0.85

Diluted

 $0.68  $0.65  $0.58  $0.70 

 

$

0.74

 

$

0.73

 

$

0.55

 

$

0.84

 

 

  

Year Ended December 31, 2016

 
  

March

  

June

  

September

  

December

 
  

2016

  

2016

  

2016

  

2016

 
                 

Total interest income

 $23,502,059  $23,913,284  $26,816,735  $32,235,657 

Total interest expense

  2,904,537   2,904,471   3,185,958   2,955,992 

Net interest income

  20,597,522   21,008,813   23,630,777   29,279,665 

Provision for loan/lease losses

  2,072,985   1,197,850   1,607,986   2,599,345 

Noninterest income

  6,822,473   6,762,401   10,423,401   7,028,600 

Noninterest expense

  16,954,498   17,743,753   24,480,483   22,307,178 

Income before taxes

  8,392,512   8,829,611   7,965,709   11,401,742 

Federal and state income tax expense

  2,019,023   2,153,144   1,858,208   2,872,412 

Net income

 $6,373,489  $6,676,467  $6,107,501  $8,529,330 
                 

EPS:

                

Basic

 $0.54  $0.54  $0.47  $0.65 

Diluted

 $0.53  $0.53  $0.46  $0.64 

 

124

133

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 20.21. Parent Company Only Financial Statements

The following is condensed financial information of QCR Holdings, Inc. (parent company only):

Condensed Balance Sheets
December 31, 2019 and 2018

Condensed Balance Sheets

        

December 31, 2017 and 2016

        

 

 

 

 

 

 

     

2019

    

2018

        

 

(dollars in thousands)

Assets

 

2017

  

2016

 

 

 

 

 

 

 

        

Cash and due from banks

 $4,325,582  $6,929,755 

 

$

59,529

 

$

6,606

Interest-bearing deposits at financial institutions

  601   651 

 

 

5,601

 

 

1,001

Securities available for sale, at fair value

  1,690,726   1,545,565 

Loans/leases receivable, held for investment

  1,710,000   - 

Investment in bank subsidiaries

  410,105,525   345,866,288 

 

 

570,698

 

 

532,164

Investment in nonbank subsidiaries

  2,956,337   1,154,642 

 

 

13,239

 

 

4,880

Premises and equipment, net

  4,947,572   5,104,677 

 

 

9,424

 

 

6,956

Goodwill

 

 

682

 

 

3,766

Intangibles

 

 

1,503

 

 

1,855

Other assets

  11,630,304   15,245,521 

 

 

15,150

 

 

14,794

Total assets

 $437,366,647  $375,847,099 

 

$

675,826

 

$

572,022

        

 

 

  

 

 

  

Liabilities and Stockholders' Equity

        

 

 

  

 

 

  

Liabilities:

        

 

 

  

 

 

  

Other borrowings

 $31,000,000  $35,000,000 

 

$

 —

 

$

32,250

Subordinated notes

 

 

63,531

 

 

 —

Junior subordinated debentures

  37,486,487   33,480,202 

 

 

37,838

 

 

37,670

Other liabilities

  15,593,031   21,326,098 

 

 

39,106

 

 

28,964

Total liabilities

  84,079,518   89,806,300 

 

 

140,475

 

 

98,884

        

 

 

  

 

 

  

Stockholders' Equity:

        

 

 

  

 

 

  

Common stock

  13,918,168   13,106,845 

 

 

15,828

 

 

15,718

Additional paid-in capital

  189,077,550   156,776,642 

 

 

274,785

 

 

270,761

Retained earnings

  151,962,661   118,616,901 

 

 

245,836

 

 

192,203

Accumulated other comprehensive loss

  (1,671,250)  (2,459,589)

 

 

(1,098)

 

 

(5,544)

Total stockholders' equity

  353,287,129   286,040,799 

 

 

535,351

 

 

473,138

Total liabilities and stockholders' equity

 $437,366,647  $375,847,099 

 

$

675,826

 

$

572,022

 

125

134

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 20.21. Parent Company Only Financial Statements (continued)

Condensed Statements of Income
Years Ended December 31, 2019, 2018, and 2017

 

Condensed Statements of Income

            

Years Ended December 31, 2017, 2016, and 2015

            

 

 

 

 

 

 

 

 

 

            

    

2019

    

2018

    

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

            

 

 

 

 

 

 

 

 

 

Total interest income

 $12,802  $74,489  $69,774 

 

$

77

 

$

88

 

$

13

Equity in net income of bank subsidiaries

  45,103,593   33,467,712   22,059,086 

 

 

69,966

 

 

55,209

 

 

45,104

Equity in net income of nonbank subsidiaries

  75,344   32,674   32,823 

 

 

6,797

 

 

(436)

 

 

75

Securities gains

  6,312   37,596   262,800 

 

 

 —

 

 

 —

 

 

 6

Other

  2,700   (2,933)  (4,436)

 

 

314

 

 

(322)

 

 

 3

Total income

  45,200,751   33,609,538   22,420,047 

 

 

77,154

 

 

54,539

 

 

45,201

            

 

 

  

 

 

  

 

 

  

Interest expense

  2,658,414   1,735,769   1,679,909 

 

 

5,836

 

 

3,637

 

 

2,658

Salaries and employee benefits

  5,021,998   4,607,887   4,847,507 

 

 

8,739

 

 

6,598

 

 

5,022

Professional fees

  1,344,721   949,442   1,121,094 

 

 

1,545

 

 

1,872

 

 

1,345

Acquisition costs

  1,068,918   1,400,004   - 

 

 

 —

 

 

1,654

 

 

1,069

Post-acquisition compensation, transition and integration costs

  3,151,384   313,598   - 

 

 

3,171

 

 

165

 

 

3,151

Gains on debt extinguishment

  -   (1,200,000)  (300,000)

Disposition costs

 

 

1,606

 

 

 —

 

 

 —

Goodwill impairment

 

 

3,000

 

 

 —

 

 

 —

Other

  1,134,139   988,057   949,041 

 

 

2,147

 

 

1,026

 

 

1,134

Total expenses

  14,379,574   8,794,757   8,297,551 

 

 

26,044

 

 

14,952

 

 

14,379

            

 

 

  

 

 

  

 

 

  

Income before income tax benefit

  30,821,177   24,814,781   14,122,496 

 

 

51,110

 

 

39,587

 

 

30,822

            

 

 

  

 

 

  

 

 

  

Income tax benefit

  4,885,330   2,872,006   2,805,385 

 

 

6,298

 

 

3,533

 

 

4,885

Net income

 $35,706,507  $27,686,787  $16,927,881 

 

$

57,408

 

$

43,120

 

$

35,707

 

126

135

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 20.21. Parent Company Only Financial Statements (continued)

Condensed Statements of Cash Flows
Years Ended December 31, 2019, 2018, and 2017

 

Condensed Statements of Cash Flows

            

Years Ended December 31, 2017, 2016, and 2015

            

 

 

 

 

 

 

 

 

 

            

    

2019

    

2018

    

2017

 

2017

  

2016

  

2015

 

 

(dollars in thousands)

Cash Flows from Operating Activities:

            

 

 

  

 

 

  

 

 

  

Net income

 $35,706,507  $27,686,787  $16,927,881 

 

$

57,408

 

$

43,120

 

$

35,707

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

            

 

 

  

 

 

  

 

 

  

Earnings of bank subsidiaries

  (45,103,593)  (33,467,712)  (22,059,086)

 

 

(69,966)

 

 

(55,209)

 

 

(45,104)

Earnings of nonbank subsidiaries

  (75,344)  (32,674)  (32,823)

Earnings (losses) of nonbank subsidiaries

 

 

(6,797)

 

 

436

 

 

(75)

Distributions from bank subsidiaries

  21,000,000   26,000,000   9,700,000 

 

 

 —

 

 

34,500

 

 

21,000

Distributions from nonbank subsidiaries

  38,734   32,860   32,695 

 

 

45,058

 

 

63

 

 

39

Accretion of acquisition fair value adjustments

  149,010   136,150   137,317 

 

 

305

 

 

183

 

 

149

Depreciation

  225,947   222,256   174,757 

 

 

327

 

 

249

 

 

225

Stock-based compensation expense

  1,187,036   947,174   941,469 

 

 

2,469

 

 

1,443

 

 

1,187

Securities gains, net

  (6,312)  (37,596)  (262,801)

 

 

 —

 

 

 —

 

 

(6)

Gains on debt extinguishment

  -   (1,200,000)  (300,000)

Goodwill impairment

 

 

3,000

 

 

 —

 

 

 —

Decrease (increase) in other assets

  (968,808)  (2,346,253)  (5,929,110)

 

 

26

 

 

2,232

 

 

(969)

(Decrease) increase in other liabilities

  (6,918,921)  5,105,251   5,502,390 

 

 

7,814

 

 

(7,226)

 

 

(6,919)

Net cash provided by operating activities

  5,234,256   23,046,243   4,832,689 

 

 

39,644

 

 

19,791

 

 

5,234

            

 

 

  

 

 

  

 

 

  

Cash Flows from Investing Activities:

            

 

 

  

 

 

  

 

 

  

Net increase in interest-bearing deposits at financial institutions

  50   50   189,426 

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

 

 

(4,600)

 

 

(1,000)

 

 

 —

Activity in securities portfolio:

            

 

 

  

 

 

  

 

 

  

Purchases

  -   (3,873,060)  (1,764,137)

Calls, maturities and redemptions

  6,312   3,800,000   1,772,719 

 

 

 —

 

 

 —

 

 

 6

Sales

  31,713   132,738   489,828 

 

 

 —

 

 

 —

 

 

32

Capital infusion, bank subsidiaries

  -   -   (45,600,000)

 

 

(8,600)

 

 

(3,500)

 

 

 —

Capital infusion, non-bank subsidiaries

 

 

(100)

 

 

 —

 

 

 —

Net cash paid for acquisitions

  (3,368,909)  (80,000,000)  - 

 

 

 —

 

 

(5,183)

 

 

(3,369)

Purchase of premises and equipment

  (68,842)  (824,498)  (1,517,157)

 

 

(2,861)

 

 

(2,257)

 

 

(69)

Net cash (used in) provided by investing activities

  (3,399,676)  (80,764,770)  (46,429,321)

Net cash (used in) investing activities

 

 

(16,161)

 

 

(11,940)

 

 

(3,400)

            

 

 

  

 

 

  

 

 

  

Cash Flows from Financing Activities:

            

 

 

  

 

 

  

 

 

  

Activity in other borrowings:

            

 

 

  

 

 

  

 

 

  

Proceeds from other borrowings

  7,000,000   35,000,000   - 

 

 

 —

 

 

9,000

 

 

7,000

Calls, maturities and scheduled principal payments

  (11,000,000)  -   (2,350,000)

Paydown on revolving line of credit

 

 

(9,000)

 

 

 —

 

 

 —

Prepayments

  -   -   (19,395,116)

 

 

(21,313)

 

 

 —

 

 

 —

Retirement of junior subordinated debentures

  -   (3,955,000)  (1,762,000)

Calls, maturities and scheduled payments

 

 

(1,799)

 

 

(12,550)

 

 

(11,000)

Proceeds from subordinated notes

 

 

63,393

 

 

 —

 

 

 —

Payment of cash dividends on common and preferred stock

  (2,494,260)  (1,981,541)  (782,054)

 

 

(3,767)

 

 

(3,300)

 

 

(2,494)

Net proceeds from common stock offering, 3,680,000 shares issued

  -   -   63,484,123 

Net proceeds from common stock offering, 1,215,000 shares issued

  -   29,828,916   - 

Proceeds from issuance of common stock, net

  2,055,507   2,105,774   1,552,673 

 

 

1,926

 

 

1,279

 

 

2,056

Net cash provided by (used in) financing activities

  (4,438,753)  60,998,149   40,747,626 

 

 

29,440

 

 

(5,571)

 

 

(4,438)

            

 

 

  

 

 

  

 

 

  

Net increase (decrease) in cash and due from banks

  (2,604,173)  3,279,622   (849,006)

 

 

52,923

 

 

2,280

 

 

(2,604)

            

 

 

  

 

 

  

 

 

  

Cash and due from banks:

            

 

 

  

 

 

  

 

 

  

Beginning

  6,929,755   3,650,133   4,499,139 

 

 

6,606

 

 

4,326

 

 

6,930

Ending

 $4,325,582  $6,929,755  $3,650,133 

 

$

59,529

 

$

6,606

 

$

4,326

 

127

136

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 21.22. Fair Value

Accounting guidance on fair value measurements 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 measured at fair value on a recurring basis comprisedcomprised the following at December 31, 2017 2019 and 2016:

2018:

Fair Value Measurements at Reporting Date Using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

December 31, 2017:

Securities available for sale:

U.S. govt. sponsored agency securities

$38,096,534$-$38,096,534$-

Residential mortgage-backed securities

163,301,304-163,301,304-

Municipal securities

66,625,496-66,625,496-

Other securities

4,884,5731,0284,883,545-

Interest rate caps

506,700-506,700-

Interest rate swaps - assets

4,397,238-4,397,238

Total assets measured at fair value

$277,811,845$1,028$277,810,817$-

Interest rate swaps - liabilities

$4,397,238$-$4,397,238$-

Total liabilities measured at fair value

$4,397,238$-$4,397,238$-

December 31, 2016:

Securities available for sale:

U.S. govt. sponsored agency securities

$46,083,607$-$46,083,607$-

Residential mortgage-backed securities

147,702,127-147,702,127-

Municipal securities

52,604,426-52,604,426-

Other securities

4,722,9791,3614,721,618-

Interest rate caps

576,527-576,527-

Interest rate swaps - assets

2,338,281-2,338,281

Total assets measured at fair value

$254,027,947$1,361$254,026,586$-

Interest rate swaps - liabilities

$2,338,281$-$2,338,281$-

Total liabilities measured at fair value

$2,338,281$-$2,338,281$-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

20,078

 

$

 —

 

$

20,078

 

$

 —

Residential mortgage-backed and related securities

 

 

120,587

 

 

 —

 

 

120,587

 

 

 —

Municipal securities

 

 

48,257

 

 

 —

 

 

48,257

 

 

 —

Other securities

 

 

21,773

 

 

 —

 

 

21,773

 

 

 —

Interest rate caps

 

 

3,148

 

 

 —

 

 

3,148

 

 

 —

Interest rate swaps - assets

 

 

84,679

 

 

 —

 

 

84,679

 

 

 —

Total assets measured at fair value

 

$

298,522

 

$

 —

 

$

298,522

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

88,437

 

$

 —

 

$

88,437

 

$

 —

Total liabilities measured at fair value

 

$

88,437

 

$

 —

 

$

88,437

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  

 

 

  

 

 

  

 

 

  

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Securities AFS:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. govt. sponsored agency securities

 

$

36,411

 

$

 —

 

$

36,411

 

$

 —

Residential mortgage-backed and related securities

 

 

159,249

 

 

 —

 

 

159,249

 

 

 —

Municipal securities

 

 

58,546

 

 

 —

 

 

58,546

 

 

 —

Other securities

 

 

6,850

 

 

 —

 

 

6,850

 

 

 —

Interest rate caps

 

 

459

 

 

 —

 

 

459

 

 

 —

Interest rate swaps - assets

 

 

22,196

 

 

 —

 

 

22,196

 

 

 —

Total assets measured at fair value

 

$

283,711

 

$

 —

 

$

283,711

 

$

 —

 

 

 

  

 

 

  

 

 

  

 

 

  

Interest rate swaps - liabilities

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

Total liabilities measured at fair value

 

$

23,347

 

$

 —

 

$

23,347

 

$

 —

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 21. Fair Value (continued)

 

There were no transfers of assets or liabilities between Levels 1,2, and 3 of the fair value hierarchy during the years ended December 31, 2017 2019 or 2016.

A small portion of the securities available for sale portfolio consists of common stock issued by various unrelated bank holding companies and mutual funds. The fair values used by the Company are obtained from an independent pricing service, which represent quoted market prices for the identical securities (Level 1 inputs).

2018.

The remainder of the securities available for sale 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

128

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 22. Fair Value (continued)

Interest rate caps are used for the purpose of hedging interest rate risk. See Note 7 to the Consolidated Financial Statements for the details of these instruments. 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 junior subordinated debt.  See Note 7 to the Consolidated Financial Statements for the details of these instruments. 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 inSee Note 17 to the Consolidated Financial Statements.Statements for the detail of these instruments. The fair values are determined by comparing the contractual rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).

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

Assets measured at fair value on a non-recurring basis comprisedcomprised the following at December 31, 2017 2019 and 2016:

2018:

      

Fair Value Measurements at Reporting Date Using

 
      

Quoted Prices

  

Significant

     
      

in Active

  

Other

  

Significant

 
      

Markets for

  

Observable

  

Unobservable

 
      

Identical Assets

  

Inputs

  

Inputs

 
  

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

December 31, 2017:

                

Impaired loans/leases

 $8,972,337  $-  $-  $8,972,337 

Other real estate owned

  14,642,973   -   -   14,642,973 
  $23,615,310  $-  $-  $23,615,310 
                 

December 31, 2016:

                

Impaired loans/leases

 $12,823,121  $-  $-  $12,823,121 

Other real estate owned

  5,964,952   -   -   5,964,952 
  $18,788,073  $-  $-  $18,788,073 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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)

December 31, 2019:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

3,394

 

$

 —

 

$

 —

 

$

3,394

OREO

 

 

4,459

 

 

 —

 

 

 —

 

 

4,459

 

 

$

7,853

 

$

 —

 

$

 —

 

$

7,853

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans/leases

 

$

9,657

 

$

 —

 

$

 —

 

$

9,657

OREO

 

 

10,128

 

 

 —

 

 

 —

 

 

10,128

 

 

$

19,785

 

$

 —

 

$

 —

 

$

19,785

 

Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value,, and are classified as a 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 may be 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.

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 21. Fair Value (continued)

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

129

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QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 22. Fair Value (continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

 

Fair Value

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level Fair Value Measurements

 

    

2019

    

2018

    

Valuation Technique

    

Unobservable Input

    

Range

 

 

December 31,

2017
Fair Value

  

December 31,

2016
Fair Value

  

Valuation Technique

 

Unobservable Input

 Range 

 

(dollars in thousands)

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans/leases

 $8,972,337  $12,823,121  

Appraisal of collateral

 

Appraisal adjustments

 -10.00%to

-50.00%

 

 

$

3,394

 

$

9,657

 

Appraisal of collateral

 

Appraisal adjustments

 

(10.00)

%  

to

 

(30.00)

%

Other real estate owned

  14,642,973   5,964,952  

Appraisal of collateral

 

Appraisal adjustments

 0.00%to

-35.00%

 

OREO

 

 

4,459

 

 

10,128

 

Appraisal of collateral

 

Appraisal adjustments

 

0.00

%  

to

 

(35.00)

%

 

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

There have been no changes in valuation techniques used for any assets measured at fair value during the yearsyears ended December 31, 2017 2019 or 2016.

2018.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’sCompany’s consolidated balance sheet, 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 December 31, 2019

 

As of December 31, 2018

 

 

Hierarchy

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

    

Level

    

Value

    

Fair Value

    

Value

    

Fair Value

 

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

Level 1

 

$

76,254

 

$

76,254

 

$

85,523

 

$

85,523

Federal funds sold

 

Level 2

 

 

9,800

 

 

9,800

 

 

26,398

 

 

26,398

Interest-bearing deposits at financial institutions

 

Level 2

 

 

147,891

 

 

147,891

 

 

133,198

 

 

133,198

Investment securities:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

HTM

 

Level 2

 

 

400,646

 

 

426,545

 

 

401,913

 

 

400,770

AFS

 

*

 

 

210,695

 

 

210,695

 

 

261,056

 

 

261,056

Loans/leases receivable, net

 

Level 3

 

 

3,143

 

 

3,394

 

 

8,942

 

 

9,657

Loans/leases receivable, net

 

Level 2

 

 

3,651,061

 

 

3,606,520

 

 

3,683,965

 

 

3,639,329

Interest rate caps

 

Level 2

 

 

3,148

 

 

3,148

 

 

459

 

 

459

Interest rate swaps - assets

 

Level 2

 

 

84,679

 

 

84,679

 

 

22,196

 

 

22,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Nonmaturity deposits

 

Level 2

 

 

3,184,726

 

 

3,184,726

 

 

3,002,327

 

 

3,002,327

Time deposits

 

Level 2

 

 

726,325

 

 

742,444

 

 

974,704

 

 

968,906

Short-term borrowings

 

Level 2

 

 

13,423

 

 

13,423

 

 

28,774

 

 

28,774

FHLB advances

 

Level 2

 

 

159,300

 

 

159,193

 

 

266,492

 

 

265,926

Other borrowings

 

Level 2

 

 

 —

 

