| | | | | Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 20182021, 2020 and 20172019 | 6064 | | | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 20182021, 2020 and 20172019 | 6165 | | | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 20182021, 2020 and 20172019 | 6266 | | | Notes to Consolidated Financial Statements | 6468 | | | Note 1: Nature of Business and Significant Accounting Policies | 6468 | �� | | Note 2: Sales/Mergers/Acquisitions | 7985 | | | Note 3: Investment Securities | 8887 | | | Note 4: Loans/Leases Receivable | 9291 | | | Note 5: Premises and Equipment | 103105 | | | Note 6: Goodwill and Intangibles | 105107 | | | Note 7: Derivatives and Hedging Activities | 107109 | | | Note 8: Deposits | 109112 | | | Note 9: Short-Term Borrowings | 110113 | | | Note 10: FHLB Advances | 111113 | | | Note 11: Other Borrowings and Unused Lines of Credit | 112114 | | | Note 12: Subordinated Notes | 113114 | | | Note 13: Junior Subordinated Debentures | 114115 | | | Note 14: Federal and State Income Taxes | 114117 | | | Note 15: Employee Benefit Plans | 117119 | | | Note 16: Stock-Based Compensation | 118120 | | | Note 17: Regulatory Capital Requirements and Restrictions on Dividends | 120123 | | | Note 18: Earnings Per Share | 122125 | | | Note 19: Commitments and Contingencies | 123125 | | | Note 20 Quarterly Results of Operations (Unaudited) | 124 | | | Note 21: Parent Company Only Financial Statements
| 125127 | | | Note 2221: Fair Value | 128130 | | | Note 2322: Business Segment Information | 131133 | | | Note 23: Pending Acquisition | 133 | | Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 132134 | | Item 9A. | Controls and Procedures | 132134 | | Item 9B. | Other Information | 135137 | | Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | 137 | | | | | Part III | | | | | 138 | | Item 10. | Directors, Executive Officers and Corporate Governance | 136138 | | Item 11. | Executive Compensation | 136138 | | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 136138 | | Item 13. | Certain Relationships and Related Transactions, and Director Independence | 136139 | | Item 14. | Principal Accountant Fees and Services | 137139 | | | | | Part IV | | | | | 139 | | Item 15. | Exhibits and Financial Statement Schedules | 138139 | | Item 16. | Form 10‑K10-K Summary | 142 | | | | | | | | | | | Signatures | 143 | | | 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 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. 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 Springfield 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,Quad City Bank & Trust (QCBT), which is based in Bettendorf, Iowa, and commenced operations in 1994;
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● | | CRBT,Cedar Rapids Bank & Trust (CRBT), which is based in Cedar Rapids, Iowa, and commenced operations in 2001;
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● | | CSB,Community State Bank (CSB), which is based in Ankeny, Iowa, and was acquired in 2016; and
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● | | SFCSpringfield First Community Bank (SFCB), which is based in Springfield, Missouri, and was acquired in 2018.
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On November 9, 2021, the Company announced the signing of a definitive agreement whereby the Company will acquire Guaranty Federal Bancshares, Inc. (GFED) and merge Guaranty Bank, the banking subsidiary of GFED into SFCB. The combined bank will operate under the Guaranty Bank name in all Springfield and southwest Missouri markets. As of December 31, 2021, GFED had $1.2 billion in assets, $815 million in loans and $1.0 billion in deposits. Under the terms of the merger agreement, stockholders of GFED will have the right to receive for each share of GFED common stock owned, at the election of each stockholder, and subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock, with total consideration to consist of approximately 80% stock and 20% cash. Based upon the $59.99 closing price of the Company’s common stock as of November 5, 2021, the transaction is valued at approximately $151.6 million. The transaction is subject to regulatory approvals, approval by GFED’s stockholders and certain customary closing conditions. The transaction is expected to close late in the first quarter or early in the second quarter of 2022. On August 12, 2020, the Company sold the Bates Companies, headquartered in Rockford, Illinois. From October 1, 2018, through the date of the disposition, the Company provided wealth management services to the Rockford community through the Bates Companies. 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-ownedwholly owned subsidiary, RB&T. Prior to this time, the Company provided full service banking services to the Rockford community. On October 1, 2018, the Company acquired the 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 Springfield, Missouri. From that time, the Company has operated SFC Bank as an independent banking subsidiary.community through RB&T.
See Note 2 to the Consolidated Financial Statements for further discussion on mergers, acquisitions and sales. The Company engages in direct financing lease contracts and equipment financing agreements through m2, a wholly-ownedwholly 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 business is geographically divided by markets into secondarythe operating segments which correspondcorresponding to the four subsidiary banks wholly-ownedwholly owned by the Company: QCBT, CRBT, CSB and SFC Bank.SFCB. See the Consolidated Financial Statements incorporated herein generally, and Note 23 to the Consolidated 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 $1.68$2.14 billion and $1.62$2.15 billion as of December 31, 20192021 and 2018,2020, 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 of 2001. Acquired 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 $1.57$2.03 billion and $1.38$1.96 billion as of December 31, 20192021 and 2018,2020, 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 nineeight other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $853.8 million$1.17 billion and $785.4 million$1.0 billion as of December 31, 20192021 and 2018,2020, respectively. SFC BankSFCB is a Missouri-chartered commercial bank that is a member of the Federal Reserve System. SFC BankSFCB was acquired by the the Company in 2018 through a merger with Springfield Bancshares. SFC BankSFCB provides full-service commercial and consumer banking to the Springfield, Missouri area through its headquarters located on Glenstone Avenue in Springfield and its branch facility located on East Primrose in Springfield. SFC BankSFCB had total segment assets of $748.8$882.88 million and $632.8$779.96 million as of December 31, 20192021 and 2018,2020, respectively.
Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of lending and 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.contracts and equipment financing agreements. 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, 20192021 and 2018:2020: | | | | | | | | | | | | | | | | | | | | | | Amount Outstanding | | Amount Outstanding | | | | Interest | | Interest | | | | | | as of | | as of | | | | Rate as of | | Rate as of | Name | | | Date Issued | | December 31, 2021 | | December 31, 2020 | | Interest Rate | | December 31, 2021 | | December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | Amount Outstanding | | Amount Outstanding | | | | Interest | | | Interest | | | | | | as of | | as of | | | | Rate as of | | | Rate as of | | Name | | Date Issued | | December 31, 2019 | | December 31, 2018 | | Interest Rate | | December 31, 2019 | | | December 31, 2018 | | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | QCR Holdings Statutory Trust II | | February 2004 | | $ | 10,310 | | $ | 10,310 | | 2.85% over 3-month LIBOR | | 4.79 | % | | | 5.65 | % | | February 2004 | | $ | 10,310 | | $ | 10,310 | | 2.85% over 3-month LIBOR | | 3.07 | % | | 3.10 | % | QCR Holdings Statutory Trust III | | February 2004 | | | 8,248 | | | 8,248 | | 2.85% over 3-month LIBOR | | 4.79 | % | | | 5.65 | % | | February 2004 | | | 8,248 | | | 8,248 | | 2.85% over 3-month LIBOR | | 3.07 | % | | 3.10 | % | QCR Holdings Statutory Trust V | | February 2006 | | | 10,310 | | | 10,310 | | 1.55% over 3-month LIBOR | | 3.54 | % | | | 3.99 | % | | February 2006 | | | 10,310 | | | 10,310 | | 1.55% over 3-month LIBOR | | 1.67 | % | | 1.79 | % | Community National Statutory Trust II | | September 2004 | | | 3,093 | | | 3,093 | | 2.17% over 3-month LIBOR | | 4.08 | % | | | 4.96 | % | | September 2004 | | | 3,093 | | | 3,093 | | 2.17% over 3-month LIBOR | | 2.38 | % | | 2.41 | % | Community National Statutory Trust III | | March 2007 | | | 3,609 | | | 3,609 | | 1.75% over 3-month LIBOR | | 3.64 | % | | | 4.54 | % | | March 2007 | | | 3,609 | | | 3,609 | | 1.75% over 3-month LIBOR | | 1.95 | % | | 1.97 | % | Guaranty Bankshares Statutory Trust I | | May 2005 | | | 4,640 | | | 4,640 | | 1.75% over 3-month LIBOR | | 3.64 | % | | | 4.54 | % | | May 2005 | | | 4,640 | | | 4,640 | | 1.75% over 3-month LIBOR | | 1.95 | % | | 1.97 | % | | | | | $ | 40,210 | | $ | 40,210 | | Weighted Average Rate | | 4.18 | % | | | 4.94 | % | | | | | | | $ | 40,210 | | $ | 40,210 | | Weighted Average Rate | | 2.43 | % | | 2.48 | % | | | | | | | | | | | | | | | | |
Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust. 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 the actions of regulatory authorities, as described more fully in this Form 10‑K.10-K, including in Appendix A “Supervision and Regulation.” Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, swap fee income/capital markets revenue, 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 697726 and 755714 FTEs at December 31, 20192021 and 2018,2020, respectively. The decreaseincrease in FTEs during 20192021 was primarily due to the resultaddition of the sale of RB&T’S operations.new positions created to build scale. The Federal Reserve is the primary federal regulator of the Company, QCBT, CRBT, CSB and SFC Bank.SFCB. QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking and SFC BankSFCB is regulated by the Missouri Division of Finance. The FDIC, as administrator of the DIF, also has regulatory authority over the subsidiary banks. See Appendix A “Supervision and Regulation” for more information on the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. 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 borrower for QCBT, CRBT and CSB, calculated as 15% of aggregate capital, was $26.7$35.9 million, $28.7$42.7 million, and $15.3$19.9 million, respectively, as of December 31, 2019.2021. In accordance with Missouri regulation, the legal lending limit to one borrower for SFC Bank,SFCB, calculated as 15% of aggregate capital, totaled $10.7$15.3 million as of December 31, 2019. 2021. 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 maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. The Company implements a tiered approach, based on the risk 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 | | | | (Risk Ratings 1-3) | | (Risk Rating 4) | | (Risk Ratings 5-8) | | | | | | | | | | | | | | High Quality | | Medium Quality | | Low Quality | | | | (Risk Ratings 1-3) | | (Risk Rating 4) | | (Risk Ratings 5-8) | | | | (dollars in thousands) | | | | | (dollars in thousands) | | | | | | | | | | | | QCBT | | $ | 16,000 | | $ | 13,500 | | $ | 9,000 | | $ | 20,500 | | $ | 17,000 | | $ | 12,000 | CRBT | | $ | 14,500 | | $ | 12,000 | | $ | 8,000 | | $ | 20,000 | | $ | 17,000 | | $ | 11,500 | CSB | | $ | 9,500 | | $ | 8,000 | | $ | 5,500 | | $ | 11,000 | | $ | 9,500 | | $ | 6,500 | SFC Bank | | $ | 9,000 | | $ | 7,500 | | $ | 5,000 | | SFCB | | | $ | 10,000 | | $ | 8,000 | | $ | 6,000 | QCRH Consolidated | | $ | 25,000 | | $ | 19,000 | | $ | 12,500 | | $ | 30,000 | | $ | 24,000 | | $ | 15,000 |
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’s in-house lending limit is $1.0$2.5 million to a single lending/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/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. Specifically, each subsidiary bank’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, 20192021 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s gross loans: | | | | | | | | | | | | | | | | | | | QCBT | | CRBT | | CSB | | SFCB | | | | 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 | | 2021 | | Policy | | 2021 | | Policy | | 2021 | | Policy | | 2021 | | | One-to-four family residential | 30 | % | 12 | % | 25 | % | 6 | % | 35 | % | 9 | % | 30 | % | 11 | % | | Multi-family | 15 | % | 9 | % | 15 | % | 16 | % | 15 | % | 11 | % | 20 | % | 16 | % | | Farmland | 5 | % | 1 | % | 5 | % | — | % | 15 | % | 1 | % | 5 | % | 1 | % | | Non-farm, nonresidential | 50 | % | 16 | % | 50 | % | 24 | % | 50 | % | 22 | % | 50 | % | 32 | % | | Construction and land development | 20 | % | 18 | % | 15 | % | 17 | % | 35 | % | 28 | % | 15 | % | 20 | % | | C&I | 60 | % | 30 | % | 60 | % | 31 | % | 50 | % | 23 | % | 20 | % | 16 | % | | Loans to individuals | 10 | % | 1 | % | 10 | % | — | % | 10 | % | — | % | 5 | % | 1 | % | | Lease financing | 30 | % | 3 | % | 5 | % | — | % | 5 | % | — | % | 5 | % | — | % | | Bank stock loans | ** | | — | | 10 | % | — | % | — | % | — | % | 20 | % | — | % | | All other loans | 15 | % | 10 | % | 10 | % | 6 | % | 15 | % | 6 | % | 15 | % | 3 | % | | | | | 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, 2019,2021, QCBT’s bank stock loans totaled 58%32% of risk-based capital. *** Policy limits are compared to average loan balances rather than the current balance for monitoring purposes. The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 20192021 and 2018.2020. Residential real estate loans held for sale are included in residential real estate loans below. Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven. Class of receivable and segment detail post-ASU 2016-03 do not break out CRE loans separately. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | m2 | | | | | | | | | | | | | | | | | | | | | | Consolidated | | | | QCBT | | Lease Funds | | CRBT | | CSB | | SFC Bank | | RB&T | | Total | | | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | | | (dollars in thousands) | | As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | C&I loans | | $ | 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 | | | 455,389 | | 42 | % | | — | | — | % | | 554,101 | | 47 | % | | 350,159 | | 55 | % | | 376,747 | | 69 | % | | N/A | | N/A | % | | 1,736,396 | | 47 | % | Direct financing leases | | | — | | — | % | | 87,869 | | 37 | % | | — | | — | % | | — | | — | % | | — | | — | % | | N/A | | N/A | % | | 87,869 | | 2 | % | Residential real estate loans | | | 122,675 | | 11 | % | | — | | — | % | | 49,544 | | 4 | % | | 40,224 | | 6 | % | | 27,461 | | 5 | % | | N/A | | N/A | % | | 239,904 | | 7 | % | Installment and other consumer loans | | | 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 | | | 1,897 | | — | % | | 6,889 | | 3 | % | | (338) | | — | % | | 88 | | — | % | | 323 | | — | % | | N/A | | N/A | % | | 8,859 | | — | % | | | $ | 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, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | C&I loans | | $ | 425,500 | | 42 | % | $ | 103,404 | | 45 | % | $ | 458,170 | | 44 | % | $ | 201,871 | | 35 | % | $ | 95,910 | | 20 | % | $ | 144,555 | | 36 | % | $ | 1,429,410 | | 38 | % | CRE loans | | | 421,032 | | 42 | % | | — | | — | % | | 486,084 | | 47 | % | | 327,775 | | 56 | % | | 332,547 | | 70 | % | | 198,673 | | 49 | % | | 1,766,111 | | 48 | % | Direct financing leases | | | — | | — | % | | 117,968 | | 52 | % | | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 117,968 | | 3 | % | Residential real estate loans | | | 120,855 | | 12 | % | | — | | — | % | | 57,469 | | 6 | % | | 39,190 | | 7 | % | | 30,706 | | 9 | % | | 42,539 | | 11 | % | | 290,759 | | 8 | % | Installment and other consumer loans | | | 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 | | | 1,759 | | — | % | | 7,274 | | 3 | % | | (815) | | — | % | | (81) | | — | % | | 188 | | — | % | | 799 | | — | % | | 9,124 | | — | % | | | $ | 1,004,471 | | 100 | % | $ | 228,646 | | 100 | % | $ | 1,037,471 | | 100 | % | $ | 582,451 | | 100 | % | $ | 475,801 | | 100 | % | $ | 403,914 | | 100 | % | $ | 3,732,754 | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consolidated | | | | QCBT | | CRBT | | CSB | | SFCB | | Total | | | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | $ | | % | | | | (dollars in thousands) | | As of December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | C & I - Revolving Lines of Credit | | $ | 69,179 | | 4 | % | $ | 92,757 | | 7 | % | $ | 56,072 | | 7 | % | $ | 30,475 | | 4 | % | $ | 248,483 | | 5 | % | C & I - Other | | | 602,451 | | 37 | % | | 437,200 | | 30 | % | | 194,357 | | 22 | % | | 112,594 | | 16 | % | | 1,346,602 | | 29 | % | CRE - Owner Occupied | | | 114,927 | | 7 | % | | 145,895 | | 10 | % | | 75,322 | | 9 | % | | 85,557 | | 12 | % | | 421,701 | | 9 | % | CRE - Non Owner Occupied | | | 171,444 | | 9 | % | | 202,051 | | 14 | % | | 122,690 | | 14 | % | | 150,315 | | 21 | % | | 646,500 | | 14 | % | Construction & Land Development | | | 291,000 | | 18 | % | | 240,790 | | 17 | % | | 243,126 | | 28 | % | | 143,655 | | 20 | % | | 918,571 | | 19 | % | Multi-Family | | | 153,977 | | 9 | % | | 228,083 | | 16 | % | | 100,186 | | 12 | % | | 118,166 | | 16 | % | | 600,412 | | 13 | % | Direct financing leases | | | 45,191 | | 3 | % | | — | | — | % | | — | | — | % | | — | | — | % | | 45,191 | | 1 | % | 1-4 Family | | | 177,227 | | 11 | % | | 73,821 | | 5 | % | | 64,767 | | 7 | % | | 61,546 | | 8 | % | | 377,361 | | 8 | % | Consumer | | | 24,837 | | 2 | % | | 17,211 | | 1 | % | | 10,432 | | 1 | % | | 22,831 | | 3 | % | | 75,311 | | 2 | % | | | $ | 1,650,233 | | 100 | % | $ | 1,437,808 | | 100 | % | $ | 866,952 | | 100 | % | $ | 725,139 | % | 100 | % | $ | 4,680,132 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | C&I loans | | $ | 732,363 | | 46 | % | $ | 601,387 | | 44 | % | $ | 230,835 | | 33 | % | $ | 162,138 | | 26 | % | $ | 1,726,723 | | 40 | % | CRE loans | | | 588,167 | | 38 | % | | 690,539 | | 51 | % | | 423,029 | | 59 | % | | 405,894 | | 65 | % | | 2,107,629 | | 50 | % | Direct financing leases | | | 66,016 | | 4 | % | | — | | — | % | | — | | — | % | | — | | — | % | | 66,016 | | 2 | % | Residential real estate loans | | | 134,712 | | 9 | % | | 45,493 | | 3 | % | | 41,673 | | 6 | % | | 30,243 | | 5 | % | | 252,121 | | 6 | % | Installment and other consumer loans | | | 26,916 | | 2 | % | | 25,986 | | 2 | % | | 12,376 | | 2 | % | | 26,024 | | 4 | % | | 91,302 | | 2 | % | Deferred loan/lease origination costs, net of fees | | | 8,588 | | 1 | % | | (1,349) | | — | % | | (231) | | — | % | | 330 | | — | % | | 7,338 | | — | % | | | $ | 1,556,762 | | 100 | % | $ | 1,362,056 | | 100 | % | $ | 707,682 | | 100 | % | $ | 624,629 | | 100 | % | $ | 4,251,129 | | 100 | % |
Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established bywith guidance from the subsidiary banks’ internal loansenior management and asset/liability management 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“Item 7A. Quantitative and Qualitative Disclosures about Market RiskRisk” for more discussion on the Company’s management of interest rate risk. In an effort to manage interest rate risk, the subsidiary banks will consider entering into back-to-back interest rate swaps with select commercial borrowers. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the banks receive a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. The banks enter an interest rate swap with the commercial borrower and an equal and offsetting interest rate swap with a larger financial institution counterparty. The Company has increased its focus on this business which has led to significantly increased noninterest income, stronger overall loan growth, and improved management of its interest rate risk. 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. 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. Future levels of swap fee income can be somewhat dependent upon prevailing interest rates and other market activity. C&I Lending As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The subsidiary 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 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; |
| ·
● | | Maximum debt to tangible net worth ratio; and/or |
| ·
● | | Minimum tangible net worth. |
Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry in which the borrower is engaged. Collateral for these loans generally includes accounts receivable, inventory equipment, and real estate.equipment. 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. | | | Approved Collateral Type |
| Maximum Advance % | 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 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, 20192021 and 2018:2020: | | | | | | | | | 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 |
| | | | | | | | | 2021 | | 2020 | | | Amount | | Amount | | | (dollars in thousands) | | | | | | | | Lessors of Residential Buildings and Dwellings | | $ | 387,818 | | $ | 346,177 | Administration of Urban Planning and Rural Development | | | 120,416 | | | 138,514 | Bank Holding Companies | | | 65,080 | | | 80,383 | Lessors of Nonresidential Buildings | | | 28,821 | | | 16,408 | Industrial Machinery and Equipment Merchant Wholesalers | | | 28,123 | | | 14,533 |
These loan categories are defined by industry-standard NAICS codes – refer to NAICS.com for a description of each category. 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 | | | | | Maximum
| CRE Loan Types | | Maximum Advance Rate ** | | Term | CRE Loans on Improved Property * | | 80% | | 7 yearsyears*** | Raw Land | | Lesser of 90% of project cost, or 65% of "as is" appraised value | | 12 months | Land Development***Development | | Lesser of 85% of project cost, or 75% of "as-completed" appraised value | | 24 months | Commercial Construction Loans | | Lesser of 85% of project cost, or 80% of "as-completed" appraised value | | 1224 months
| Residential Construction Loans to BuildersBuilders**** | | Lesser of 90% of project cost, or 80% of "as-completed" appraised value | | 1215 months
| LIHTC construction Loans | | 80% | | 3 years | LIHTC permanent Loans | | 80% | | |
* Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans.loans that are subject to a DSCR covenant. 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. *** Some real estate transactions may offer a swap option whereby the maximum term is 20 years. **** Generally, the maximum term for land development loans is 12 months but there are some situations where the maximum term wouldcan be 24 months.15 months with credit risk committee monthly review. 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, 20192021 and 2018,2020, approximately 26%16% and 28%24%, 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 and outstanding balances have increased 50% or more during the prior 36 months or construction, land development and other land loans exceed 100% of total risk-based capital. In addition, the banks have established policy limits around non-owner occupied CRE and total construction, land development and other land loans. | | | | | | | | | | | | Non-owner CRE Loans/TRBC | | Total Construction, Land Development and Other Land Loans/TRBC | QCBT | | 300% | | 100% | CRBT | | 400% | | 100% | CSB | | 400% | | 150% | SFC | | 450% | | 100% |
Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfoliototal construction, land development and other land loans 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’s CRE loan portfolio as of December 31, 20192021 and 2018:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | | | Amount | | % | | Amount | | % | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | | | Amount | | % | | Amount | | % | | | | | (dollars in thousands) | | | | | | | | | | | | | | | Lessors of Residential Buildings | | | $ | 1,316,851 | | 49 | % | $ | 786,066 | | 37 | % | Lessors of Nonresidential Buildings | | $ | 553,142 | | 32 | % | $ | 612,327 | | 34 | % | | | 557,859 | | 21 | % | | 567,759 | | 27 | % | Lessors of Residential Buildings | | | 465,172 | | 27 | % | | 346,270 | | 19 | % | | Hotels | | | 63,720 | | 4 | % | | 81,345 | | 5 | % | | | 73,639 | | 3 | % | | 72,718 | | 4 | % | New Housing For-Sale Builders | | | 55,525 | | 3 | % | | 47,598 | | 3 | % | | | 61,028 | | 2 | % | | 46,764 | | 2 | % | Nonresidential Property Managers | | | 48,059 | | 3 | % | | 69,885 | | 4 | % | | Land Subdivision | | | 46,318 | | 3 | % | | 48,378 | | 3 | % | | Lessors of Other Real Estate Property | | | | 60,605 | | 2 | % | | 45,619 | | 2 | % | Other Activities Related to Real Estate | | | 42,060 | | 2 | % | | 25,345 | | 2 | % | | | 42,507 | | 2 | % | | 41,197 | | 2 | % | Other * | | | 462,400 | | 26 | % | | 534,963 | | 30 | % | | | 568,784 | | 21 | % | | 547,506 | | 26 | % | Total CRE Loans | | $ | 1,736,396 | | 100 | % | $ | 1,766,111 | | 100 | % | | $ | 2,681,273 | | 100 | % | $ | 2,107,629 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | |
* “Other” consists of all other industries. None of these had concentrations greater than $28.8$40.9 million, or 1.7%1.5%, of total CRE loans as of December 31, 2019. 2021. Following is a breakdown of non owner-occupied income-producing CRE by property type as of December 31, 20192021 and 2018:2020: | | | | | | | | | | | | | | 2021 | 2020 | | | Amount | | % | | Amount | | % | | | | (dollars in thousands) | | | | | | | | | | | �� | | | Multi-family | | $ | 1,231,937 | | 58 | % | $ | 599,774 | | 38 | % | Office | | | 175,890 | | 8 | % | | 174,578 | | 11 | % | Retail | | | 147,327 | | 7 | % | | 156,589 | | 10 | % | Industrial/warehouse | | | 104,035 | | 5 | % | | 82,568 | | 5 | % | Hotel/motel | | | 77,758 | | 4 | % | | 77,165 | | 5 | % | Other | | | 373,872 | | 18 | % | | 480,292 | | 31 | % | Total income-producing CRE | | $ | 2,110,819 | | 100 | % | $ | 1,570,966 | | 100 | % |
Included in Multi-family is $445.6 million of LIHTC permanent loans which are permanent financing for low-income housing tax credit real estate projects. These loans have a maximum term of 20 years. Considering the longer duration, the subsidiary banks often enter into a back-to-back interest rate swap to provide the borrower a long-term fixed interest rate while the subsidiary banks receive a variable interest rate and an upfront nonrefundable fee dependent on market pricing. In addition, the financing structure of the LIHTC permanent loans includes tax credit equity investment that strengthens the overall credit profile. Including the value of the real estate and the LIHTCs, the loan-to-values of the LIHTC permanent loans are typically in the range of 25% to 65%. Lastly, the Company has policy limits on maximum exposure amounts to single developers. | | | | | | | | | | | | | | 2019 | 2018 | | | Amount | | % | | Amount | | % | | | | (dollars in thousands) | | | | | | | | | | | | | | Multi-family | | $ | 359,469 | | 39 | % | $ | 189,137 | | 18 | % | Office | | | 193,381 | | 21 | % | | 255,452 | | 25 | % | Retail | | | 175,602 | | 19 | % | | 232,022 | | 23 | % | Hotel/motel | | | 71,611 | | 8 | % | | 89,906 | | 9 | % | Industrial/warehouse | | | 68,978 | | 8 | % | | 93,503 | | 9 | % | Other | | | 44,569 | | 5 | % | | 168,650 | | 16 | % | Total income-producing CRE | | $ | 913,610 | | 100 | % | $ | 1,028,670 | | 100 | % |
A portion of the Company’s construction portfolio is considered non-residential construction. Following is a summary of industry concentrations within that category as of December 31, 20192021 and 2018:2020: | | | | | | | | | | | | | | | 2019 | 2018 | | | | Amount | | % | | Amount | | % | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | 2020 | | | | Amount | | % | | Amount | | % | | | | | (dollars in thousands) | | | | | | | | | | | | | | | Multi-family | | $ | 169,523 | | 50 | % | $ | 61,055 | | 30 | % | | $ | 627,101 | | 77 | % | $ | 281,986 | | 57 | % | Industrial/warehouse | | | | 28,191 | | 4 | % | | 10,884 | | 2 | % | Office | | | 24,950 | | 7 | % | | 17,692 | | 9 | % | | | 23,714 | | 3 | % | | 17,126 | | 3 | % | Retail | | | 14,584 | | 4 | % | | 10,285 | | 5 | % | | | 11,798 | | 1 | % | | 8,665 | | 2 | % | Industrial/warehouse | | | 8,388 | | 2 | % | | 4,591 | | 2 | % | | Hotel/motel | | | 5,715 | | 2 | % | | 5,679 | | 3 | % | | | 6,804 | | 1 | % | | 5,715 | | 1 | % | Other | | | 115,349 | | 35 | % | | 106,532 | | 51 | % | | | 113,786 | | 14 | % | | 170,153 | | 35 | % | Total non-residential construction loans | | $ | 338,509 | | 100 | % | $ | 205,834 | | 100 | % | | $ | 811,394 | | 100 | % | $ | 494,529 | | 100 | % |
Included in Multi-family is $587.2 million of LIHTC construction loans which provide financing for the construction of both new LIHTC real estate projects and the rehabilitation of existing LIHTC real estate projects. Many of these will convert to LIHTC permanent loans upon completion of construction. Additionally, the Company had approximately $48.4$78.0 million and $52.3$48.8 million of residential construction loans outstanding as of December 31, 20192021 and 2018,2020, respectively. Of this amount, approximately 66%52% was considered speculative, while 34%48% was pre-sold at December 31, 2019,2021, and approximately 72%54% was considered speculative, while 28%46% was pre-sold at December 31, 2018.2020. 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: | ·
● | | Specialized road maintenance equipment; |
| ·
● | | Commercial business furnishings; |
| ·
● | | Vehicles classified as heavy equipment; |
| ·
● | | Equipment classified as plant or office equipment; and |
m2 will generally refrain from funding leases of the following type: | ·
● | | Leases collateralized by non-marketable items; |
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● | | Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.; |
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● | | Leases collateralized by used equipment, unless its remaining useful life can be readily determined; and |
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● | | 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, | | | | 2019 | 2018 | 2017 | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the year ended December 31, | | | | 2021 | 2020 | 2019 | | | | (dollars in thousands) | | | | | | | | | | | | | | Originations of residential real estate loans | | $ | 183,491 | | $ | 87,133 | | $ | 38,079 | | | $ | 249,892 | | $ | 281,662 | | $ | 183,491 | | Sales of residential real estate loans | | $ | 141,195 | | $ | 51,010 | | $ | 33,165 | | | $ | 201,638 | | $ | 234,512 | | $ | 141,195 | | Percentage of sales to originations | | | 77 | % | | 59 | % | | 87 | % | | | 81 | % | | 83 | % | | 77 | % |
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 650.for primary residences and 80% for second/vacation homes. 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. Human Capital Resources.As of December 31, 2021, the Company employed 693 full-time employees and 63 part-time employees across all locations. The employees are not represented by a collective bargaining unit. The Company is a relationship driven company and its ability to attract and retain exceptional employees is key to its success. The Company encourages and supports the growth and development of its employees and, wherever possible, seeks to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and external training opportunities. Educational reimbursement is available to employees enrolled in degree or certification programs and for seminars, conferences, and other training events employees attend in connection with their job duties. As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive total rewards programs for its employees in order to attract and retain exceptional talent. In addition to competitive base wages, additional programs include annual bonus opportunities, an employee stock purchase plan, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, sabbaticals, flexible work schedules, an employee assistance program, and various wellness programs. The Company is committed to fostering and preserving a culture of diversity, equity, and inclusion, and believes its differences, of every kind, make the company and its communities better. During recent years, the Company focused on several initiatives to promote diversity, equity, and inclusion across its organization. A few specific actions included hiring a Diversity Officer, rolling out a diversity survey for the second year to gather feedback from all employees, and several diversity and inclusion sessions and workshops across our different entities. The safety, health and wellness of the Company’s employees is a top priority. The COVID-19 pandemic continues to present a unique challenge with regard to maintaining employee safety while continuing successful operations. The Company offers remote working alternatives and enforces safety measures for all employees working in locations across the Company. All employees are encouraged to get vaccinated and are asked not to come in to the office to work when they are experiencing symptoms of COVID-19 or other communicable illnesses. The Company provided frequent communication using a variety of methods to ensure that all employees were kept informed regarding the ongoing pandemic. The Company strives to maintain a culture in which employees feel valued and, to that end, regularly solicits feedback from employees to understand their views about their work environment and the Company’s culture. The results from employee engagement surveys are used to implement programs and processes designed to enhance engagement and improve the employee experience. In 2021, 88% of employees participated in the annual employee engagement survey, exceeding the Company goal of 80%, and the Company received a strong employee engagement score of 81%, above the national benchmark of 74%. The regions in which the subsidiary banks operate primarily – the Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield, Missouri – generally have strong labor markets, with unemployment rates of 3.7% and 3.3% in Iowa and Missouri, respectively. ESG Commitment. The Company is built on relationships and integrity. We adhere to those principles in all areas of our business and in our communities and believe that meaningful environmental, social and governance programs will drive shareholder value and make us a better company. With numerous programs and activities aligned with the ESG framework, we continue to develop and enhance our long-term plan for the future. We are advancing standard reporting processes and gathering benchmarking data to generate meaningful ESG goals for our company. Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield, Missouri 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 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 discussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries. 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, results are presented as of and for the fiscal years ended December 31, 2019, 2018, and 2017, as applicable.
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 Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current 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. Also available are many of itsthe Company’s corporate governance documents, including theits Business Code of Conduct and Ethics Policy (http:(https://www.snl.com/IRW/govdocs/1024092)qcrh.q4ir.com/governance/documents/default.aspx). 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: Economic and Market Risks Conditions in the financial market and economic conditions, including conditions in the markets in which we operate, generally may adversely affect our business. We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and Springfield, Missouri markets. 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, pandemics 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 improvementconditions 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:
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| | 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;
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| | difficulties in supporting and transitioning customers of the target company;
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| | diversion of financial and management resources from existing operations;
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| | 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;
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| | 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;
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| | risks of acquiring loans with deteriorated credit quality;
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| | assumption of unanticipated problems or latent liabilities; and
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| | inability to generate sufficient revenue to offset acquisition costs.
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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’ 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 $1.5 billion, or approximately 41% of our total loan/lease portfolio, as of December 31, 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.
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 $1.7 billion, or approximately 47% of our total loan/lease portfolio, as of December 31, 2019. Of this amount, $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.
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, 2019, our allowance as a percentage of total gross loans/leases was 0.98%, and as a percentage of total NPLs was 403.87%. In accordance with GAAP for acquisition accounting, the loans acquired through the acquisitions 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 ($7.0 million at December 31, 2019).
In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.11% for the year ended December 31, 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, 2019 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.
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 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’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
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’ 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. SFC Bank, as a Missouri-chartered commercial bank, is subject to regulation by both the Missouri 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’ 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.
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.
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, and 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. In addition, the size of nonrefundable swap fees earned in connection with our LIHTC permanent loans may fluctuate depending on the interest rate environment. 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"Quantitative and Qualitative Disclosures about Market Risk”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. 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. In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic and reduced the interest it pays on excess reserves. The prolong reduction in interest rates is likely to continue to have an adverse effect our net interest income and margins and our profitability. There is potential that reduced rates could pose additional risks to the economy primarily through higher inflation and financial-stability concerns driven by low borrowing costs. There is also a possibility that labor markets could tighten causing inflationary pressures to build faster than the expected gradual pace. 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. The Federal Reserve has signaled that it will begin to increase rates, taper its quantitative easing program, and reduce its balance sheet of bonds and other assets in 2022, but will do so with the goal of avoiding abrupt or unpredictable changes in economic or financial conditions so as not to disrupt the financial systems, also known as “shocks;” despite this, the impact of these changes cannot be certain. Vulnerabilities in the financial system can amplify the impact of an initial shock following rate increases, potentially leading to unintended volatility, as well to disruptions in the provision of financial services, such as clearing payments, the provision of liquidity, and the availability of credit. Furthermore, asset liquidation pressures can be amplified by liquidity mismatches and the leverage of certain nonbank financial intermediaries such as hedge funds. The financial downturn in March 2020 also demonstrated that pressures on dealer intermediation can limit the availability of liquidity during times of market stress. Given the interconnectedness of the global financial system, these vulnerabilities could impact the Company’s business operations and financial condition. 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, 2021, we had gross unrealized losses of $1.3 million, or 0.2% of amortized cost, in our investment portfolio (offset by gross unrealized gains of $58.9 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. Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders' equity. We maintained a balance of $810.2 million, or 13% of our assets, in investment securities at December 31, 2021. Changes in market interest rates can affect the value of these investment securities, with increasing interest rates generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income that can reduce our common stockholders’ equity. Further, we may have to record provision expense to establish an allowance for credit losses on our carried at fair value debt securities, and we must periodically test our investment securities for other-than-temporary impairment in value. In assessing whether the value of investment securities is impaired, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Based on management's evaluation, it was determined that the gross unrealized losses at December 31, 2021 were primarily a function of the changes in certain market interest rates. 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. 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. 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. The mix of loans with interest rate swaps are heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate on the interest rate environment. The COVID-19 pandemic continues to create disruptions that affect our business, financial condition, liquidity, and results of operations. The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic. The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown. In the past year, the United States economy began to rebound from severe disruptions caused by the onset of the pandemic in March 2020. Economic conditions have begun to normalize with the availability of vaccines and treatments, increasing workforce employment and participation, the lessening of business and education restrictions, and demand for services beginning to return. The financial conditions of households and businesses was bolstered significantly by government stimulus, which contributed to the economic recovery but also brought about growing pains as evidenced by supply chain problems and rising prices. Although current economic conditions are more favorable than the prior year, the outlook for continued growth is characterized by elevated uncertainty with potential for unevenness across markets and sectors. Although household and business credit and liquidity is strong currently, further pandemic-related disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans; declines in assets under management, affecting wealth management revenues; negative impacts on regional economic conditions resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations, and deposit availability; and impacts on the implementation of our growth strategy. While the recovery this past year has been strong, the pace of growth in the United States and globally could decline as a result of rising inflation, the pervasiveness of supply chain challenges across industries, and the persistence of the virus in variant forms. Overall, we believe that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. Continued elevated levels of inflation could adversely impact our business and results of operations. The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7.0% in 2021. Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. For example, if interest rates were to rise in response to, or as a result of, elevated levels of inflation, the value of our securities portfolio would be negatively impacted. In addition, while we generally expect any inflation-related increases in our interest expense to be offset by increases in our interest revenue, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations. Continued elevated levels of inflation could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision. Labor shortages and failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition. A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, decreased labor force size and participation rates as a result of the COVID-19 pandemic, expanded unemployment benefits offered in response to the ongoing COVID-19 pandemic, and other government actions. Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly competitive local labor market. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees. In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows. Regulatory and Legal Risks 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' 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. SFCB, as a Missouri-chartered commercial bank, is subject to regulation by both the Missouri 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 “Supervision and Regulation” to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time. 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. 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. 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. 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. Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business. Failure
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 pay interestthe 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. 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. Evolving law impacting cannabis-related businesses in Illinois and other states 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 with a significant financial interest in such entities; or (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 legalizing cannabis use has increased the number of direct and indirect cannabis-related businesses in Illinois, and therefore has increased 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. Credit and Lending Risks 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' 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 $1.6 billion, or approximately 34% of our total loan/lease portfolio, as of December 31, 2021. 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. 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 $2.7 billion, or approximately 57% of our total loan/lease portfolio, as of December 31, 2021. Of this amount, $421.7 million, or approximately 16%, 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. Included in our CRE lending portfolio are our LIHTC construction and permanent loans, which have the same inherent risks as our other non-owner occupied CRE loans. However, the LIHTC construction and permanent loans, and related nonrefundable swap fee income, rely on federal LIHTCs to help finance the overall real estate projects and are dependent on the continued availability of such LIHTC programs. Changes to the LIHTC programs, including changes to the level of tax credits provided by the federal government on low income housing, may have an adverse effect on our business, results of operations and financial condition. Capital and Liquidity Risks 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 and 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 pay common stock dividends. As of December 31, 2019, we had $40.2 million of junior subordinated debentures held by six business trusts that we control. Interest expense on the debentures, which totaled $2.3 million for 2019, must be paid before weoriginate 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 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. Deferralliquidity, business, results of interest payments on the debentures could cause a subsequent decline in the market priceoperations and financial condition.
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, 2019,2021, our subsidiary banks had deposits, borrowings and other liabilities in the aggregate of approximately $4.4$5.5 billion. Declines
Our allowance may prove to be insufficient to absorb losses in asset values may resultour loan/lease portfolio. We establish our allowance for credit losses in impairment charges and adversely affect the valueconsultation with management of our investments, financial performancesubsidiaries and capital.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, 2021, our allowance as a percentage of total gross loans/leases was 1.68%, and as a percentage of total NPLs was 2,852.21%. The market value
In addition, we had net charge-offs as a percentage of investmentsgross average loans/leases of 0.00% for the year ended December 31, 2021. Because of the concentration of C&I and CRE loans in our securitiesloan portfolio, has become increasingly volatilewhich tend to be larger in recent years,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, 2019,2021 was adequate to absorb losses on any existing loans/leases that may become uncollectible, we had gross unrealizedcannot predict loan/lease losses of $478 thousand, or 0.08% of amortized cost, inwith certainty, and we cannot assure you that our investment portfolio (offset by gross unrealized gains of $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 changesallowance will prove sufficient to cover actual loan/lease losses 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 chargesfuture, particularly 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, 2019 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,economic conditions are more difficult than what management currently expects. Additional provisions 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 sourceslosses 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 and 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.
The successexcess 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’s SBA Preferred Lender status. If we lose our status as an 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 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 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 controlallowance may adversely impactaffect our business, financial condition and results of operations.
In recent years, the U.S. government implemented tariffs on certain products,Competitive 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
on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.Strategic Risks
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 Springfield, Missouri markets.
We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and Springfield, 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 Springfield, 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, financial institutions and non-bank financial institutions.services providers. 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, Fintech 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. 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. 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
Potential future acquisitions could be volatile,difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value 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. Market fluctuations could also adversely affect our stock price. These fluctuations have often been unrelatedfinancial results.