 

 —

 

 

67,250

 

 

67,770

Subordinated notes

 

Level 2

 

 

68,394

 

 

68,563

 

 

4,782

 

 

4,933

Junior subordinated debentures

 

Level 2

 

 

37,838

 

 

30,477

 

 

37,670

 

 

29,992

Interest rate swaps - liabilities

 

Level 2

 

 

88,437

 

 

88,437

 

 

23,347

 

 

23,347

 

 

Fair Value

 

As of December 31, 2017

  

As of December 31, 2016

 
 

Hierarchy

 

Carrying

  

Estimated

  

Carrying

  

Estimated

 
 

Level

 

Value

  

Fair Value

  

Value

  

Fair Value

 
                  

Cash and due from banks

Level 1

 $75,721,663  $75,721,663  $70,569,993  $70,569,993 

Federal funds sold

Level 2

  30,197,000   30,197,000   22,257,000   22,257,000 

Interest-bearing deposits at financial institutions

Level 2

  55,765,012   55,765,012   63,948,925   63,948,925 

Investment securities:

                 

HTM

Level 2

  379,474,205   379,749,804   322,909,056   320,414,899 

AFS

See Previous Table

  272,907,907   272,907,907   251,113,139   251,113,139 

Loans/leases receivable, net

Level 3

  8,307,719   8,972,337   11,873,260   12,823,121 

Loans/leases receivable, net

Level 2

  2,921,821,953   2,892,963,000   2,362,856,277   2,344,462,740 

Interest rate caps

Level 2

  506,700   506,700   576,527   576,527 

Interest rate swaps - assets

Level 2

  4,397,238   4,397,238   2,338,281   2,338,281 

Deposits:

                 

Nonmaturity deposits

Level 2

  2,670,583,178   2,670,583,178   2,188,683,349   2,188,683,349 

Time deposits

Level 2

  596,071,878   591,772,000   480,577,924   479,605,000 

Short-term borrowings

Level 2

  13,993,122   13,993,122   39,971,387   39,971,387 

FHLB advances

Level 2

  192,000,000   192,115,000   137,500,000   138,338,000 

Other borrowings

Level 2

  66,000,000   66,520,000   80,000,000   81,282,000 

Junior subordinated debentures

Level 2

  37,486,487   29,253,624   33,480,202   24,881,494 

Interest rate swaps - liabilities

Level 2

  4,397,238   4,397,238   2,338,281   2,338,281 

 

130

139

Table of Contents

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 21. Fair Value (continued)

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These instruments include: cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Securities held to maturity: The fair values are estimated using pricing models that consider certain observable market data and some observable inputs, such as rate and term.

Loans/leases receivable: The fair values for all types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market.

Deposits: The fair values disclosed for demand deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits.

FHLB advances and junior subordinated debentures: The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Other borrowings: The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities. The fair value for variable rate other borrowings is equal to its carrying value.

Commitments to extend credit: The fair value of these commitments is not material.

Note 22.23. Business Segment Information

 

Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management“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’sCompany’s primary segment, Commercial Banking, is geographically divided by markets into the secondary segments which are the fourfour subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB and RB&T.SFC Bank. Each of these secondary segments offer similar products and services, but are managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

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

QCR Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 22. Business Segment Information (continued)

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

The financial results for RB&T prior to the sale of the majority of its assets and liabilities at November 30, 2019 are also included in the Company’s All Other segment as are the assets held for sale at December 31, 2019.

Selected financial information on the Company'sCompany’s business segments, with all intercompany accounts and transactions eliminated, is presented as follows as of and for the years ended December 31, 2017, 2016,2019, 2018, and 2015:

2017:

 

Commercial Banking

  

 

      

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCBT

  

CRBT

  

Guaranty Bank*

  

CSB

  

RB&T

  

Wealth Management

  

All other

  

Intercompany Eliminations

  

Consolidated Total

 

Commercial Banking

 

Wealth

 

 

 

Intercompany

 

Consolidated

QCBT

    

CRBT*

    

CSB

    

SFC Bank

    

Management

    

All other*

    

Eliminations

    

Total

(dollars in thousands)

Twelve Months Ended December 31, 2019

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

79,418

 

$

93,147

 

$

41,589

 

$

31,569

 

$

16,553

 

$

32,791

 

$

(223)

 

$

294,844

Net interest income

 

52,097

 

 

44,310

 

 

31,370

 

 

21,422

 

 

 —

 

 

6,360

 

 

 —

 

 

155,559

Provision

 

3,433

 

 

1,080

 

 

679

 

 

1,315

 

 

 —

 

 

559

 

 

 —

 

 

7,066

Net income (loss) from continuing operations

 

19,006

 

 

26,940

 

 

10,824

 

 

8,243

 

 

3,567

 

 

(11,172)

 

 

 —

 

 

57,408

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

682

 

 

 —

 

 

74,748

Intangibles

 

 —

 

 

2,684

 

 

3,980

 

 

6,802

 

 

 —

 

 

1,504

 

 

 —

 

 

14,970

Total assets

 

1,682,477

 

 

1,572,324

 

 

853,834

 

 

748,753

 

 

 —

 

 

116,968

 

 

(65,306)

 

 

4,909,050

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Twelve Months Ended December 31, 2018

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

$

69,691

 

$

69,864

 

$

36,069

 

$

15,152

 

$

13,433

 

$

21,082

 

$

(871)

 

$

224,420

Net interest income

 

48,682

 

 

43,038

 

 

28,763

 

 

11,835

 

 

 —

 

 

10,077

 

 

 —

 

 

142,395

Provision

 

3,693

 

 

1,833

 

 

1,523

 

 

990

 

 

 —

 

 

4,619

 

 

 —

 

 

12,658

Net income (loss) from continuing operations

 

18,347

 

 

20,044

 

 

8,389

 

 

4,816

 

 

2,952

 

 

(11,428)

 

 

 —

 

 

43,120

Goodwill

 

3,223

 

 

14,980

 

 

9,888

 

 

45,975

 

 

 —

 

 

3,766

 

 

 —

 

 

77,832

Intangibles

 

 —

 

 

3,186

 

 

4,675

 

 

7,735

 

 

 —

 

 

1,854

 

 

 —

 

 

17,450

Total assets

 

1,623,369

 

 

1,379,222

 

 

785,364

 

 

632,849

 

 

 —

 

 

555,293

 

 

(26,387)

 

 

4,949,710

                                    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended December 31, 2017

                                    

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenue

 $58,055,715  $45,367,035  $1,806,078  $31,944,152  $18,035,971  $11,057,519  $232,660  $(499,520) $165,999,610 

$

58,056

 

$

45,367

 

$

31,944

 

$

 —

 

$

11,058

 

$

20,074

 

$

(500)

 

$

165,999

Net interest income

  46,407,078   31,042,302   1,551,356   27,020,674   12,707,651   -   (2,663,780)  -   116,065,281 

 

46,407

 

 

31,042

 

 

27,021

 

 

 —

 

 

 —

 

 

11,595

 

 

 —

 

 

116,065

Provision for loan/lease losses

  3,908,919   1,050,000   -   2,783,000   728,000   -   -   -   8,469,919 

 

3,909

 

 

1,050

 

 

2,783

 

 

 —

 

 

 —

 

 

728

 

 

 —

 

 

8,470

Net income

  22,095,055   10,712,174   346,835   7,047,671   2,660,364   2,241,494   (9,397,086)  -   35,706,507 

Net income (loss)

 

22,095

 

 

10,712

 

 

7,048

 

 

 —

 

 

2,241

 

 

(6,389)

 

 

 —

 

 

35,707

Goodwill

  3,222,688   15,223,179   -   9,888,225   -   -   -   -   28,334,092 

 

3,223

 

 

15,223

 

 

9,888

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,334

Core deposit intangible

  -   3,693,592   -   5,385,361   -   -   -   -   9,078,953 

Intangibles

 

 —

 

 

3,694

 

 

5,385

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,079

Total assets

  1,541,777,558   1,307,376,687   -   670,516,373   461,650,765   -   28,267,478   (26,924,088)  3,982,664,773 

 

1,541,778

 

 

1,307,377

 

 

670,516

 

 

 —

 

 

 —

 

 

489,918

 

 

(26,924)

 

 

3,982,665

                                    

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Twelve Months Ended December 31, 2016

                                    

Total revenue

 $59,442,052  $37,242,901  $-  $11,406,291  $16,043,894  $9,156,948  $109,563  $4,100,975  $137,502,624 

Net interest income

  45,081,080   29,205,047   -   10,004,729   11,887,201   -   (1,661,280)  -   94,516,777 

Provision for loan/lease losses

  4,168,166   950,000   -   1,460,000   900,000   -   -   -   7,478,166 

Net income

  14,116,751   12,317,545   -   2,132,252   3,235,711   1,665,453   (5,780,925)  -   27,686,787 

Goodwill

  3,222,688   -   -   9,888,225   -   -   -   -   13,110,913 

Core deposit intangible

  -   1,271,897   -   6,109,316   -   -   -   -   7,381,213 

Total assets

  1,395,785,241   913,055,738   -   600,075,798   391,154,780   -   34,998,902   (33,126,711)  3,301,943,748 
                                    

Twelve Months Ended December 31, 2015

                                    

Total revenue

 $52,914,705  $37,593,652  $-  $-  $14,816,300  $9,103,173  $363,432  $(424,688) $114,366,574 

Net interest income

  40,416,563   26,635,659   -   -   10,854,637   -   (1,610,135)  -   76,296,724 

Provision for loan/lease losses

  4,367,234   1,750,000   -   -   753,666   -   -   -   6,870,900 

Net income

  10,333,111   7,695,867   -   -   2,402,522   1,627,586   (5,131,205)  -   16,927,881 

Goodwill

  3,222,688   -   -   -   -   -   -   -   3,222,688 

Core deposit intangible

  -   1,471,409   -   -   -   -   -   -   1,471,409 

Total assets

  1,336,571,694   866,872,406   -   -   367,471,639   -   27,605,704   (5,323,168)  2,593,198,275 

 

*    RepresentsIncludes financial results for Guaranty Bank for the period from October 1, 2017 through December 2, 2017, when Guaranty Bank was merged into CRBT.CRBT and

      financial results for RB&T for the years 2017, 2018 and the period from January 1, 2019 through November 30, 2019, prior to the sale of the majority of its assets

      and liabilities.

 

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Item 9.9.    Changes in and Disagreements withwith Accountants on Accounting and Financial Disclosure

None.