As part of our business strategy, we may consider acquisitions of other banks or disproportionatefinancial 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; |
| ● | 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 operating performanceissuance of particular companies. These broad market fluctuations,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 general economic, systemic, politicalunforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and market conditions, such as recessions, lossfinancial 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 investor confidence, interest rate changes,operations and financial condition. New lines of business or international currency fluctuations,new products and services may negatively affectsubject 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 market pricemarkets are not fully developed. In developing and marketing new lines of our common stock. Moreover, our operating resultsbusiness and/or new products and services, we may fluctuateinvest significant time and vary from period to period due toresources. Initial timetables for the risk factors set forth herein. As a result, period-to-period comparisons shouldintroduction and development of new lines of business and/or new products or services may not be relied upon as an indication of future performance. Our stockachieved and price and profitability targets may not prove feasible, which could fluctuate significantly in response to our quarterly or annual results and the impact of these risk factorsturn have a material negative effect on our operating results or financial position.results. 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)
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 transactionsreputation could be negatively affecteddamaged 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 commercial soundness of other financial institutions. Financial services institutions are interrelatedothers as a result of trading, clearing, counterpartythat conduct. Damage to our reputation could impact our ability to attract new or othermaintain existing loan and deposit customers, employees and business relationships. Defaults by, Accounting and Tax Risks The FASB has issued an accounting standard update that has resulted in a significant change in how the Company recognizes credit losses and may have a material impact on our financial condition or even rumors or questions about, one orresults 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 replaced the "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. The new CECL standard became effective for us on January 1, 2021. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. CECL also requires that an allowance for credit losses be established for any unfunded loan commitments that are not cancelable. 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, including anticipated losses resulting from deteriorating economic conditions as a result of events such as the COVID-19 pandemic. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model previously required under GAAP, which delayed recognition until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model materially affected how we determine our allowance for credit losses and could require us to significantly increase our allowance in future periods. Moreover, the CECL model may create more volatility in the level of the allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial services institutions, orcondition and results of operations. See Note 1 “Nature of Business and Significant Accounting Policies” of the notes to the consolidated financial statements for additional information on the impact of the adoption of this standard. The preparation of our Consolidated 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 Statements are prepared in accordance with U.S. GAAP and general reporting practices within the financial services industry, generally,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 leda material adverse effect on our financial condition or results of operations in subsequent periods. From time to market-wide liquidity problemstime, the FASB and lossesthe SEC change the financial accounting and reporting standards or the interpretation of depositor, creditor and counterparty confidencethose standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could leadmaterially impact how we report our financial condition and results of operations. Operational Risks The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions. LIBOR represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. 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. End dates for LIBOR have now been set, and U.S. Regulators have issued guidance as of October 2021 that urges market participants to address their existing LIBOR exposures and transition to robust and sustainable alternative rates. The Alternative Reference Rate Committee has proposed that the 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 but has also advised participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use. Contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. Although the Company has actively worked to plan for the transition away from LIBOR, the transition is both complex and challenging and the downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions. If the Company’s selected alternative rate is based on small transaction volume, it could be susceptible to volatility and disruption during times of market stress. Furthermore, if the Company fails to properly address legacy contracts by adding robust fallback positions, it will be exposed to interest rate risks and potential loss of yields. Finally, if the Company or other market participants fail to properly plan to implement alternative rates other than LIBOR it could have an adverse effect on the Company and the financial system as a whole. 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, cyber attackers have taken advantage of the pandemic to create campaigns to leverage individuals fears and uncertainties as well as capitalize on the increased number of transactions occurring on digital channels. Industry trends in ransomware, phishing, and other intrusion methods have increased significantly and will continue to pose increased risk while the Company’s operations remain partially remote. 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. The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card, debit card and other payment related transactions that typically involve the transmission of sensitive information regarding the Company'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. 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 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 misconduct or fraud and data processing system failures and errors. Employee errors and employee and customer misconduct could subject us to financial losses or defaultsregulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or byunauthorized 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 institutions. Wesafeguards, the Company could experience increases in depositsstill be affected. Should our internal controls fail to prevent or detect an occurrence, and assetsif 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. 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's SBA Preferred Lender status. If we lose our status as an 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 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 difficultiesguaranteed portion of these loans. When we sell the guaranteed portion of our SBA 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 failuresserviced by the us, the SBA may require us to repurchase the loan, deny its liability under the guaranty, reduce the amount of other banksthe 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 government-sponsored financial institutions, which would increase the capital we need to support our growth.condition. 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 our market areas to implement our community-based operating strategy. Recent changes in labor market conditions have contributed to heightened levels of employee attrition and increased competition for talent, which has in turn driven wage rates higher and may contribute to an increase in operating expenses. 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 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 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, the FASB has adopted a new accounting standard that will be effective for our 2020 fiscal 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 prior 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. The ongoing impacts of CECL will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.
See Note 1 to the Consolidated Financial Statements for further discussion.
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, 2019,2021, we had approximately $101.4$152.0 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; |
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● | | making it more difficult for us to satisfy our debt and other obligations; |
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● | | 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; |
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● | | 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’sCompany's business. As the Company’sCompany'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’sCompany's ability to conduct business. The Company’sCompany'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’sCompany'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’sCompany'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.
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 The Company’s headquarters areis located at 3551 7th Street, Moline, Illinois. The Company and its subsidiaries maintain numerous other facilities, including bank branch locations, which are occupied by the Company and its subsidiaries and which house the executive and primary administrative offices of each respective entity or otherwise facilitate the business operations of the Company and its subsidiaries. Each such property is leased or owned by the Company or its subsidiaries and no such property is subject to any material encumbrance. 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. 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. As of February 28, 2020,18, 2022, there were 15,867,83815,641,927 shares of common stock outstanding held by 725656 holders of record. Additionally, there are an estimated 3,5003,700 beneficial holders whose stock was held in the street name by brokerage houses and other nominees as of that date. Dividends on Common Stock. 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 Missouri laws provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits. 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. 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 debt securities in public offerings and in private placements. Under the terms of the 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 17 to the Consolidated Financial Statements for additional information regarding dividend restrictions. Purchase of Equity Securities by the Company. There were no purchases of common stock by the Company during the years ended December 31, 2019, 2018, and 2017. On February 18, 2020, the Board of Directors of the Company announcedapproved a share repurchase program permittingunder which the Company is authorized to repurchase, offrom time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. TheAll shares that were repurchased under the share 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-18were retired. There were no repurchases of the Securities and Exchange Commission. The timing, manner, price and amount of any repurchases will be determinedcommon stock by the Company in its discretion and will be subject to economic and market conditions,during the fourth quarter of 2021. | | | | | | | | | | | | | | | | Total number of shares | | Maximum number | | | | | | | | purchased as part of | | of shares that may yet | | | | Total number of | | Average price | | publicly announced | | be purchased under | | Period | | shares purchased | | paid per share | | plans or programs | | the plans or programs | | | | | | | | | | | | January 1-31, 2021 | | — | | — | | 100,932 | | 699,068 | | February 1-28, 2021 | | — | | — | | 100,932 | | 699,068 | | March 1-31, 2021 | | — | | — | | 100,932 | | 699,068 | | April 1-30, 2021 | | — | | — | | 100,932 | | 699,068 | | May 1-31, 2021 | | 12,000 | | 47.45 | | 112,932 | | 687,068 | | June 1-30, 2021 | | 88,000 | | 48.04 | | 200,932 | | 599,068 | | July 1-31, 2021 | | 84,000 | | 47.21 | | 284,932 | | 515,068 | | August 1-31, 2021 | | 84,904 | | 49.32 | | 369,836 | | 430,164 | | September 1-30, 2021 | | 24,249 | | 49.82 | | 394,085 | | 405,915 | | October 1-31, 2021 | | — | | — | | 394,085 | | 405,915 | | November 1-30, 2021 | | — | | — | | 394,085 | | 405,915 | | December 1-31, 2021 | | — | | — | | 394,085 | | 405,915 | |
There were 100,932 shares of common stock price, applicable legal requirements and other factors. The repurchase program does not obligatepurchased by the Company to purchase any shares or any particular numberduring the year ended December 31, 2020. There were no purchases of shares.common stock by the Company during the year ended December 31, 2019. Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 20142016 and ending December 31, 2019,2021, a comparison of cumulative total returns for the Company, the Nasdaq Composite Index, and the SNL Bank Nasdaq Index prepared by S&P Global, Charlottesville, Virginia. The graph was prepared at the Company’s request by S&P Global. The information assumes that $100 was invested at the closing price on December 31, 20142016 in the common stock of the Company and in each index, and that all dividends were reinvested. 
| | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | Index | | 12/31/16 | | 12/31/17 | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | QCR Holdings, Inc. | | 100.00 | | 99.40 | | 74.88 | | 103.01 | | 93.71 | | 133.19 | Nasdaq Composite Index | | 100.00 | | 129.64 | | 125.96 | | 172.18 | | 249.51 | | 304.85 | SNL Bank Nasdaq Index | | 100.00 | | 118.59 | | 97.58 | | 132.84 | | 119.14 | | 164.80 |
Item 6. [Reserved] 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 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.
| | | | | | | | | | | | | | | | | | | 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, $6.9 million, $3.9 million and $5.4 million of acquisition, disposition and post-acquisition compensation, transition and integration costs for 2019, 2018 and 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 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.
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| (2)
| | Numerator is net income.
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| (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.
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| (4)
| | Non-interest expenses divided by the sum of net interest income before provision for loan/lease losses and non-interest income.
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| (5)
| | See GAAP to Non-GAAP reconciliations.
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ItemItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section generally discusses 20192021 and 20182020 items and annual comparison between our fiscal 20192021 performance compared to our fiscal 20182020 performance. A detailed review of our fiscal 20182020 performance compared to our fiscal 20172019 performance can be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2020, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion should be read in conjunction with Part II, Item 6 hereof, “Selected Financial Data” and our Consolidated 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. GENERAL
GENERAL The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-sixtwenty-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2019,2021, the Company had $4.9$6.1 billion in consolidated assets, including $3.7$4.7 billion in total loans/leases, and $3.9$4.9 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger. EXECUTIVE OVERVIEWIMPACT OF COVID-19
The Company reported net incomeprogression of $57.4 millionthe COVID-19 pandemic in the United States has not had a materially adverse impact on the Company’s financial condition and results of operations as of and for the year ended December 31, 2019,2021, but continues to have a complex and diluted EPS of $3.60. Forsignificant adverse impact on the same period in 2018 the Company reported net income of $43.1 million and diluted EPS of $2.86. The year ended December 31, 2019 was highlighted by several significant items:
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| | Adjusted net income (non-GAAP) of $58.5 million, or $3.66 per diluted share;
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| ·
| | NIM and NIM (TEY)(non-GAAP) at 3.31% and 3.45%, respectively;
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| ·
| | Noninterest income of $78.8 million for the year;
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| ·
| | Completed the sale of the operations of RB&T, a wholly-owned subsidiary of the Company, to Heartland Financial USA, Inc.; and
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| ·
| | Excluding RB&T assets and liabilities sold:
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| ·Deposit growth of 10.3% for the year;
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| ·Loan and lease growth of 10.9% for the year; and
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| ·Nonperforming assets to total assets down to 0.27% at December 31, 2019 from 0.56% at December 31, 2018.
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Following is a table that represents the various net income measurements for the years ended December 31, 2019 and 2018.
| | | | | | | | 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 Company reported adjusted net income (non-GAAP) of $58.5 million, with adjusted diluted EPS of $3.66. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the year excludes a number of non-recurring items, most significantly:
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| | $8.5 million of after-tax gain on sale of assets and liabilities of RB&T;
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| ·
| | $3.0 million of after-tax goodwill impairment expense;
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| ·
| | $2.6 million of after-tax disposition costs; and
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| ·
| | $2.8 million of after-tax post-acquisition compensation, transition and integration costs.
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Following is a table that represents the major income and expense categories.
| | | | | | | | | | Year Ended December 31, | | | 2019 | | 2018 | | | | (dollars are in thousands) | | | | | | | | | Net interest income | | $ | 155,559 | | $ | 142,395 | | Provision expense | | | 7,066 | | | 12,658 | | Noninterest income | | | 78,768 | | | 41,541 | | Noninterest expense | | | 155,234 | | | 119,143 | | Federal and state income tax expense | | | 14,619 | | | 9,015 | | Net income | | $ | 57,408 | | $ | 43,120 | |
The following are some noteworthy developments in the Company’s financial results:
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| | Net interest income grew $13.2 million, or 9.2%, in 2019 compared to the prior year. The increase in 2019 was primarily due to strong organic loan and lease growth and recent acquisitions.
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| ·
| | Provision expense decreased $5.6 million when comparing 2019 to 2018. The decrease in 2019 was primarily attributable to continued asset quality improvements.
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| ·
| | Noninterest income increased $37.2 million, or 90%, when compared to the prior year. The increase in 2019 was primarily attributable to higher swap fee income as well as a $12.3 million gain on the sale of substantially all of the assets and liabilities of RB&T.
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| ·
| | Noninterest expense increased $36.1 million, or 30.3%, in 2019 compared to the prior year, due to:
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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
The Company had previously established 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. The Company’s long-term financial goals are as follows:
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| | 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%;
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| ·
| | Improve profitability (measured by NIM and ROAA);
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| ·
| | 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;
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| ·
| | Grow core deposits to maintain reliance on wholesale funding at less than 15% of total assets;
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| | Continue to focus on generating gains on sales of government guaranteed portions of loans and swap fee income to more than $8-12 million annually; and
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| | Grow wealth management net income by 10% annually.
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The following table shows the evaluation of the Company’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 | % |
| (1)
| | Refer to GAAP to non-GAAP Reconciliations for detail concerning non-GAAP financial measures.
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| (2)
| | Targets will be re-evaluated and adjusted as appropriate.
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| (3)
| | Wholesale funding to total assets is calculated by dividing total borrowings and brokered deposits by total assets.
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In 2020, the Company announced refreshed strategic financial metrics that it intends to measure, monitor and adhere to as follows:
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| | Grow loans and leases organically by 9% per year, funded with core deposits;
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| | Grow fee income by no less than 6% per year; and
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| ·
| | Improve operational efficiencies and hold noninterest expense growth to 5% per year.
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STRATEGIC DEVELOPMENTS
The Company took the following actions in 2019 to support our corporate strategy and further the long-term financial goals shown above.
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| | Excluding the impact of RB&T loans/leases sold, loan and lease growth for the year was 10.9%. This was in the range of the Company’s target organic growth rate of 10‑12%. A portion of this growth was in the C&I category. As of December 31, 2019, this segment of the portfolio accounted for 41% of total loans and leases. The Company has also grown CRE loans, with that segment now representing 47% of the portfolio as of December 31, 2019. The strong organic loan and lease growth has continued to help maintain the loan and lease to total asset ratio at 75% for both 2019 and 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.
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| ·
| | Excluding RB&T loans/leases sold, the Company continues to focus on reducing the NPAs to total assets ratio. The ratio of NPAs to total assets decreased from 0.56% at December 31, 2018 to 0.27% at December 31, 2019. The Company remains committed to improving asset quality in 2020.
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| ·
| | Management continues to focus on reducing the Company’s reliance on wholesale funding and continues to prioritize core deposit growth through a variety of strategies including growth in correspondent banking.
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| ·
| | 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 – and to expand into Missouri. The Company acts as the correspondent bank for 193 downstream banks with total average noninterest bearing deposits of $170.4 million and total average interest bearing deposits of $326.7 million as of December 31, 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.
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| ·
| | As a result of the relatively 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.
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| ·
| | 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, 2019, the Company had $3.2 billion of total financial assets in trust and related accounts and $1.7 billion of total financial assets in brokerage 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 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.
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GAAP TO NON-GAAP RECONCILIATIONS
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted net income attributable to QCR Holdings, Inc. common stockholders”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM” and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
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| | TCE/TA ratio (non-GAAP) is reconciled to stockholders’ equity and total assets;
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| ·
| | Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;
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| ·
| | NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; and
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| ·
| | Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income.
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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 Company’s management believes that adjusted net income, adjusted EPS and adjusted ROAA are important to investors as they exclude non-recurring income and expense items. Therefore, they provide a helpful 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. It is standard ineconomy, the banking industry and widely utilized by investors.the Company in future fiscal periods, all subject to a high degree of uncertainty.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
| | | | | | | | | | As of | | GAAP TO NON-GAAP | | December 31, | | December 31, | | RECONCILIATIONS | | 2019 | | 2018 | | | | (dollars in thousands, except per share data) | | TCE/TA RATIO | | | | | | | | Stockholders' equity (GAAP) | | $ | 535,351 | | $ | 473,138 | | Less: Intangible assets | | | 89,718 | | | 95,282 | | TCE (non-GAAP) | | $ | 445,633 | | $ | 377,856 | | | | | | | | | | Total assets (GAAP) | | $ | 4,909,050 | | $ | 4,949,710 | | Less: Intangible assets | | | 89,718 | | | 95,282 | | TA (non-GAAP) | | $ | 4,819,332 | | $ | 4,854,428 | | | | | | | | | | TCE/TA ratio (non-GAAP) | | | 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%.
NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS) (Non-GAAP)
Net interest income, on a tax equivalent basis, increased 9% to $162.3 million 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 merger with Springfield Bancshares in the third quarter of 2018; and
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| ·
| | Strong organic loan and deposit growth over the past 12 months.
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A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
| | | | | | | | | | | | | | | | 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 | % | |
Acquisition accounting net accretion can fluctuate mostly dependingEffects on the payoff activityCompany’s Market Areas
The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois. Each of these three states has recently taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the acquired loans. In evaluating net interest incomepandemic. Effects on the Company’s Business The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and NIM, it's important to understandresults of operations will depend on future developments that cannot be predicted, including the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM withduration 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 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 NIM during the year was due to a 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 and 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 a falling rate environment, and the Company experienced NIM expansion.
In an effort to shift its interest rate risk position closer to neutral, the Company purchased interest rate caps on $375 million of variable rate deposits and short-term fixed rate brokered CDs. See Note 7scope of the Company’s Consolidated Financial Statements for detailspandemic. The direct or indirect impact on the interest rate caps purchased. The result shifted the Company’s interest rate risk position from liability sensitive to modestly asset sensitive. The Company is now better positioned to withstand shifts in interest rates including both risingemployees, customers, counterparties, and falling ratesservice providers, as well as other shapesmarket participants, is likely to continue through 2022 as the world attempts to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.
The Company currently expects that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the yield curve. Refer to Item 7A for further discussionglobal economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on the Company’s interest rate risk position. The Company's management closely monitorsliquidity, and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies which 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 Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presentedany recession that has occurred or may occur 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 | % | | | | | |
| (1)
| | Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
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| (2)
| | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
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| (3)
| | Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
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future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. The Company’s components of change in net interest income are presented in the following table:
| | | | | | | | | | | | | 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.
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| (2)
| | Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
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| (3)
| | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
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The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the U.S. of America.GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill and the fair value of financial instruments. A more detailed discussion of these critical accounting policies and estimates can be found in Note 1 to the Consolidated Financial Statements. Based on its consideration of accounting policies and estimates that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:policies and estimates: GOODWILLGOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The initial recognition of goodwill and subsequent impairment analysis requires us to make subjective judgments concerning estimates of how the 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 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 asetsassets 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. |
The Company engagedAs of November 30, 2021 the Company’s management performed an external specialist to assess the goodwillannual assessment 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.impairment existed.
ALLOWANCE FOR LOANCREDIT LOSSES ON LOANS AND LEASE LOSSESLEASES AND OFF-BALANCE SHEET EXPOSURES On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures and HTM securities to be calculated using a current expected credit loss methodology. The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors includeThe Company’s methodologies for estimating the Company’sACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable – to the identified pools of financial assets with similar risk characteristics for which the historical loss experience delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, andwas observed. If a loan is determined to no longer share similar risk characteristics with 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 environmentassets in the segmented pool, it is evaluated on an individual basis.
The Company believes that as a result of the COVID-19 pandemic, losses have been incurred that are not yet known and this could have an adverse effect in the future on the Company’s markets, including economic conditions both locallyACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and nationally,defaults resulting in an increase in quantitative allocations. Management believes individually analyzed loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL. The Company also estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance for OBS exposures is calculated using probability of default and in particularloss given default using the economic health of certain industries. Sizesame segmentation 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 productsused for loans 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’s allowance should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this
Annual Report on Form 10‑K, as well as the portion of this MD&A section entitled “Financial Condition – Allowance for Estimated Losses on Loans/Leases.”leases.
Although management believes the level of the allowanceACL as of December 31, 20192021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. FAIR VALUE OF SECURITIES The fair value of securities is determined monthly and the securities are stated at fair value. For available for sale securities, unrealized gains and losses are reported as a component of stockholders’ equity, net of the related tax effect. For both available for sale and held to maturity debt securities, any portion of a decline in value associated with credit loss is recognized in income with the remaining noncredit related component being recognized in other comprehensive income. EXECUTIVE OVERVIEW The Company reported net income of $98.9 million for the year ended December 31, 2021, and diluted EPS of $6.20. For the same period in 2020 the Company reported net income of $60.6 million and diluted EPS of $3.80. The year ended December 31, 2021 was highlighted by several significant items: | ● | Record annual net income of $98.9 million, or $6.20 per diluted share; |
| ● | Noninterest income of $100.4 million for the year; |
| ● | Core deposit growth of 7.2% for the year*; |
| ● | Loan and lease growth of 16.9% for the year, excluding PPP loans (non-GAAP); |
| ● | ACL to total loans/leases of 1.69%, excluding PPP loans (non-GAAP); and |
| ● | Nonperforming assets to total assets improved by 80% for the full year and now represent only 0.05% of total assets at December 31, 2021. |
* Core deposits are total deposits less brokered deposits Following is a table that represents the various net income measurements for the years ended December 31, 2021 and 2020. | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | | (dollars in thousands, except per share data) | | | | | | | | Net income | $ | 98,905 | | $ | 60,582 | | | | | | | | | Diluted earnings per common share | $ | 6.20 | | $ | 3.80 | | | | | | | | | Weighted average common and common equivalent shares outstanding | | 15,944,708 | | | 15,952,637 | |
The Company reported adjusted net income (non-GAAP) of $100.0 million, with adjusted diluted EPS of $6.27. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the year excludes a number of non-recurring items, after-tax, most significantly: | ● | $135 thousand of mark to market gains on unhedged derivatives; |
| ● | $493 thousand of acquisition costs; and |
| ● | $734 thousand of separation agreement expense. |
Following is a table that represents the major income and expense categories. | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | | | (dollars are in thousands) | | | | | | | | | Net interest income | | $ | 178,233 | | $ | 166,950 | | Provision for credit losses | | | 3,486 | | | 55,704 | | Noninterest income | | | 100,422 | | | 113,798 | | Noninterest expense | | | 153,702 | | | 151,755 | | Federal and state income tax expense | | | 22,562 | | | 12,707 | | Net income | | $ | 98,905 | | $ | 60,582 | | | | | | | | | |
The following are some noteworthy developments in the Company’s financial results: | ● | Net interest income grew $11.3 million, or 6.8%, in 2021 compared to the prior year. The increase in 2021 was primarily due to strong loan/lease growth funded by core deposit growth while maintaining modest excess liquidity. The Company had success moving cost of funds lower which helped to drive NIM expansion of 4% compared to the fourth quarter of 2020. |
| ● | Provision expense decreased $52.2 million when comparing 2021 to 2020. The decrease in 2021 was primarily due to continued strong credit quality, a reduction in NPLs and improving economic conditions. Additionally, the provision amounts for prior years were calculated under different accounting standards due to the adoption of CECL on January 1, 2021. See the “Provision for Credit Losses” section of this report for additional details. |
| ● | Noninterest income decreased $13.4 million, or 11.8%, when compared to the prior year. The decrease in 2021 was primarily attributable to lower swap fee income/capital market revenue. |
| ● | Noninterest expense increased $1.9 million, or 1.3%, in 2021 compared to the prior year, primarily due to an increase in salaries and benefits expense, a write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets and increase in advertising and marketing expense. In addition, there was a $1.1 million increase in net income from and gain/losses on operations of other real estate due to the sale of one large OREO property at a gain. |
STRATEGIC FINANCIAL METRICS The Company has established strategic financial metrics 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. The Company’s strategic financial metrics are as follows: | ● | Generate organic loan and lease growth of 9% per year, funded by core deposits; |
| ● | Grow fee-based income by at least 6% per year; and |
| ● | Limit our annual operating expense growth to 5% per year. |
The following table shows the evaluation of the Company’s strategic financial metrics: | | | | | | | | | | | | | | | | | | For the Year Ending | Strategic Financial Metric* | | Key Metric | | Target | | December 31, 2021 | December 31, 2020 | Loan and lease growth organically ** | | Loans and leases growth | | > 9% annually | | | 16.9 | % | | 7.8 | % | Fee income growth | | Fee income growth | | > 6% annually | | | (10.1) | % | | 67.8 | % | Improve operational efficiencies and hold noninterest expense growth | | Noninterest expense growth | | < 5% annually | | | 4.0 | % | | 1.5 | % |
* The calculations provided exclude non-core noninterest income and noninterest expense. ** Loans and leases growth excludes PPP loans. It should be noted that these initiatives are long-term targets. STRATEGIC DEVELOPMENTS The Company took the following actions in 2021 to support our corporate strategy and further the strategic financial metrics shown above: | ● | The Company grew loans and leases organically in 2021 by 16.9%, excluding PPP loans (non-GAAP), driven by both our specialty finance group and our traditional lending and leasing business. |
| ● | 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 four states it currently serves – Iowa, Wisconsin, Missouri and Illinois. The Company acts as the correspondent bank for 187 downstream banks with total average noninterest bearing deposits of $349.0 million and total average interest bearing deposits of $305.3 million for 2021. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. |