Item 9A.    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)13a‑15(e) and 15d – 15(e) promulgated under the Exchange Act) as of December 31, 2017.2019. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was: (1) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures; and (2) recorded, processed, summarized and reported as and when required.

Management’sManagement’s Report on Internal Control overover Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)13a‑15(f) and 15d-15(f)15d‑15(f) of the Exchange Act). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The Company’s management has excluded Guaranty Bank from its assessment of internal control over financial reporting as of December 31, 2017, because Guaranty Bank was acquired by the Company in the fourth quarter of 2017.

The Company’sCompany’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2019. Management’s assessment is based on the criteria established in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2017.2019. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2017.2019.

RSM US LLP, the Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2017,2019, which is included on the following pages of this Form 10-K.10‑K.

 

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Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and the Board of Directors and Stockholders of QCR Holdings, Inc.

 

 

Opinion on the Internal Control Over Financial Reporting

We have audited QCR Holdings, Inc. and subsidiaries'subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of QCR Holdings, Inc. and subsidiariesthe Company as of

December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’stockholders’ equity and cash flows for each of the three years in the period ended December 31, 20172019  and our report dated March 9, 201813, 2020 expressed an unqualified opinion.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Guaranty Bank and Trust from its assessment of internal control over financial reporting as of December 31, 2017, because it was acquired by the Company in a purchase business combination in the fourth quarter of 2017. We have also excluded this entity from our audit of internal control over financial reporting. Guaranty Bank and Trust operated as a wholly-owned subsidiary of QCR Holdings, Inc. from October 1, 2017 (the date of acquisition) until it was merged into Cedar Rapids Bank & Trust on December 2, 2017. Guaranty Bank and Trust’s total assets represented approximately 7% of QCR Holdings, Inc.’s related consolidated assets as of the date of the merger.

 

Basis for Opinion

The Company’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

mcgsign

Davenport, Iowa

March 9, 201813, 2020

 

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Changes in Internal Control Overover Financial Reporting.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 likelylike to materially affect, the Company’s internal control over financial reporting.

Item 9B.    Other Information

None.

 

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Part III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by thisthis item is set forth under the captions “Proposal 1: Election of Directors,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 20182020 Proxy Statement and is incorporated herein by reference.

Item 11.    Executive Compensation

The information required by this item is set forth under the captionscaptions “Executive Compensation” and “Director Compensation” in the Company’s 20182020 Proxy Statement and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is set forth under the caption “Security Ownership of Certain Beneficial Owners” in the Company’s 2018Company’s 2020 Proxy Statement and is incorporated herein by reference.

The table below sets forth the following information as of December 31, 20172019 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:

(a)

The number of securities to be issued upon the exercise of outstanding options, warrants, and rights;

(b)

The weighted-average exercise price of such outstanding options, warrants, and rights; and

(c)

Other than securities to be issued upon the exercise of such outstanding options, warrants, and rights, the number of securities remaining available for future issuance under the plans.

 

EQUITY COMPENSATION PLAN INFORMATION

 

Plan category

 

Number of securities to be

issued upon exercise of

outstanding options, warrants,

and rights

  

Weighted-average exercise price

of outstanding options,

warrants, and rights

  

Number of securities remaining

available for future issuance

under equity compensation

plans (excluding securities

reflected in column (a))

 
  

(a)

  

(b)

  

(c)

 
             

Equity compensation plans approved by stockholders

  516,223   $17.24   526,712(1)
             

Equity compensation plans not approved by stockholders

  -   -   - 
             

Total

  516,223   $17.24   526,712(1)

 

 

 

 

 

 

 

 

 

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

 

 

 

 

 

 

 

Number of securities remaining

 

 

 

Number of securities to be

 

 

 

 

available for future issuance

 

 

 

issued upon exercise of

 

Weighted-average exercise price

 

under equity compensation

 

 

 

outstanding options, warrants,

 

of outstanding options,

 

plans (excluding securities

 

Plan category

    

and rights

    

warrants, and rights

    

reflected in column (a))

 

 

 

(a)

 

 

(b)

 

(c)

 

Equity compensation plans approved by stockholders

 

503,884

(2)

$

20.24

 

347,625

(3)

 

 

  

 

 

  

 

  

  

Equity compensation plans not approved by stockholders

 

 —

 

 

 —

 

 —

  

 

 

  

 

 

  

 

  

  

Total

 

503,884

(2)

$

20.24

 

347,625

(3)

(1)

The weighted average exercise price only relates to outstanding option awards.

(2)

Includes 426,913 outstanding option awards, 53,360 outstanding restricted stock units and 18,058 outstanding performance share units granted under the Stock Option Plans.

175,507(3)Includes 219,305 and 128,320 shares available under the QCR Holdings, Inc. Employee Stock Purchase Plan.2016 Equity Incentive Plan and QCR Holdings, Inc.

        Employee Stock Purchase Plan.

 

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this item is set forth under the captions “Corporate Governance and the Board of Directors” and “Transactions with ManagementManagement and Directors” in the Company’s 20182020 Proxy Statement and is incorporated herein by reference.

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Item 14.    Principal Accountant Fees and Services

The information required by this item is set forth under the caption “Proposal“Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s 20182020 Proxy Statement and is incorporated herein by reference.

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Part IV

Part IV

Item 15.Exhibits and Financial Statement Schedules

(a) 1. Financial Statements

(a)

1. Financial Statements

These documents are listed in the Index to Consolidated Financial Statements under Item 8.

(a) 2. Financial Statement Schedules

(a)

2. Financial Statement Schedules

Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the consolidated financial statementsConsolidated Financial Statements and the accompanying notes thereto.

(a) 3. Exhibits

(a)

3. Exhibits

The following exhibits are either filed as a part of this Annual Report on Form 10-K10‑K or are incorporated herein by reference:

Exhibit


Number

    

Exhibit Description

 

 

 

2.1*

Purchase and Assumption Agreement betweenby and among Illinois Bank & Trust, Rockford Bank and Trust Company and QCR Holdings, Inc. and Guaranty Bankshares, Ltd.(solely for the purposes of the sections defined therein), dated as of June 8, 2017August 13, 2019 (incorporated by reference to Exhibit 2.1 of the Company'sCompany’s Form 8-K filed with the SEC on June 8, 2017.August 13, 2019).

3.1

Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Registrant’sCompany’s Quarterly Report on Form 10-Q/10‑Q/A Amendment No. 1 for the period ended September 30, 2011).

3.2

Bylaws of QCR Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant'sCompany’s Form 8-K8‑K filed November 20, 2015)February 19, 2019).

4.1

Amended and Restated Rights Agreement between QCR Holdings, Inc. and Quad City Bank and Trust Company dated May 8, 2013 (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed May 8, 2013).

4.2

4.1

First Amendment to Amended and Restated Rights Agreement between QCR Holdings, Inc. and Quad City Bank and Trust Company dated February 11, 2016 (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed on February 18, 2016).

4.3

Certain instruments defining the rights of holders of long-term debt of the Company, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request.

4.2

Description of the Company’s Securities (filed herewith).

10.2+

 

10.1+

Employment Agreement between QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated January 1, 2004 (incorporated by reference to Exhibit 10.2 of Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2003).

10.2+10.3+

Employment Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated January 1, 2004 (incorporated by reference to Exhibit 10.6 of Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2003).

10.3+10.4+

Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated January 1, 2004 (incorporated by reference to Exhibit 10.11 of Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2003).

10.4

10.5

Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 99.1 of Registrant’sCompany’s Form S-3D,S‑3D, File No. 333-102699333‑102699 dated January 24, 2003).

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10.5

10.6

Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 (incorporated by reference to Exhibit 10.210.1 of Registrant’sCompany’s Quarterly Report on Form 10-Q10‑Q for the quarter ended September 30, 2005).

10.6+10.7+

First Amendment to the Employment Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 27, 2008 (incorporated by reference to Exhibit 10.19 of the Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2008).

10.7+10.8+

First Amendment to the Employment Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 30, 2008 (incorporated by reference to Exhibit 10.20 of the Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2008).

10.8+10.9+

First Amendment to the Employment Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 30, 2008 (incorporated by reference to Exhibit 10.21 of the Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2008).

10.9+10.10+

Executive Deferred Compensation Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 10.22 of the Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2008).

10.10+10.11+

Amended and Restated Executive Deferred Compensation Plan Participation Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 19, 2013 (incorporated by reference to exhibitExhibit 10.11 to the Registrant'sCompany’s Annual Report on Form10-KForm 10‑K for the year ended December 31, 2014).

10.11+10.12+

Amended and Restated Executive Deferred Compensation Plan Participation Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 19, 2013 (incorporated by reference to exhibitExhibit 10.12 to the Registrant'sCompany’s Annual Report on Form10-KForm 10‑K for the year ended December 31, 2014).

10.12+10.13+

Amended and Restated Executive Deferred Compensation Plan Participation Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 19, 2013 (incorporated by reference to exhibitExhibit 10.13 to the Registrant'sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2014).

10.13+10.14+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 31, 2008 (incorporated by reference to Exhibit 10.28 of the Registrant’sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2008).

10.14+10.15+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 31, 2008 (incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10‑K for the year ended December 31, 2008).

10.16+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., and Todd A. Gipple dated December 31, 2008 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10‑K for the year ended December 31, 2008).

10.17+

First Amendment to the Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Douglas M. Hultquist dated December 29, 2015 (incorporated by reference to Exhibit 10.1 of the Registrant'sCompany’s Form 8-K8‑K dated December 31, 2015).

10.15+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 31, 2008 (incorporated by reference to Exhibit 10.29 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

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10.16+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 31, 2008 (incorporated by reference to Exhibit 10.30 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).

10.17+

10.18

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement among QCR Holdings, Inc., Quad City Bank and Trust Company and Michael A. Bauer dated December 31, 2008 (incorporated by reference to Exhibit 10.31 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).+

10.18+

QCR Holdings, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Registrant’sCompany’s Definitive Proxy Statement on Schedule 14A dated March 21, 2012).

10.19

Amendment No. 1 to the Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht, dated August 26, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’sCompany’s Quarterly Report on Form 10-Q10‑Q for the quarter ended September 30, 2012).

10.20+

10.20

+

QCR Holdings, Inc. 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant'sCompany’s Definitive Proxy Statement on Schedule 14A dated March 20, 2013).

10.21+

10.21

+

Form of Participation Agreement under the QCR Holdings, Inc. Executive Deferred Compensation Plan (incorporated by reference to exhibitExhibit 10.23 to the Registrant'sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2014).