| ● | The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. Future levels of swap fees are somewhat dependent upon prevailing interest rates. Swap fee income/capital markets revenue totaled $61.0 million in 2021 as compared to $74.8 million in 2020. Swap fee income relative to the increase in notional amount of the non-hedging interest rate swap contracts was 11.5% in 2021 and 10.6% in 2020. |
| ● | In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $1.0 billion in 2021. There were 321 new relationships added in 2021 totaling $450.2 million of new assets under management. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust |
| | department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations. |
| ● | Noninterest expense in 2021 totaled $153.7 million as compared to $151.8 million in 2020. Salaries and employee benefits expense increased 5% in 2021. This increase was primarily related to increased performance-based incentive compensation driven by strong financial results. Advertising and marketing expenses increased 31% primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020. In addition, there were $624 thousand of acquisition costs in 2021 related to the pending acquisition of GFED as discussed in the Company’s financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K. Net cost of (income from) and gains/losses on operations of other real estate totaled $1.4 million for 2021 due primarily to the sale of one commercial OREO property at a gain. There were no losses on liability extinguishment in 2021 as compared to $3.9 million in 2020 from the prepayment of certain FHLB advances. Other noninterest expense increased 44% in 2021 due primarily to the write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets. |
GAAP TO NON-GAAP RECONCILIATIONS The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”, “ACL to total loans and leases excluding PPP loans” and “loan growth excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows: | ● | TCE/TA ratio (non-GAAP) is reconciled to stockholders’ equity and total assets; |
| ● | Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income; |
| ● | NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; |
| ● | Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and |
| ● | ACL to total loans and leases excluding PPP loans and loan growth excluding PPP loans (all non-GAAP measures) are reconciled to ACL and total loans and leases. |
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 following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company’s management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance. NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain 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. It is standard in the banking industry and widely utilized by investors. ACL to total loans and leases, excluding PPP loans, and loan growth, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the years ended December 31, 2021 and 2020 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ACL. By excluding the PPP loans, the investor is provided a better comparison to prior years for analysis. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. | | | | | | | | | | | | As of | | GAAP TO NON-GAAP | | | December 31, | | December 31, | | RECONCILIATIONS | | | 2021 | | 2020 | | | | | | (dollars in thousands, except per share data) | | TCE/TA RATIO | | | | | | | | | Stockholders' equity (GAAP) | | | $ | 677,010 | | $ | 593,793 | | Less: Intangible assets | | | | 83,415 | | | 85,447 | | TCE (non-GAAP) | | | $ | 593,595 | | $ | 508,346 | | | | | | | | | | | Total assets (GAAP) | | | $ | 6,096,132 | | $ | 5,705,043 | | Less: Intangible assets | | | | 83,415 | | | 85,447 | | TA (non-GAAP) | | | $ | 6,012,717 | | $ | 5,619,596 | | | | | | | | | | | TCE/TA ratio (non-GAAP) | | | | 9.87 | % | | 9.05 | % |
| | | | | | | | | | For the Year Ended | | | | December 31, | | December 31, | | | | 2021 | | 2020 | | | | | | | | | | ADJUSTED NET INCOME | | | | | | | | Net income (GAAP) | | $ | 98,905 | | $ | 60,582 | | Less non-core items (post-tax) (*): | | | | | | | | Income: | | | | | | | | Securities gains (losses), net | | $ | (69) | | $ | 1,962 | | Mark to market gains on unhedged derivatives, net | | | 135 | | | — | | Gain on sale of loan | | | 28 | | | — | | Loss on syndicated loan | | | — | | | (210) | | Total non-core income (non-GAAP) | | $ | 94 | | $ | 1,752 | | Expense: | | | | | | | | Losses on liability extinguishment | | $ | — | | $ | 3,087 | | Goodwill impairment | | | — | | | 500 | | Disposition costs | | | 10 | | | 545 | | Acquisition costs | | | 493 | | | — | | Post-acquisition compensation, transition and integration costs | | | — | | | 169 | | Separation agreement | | | 734 | | | — | | Loss on sale of subsidiary | | | — | | | 110 | | Total non-core expense (non-GAAP) | | $ | 1,237 | | $ | 4,411 | | | | | | | | | | | | | | | | | | Adjusted net income (non-GAAP) | | $ | 100,048 | | $ | 63,241 | | | | | | | | | | ADJUSTED EPS | | | | | | | | Adjusted net income (non-GAAP) (from above) | | $ | 100,048 | | $ | 63,241 | | | | | | | | | | Weighted average common shares outstanding | | | 15,708,744 | | | 15,771,650 | | Weighted average common and common equivalent shares outstanding | | | 15,944,708 | | | 15,952,637 | | | | | | | | | | Adjusted EPS (non-GAAP): | | | | | | | | Basic | | $ | 6.37 | | $ | 4.01 | | Diluted | | $ | 6.27 | | $ | 3.96 | | | | | | | | | | ADJUSTED ROAA | | | | | | | | Adjusted net income (non-GAAP) (from above) | | $ | 100,048 | | $ | 63,241 | | | | | | | | | | Average Assets | | $ | 5,890,042 | | $ | 5,604,074 | | | | | | | | | | Adjusted ROAA (non-GAAP) | | | 1.70 | % | | 1.13 | % | | | | | | | | | ADJUSTED NIM (TEY)* | | | | | | | | Net interest income (GAAP) | | $ | 178,233 | | $ | 166,950 | | Plus: Tax equivalent adjustment | | | 10,211 | | | 8,216 | | Net interest income - tax equivalent (non-GAAP) | | $ | 188,444 | | $ | 175,166 | | Less: Acquisition accounting net accretion | | | 1,340 | | | 3,271 | | Adjusted net interest income | | $ | 187,104 | | $ | 171,895 | | | | | | | | | | Average earning assets | | $ | 5,398,868 | | $ | 5,085,659 | | | | | | | | | | NIM (GAAP) | | | 3.30 | % | | 3.28 | % | NIM (TEY) (non-GAAP) | | | 3.49 | % | | 3.44 | % | Adjusted NIM (TEY) (non-GAAP) | | | 3.47 | % | | 3.38 | % | | | | | | | | | EFFICIENCY RATIO | | | | | | | | Noninterest expense (GAAP) | | $ | 153,702 | | $ | 151,755 | | | | | | | | | | Net interest income (GAAP) | | $ | 178,233 | | $ | 166,950 | | Noninterest income (GAAP) | | | 100,422 | | | 113,798 | | Total income | | $ | 278,655 | | $ | 280,748 | | | | | | | | | | Efficiency ratio (noninterest expense/total income) (non-GAAP) | | | 55.16 | % | | 54.05 | % | | | | | | | | | ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS | | | | | | | | ACL, loans and leases | | $ | 78,721 | | $ | 84,376 | | | | | | | | | | Total loans and leases | | | 4,680,132 | | | 4,251,129 | | Less: PPP loans | | | 28,181 | | | 273,146 | | Total loans and leases, excluding PPP loans | | $ | 4,651,951 | | $ | 3,977,983 | | | | | | | | | | ACL to total loans and leases, excluding PPP loans | | | 1.69 | % | | 2.12 | % | | | | | | | | | LOAN GROWTH, EXCLUDING PPP LOANS | | | | | | | | Total loans and leases | | $ | 4,680,132 | | $ | 4,251,129 | | Less: PPP loans | | | 28,181 | | | 273,146 | | Total loans and leases, excluding PPP loans | | $ | 4,651,951 | | $ | 3,977,983 | | | | | | | | | | Loan growth, excluding PPP loans | | | 16.94 | % | | 7.80 | % |
* 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%. NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS) Net interest income, on a tax equivalent basis (non-GAAP), increased 8% to $188.4 million for the year ended December 31, 2021, as compared to the prior year. Excluding the tax equivalent adjustments, net interest income increased 7% for the year ended December 31, 2021 compared to the prior year. Net interest income improved due to several factors: | ● | Strong organic loan and deposit growth; |
| ● | Significant growth and forgiveness of PPP loans in 2021 and 2020; |
| ● | Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and |
| ● | Reduction in cost of funds. |
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows: | | | | | GAAP | | For the Year Ended | | December 31, | | 2020 | Average Yield on Interest-Earning Assets | | 3.97 | % | Average Cost of Interest-Bearing Liabilities | | 0.63 | % | Net Interest Spread | | 3.34 | % | NIM (TEY) (Non-GAAP) | | 3.28 | % | NIM Excluding Acquisition Accounting Net Accretion | | 3.27 | % |
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it's important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows: | | | | | | | | | | | | For the Year Ended | | | | | December 31, | | | December 31, | | | | | 2021 | | | 2020 | | | | | (dollars in thousands) | | | | | | | | | Acquisition Accounting Net Accretion in NIM | | | $ | 1,340 | | $ | 3,271 |
The Company's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies which 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 Company’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, | | 2021 | | | 2020 | | | 2019 | | | | | | 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 | $ | 1,964 | | $ | 2 | | | 0.10 | % | | $ | 2,398 | | $ | 19 | | 0.79 | % | | $ | 8,898 | | $ | 203 | | 2.29 | % | Interest-bearing deposits at financial institutions | | 116,421 | | | 173 | | | 0.15 | | | | 315,616 | | | 669 | | 0.21 | | | | 179,635 | | | 3,910 | | 2.18 | | Investment securities (1) | | 804,636 | | | 29,504 | | | 3.66 | | | | 715,808 | | | 26,773 | | 3.74 | | | | 635,650 | | | 24,151 | | 3.80 | | Restricted investment securities | | 19,386 | | | 950 | | | 4.83 | | | | 20,270 | | | 1,031 | | 5.00 | | | | 21,559 | | | 1,174 | | 5.45 | | Gross loans/leases receivable (1) (2) (3) | | 4,456,461 | | | 179,738 | | | 4.03 | | | | 4,031,567 | | | 178,097 | | 4.42 | | | | 3,857,547 | | | 193,365 | | 5.01 | | Total interest earning assets | $ | 5,398,868 | | | 210,367 | | | 3.90 | | | $ | 5,085,659 | | | 206,589 | | 4.06 | | | $ | 4,703,289 | | | 222,803 | | 4.74 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and due from banks | $ | 60,298 | | | | | | | | | $ | 80,208 | | | | | | | | $ | 81,645 | | | | | | | Premises and equipment | | 75,015 | | | | | | | | | | 73,063 | | | | | | | | | 78,189 | | | | | | | Less allowance | | (81,633) | | | | | | | | | | (55,275) | | | | | | | | | (40,953) | | | | | | | Other | | 420,809 | | | | | | | | | | 420,419 | | | | | | | | | 280,810 | | | | | | | Total assets | $ | 5,873,357 | | | | | | | | | $ | 5,604,074 | | | | | | | | $ | 5,102,980 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | $ | 3,058,917 | | | 8,621 | | | 0.28 | % | | $ | 2,797,669 | | | 11,980 | | 0.43 | % | | $ | 2,443,989 | | | 29,898 | | 1.22 | % | Time deposits | | 448,191 | | | 4,679 | | | 1.04 | | | | 690,222 | | | 11,289 | | 1.64 | | | | 966,745 | | | 20,977 | | 2.17 | | Short-term borrowings | | 6,281 | | | 5 | | | 0.08 | | | | 22,625 | | | 84 | | 0.37 | | | | 16,837 | | | 363 | | 2.16 | | FHLB advances | | 23,389 | | | 70 | | | 0.30 | | | | 74,167 | | | 1,087 | | 1.44 | | | | 108,536 | | | 2,895 | | 2.67 | | Other borrowings | | — | | | — | | | — | | | | — | | | — | | — | | | | 13,563 | | | 512 | | 3.77 | | Subordinated notes | | 115,398 | | | 6,272 | | | 5.44 | | | | 83,404 | | | 4,697 | | 5.63 | | | | 60,883 | | | 3,564 | | 5.85 | | Junior subordinated debentures | | 38,067 | | | 2,276 | | | 5.90 | | | | 37,913 | | | 2,286 | | 5.93 | | | | 37,751 | | | 2,308 | | 6.11 | | Total interest-bearing liabilities | $ | 3,690,243 | | | 21,923 | | | 0.59 | | | $ | 3,706,000 | | | 31,423 | | 0.85 | | | $ | 3,648,304 | | | 60,517 | | 1.66 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest-bearing demand deposits | $ | 1,269,467 | | | | | | | | | $ | 1,052,375 | | | | | | | | $ | 817,473 | | | | | | | Other noninterest-bearing liabilities | | 276,457 | | | | | | | | | | 279,459 | | | | | | | | | 129,794 | | | | | | | Total liabilities | $ | 5,236,167 | | | | | | | | | $ | 5,037,834 | | | | | | | | $ | 4,595,571 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stockholders' equity | | 637,190 | | | | | | | | | | 566,240 | | | | | | | | | 507,409 | | | | | | | Total liabilities and stockholders' equity | $ | 5,873,357 | | | | | | | | | $ | 5,604,074 | | | | | | | | $ | 5,102,980 | | | | | | | Net interest income | | | | $ | 188,444 | | | | | | | | | $ | 175,166 | | | | | | | | $ | 162,286 | | | | Net interest spread | | | | | | | | 3.31 | % | | | | | | | | 3.21 | % | | | | | | | | 3.08 | % | Net interest margin | | | | | | | | 3.30 | % | | | | | | | | 3.28 | % | | | | | | | | 3.31 | % | Net interest margin (TEY)(Non-GAAP) | | | | | | | | 3.49 | % | | | | | | | | 3.44 | % | | | | | | | | 3.45 | % | Adjusted net interest margin (TEY)(Non-GAAP) | | | | | | | | 3.47 | % | | | | | | | | 3.38 | % | | | | | | | | 3.36 | % | Ratio of average interest-earning assets to average interest-bearing liabilities | | 146.30 | % | | | | | | | | | 137.23 | % | | | | | | | | 128.92 | % | | | | | |
| (1) | Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate. |
| (2) | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance. |
| (3) | Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance. |
The Company’s components of change in net interest income are presented in the following table: | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, 2021 and 2020 | | | Inc./(Dec.) | | Components | | Inc./(Dec.) | | Components | | | from | | of Change (1) | | from | | of Change (1) | | | Prior Year | | Rate | | Volume | | Prior Year | | Rate | | Volume | | | | 2021 vs. 2020 | | 2020 vs. 2019 | | | (dollars in thousands) | | (dollars in thousands) | INTEREST INCOME | | | | | | | | | | | | | | | | | | | Federal funds sold | | $ | (17) | | $ | (14) | | $ | (3) | | $ | (184) | | $ | (88) | | $ | (96) | Interest-bearing deposits at financial institutions | | | (496) | | | (154) | | | (342) | | | (3,241) | | | (4,985) | | | 1,744 | Investment securities (2) | | | 2,731 | | | (576) | | | 3,307 | | | 2,622 | | | (382) | | | 3,004 | Restricted investment securities | | | (81) | | | (35) | | | (46) | | | (143) | | | (83) | | | (60) | Gross loans/leases receivable (2) (3) | | | 1,641 | | | (16,368) | | | 18,009 | | | (15,268) | | | (23,679) | | | 8,411 | Total change in interest income | | $ | 3,778 | | $ | (17,147) | | $ | 20,925 | | $ | (16,214) | | $ | (29,217) | | $ | 13,003 | | | | | | | | | | | | | | | | | | | | INTEREST EXPENSE | | | | | | | | | | | | | | | | | | | Interest-bearing deposits | | $ | (3,359) | | $ | (4,422) | | $ | 1,063 | | $ | (17,918) | | $ | (21,725) | | $ | 3,807 | Time deposits | | | (6,610) | | | (3,375) | | | (3,235) | | | (9,688) | | | (4,462) | | | (5,226) | Short-term borrowings | | | (79) | | | (41) | | | (38) | | | (279) | | | (372) | | | 93 | Federal Home Loan Bank advances | | | (1,017) | | | (546) | | | (471) | | | (1,808) | | | (1,071) | | | (737) | Other borrowings | | | — | | | — | | | — | | | (512) | | | (256) | | | (256) | Subordinated notes | | | 1,575 | | | — | | | 1,575 | | | 1,133 | | | — | | | 1,133 | Junior subordinated debentures | | | (10) | | | — | | | (10) | | | (22) | | | — | | | (22) | Total change in interest expense | | $ | (9,500) | | $ | (8,384) | | $ | (1,116) | | $ | (29,094) | | $ | (27,886) | | $ | (1,208) | | | | | | | | | | | | | | | | | | | | Total change in net interest income | | $ | 13,278 | | $ | (8,763) | | $ | 22,041 | | $ | 12,880 | | $ | (1,331) | | $ | 14,211 |
| (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 21% tax rate. |
| (3) | Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance. |
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses. The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 20192021 and 20182020 INTEREST INCOME For 2019,2021, interest income grew $33.3increased $1.8 million, or 18%.1%, primarily due to an increase in the volume of average securities and average loans/leases partially offset by a decline in yields on average loans/leases and average securities. In total, the Company’s average interest-earning assets increased $583.1$313.2 million, or 14%6%, year-over-year. Average loans/leases grew 15%11%, 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 12%. The acquisition of Guaranty Bank occurred in the fourth quarter of 2017, therefore 2018 was the first full year that Guaranty Bank was included in the Company’s financial results. The acquisition of SFC Bank in the third quarter of 2018 also contributed to the increase in interest income and average interest-earning assets.