10.22+

10.22

+

Employment Agreement between Quad City Bank and Trust Company and John Anderson dated October 30, 2009 (incorporated by reference to exhibitExhibit 10.24 to the Registrant'sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2014).

10.23+

10.23

+

First Amendment to the Employment Agreement between Quad City Bank and Trust Company and John Anderson dated December 18, 2012 (incorporated by reference to exhibitExhibit 10.25 to the Registrant'sCompany’s Annual Report on Form 10-K10‑K for the year ended December 31, 2014).

10.24+

Employment Agreement between Rockford Bank and Trust Company and Thomas Budd dated December 30, 2008 (incorporated by reference to exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014).

10.25+

10.28

First Amendment to the Employment Agreement between Rockford Bank and Trust Company and Thomas Budd dated December 30, 2008 (incorporated by reference to exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014).+

10.26+

Employment Agreement between QCR Holdings, Inc. and Cathie Whiteside dated August 27, 2007 (incorporated by reference to exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014).

10.27+

First Amendment to the Employment Agreement between QCR Holdings, Inc. and Cathie Whiteside dated December 28, 2008 (incorporated by reference to exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014).

10.28+

QCR Holdings, Inc. 2016 Equity Incentive Plan (incorporated by reference to Appendix A of the Registrant’sCompany’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2016).

10.2910.29+

Form of Securities Purchase Agreement between QCR Holdings, Inc. and certain investors dated May 20, 2016 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 23, 2016).

10.30+

QCR Holdings, Inc., Non-Qualified Supplemental Executive Retirement Plan, as amended and restated December 22, 2016 (incorporated by reference to Exhibit 10.1 of the Registrant’sCompany’s Current Report on Form 8-K8‑K filed on December 28, 2016).

10.31+10.30+

Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Quad City Bank and Trust Company and John H. Anderson dated December 22, 2016 (incorporated by reference to Exhibit 10.2 of the Registrant’sCompany’s Current Report on Form 8-K8‑K filed on December 28, 2016).

10.31+

 

10.32+

Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 4.5 of the Registrant’sCompany’s Form S-8S‑8 filed on October 27, 2016 (File No. 333-214282)333‑214282)).

10.33+10.32+

Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.6 of the Registrant’sCompany’s Form S-8S‑8 filed on October 27, 2016 (File No. 333-214282)333‑214282)).

10.34+10.33+

Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.7 of the Registrant’sCompany’s Form S-8S‑8 filed on October 27, 2016 (File No. 333-214282)333‑214282)).

10.34+

Transitional Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Douglas M. Hultquist (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed November 19, 2018).

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10.35+

Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Larry Helling (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 19, 2018).

10.36+

Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Todd Gipple (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed November 19, 2018).

21.110.37+

Employment Agreement, dated January 9, 2019, between QCR Holdings, Inc., Quad City Bank and Trust Company, and John Anderson (filed herewith).

10.38+

Executive Deferred Compensation Plan Participation Agreement, dated December 16, 2016, between Quad City Bank and Trust Company and John Anderson (filed herewith).

10.39+

Executive Deferred Compensation Plan Participation Agreement, dated November 24, 2014, between QCR Holdings, Inc. and Dana Nichols (filed herewith).

10.40+

First Amendment to the Employment Agreement, dated December 31, 2008, between Cedar Rapids Bank and Trust Company and Dana Nichols (filed herewith).

10.41+

Employment Agreement, dated April 17, 2018, between Springfield First Community Bank and Robert Fulp (filed herewith).

10.42+

Executive Deferred Compensation Plan Participation Agreement, dated January 1, 2019, between Springfield First Community Bank and Robert Fulp (filed herewith).

10.43+

QCR Holdings, Inc. 2008 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 25, 2008).

10.44+

QCR Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 22, 2010).

10.45

Employment Agreement, dated January 1, 2004, between Cedar Rapids Bank and Trust and Dana Nichols (filed herewith).

21.1

Subsidiaries of QCR Holdings, Inc. (exhibit is being filed herewith).

23.1

Consent of Independent Registered Pubic Accounting Firm - RSM US LLP (exhibit is being filed herewith).

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)13a‑14(a)/15d-14(a)15d‑14(a) (exhibit is being filed herewith).

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)13a‑14(a)/15d-14(a)15d‑14(a) (exhibit is being filed herewith).

32.1

Certification of Chief ExecutivveExecutive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).

32.2

Certification of Chief FinanicalFinancial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (exhibit is being filed herewith).

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101

Interactive Data File

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 20172019 and December 31, 2016;2018; (ii) Consolidated Statements of Income for the years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015;2017; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017,2019, December 31, 2016,2018, and December 31, 2015;2017; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015;2017; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015;2017; and (vi) Notes to Consolidated Financial Statements.

*

*

The Company has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

+

+

Management contract of

A compensatory plan or arrangement.

 

Item 16. Form 10-K Summary

 

Item 16.    Form 10‑K Summary

None

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SIGNATURESSIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

QCR HOLDINGS, INC.

Dated: March 12, 201813, 2020

By:

/s/ Douglas M. Hultquist

Larry J. Helling

Douglas M. Hultquist

Larry J. Helling

President and

Chief Executive Officer

Dated: March 12, 201813, 2020

By:

/s/ Todd A. Gipple

Todd A. Gipple

Executive Vice

President, Chief Operating Officer and

Chief Financial Officer

Dated: March 12, 201813, 2020

By:

/s/ Elizabeth A. Grabin

Nick W. Anderson

Elizabeth A. Grabin

Nick W. Anderson

First Vice President, Director of Financial

Chief Accounting Officer

Reporting

(Principal Accounting Officer)

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

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SIGNATURES

Signature

Title

Date

Signature

Title

Date

/s/ PatrickPatrick S. Baird

Chair of the Board of Directors

March 12, 201813, 2020

Patrick S. Baird

/s/ Douglas M. Hultquist

President, Chief ExecutiveMarch 12, 2018
Douglas M. HultquistOfficer and Director
/s/ John Paul E. BesongDirectorMarch 12, 2018
John Paul E. Besong
/s/ Todd A. GippleExecutive Vice President, ChiefMarch 12, 2018
Todd A. GippleOperating Officer, Chief Financial
Officer and Director
/s/ Larry J. HellingDirectorMarch 12, 2018
Larry J. Helling
/s/ Mark C. KilmerDirectorMarch 12, 2018
Mark C. Kilmer
/s/ Linda K. NeumanDirectorMarch 12, 2018
Linda K. Neuman
/s/ Michael L. PetersonDirectorMarch 12, 2018
Michael L. Peterson
/s/ George T. Ralph IIIDirectorMarch 12, 2018
George T. Ralph III
/s/ Donna J. Sorensen, J.D.DirectorMarch 12, 2018
Donna J. Sorensen, J.D.
/s/ Marie Z. Ziegler

Vice-Chair of the Board of Directors

March 12, 201813, 2020

Marie Z. Ziegler

/s/ Larry J. Helling

Chief Executive Officer and Director

March 13, 2020

Larry J. Helling

/s/ John Paul E. Besong

Director

March 13, 2020

John Paul E. Besong

/s/ Todd A. Gipple

President, Chief Operating Officer

March 13, 2020

Todd A. Gipple

Chief Financial Officer and Director

/s/ Mary Kay Bates

Director

March 13, 2020

Mary Kay Bates

/s/ Mark C. Kilmer

Director

March 13, 2020

Mark C. Kilmer

/s/ James Field

Director

March 13, 2020

James Field

/s/ Michael L. Peterson

Director

March 13, 2020

Michael L. Peterson

/s/ Timothy O’Reilly

Director

March 13, 2020

Timothy O’Reilly

/s/ George T. Ralph III

Director

March 13, 2020

George T. Ralph III

/s/ Donna J. Sorensen, J.D.

Director

March 13, 2020

Donna J. Sorensen, J.D.

 

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Appendix A

 

Appendix A

SUPERVISION AND REGULATION

General

FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Iowa Superintendent,Division of Banking, the IDFPR,Missouri Division of Finance, the Federal Reserve, the FDIC and the CFPB. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the Treasury have an impact on the business of the Company. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company’sCompany’s operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’sCompany’s business, the kinds and amounts of investments the Company and the Banks may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Company’s and the Banks’ insiders and affiliates and the Company’s payment of dividends. In reaction to the global financial crisis and particularly following the passage of the Dodd Frank Act, the Company experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused the Company’s compliance and risk management processes, and the costs thereof, to increase. AfterHowever, in May 2018, the 2016 federal elections, momentumEconomic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to decrease theprovide regulatory burden onrelief for community banks gathered strength. Althoughand their holding companies. To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Company of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. The Company believes these deregulatory trends continuereforms are favorable to receive much discussion among the banking industry, lawmakers and the bank regulatory agencies, little substantive progress has yet been made. The true impact of proposed reforms remains difficult to predict with any certainty.its operations.  

TheThe supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiarysubsidiary banks, beginning with a discussion of the continuing regulatory emphasis on the Company’s capital levels. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

Regulatory Emphasis on Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects the Company’sCompany’s earnings capabilities. While capital has historically been one of the key

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measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies require more capital to be held in the form of common stock and disallow certain funds from being included in capital determinations. These standards represent regulatory capital requirements that are meaningfully more stringent than those in place previously.

Minimum Required Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of capital“capital” divided by total assets.“total assets”. As discussed below, bank capital measures have become more sophisticated over the years and have focused more on the quality of capital and the risk of assets.  Bank holding companies have historically had to comply with less stringent capital standards than their bank subsidiaries and have been able to raise capital with hybrid instruments such as trust preferred securities. The Dodd-Frank Act mandated the Federal Reserve to establish minimum capital levels for holding companies on a consolidated basis as stringent as those required for FDIC-insured institutions.  A result of this change is that the proceeds of hybrid instruments, such as trust preferred securities, are beingwere excluded from capital over a phase-out period. However, if such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets, they may be retained, subject to certain restrictions. Because the Company has assets of less than $15 billion, the Company is able to maintain its trust preferred proceeds as capital but the Company has to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel International Capital Accords. The risk-based capital guidelines for U.S. banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weightedweights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations.  Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories.  In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as “advanced approaches” banks.  The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank. Because most banks were not subject to Basel II, the U.S. bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II. This “standardized approach” increased the number of risk-weight categories and recognized risks well above the original 100% risk weighting.weight. It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.  

The Basel III Rule.  In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”).  In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of enforceable regulations by each of the regulatory agencies. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally holding companies with consolidated assets of less than $1 billion$3 billion) and certain qualifying banking organizations that domay elect a simplified framework (which the Company has not have securities registered withdone.) Thus, the SEC).Company and the Banks are each currently subject to the Basel III Rule as described below.