In 2019, the Company continued to diversify its securities portfolio, including 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 EXPENSE Comparing 20192021 to 2018,2020, interest expense increased $20.0decreased $9.5 million, or 49%30%, year-over-year. Average interest-bearing liabilities increased 16% in 2019. The acquisition of SFC Bank occurred in the third quarter of 2018. Therefore 2019 was the first full year that SFC Bank was included in the Company’s financial results. 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 withcore deposits and has also allowed the Company to prepay higher rate sensitivity, many of which have pricing tied to a certain index. As a result, the cost of these funds is higher than the rest of the Company’s core deposit portfolio,brokered deposits and the cost rises at a higher rate (beta) as market interest rates rise. The beta on the balance of the Company’s core deposit portfolio has performed well and is much lower than the beta on relationships with pricing tied to a certain index. Additionally, loan growth has outpaced deposit growth. Therefore, short-term borrowings have increased to temporarily fill in the funding gap and the cost of these funds has increased with the rising rate environment experienced in 2018 and the first half of 2019.FHLB advances. In the second half of 2019,2020 and the full year of 2021, the Company’s cost of funds declined in conjunction with the now declining rate environment. In addition, the Company purchased interest rate capsThe Company’s cost of funds expansion in future rising rate environments.was 0.59% for the year ending December 31, 2021, which was down from 0.85% for the year ending December 31, 2020. The Company’s management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company’s franchise value, reduce funding costs and increase fee income opportunities through deposit service charges. PROVISION FOR LOAN/LEASECREDIT LOSSES The ACL is established through provision for loan/leasecredit losses expense to provide an estimated ACL. The following table shows the components for the provision for credit losses for the years ended December 31, 2021 and 2020. | | | | | | | | | Year Ended | | | December 31, | | December 31, | | | 2021 | | 2020 | | | | (dollars in thousands) | | | | | | | | Provision for credit losses - loans and leases (1) | | $ | 5,702 | | $ | 55,704 | Provision for credit losses - off-balance sheet exposures (2) | | | (2,231) | | | N/A | Provision for credit losses - held to maturity securities (3) | | | 15 | | | N/A | Total provision for credit losses | | $ | 3,486 | | $ | 55,704 |
| (1) | 2021 and years forward are evaluated using ASU 2016-13 and years prior to 2021 were calculated under an incurred loss model. |
| (2) | Prior to adoption of ASU 2016-13 on January 1, 2021, there were no requirements to record provision for off-balance sheet exposures. |
| (3) | Prior to the adoption of ASU 2016-13 on January 1, 2021, there was no requirement to record provision for credit losses for held to maturity securities. |
The Company’s total provision for credit losses was $3.5 million for 2021, a decrease of $52.2 million from 2020. The adoption of ASU 2016-13 now requires an allowance on HTM debt securities and OBS exposures, specifically unfunded commitments. For the year ended December 31, 2021, the provision related to OBS was negative due to the decrease in the balance of those OBS exposures with an increase in line of credit usage. The decrease in provision on loans and leases was substantially driven by decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19. The ACL for loans and leases is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economyeconomies and the risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies”Policies and Critical Accounting Estimates” section. The Company’s provision totaled $7.1 million for 2019, a derease of $5.6 million from 2018. The decrease in 2019 was primarily attributable to improved asset quality.
The Company had an allowanceACL on loans/leases of 0.98%1.68% of total gross loans/leases at December 31, 2019,2021, compared to 1.07%1.98% of total gross loans/leases at December 31, 2018.2020. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $7.0$1.5 million and $11.6$3.1 million at December 31, 20192021 and 2018,2020, respectively. The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19: | | | | | | | As of December 31, | | | 2021 | | | | | % of Total Gross | | | Amount | | Loans and Leases | | | | (dollars in thousands) | | | | | | | | Hotels | $ | 76,628 | | 1.64 | % | Arts, Entertainment and Recreation | | 21,918 | | 0.47 | | Restaurants (full service and limited service only) | | 21,162 | | 0.45 | | | $ | 119,708 | | 2.56 | % |
Additional discussion of the Company’s allowance to total NPLs was 403.87% at December 31, 2019, which was up from 214.79% at December 31, 2018. The fluctuationscan be found in these ratios were the result“Financial Condition” section of recent acquisitions. In accordance with GAAP for acquisition accounting, acquired loans must be recorded at fair value; therefore, no 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.this report.
For 2020, the Company expects the provision for credit losses to adjust with changes to risk grade, other indications40
NONINTEREST INCOME The following tables set forth the various categories of noninterest income for the years ended December 31, 20192021 and 2018.2020. | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | December 31, | | December 31, | | | | | | | | | | 2021 | | 2020 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | December 31, | | December 31, | | | | | | | | | | 2019 | | 2018 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | Trust department fees | | $ | 9,559 | | $ | 8,707 | | $ | 852 | | 9.8 | % | | $ | 11,206 | | $ | 9,207 | | $ | 1,999 | | 21.7 | % | Investment advisory and management fees | | | 6,995 | | | 4,726 | | | 2,269 | | 48.0 | | | | 4,080 | | | 5,318 | | | (1,238) | | (23.3) | | Deposit service fees | | | 6,812 | | | 6,420 | | | 392 | | 6.1 | | | | 6,132 | | | 6,041 | | | 91 | | 1.5 | | Gains on sales of residential real estate loans, net | | | 2,571 | | | 901 | | | 1,670 | | 185.3 | | | | 4,397 | | | 4,680 | | | (283) | | (6.0) | | Gains on sales of government guaranteed portions of loans, net | | | 748 | | | 405 | | | 343 | | 84.7 | | | | 227 | | | 224 | | | 3 | | 1.3 | | Swap fee income | | | 28,295 | | | 10,787 | | | 17,508 | | 162.3 | | | Securities losses, net | | | (30) | | | — | | | (30) | | 100.0 | | | Swap fee income/capital markets revenue | | | | 60,992 | | | 74,821 | | | (13,829) | | (18.5) | | Securities gains (losses), net | | | | (88) | | | 2,484 | | | (2,572) | | (103.5) | | Earnings on bank-owned life insurance | | | 1,973 | | | 1,632 | | | 341 | | 20.9 | | | | 1,838 | | | 1,904 | | | (66) | | (3.5) | | Debit card fees | | | 3,357 | | | 3,263 | | | 94 | | 2.9 | | | | 4,216 | | | 3,402 | | | 814 | | 23.9 | | Correspondent banking fees | | | 773 | | | 852 | | | (79) | | (9.3) | | | | 1,114 | | | 903 | | | 211 | | 23.4 | | Gain on sale of assets and liabilities of subsidiary | | | 12,286 | | | — | | | 12,286 | | 100.0 | | | Other | | | 5,429 | | | 3,848 | | | 1,581 | | 41.1 | | | | 6,308 | | | 4,814 | | | 1,494 | | 31.0 | | Total noninterest income | | $ | 78,768 | | $ | 41,541 | | $ | 37,227 | | 89.6 | % | | $ | 100,422 | | $ | 113,798 | | $ | (13,376) | | (11.8) | % | | | | | | | | | | | | | | |
In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income. With strong growth in assetsAssets under management trust department fees increased 10%by $1.0 billion in the current year.2021. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. Trust department fees increased 22% in 2021 as compared to 2020. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuation. Management has placed a stronger emphasis on growing its investmentInvestment advisory and management services. Part of this initiative has beenfees decreased 23% in 2021 as compared to structure 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.2020. Similar to trust department fees, fees from these services are largely determined based on the value of the investments managed. On October 1, 2018 the Company acquiredAs a result, fee income from this line of business fluctuates with market valuations. The sale of the Bates Companies headquartered in Rockford, Illinois. The acquisition enhancedAugust 2020 negatively impacted the wealth management servicesfee income from this line of business compared to 2020. Excluding the impact of the Company by adding approximately $704 million of assets under management as of the acquisition date. InvestmentBates Companies sale, investment advisory and management fees increased 48% in 2019 compared22% when comparing 2021 to 2018.
2020. Deposit service fees expanded 6%increased 2% in 20192021 as compared to 2018.2020. The increase was the result of recent acquistions. Additionally, theprimarily due to higher transactional volume with improving current economic conditions and new accounts. The Company has continued its emphasis oncontinues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees. Gains on sales of residential real estate loans, net, increased 185%decreased 6% in 20192021 as compared to 2018.2020. The increasedecrease was largelyprimarily due to decreased residential real estate purchases impacted by availability and the addition of SFC Bank in 2018 which recognized gains on salesrefinancing of residential real estate of $1.7 millionloans as volumes peaked in 2019. 2020 when rates declined. The Company’s gains on the sale of government-guaranteed portions of loans for 20192021 increased 85%1% as compared to 2018. Given2020. Over the nature of these gains, large fluctuations can happen from quarter-to-quarter and year-to-year. As one of its strategies, the Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company’s portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Recently,past few years, competitors have been offering SBA and USDA loan candidates traditional financing without such a guarantee and the Company is not willing to relax its structure for those lending opportunities. As a result of the relatively lowThe Company has grown its interest rate environment,swap program significantly over the Company was able to execute numerouspast several years. The Company’s interest rate swap program consists of back-to-back interest rate swaps on selectwith two types of commercial borrowers: (1) traditional commercial loans including tax credit projectof a certain minimum size and sophistication, and (2) LIHTC permanent loans. Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience. The LIHTC industry is strong and growing with an increased need for affordable housing. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Management will continueSwap fee income/capital markets revenue totaled $61.0 million in 2021 as compared to review opportunities$74.8 million in 2020. Swap fee income relative to execute these swaps at allthe increase in notional amount of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal
non-hedging interest rate swap candidate must be of a certain sizecontracts was 11.5% in 2021 and sophistication which can lead to volatility10.6% in activity from year to year. Swap fee income totaled $28.3 million in 20192020. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to $10.8 million in 2018.the LIHTC permanent loans. The increase in swap fee income was duemix of loans with interest rate swaps continued to both the volume and the size of the transactions executed.be heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon prevailingthe needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rates.rate environment. Securities losses, net of gains totaled $30$88 thousand in 20192021 as compared to no$2.5 million in securities gains, ornet of losses for 2018.in 2020. In 2020, management sold select overvalued securities and utilized the gains to offset the cost of prepaying certain high-cost wholesale funds. Earnings on BOLI increased 21%decreased 4% in 2019.2021. There were no purchases of BOLI in 2019.2021 or 2020. Yields on BOLI (based on a simple average and excluding the impact of the federal income tax exemption) were 2.10%2.94% for 20192021 and 2.57%2.87% for 2018.2020. 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 3%24% in 2019. The primary reason for the increase was the recent acquisitions.2021. These fees improved alongside improving economic conditions and more normalized spending patterns. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity. Correspondent banking fees decreased 9%increased 23% in 2019.2021. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves 193187 banks in Iowa, Illinois, Missouri and Wisconsin. Gain on sale of assets and liabilities of subsidiary totaled $12.3 million in 2019 due to the sale of the 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%31% in 2019. The increase was driven by fluctuations in net2021 primarily due to equity investment income and gains recognized on the disposal of leased assets, fee income and the addition of SFC Bank.assets. NONINTEREST EXPENSES The following tables set forth the various categories of noninterest expenses for the years ended December 31, 20192021 and 2018.2020. | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | December 31, | | December 31, | | | | | | | | | | 2021 | | 2020 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | Year Ended | | | | | | | | | | December 31, | | December 31, | | | | | | | | | | 2019 | | 2018 | | $ Change | | % Change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | Salaries and employee benefits | | $ | 92,063 | | $ | 68,994 | | $ | 23,069 | | 33.4 | % | | $ | 100,907 | | $ | 96,268 | | $ | 4,639 | | 4.8 | % | Occupancy and equipment expense | | | 15,106 | | | 12,884 | | | 2,222 | | 17.2 | | | | 15,918 | | | 16,504 | | | (586) | | (3.6) | | Professional and data processing fees | | | 13,381 | | | 11,452 | | | 1,929 | | 16.8 | | | | 14,579 | | | 14,644 | | | (65) | | (0.4) | | Acquisition costs | | | — | | | 1,795 | | | (1,795) | | (100.0) | | | | 624 | | | — | | | 624 | | 100.0 | | Post-acquisition compensation, transition and integration costs | | | 3,582 | | | 2,086 | | | 1,496 | | 71.7 | | | | — | | | 214 | | | (214) | | (100.0) | | Disposition costs | | | 3,325 | | | — | | | 3,325 | | 100.0 | | | | 13 | | | 690 | | | (677) | | (98.1) | | FDIC insurance, other insurance and regulatory fees | | | 2,955 | | | 3,594 | | | (639) | | (17.8) | | | | 4,475 | | | 4,164 | | | 311 | | 7.5 | | Loan/lease expense | | | 1,097 | | | 1,544 | | | (447) | | (29.0) | | | | 1,671 | | | 1,435 | | | 236 | | 16.4 | | Net cost of and gains/losses on operations of other real estate | | | 3,789 | | | 2,489 | | | 1,300 | | 52.2 | | | Net (income from) and gains/losses on operations of other real estate | | | | (1,420) | | | (307) | | | (1,113) | | 362.5 | | Advertising and marketing | | | 4,548 | | | 3,552 | | | 996 | | 28.0 | | | | 4,254 | | | 3,260 | | | 994 | | 30.5 | | Bank service charges | | | 2,009 | | | 1,838 | | | 171 | | 9.3 | | | | 2,173 | | | 2,016 | | | 157 | | 7.8 | | Loss on debt extinguishment | | | 436 | | | — | | | 436 | | 100.0 | | | Loss on liability extinguishment | | | | — | | | 3,907 | | | (3,907) | | (100.0) | | Correspondent banking expense | | | 836 | | | 821 | | | 15 | | 1.8 | | | | 799 | | | 838 | | | (39) | | (4.7) | | Intangibles amortization | | | 2,266 | | | 1,692 | | | 574 | | 33.9 | | | | 2,032 | | | 2,149 | | | (117) | | (5.4) | | Goodwill Impairment | | | 3,000 | | | — | | | 3,000 | | 100.0 | | | Goodwill impairment | | | | — | | | 500 | | | (500) | | (100.0) | | Loss on sale of subsidiary | | | | — | | | 158 | | | (158) | | (100.0) | | Other | | | 6,841 | | | 6,402 | | | 439 | | 6.9 | | | | 7,677 | | | 5,315 | | | 2,362 | | 44.4 | | Total noninterest expense | | $ | 155,234 | | $ | 119,143 | | $ | 36,091 | | 30.3 | % | | $ | 153,702 | | $ | 151,755 | | $ | 1,947 | | 1.3 | % |
Management places strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. One-time charges relating to acquisitions and separation agreement expenses impacted expense in 2021. In 2020, one-time charges relating to losses on liability extinguishment, dispositions and goodwill impairmentimpairments impacted expense in 2019.expenses. Salaries and employee benefits, which is the largest component of noninterest expense, increased 33%5% in 20192021 as compared to 2018.2020. This increase was primarily related to bonuses and commissions on elevated swap fee income, improvedincreased incentive compensation driven by record financial results, and the related incentives, the additionhigher salary costs due to a higher number of SFC Bank and Bates Companies employees and the addition to operational infrastructure and investment in additional staffing both at the corporate level and at some of the bank charters.FTEs. Occupancy and equipment expense increased 17%decreased 4% in 20192021 as compared to 2018.2020. This increasedecrease was due to higher information technologyreduced service costs, increases in repairs and maintenance costs, renovations to existing buildings, and the additions of SFC Bank and the Bates Companies.contract costs. Professional and data processing fees increased 17%remained flat in 20192021 as compared to 2018. This increased expense was mostly due to the additions of the Bates Companies and SFC Bank. Legal expense was elevated due to a legal matter at RB&T where two employees had been charged with wrongdoing in connection with an SBA loan application. Neither RB&T, nor the Company, have been charged in the case. The charges were dismissed in December 2019.2020. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis. There were no acquisitionAcquisition costs totaled $624 thousand in 2019. There were $1.8 million of acquisition costs in 2018 related to the acquisitions of the Bates Companies and SFC Bank.2021. These costs were comprised of primarily of legal, accounting and investment banking costs related to the acquisitionspending acquisition described in Note 224 to the Consolidated Financial Statements.