The Basel III Rule required higher capital levels, increased the required quantity and quality of capital and required more detailed categories of risk-weighting of riskier, more opaque assets. Forfor nearly every class of assets, the Basel III Ruleit requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings.risk-weight amounts.

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Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).  A number of instruments that qualified as Tier 1 Capital under Basel I do not qualify, or their qualifications will change.changed. For example, noncumulative perpetual preferred stock, which qualified as simple Tier 1 Capital under Basel I, does not qualify as Common Equity Tier 1 Capital, but qualifies as Additional Tier 1 Capital. The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 Capital in the event that such assets exceed a certain percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule required requires minimum capital ratios as of January 1, 2015, as follows:

●·

A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

●

An increase in the·

A minimum required amount of Tier 1 Capital from 4%equal to 6% of risk-weighted assets;

●·

A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) atequal to 8% of risk-weighted assets; and

●·

A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer being phased in over three years beginning in 2016 (as of January 1, 2018, it had phased in to 1.875%).buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. Factoring in the fully phased-in conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Banking organizations (except for large, internationally active banking organizations) became subject to the new rules on January 1, 2015. However, there are separate phase-in/phase-out periods for: (i) the capital conservation buffer; (ii) regulatory capital adjustments and deductions; (iii) nonqualifying capital instruments; and (iv) changes to the prompt corrective action rules discussed below. The phase-in periods commenced on January 1, 2016 and extend until January 2019.

Well-Capitalized Requirements.  The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the FDIC and Federal Reserve, in order to be well-capitalized,well‑capitalized, a banking organization must maintain:

●·

A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

●·

A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more (6% under Basel I);more;

●·

A ratio of Total Capital to total risk-weighted assets of 10% or more (the same as Basel I);more; and

●·

A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

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As of December 31, 2017:2019: (i) none of the Banks were subject to a directive from the Iowa Superintendent,Division of Banking, the IDFPR,Missouri Division of Finance, or the Federal Reserve, or the FDIC, as applicable, to increase its capital and (ii) the Banks were well-capitalized, as defined by FDICFederal Reserve regulations.  As of December 31, 2017,2019, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. The Company is also in compliance with the capital conservation buffer.

Prompt Corrective Action.  An FDIC-insured institution’s capital playsThe concept of an important role in connection withinstitution being “well-capitalized” is part of a regulatory enforcement as well. Federal lawregime that provides the federal banking regulators with broad power to take prompt“prompt corrective actionaction” to resolve the problems of undercapitalized institutions. institutions based on the capital level of each particular institution.The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

the Basel III Rule.  In response, Congress provided an “off-ramp” for institutions, like the Company, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The Company may elect the CBLR framework at any time but has not currently determined to do so.

Regulation and Supervision of the Company

General. The Company, as the sole stockholder of the Banks, is a bank holding company. As a bank holding company, the Company is registered with, and is subject to regulation supervision and enforcement by, the Federal Reserve under the BHCA. The Company is legally obligated to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the Company and its subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Change in ControlFinancial Holding Company Election.  The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States.U.S.. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “Regulatory Emphasis on“--The Role of Capital” above.

The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of

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banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permitpermits the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

The Company operates Bates Financial Advisors, Inc., a registered investment advisor, and Bates Securities, Inc., a broker-dealer, as nonbanking subsidiaries under this authority.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. The Company has elected to operate as a financial holding company.

In order to maintain ourits status as a financial holding company, the Company and the Banks must be well-capitalized, well-managed, and the Banks must have a least a satisfactory CRA rating.  If the Federal Reserve determines that a financial holding company is not well-capitalized or well-managed, the Company has a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on the Company it believes to be appropriate. Furthermore, if the Federal Reserve determines that a financial holding company’s subsidiary bank has not received a satisfactory CRA rating, that company will not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control.Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements. For a discussion of capital requirements, see “—Regulatory Emphasis onThe Role of Capital” above.

Dividend Payments. The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.  As a Delaware corporation, the Company is subject to the limitations of the DGCL, which allow the Company to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer to be phased in over three years beginning in 2016. See “—Regulatory Emphasis on Capital” above.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to stockholders if: (i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-banknonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.  In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer to be phased in over three years beginning in 2016.buffer. See “—Regulatory Emphasis onThe Role of Capital” above.

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Incentive Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank holding companies and banks, reflecting recognition by the bank regulatory agencies and Congress that flawed incentive compensation practices in the financial industry were one of many factors contributing to the global financial crisis. Layered on top of that are the abuses in the headlines dealing with product cross-selling incentive plans. The result is interagency guidance on sound incentive compensation practices and proposed rulemaking by the agencies required under Section 956 of the Dodd-Frank Act.practices.

The interagency guidance recognized three core principles.principles. Effective incentive plans should: (i) provide employees incentives that appropriately balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Much of the guidance addresses large banking organizations and, because of the size and complexity of their operations, the regulators expect those organizations to maintain systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards.  Smaller banking organizations like the Company that use incentive compensation arrangements are expected to be less extensive, formalized, and detailed than those of the larger banks. 

Section 956 of the Dodd-Frank Act required the banking agencies, the National Credit Union Administration, the SEC and the Federal Housing Finance Agency to jointly prescribe regulations that prohibit types of incentive-based compensation that encourages inappropriate risk taking and to disclose certain information regarding such plans. On June 10, 2016, the agencies released an updated proposed rule for comment. Section 956 will only apply to banking organizations with assets of greater than $1 billion. The Company has consolidated assets greater than $1 billion and less than $50 billion and the Company is considered a Level 3 banking organization under the proposed rules. The proposed rules contain mostly general principles and reporting requirements for Level 3 institutions so there are no specific prescriptions or limits, deferral requirements or claw-back mandates. Risk management and controls are required, as is board or committee level approval and oversight. Management expects to review its incentive plans in light of the proposed rulemaking and guidance and implement policies and procedures that mitigate unreasonable risk. As of December 31, 2017, these rules remain in proposed form.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Federal Securities Regulation. The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate GoGovernancevernance.  The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-bindingnonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

Supervision and Regulation of the Banks

General. The Company owns four subsidiary banks: QCBT, CRBT and CSB are chartered under Iowa law (collectively, the “Iowa Banks”) and RB&TSFC Bank is chartered under IllinoisMissouri law. The deposit accounts of the Banks are insured by the FDIC’s DIF to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. All four of the Company’s subsidiary banks are members of the Federal Reserve System (“member banks”).  In 2019, the Company sold RB&T and it no longer has a bank subsidiary chartered under Illinois law.  QCBT owns Quad Cities Investment Advisers, a registered investment advisor (“QCIA”), as a wholly-owned subsidiary.

As Iowa-chartered, FDIC-insured banks, the Iowa Banks are subject to the examination, supervision, reporting and enforcement requirements of the Iowa Superintendent,Division of Banking, as the chartering authority for Iowa banks. As an Illinois-chartered,a Missouri-chartered, FDIC-insured bank, RB&TSFC Bank is subject to the examination, supervision, reporting and enforcement requirements of the IDFPR,Missouri Division of Finance, as the chartering authority for IllinoisMissouri banks. All four of the Company’s subsidiary banks are also subject to the examination, reporting and enforcement requirements of the Federal Reserve, as the primary federal regulator of member banks. In addition, the FDIC, as administrator of the DIF, has regulatory authority over the Banks.

Deposit Insurance.  As FDIC-insured institutions, the Banks are required to pay deposit insurance premium assessments to the FDIC.  The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay

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insurance premiums at rates based on their risk classification.  For institutions like the Banks that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF arehas been calculated issince effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity. This method shiftsshifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits. 

The reserve ratio is the DIFFDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15%1.15 % to 1.35%1.35 % of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to FDIC-insured institutions when the reserve ratio exceeds certain thresholds.  The reserve ratio reached 1.28% on1.36 % as of September 30, 2017.  If2018, exceeding the statutory required minimum reserve ratio does not reach 1.35% by December 31, 2018 (provided it is at least 1.15%),of 1.35 %.  As a result, the FDIC will impose a shortfall assessment on March 31, 2019 on insured depository institutions with total consolidated assets of $10 billion or more. The FDIC will provideis providing assessment credits to insured depository institutions, like the Banks, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributecontributed to growth in the reserve ratio between 1.15%1.15 % and 1.35%.1.35 %. The share of the aggregate small bank credits allocated to each insured institution is proportional to its credit base, defined as the average of its regular assessment base during the credit calculation period. The FDIC will applyis currently applying the credits each quarter thatfor quarterly assessment periods beginning July 1, 2019, and, as long as the reserve ratio is at least 1.38% to offset1.35 %, the regular deposit insurance assessmentsFDIC will remit the full nominal value of institutions with credits.any remaining credits in a lump-sum payment.

 

FICO Assessments. In addition to paying basic deposit insurance assessments, FDIC-insured institutions must pay FICO assessments. FICO is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal legislation has required that all FDIC-insured institutions pay assessments to cover interest payments on FICO’s outstanding obligations. The FICO assessment rate is adjusted quarterly and for the fourth quarter of 2017 was 54 cents per $100 dollars of assessable deposits.

Supervisory Assessments.  Each of the Banks is required to pay supervisory assessments to its respective state banking regulator to fund the operations of that agency. The amount of the assessment payable by each Bank is calculated on the basis of that Bank’s total assets. During the year ended December 31, 2017,2019, the Iowa Banks paid supervisory assessments to the Iowa SuperintendentDivision of Banking totaling $263,614 and$310,117, RB&T paid supervisory assessments to the IDFPR totaling $60,265.$17,526 and SFC Bank paid supervisory assessments to the Missouri Division of Finance totaling $47,899.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—Regulatory Emphasis onThe Role of Capital” above.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the LCR, is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the NSFR, is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While these testsrules do not, and will not, apply only to the largest banking organizations in the country, certain elements are expected to filter down to all FDIC-insured institutions. The Company continuesBanks, they continue to review the Company’stheir liquidity risk management policies in light of the LCR and NSFR.developments.

Liability of Commonly Controlled Institutions. Under federal law, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC-insured depository institutions or any assistance provided by the FDIC to commonly

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controlled FDIC-insured depository institutions in danger of default. Because the Company controls each of the Banks, the Banks are commonly-controlled for purposes of these provisions of federal law.

Dividend Payments. The primary source of funds for the Company is dividends from the Banks. In general, the Banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The Federal Reserve Act also imposes limitations on the amount of dividends that may be paid by state member banks, such as the Banks. Without prior Federal Reserve approval, a state member bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s calendar year-to-date net income plus the bank’s retained net income for the two preceding calendar years.

The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Banks exceeded its minimum capital requirements under applicable guidelines as of December 31, 2017.2019. Notwithstanding the availability of funds for dividends, however, the Federal Reserve, the FDIC, the IDFPRMissouri Division of Finance or the Iowa Superintendent,Division of Banking, as applicable, may prohibit the payment of dividends by one of the Banks if it determines such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer to be phased in over three years beginning in 2016.buffer. See “—Regulatory Emphasis onThe Role of Capital” above.

State Bank Investments and Activities.  The Banks are permitted to make investments and engage in activities directly or through subsidiaries as authorized by IllinoisIowa or IowaMissouri law, as applicable. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Banks.

Insider Transactions. The Banks are subject to certain restrictions imposed by federal law on “covered transactions” between each Bank and its “affiliates.” The Company is an affiliate of the Banks for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by any of the Banks. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by each Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company and to “related interests” of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Banks, or a principal stockholder of the Company, may obtain credit from banks with which any of the Banks maintains a correspondent relationship.

SafetySafety and Soundness Standards/Risk Management.The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The guidelines set forth standards forapply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelinesstandards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.  IfWhile regulatory standards do not have the force of law, if an institution fails to comply with any of the standards set forthoperates in the guidelines,an unsafe and unsound manner, the FDIC-insured institution’sinstitution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a

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compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise.  Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets.  The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. In particular, recent regulatory pronouncements have focused onThe key risk themes identified for 2020 are: (i) elevated operational risk which arisesas banks adapt to an evolving technology environment and persistent cybersecurity risks;  (ii) the need for banks to prepare for a cyclical change in credit risk while credit performance is strong;  (iii) elevated interest rate risk due to lower rates continuing to compress net interest margins; and (iv) strategic risks from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New productsnon-depository financial institutions, use of innovative and services, third-party riskevolving technology, and cybersecurity are critical sources of operational risk that FDIC-insured institutions are expected to address in the current environment.progressive data analysis capabilities.  Each Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.

10
TablePrivacy and Cybersecurity. The Banks are subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of Contents

their customers. These laws require each Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact each Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, the Banks are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across all businesses and geographic locations.

Branching Authority.  The Iowa Banks have the authority under Iowa law to establish branches anywhere in the State of Iowa, subject to receipt of all required regulatory approvals. In 1997, the Company formed a de novo Illinois bank that was merged into QCBT, resulting in QCBT establishing a branch office in Illinois. Under Illinois law, QCBT may continue to establish offices in Illinois to the same extent permitted for an Illinois bank (subject to certain conditions, including certain regulatory notice requirements). Similarly, RB&TSFC Bank has the authority under IllinoisMissouri law to establish branches anywhere in the State of Illinois,Missouri, subject to receipt of all required regulatory approvals.

Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new interstate branches or acquire individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) without impediments.

Transaction Account Reserves.Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts). For 2018:2020, the first $16$16.9 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement; for transaction accounts aggregating more than $16between $16.9 million to $122.3$127.5 million, the reserve requirement is 3% of totalthose transaction accounts;account balances; and for net transaction accounts in excess of $122.3$127.5 million, the reserve requirement is 3% up to $122.3 million plus 10% of the aggregate amount of total transaction accountsaccount balances in excess of $122.3$127.5 million. These reserve requirements are subject to annual adjustment by the Federal Reserve.

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Federal Home Loan Bank System. The Banks are each a member of the FHLB, which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

Community Reinvestment Act Requirements. The Community Reinvestment Act requires the Banks to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess each Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its Community Reinvestment Act requirements.

Anti-Money Laundering. The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk. As of December 31, 2017,2019, QCBT, CRBT, CSB and RB&TSFC Bank were in compliance with the 300% guideline for commercial real estate loans. Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfolio levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate portfolio.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Banks, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Banks, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Company does not expectDodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.”  The Regulatory Relief Act provided relief in connection with mortgages for banks

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with assets of less than $10 billion, and, as a result, mortgages the Banks make are now considered to be qualified mortgages if they are held in portfolio for the life of the loan.

 The CFPB’s rules to have not had a significant impact on itsthe operations of the Banks, except for higher compliance costs.

Regulation of the Bates Companies and QCIA

The Bates Companies and QCIA provide financial investment services as part of the wealth management operations of the Company. Bates Financial Advisors, Inc. and QCIA are investment advisers registered with the SEC. The SEC has supervisory, examination and enforcement authority over their respective operations. The SEC's focus is primarily for the protection of investors under the federal securities laws. Bates Securities, Inc. is a broker-dealer that executes trades in investment products primarily for customers of Bates Financial Advisors, Inc. It is a member of FINRA and is regulated by the SEC. FINRA is a non-governmental organization that regulates member brokerage firms with an emphasis on investor protection and market integrity.

 

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Appendix B

Guide 3 Information

The following tables and schedules show selected comparative financial information required by the SEC Securities Act Guide 3, regarding the business of the Company for the periods shown.

I. Distribution of Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differential

A. and B. Consolidated Average Balance Sheets and Analysis of Net Interest Earnings

The information requested is disclosed in the MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

C. Analysis of Changes of Interest Income/Interest Expense

The information requested is disclosed in the MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.2019.

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II. Investment Portfolio

A. Investment Securities

A.

Investment Securities

The following tables present the amortized cost and fair value of investment securities as of December 31, 2017, 2016,2019, 2018, and 20152017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

(Losses)

    

Value

 

 

(dollars in thousands)

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

399,596

 

$

26,042

 

$

(143)

 

$

425,495

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

400,646

 

$

26,042

 

$

(143)

 

$

426,545

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. gov't.sponsored agency securities

 

$

19,872

 

$

283

 

$

(77)

 

$

20,078

Residential mortgage-backed and related securities

 

 

118,724

 

 

2,045

 

 

(182)

 

 

120,587

Municipal securities

 

 

46,659

 

 

1,602

 

 

(4)

 

 

48,257

Other securities

 

 

21,707

 

 

138

 

 

(72)

 

 

21,773

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

206,962

 

$

4,068

 

$

(335)

 

$

210,695

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

400,863

 

$

5,661

 

$

(6,803)

 

$

399,721

Other securities

 

 

1,050

 

 

 —

 

 

(1)

 

 

1,049

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

401,913

 

$

5,661

 

$

(6,804)

 

$

400,770

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. gov't.sponsored agency securities

 

$

37,150

 

$

39

 

$

(778)

 

$

36,411

Residential mortgage-backed and related securities

 

 

163,698

 

 

182

 

 

(4,631)

 

 

159,249

Municipal securities

 

 

59,069

 

 

180

 

 

(703)

 

 

58,546

Other securities

 

 

6,754

 

 

100

 

 

(4)

 

 

6,850

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

266,671

 

$

501

 

$

(6,116)

 

$

261,056

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal securities

 

$

378,424

 

$

2,764

 

$

(2,488)

 

$

378,700

Other securities

 

 

1,050

 

 

 —

 

 

 —

 

 

1,050

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

379,474

 

$

2,764

 

$

(2,488)

 

$

379,750

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. gov't.sponsored agency securities

 

$

38,409

 

$

37

 

$

(349)

 

$

38,097

Residential mortgage-backed and related securities

 

 

165,460

 

 

155

 

 

(2,313)

 

 

163,301

Municipal securities

 

 

66,176

 

 

660

 

 

(211)

 

 

66,625

Other securities

 

 

4,014

 

 

897

 

 

(27)

 

 

4,885

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

274,059

 

$

1,749

 

$

(2,900)

 

$

272,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

(Losses)

  

Value

 
  

(dollars in thousands)

 

December 31, 2017

                
                 

Securities held to maturity:

                

Municipal securities

 $378,424  $2,764  $(2,488) $378,700 

Other bonds

  1,050   -   -   1,050 
                 

Totals

 $379,474  $2,764  $(2,488) $379,750 
                 

Securities available for sale:

                

U.S. gov't.sponsored agency securities

 $38,409  $37  $(349) $38,097 

Residential mortgage-backed and related securities

  165,460   155   (2,313)  163,301 

Municipal securities

  66,176   660   (211)  66,625 

Other securities

  4,014   897   (27)  4,885 
                 

Totals

 $274,059  $1,749  $(2,900) $272,908 
                 

December 31, 2016

                
                 

Securities held to maturity:

                

Municipal securities

 $321,859  $2,201  $(4,695) $319,365 

Other bonds

  1,050   -   -   1,050 
                 

Totals

 $322,909  $2,201  $(4,695) $320,415 
                 

Securities available for sale:

                

U.S. gov't.sponsored agency securities

 $46,281  $133  $(331) $46,083 

Residential mortgage-backed and related securities

  150,465   175   (2,938)  147,702 

Municipal securities

  52,817   426   (638)  52,605 

Other securities

  4,046   704   (27)  4,723 
                 

Totals

 $253,609  $1,438  $(3,934) $251,113 
                 

December 31, 2015

                
                 

Securities held to maturity:

                

Municipal securities

 $252,624  $3,190  $(1,173) $254,641 

Other bonds

  1,050   -   -   1,050 
                 

Totals

 $253,674  $3,190  $(1,173) $255,691 
                 

Securities available for sale:

                

U.S. gov't.sponsored agency securities

 $216,282  $105  $(2,850) $213,537 

Residential mortgage-backed and related securities

  81,442   511   (1,283)  80,670 

Municipal securities

  26,765   873   (59)  27,579 

Other securities

  1,108   541   -   1,649 
                 

Totals

 $325,597  $2,030  $(4,192) $323,435 

 

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NOTE: Stock of the Federal Home Loan Bank and Federal Reserve Bank are NOT included in the above. The Company carries these investments within restricted investment securities on the consolidated balance sheets. Following is a summary of the carrying value of all of the Company's restricted investment securities as of December 31, 2017, 2016,2019, 2018, and 2015:

  

As of December 31,

 
  

2017

  

2016

  

2015

 
  

(dollars in thousands)

 

Federal Home Loan Bank

 $11,697  $9,271  $9,136 

Federal Reserve Bank

  8,032   5,672   5,646 

Other

  54   54   54 

Totals

 $19,783  $14,997  $14,836 

2017:

B-2

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank

 

$

11,702

 

$

15,732

 

$

11,697

Federal Reserve Bank

 

 

11,496

 

 

9,903

 

 

8,032

Other

 

 

54

 

 

54

 

 

54

Totals

 

$

23,252

 

$

25,689

 

$

19,783

 

B. Investment Securities, Maturities, and Yields

The following table presents the maturity of securities held on December 31, 20172019 and the weighted average stated coupon rates by range of maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Amortized

 

Average

 

 

    

Cost

    

Yield

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

U.S. gov't.sponsored agency securities:

 

 

  

    

  

 

Within 1 year

 

$

 —

 

 —

%

After 1 but within 5 years

 

 

3,500

 

2.13

%

After 5 but within 10 years

 

 

895

 

4.00

%

After 10 years

 

 

15,477

 

2.71

%

 

 

 

 

 

 

 

Total

 

$

19,872

 

2.66

%

 

 

 

 

 

 

 

Residential mortgage-backed and related securities:

 

 

  

 

  

 

After 1 but within 5 years

 

$

22,442

 

2.33

%

After 5 but within 10 years

 

 

51,053

 

2.66

%

After 10 years

 

 

45,229

 

2.54

%

 

 

 

 

 

 

 

Total

 

$

118,724

 

2.55

%

 

 

 

 

 

 

 

Municipal securities:

 

 

  

 

  

 

Within 1 year

 

$

4,055

 

3.20

%

After 1 but within 5 years

 

 

45,844

 

3.25

%

After 5 but within 10 years

 

 

76,754

 

3.26

%

After 10 years

 

 

319,602

 

3.81

%

 

 

 

 

 

 

 

Total

 

$

446,255

 

3.65

%

 

 

 

 

 

 

 

Other securities:

 

 

  

 

  

 

Within 1 year

 

$

249

 

2.49

%

After 1 but within 5 years

 

 

1,050

 

3.62

%

After 5 but within 10 years

 

 

4,500

 

5.76

%

After 10 years

 

 

16,958

 

3.31

%

 

 

 

 

 

 

 

Total

 

$

22,757

 

3.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE: Yields above are NOT computed on a tax equivalent basis

 

 

 

 

  

 

      

Weighted

 
  

Amortized

  

Average

 
  

Cost

  

Yield

 
  

(dollars in thousands)

 

U.S. gov't.sponsored agency securities:

        

Within 1 year

 $50   7.93%

After 1 but within 5 years

  13,337   2.01%

After 5 but within 10 years

  1,490   2.91%

After 10 years

  23,532   2.12%
         

Total

 $38,409   2.12%
         

Residential mortgage-backed and related securities:

        

After 1 but within 5 years

 $8,718   1.97%

After 5 but within 10 years

  73,552   2.47%

After 10 years

  83,190   2.35%
         

Total

 $165,460   2.38%
         

Municipal securities:

        

Within 1 year

 $4,853   2.89%

After 1 but within 5 years

  33,937   2.75%

After 5 but within 10 years

  94,267   3.07%

After 10 years

  311,543   3.40%
         

Total

 $444,600   3.27%
         

Other bonds:

        

After 1 but within 5 years

 $550   2.92%

After 5 but within 10 years

  500   4.39%
         

Total

 $1,050   3.62%
         

Other securities with no maturity or stated face rate

 $4,014     

NOTE: Yields above are NOT computed on a tax equivalent basis.158

Table of Contents

C. As of December 31, 2017,2019, there were no securities with aggregate book value and market value purchased from a single issuer (as defined by Section 2(4) of the Securities Act of 1933) that exceeded 10% of stockholders' equity.

III. Loan/Lease Portfolio

A. Types of Loans/Leases

The information requested is disclosed in MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

B. Maturities and Sensitivities of Loans/Leases to Changes in Interest Rates

The information requested is disclosed in MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

C. Risk Elements

1. Nonaccrual, Past Due and Restructured Loans/Leases

The gross interest income that would have been recorded if nonaccrual loans/leases and performing troubled debt restructurings had been current in accordance with their original terms was $682,027$428 thousand and $351none, respectively, for the year ended December 31, 2017.2019. The amount of interest collected on nonaccrual loans/leases and performing troubled debt restructurings that was included in interest income was none and $435,034,$88 thousand, respectively, for the year ended December 31, 2017.

2019.

The remaining information requested is disclosed in MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

2. Potential Problem Loans/Leases.

To management's best knowledge, there are no such significant loans/leases that have not been disclosed in the table presented in the MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

3. Foreign Outstandings. None.

4. Loan/Lease Concentrations.

As of December 31, 2017,2019, there were two concentrations of loans/leases exceeding 10% of total loans/leases, which is not otherwise disclosed in Item III. A. Those concentrations are Lessors of Non-Residential Buildings & Dwellings at 14%17% and Lessors of Residential Buildings & Dwellings at 12%22%.

D. Other Interest-Bearing Assets

As of December 31, 2017,2019, there are no interest-bearing assets required to be disclosed in this Appendix.

IV. Summary of Loan/Lease Loss Experience

A. Analysis of the Allowance for Estimated Losses on Loans/Leases

The information requested is disclosed in MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

B. Allocation of the Allowance for Estimated Losses on Loans/Leases

The information requested is disclosed in MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.2019.

159

B-4

Table of Contents

V. Deposits.

The average amount of and average rate paid for the categories of deposits for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 are included in the consolidated average balance sheets and can be found in the MD&A section of the Company's Form 10-K for the fiscal year ended December 31, 2017.

2019.

The Company has no deposits by foreign depositors in domestic offices as of December 31, 2017.

2019.

Included in interest bearing deposits at December 31, 2017,2019, were certificates of deposit totaling $282,652,000$515 million that were $100,000 or greater. Maturities of these certificates were as follows:

  

December 31,

 
  

2017

 
  

(dollars in thousands)

 
     

One to three months

 $98,067 

Three to six months

  41,678 

Six to twelve months

  66,182 

Over twelve months

  76,725 
     

Total certificates of deposit greater than or equal to $100,000

 $282,652 

 

 

 

 

 

    

December 31,

 

    

2019

 

 

(dollars in thousands)

 

 

 

 

One to three months

 

$

144,090

Three to six months

 

 

95,887

Six to twelve months

 

 

127,123

Over twelve months

 

 

148,137

 

 

 

 

Total certificates of deposit greater than or equal to $100,000

 

$

515,237

 

VI. Return on Equity and Assets.

The following tables present the return on assets and equity and the equity to assets ratio of the Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

 

December 31,

 

 

    

2019

    

2018

    

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Average total assets

 

$

5,102,980

 

$

4,392,121

 

$

3,519,848

 

Average equity

 

 

507,409

 

 

405,973

 

 

310,210

 

Net income

 

 

57,408

 

 

43,120

 

 

35,707

 

Return on average assets

 

 

1.12

%  

 

0.98

%  

 

1.01

%

Return on average common equity

 

 

11.31

%  

 

10.62

%  

 

11.51

%

Return on average total equity

 

 

11.31

%  

 

10.62

%  

 

11.51

%

Dividend payout ratio

 

 

6.58

%  

 

8.22

%  

 

7.46

%

Average equity to average assets ratio

 

 

9.94

%  

 

9.24

%  

 

8.81

%

 

 

  

Years ended

 
  

December 31,

 
  

2017

  

2016

  

2015

 
  

(dollars in thousands)

 
             

Average total assets

 $3,519,848  $2,846,699  $2,549,921 

Average equity

  310,210   262,075   192,489 

Net income

  35,707   27,687   16,928 

Return on average assets

  1.01%  0.97%  0.66%

Return on average common equity

  11.51%  10.56%  8.79%

Return on average total equity

  11.51%  10.56%  8.79%

Dividend payout ratio

  7.46%  7.27%  4.88%

Average equity to average assets ratio

  8.81%  9.21%  7.55%

 

160

B-5

Table of Contents

VII. Short Term Borrowings.

The following tables present the information requested on short-term borrowings of the Company:

Short-term borrowings as of December 31, 2017, 2016,2019, 2018, and 20152017 are summarized as follows:

  

2017

  

2016

  

2015

 
      

(dollars in thousands)

     

Overnight repurchase agreements with customers

 $7,003  $8,131  $73,873 

Federal funds purchased

  6,990   31,840   70,790 
  $13,993  $39,971  $144,663 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Overnight repurchase agreements with customers

 

$

2,193

 

$

2,084

 

$

7,003

Federal funds purchased

 

 

11,230

 

 

26,690

 

 

6,990

 

 

$

13,423

 

$

28,774

 

$

13,993

 

Information concerning overnight repurchase agreements with customers is summarized as follows:

  

2017

  

2016

  

2015

 
      

(dollars in thousands)

     

Average daily balance during the period

 $7,476  $30,083  $121,186 

Average daily interest rate during the period

  0.08%  0.07%  0.11%

Maximum month-end balance during the period

 $11,829  $59,833  $159,407 

Weighted average rate as of end of period

  0.15%  0.18%  0.11%
             

Securities underlying the agreements as of end of period:

            

Carrying value

 $20,894  $19,720  $95,389 

Fair value

  20,894   19,720   95,389 

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Average daily balance during the period

 

$

4,231

 

$

7,831

 

$

7,476

 

Average daily interest rate during the period

 

 

0.73

%  

 

0.38

%  

 

0.08

%

Maximum month-end balance during the period

 

$

4,177

 

$

10,392

 

$

11,829

 

Weighted average rate as of end of period

 

 

1.00

%  

 

0.90

%  

 

0.15

%

 

 

 

 

 

 

 

 

 

 

 

Securities underlying the agreements as of end of period:

 

 

  

 

 

  

 

 

  

 

Carrying value

 

$

4,110

 

$

24,316

 

$

20,894

 

Fair value

 

 

4,110

 

 

24,316

 

 

20,894

 

 

Information concerning federal funds purchased is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

2019

    

2018

    

2017

 

 

 

  (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Average daily balance during the period

 

$

12,594

 

$

13,059

 

$

13,486

 

Average daily interest rate during the period

 

 

2.56

%  

 

2.18

%  

 

1.31

%

Maximum month-end balance during the period

 

$

17,010

 

$

32,330

 

$

33,650

 

Weighted average rate as of end of period

 

 

1.50

%  

 

2.46

%  

 

1.24

%

 

  

2017

  

2016

  

2015

 
      

(dollars in thousands)

     

Average daily balance during the period

 $13,486  $19,106  $32,826 

Average daily interest rate during the period

  1.31%  0.56%  0.41%

Maximum month-end balance during the period

 $33,650  $51,750  $126,220 

Weighted average rate as of end of period

  1.24%  0.70%  0.57%

B-6161