There were no post-acquisition compensation, transition and integration costs in 2021. Post-acquisition compensation, transition and integration costs totaled $3.6 million and $2.1 million$214 thousand for 2019 and 2018, respectively.2020. These costs were comprised primarily of personnel costs, IT integration, and conversion costs related to the previous mergers/acquisitions as described in Note 2 to the Consolidated Financial Statements. Disposition costs totaled $3.3 million$13 thousand for 2019.2021 as compared to $690 thousand for 2020. 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 coststhe Bates Companies. See Note 2 to the Consolidated Financial Statements for 2018.further discussion. FDIC insurance, other insurance and regulatory fee expense decreased 18%increased 8% in 2019.2021. The decreaseincrease in expense was due to an increase in the awardasset size of the Company in 2021 as well as FDIC insurance assessment credits by the FDICapplied in September 2019 and December 2019. 2020. Loan/lease expense decreased 29%increased 16% in 20192021 as compared to 2018.2020. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs. Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net costsincome from operations totaled $1.4 million for 2021 as compared to net income of operations totaled $3.8 millionof $307 thousand for 2019.2020. The increasehigher amount in 20192021 is due primarily to $3.4 millionthe gain on sale of subsequent write-down of one commercial OREO property. Advertising and marketing expense increased 28%31% in 20192021 as compared to 2018.2020. The increase in expense was primarily due to the addition of SFC Bank.return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020. Bank service charges, a large portion of which includeincludes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 9%8% in 20192021 as compared to 2018.2020. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses willis expected to also increase. There were no losses on liability extinguishment in 2021. Losses on debtliability extinguishment were $436 thousand$3.9 million in 2019 as compared to 2018.2020. These losses relate to the prepayment of certain FHLB advances and wholesale structured repurchase agreements. There were no losses on debt extinguishment in 2018.advances. Correspondent banking expense increased 2%decreased 5% in 2019.2021 as compared to 2020. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services. The increase was due,In 2021, the Company made a strategic decision to discontinue maintenance of a cash vault to supply correspondents and correspondents were successfully moved to ordering cash directly through the Federal Reserve Bank. This resulted in large part, toa cost savings for the success QCBT has had in growing its correspondent banking customer portfolio.Company. Intangible amortization expense increased 34%decreased 5% in 20192021 as compared to 2018. The increase2020. These expenses naturally decrease unless there is an addition to intangible assets. There was due to the addition of SFC Bank and the Bates Companiesno goodwill impairment expense in 2018. 2021. Goodwill impairment expense totaled $3.0 million$500 thousand in 20192020 related to the Bates Companies. See Note 76 to the Consolidated Financial Statements for further discussion. There was no loss on sale of a subsidiary in 2021. Loss on sale of a subsidiary totaled $158 thousand in 2020 due to the sale of the Bates Companies. See Note 2 to the Consolidated Financial Statements for further discussion. There was no goodwill impairment expenseloss on sale of a subsidiary in 2018.2021. Other noninterest expense increased 7%44% in 20192021 as compared to 2018. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.2020. The majority of this increase is relatedwas due primarily to the additionwrite-off of SFC Bank.certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets and $993 of credit card processing expenses. INCOME TAX EXPENSE The provision for income taxes was $14.6$22.6 million for 2019,2021, or an effective tax rate of 20.3%18.6%, compared to $9.0$12.7 million for 2018,2020, or an effective tax rate of 17.3%. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 14 to the Consolidated Financial Statements for additional details. FINANCIAL CONDITION AS OF DECEMBER 31, 20192021 AND 20182020 OVERVIEW Following is a table that represents the major categories of the Company’s balance sheet. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of December 31, 2019, the removal of which impacts balance sheet comparisons to the prior period. | | | | | | | | | | | | | | | | | | As of December 31, | | | | | | 2021 | | | | 2020 | | | | | | | | | | | | | | | | | | As of December 31, | | | | | | 2019 | | | | 2018 | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | Amount | | % | | | Amount | | % | | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | Amount | | % | | | Amount | | % | | Cash, federal funds sold, and interest-bearing deposits | | $ | 233,945 | | 5 | % | | $ | 245,119 | | 5 | % | | $ | 125,152 | | 2 | % | | $ | 157,005 | | 3 | % | Securities | | | 611,341 | | 12 | % | | | 662,969 | | 13 | % | | | 810,215 | | 13 | % | | | 838,131 | | 15 | % | Net loans/leases | | | 3,654,204 | | 75 | % | | | 3,692,907 | | 75 | % | | | 4,601,411 | | 75 | % | | | 4,166,753 | | 73 | % | Derivatives | | | | 222,220 | | 4 | % | | | 222,757 | | 4 | % | Other assets | | | 397,594 | | 8 | % | | | 348,715 | | 7 | % | | | 337,134 | | 6 | % | | | 320,397 | | 6 | % | Assets held for sale | | | 11,966 | | - | % | | | — | | - | % | | Total assets | | $ | 4,909,050 | | 100 | % | | $ | 4,949,710 | | 100 | % | | $ | 6,096,132 | | 100 | % | | $ | 5,705,043 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total deposits | | $ | 3,911,051 | | 80 | % | | $ | 3,977,031 | | 80 | % | | $ | 4,922,772 | | 80 | % | | $ | 4,599,137 | | 81 | % | Total borrowings | | | 278,955 | | 5 | % | | | 404,968 | | 8 | % | | | 170,805 | | 3 | % | | | 177,114 | | 3 | % | Derivatives | | | | 225,135 | | 4 | % | | | 229,270 | | 4 | % | Other liabilities | | | 178,690 | | 4 | % | | | 94,573 | | 2 | % | | | 100,410 | | 2 | % | | | 105,729 | | 2 | % | Liabilities held for sale | | | 5,003 | | - | % | | | — | | - | % | | Total stockholders' equity | | | 535,351 | | 11 | % | | | 473,138 | | 10 | % | | | 677,010 | | 11 | % | | | 593,793 | | 10 | % | Total liabilities and stockholders' equity | | $ | 4,909,050 | | 100 | % | | $ | 4,949,710 | | 100 | % | | $ | 6,096,132 | | 100 | % | | $ | 5,705,043 | | 100 | % | | | | | | | | | | | | | | |
In 2019,2021, total assets decreased $40.7increased $391.1 million, or 1%7%. This included $454.0The Company’s securities portfolio decreased $27.9 million, in assets sold as part of the RB&T sale (further described in Note 2 to the Consolidated Financial Statements).or 3%, during 2021. The Company’s loan/lease portfolio decreased $38.7increased $434.7 million, or 1%10%, during 2019.2021. The decreaseincrease in the loan/lease portfolio was relateddue to the sale oftraditional commercial lending and SFG. Excluding PPP loans as part of the RB&T sale (further described in Note 2 to the Consolidated Financial Statements). Excluding the sale of loans as part of the RB&T sale,(non-GAAP), the Company’s loan/lease portfolio grew organically $319.2$674.0 million, or 10.9%16.9%, during 2019,2021, which was primarily funded by deposit growth.growth and excess cash. Deposits grew $335.3$323.6 million, or 10%7%, during 2019, excluding the $401.3 million of deposits sold as part of the RB&T sale.2021. Borrowings decreased $109.9$6.3 million, or 27%4%, during 2019, excluding the $16.2 million of borrowings sold in the RB&T sale.2021. As of December 31, 2019, there were $12.0 million of assets held for sale, primarily comprised of bank-owned life insurance that was retained from the RB&T sale. There were $5.0 million of liabilities 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 expected to be liquidated by June 30, 2020.
INVESTMENT SECURITIES The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk and maximizing return, while minimizing credit risk. Over the recent years, the Company has further diversifiedcontinued to change the mix of 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) that require a thorough underwriting process before investment. investment and are generated by our specialty finance group. Following is a breakdown of the Company’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, 20192021 and 2018.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | | 2018 | | | | | | Amount | | % | | | Amount | | % | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | U.S. govt. sponsored agency securities | | $ | 20,078 | | 3 | % | | $ | 36,411 | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | | 2020 | | | | | | Amount | | % | | | Amount | | % | | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | U.S. treasuries and govt. sponsored agency securities | | | $ | 23,328 | | 3 | % | | $ | 15,336 | | 2 | % | | Municipal securities | | | 447,853 | | 73 | % | | | 459,409 | | 70 | % | | | | 639,601 | | 79 | % | | | 627,523 | | 75 | % | | Residential mortgage-backed and related securities | | | 120,587 | | 20 | % | | | 159,249 | | 24 | % | | | | 94,323 | | 12 | % | | | 132,842 | | 16 | % | | Asset-backed securities | | | | 27,124 | | 3 | % | | | 40,683 | | 4 | % | | Other securities | | | 22,823 | | 4 | % | | | 7,900 | | 1 | % | | | | 25,839 | | 3 | % | | | 21,747 | | 3 | % | | | | $ | 611,341 | | 100 | % | | $ | 662,969 | | 100 | % | | | | | | | | | | | | | | | | | | | | | $ | 810,215 | | 100 | % | | $ | 838,131 | | 100 | % | | | | | | | | | | | | | | | | | Securities as a % of Total Assets | | | 12.45 | % | | | | | 13.39 | % | | | | | | 13.29 | % | | | | | 14.69 | % | | | | Net Unrealized Gains (Losses) as a % of Amortized Cost | | | 4.88 | % | | | | | (1.01) | % | | | | | Net Unrealized Gains as a % of Amortized Cost | | | | 7.17 | % | | | | | 6.90 | % | | | | Duration (in years) | | | 6.7 | | | | | | 6.8 | | | | | | | 8.2 | | | | | | 7.0 | | | | | Yield on investment securities (tax equivalent) | | | 3.80 | % | | | | | 3.58 | % | | | | | | 3.66 | % | | | | | 3.74 | % | | | |
Notably,At January 1, 2021, the net decline in totalCompany adopted ASU 2016-13, which requires an ACL related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, is mostly duerequires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the saleconsolidated financial statement for a discussion of RB&T.
Management monitors the levelimpact of unrealized gains/losses including performing quarterly reviewsthe adoption of individual securities for evidence of OTTI. Management identified no OTTI in 2019 or 2018.ASU 2016-13.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. The following is a breakdown of the weighted-average yield for each range of maturities by category of debt securities that are not held at fair value: | | | | | | | | | | | | | | | | | | | Weighted | | | Amortized | | Average | | | Cost* | | Yield | | | | (dollars in thousands) | Municipal securities: | | | | | | | Within 1 year | | $ | 2,622 | | 2.08 | % | After 1 but within 5 years | | | 22,746 | | 3.34 | % | After 5 but within 10 years | | | 48,402 | | 3.43 | % | After 10 years | | | 397,763 | | 3.87 | % | Total | | $ | 471,533 | | 3.79 | % | | | | | | | | Other securities: | | | | | | | Within 1 year | | $ | 550 | | 2.92 | % | After 1 but within 5 years | | | 500 | | 4.39 | % | Total | | $ | 1,050 | | 3.62 | % | | | | | | | | Total HTM Securities | | $ | 472,583 | | | |
* Amortized cost above excludes ACL of $198 thousand. The weighted-average yield is calculated by dividing the total interest for each security per maturity range by the total amortized cost within that maturity range. Yields are not computed on a tax equivalent basis. There have been no major changes within the tax exempt portfolio. See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities. LOANS/LEASES Excluding RB&TTotal loans/leases, excluding PPP loans sold, total loans(non-GAAP), grew 10.9%16.9% in 20192021 over 2018.2020. The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for prior to 2021 are shown in a separate table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | | Amount | | % | | | Amount | | % | | | Amount | | % | | | Amount | | % | | | Amount | | % | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | C&I loans | | $ | 1,507,825 | | 41 | % | | $ | 1,429,410 | | 38 | % | | $ | 1,134,516 | | 38 | % | | $ | 827,637 | | 34 | % | | $ | 648,160 | | 36 | % | CRE loans | | | 1,736,396 | | 47 | % | | | 1,766,111 | | 48 | % | | | 1,303,492 | | 44 | % | | | 1,093,459 | | 46 | % | | | 724,369 | | 41 | % | Direct financing leases | | | 87,869 | | 2 | % | | | 117,969 | | 3 | % | | | 141,448 | | 5 | % | | | 165,419 | | 7 | % | | | 173,656 | | 10 | % | Residential real estate loans | | | 239,904 | | 7 | % | | | 290,759 | | 8 | % | | | 258,646 | | 9 | % | | | 229,233 | | 10 | % | | | 170,433 | | 9 | % | Installment and other consumer loans | | | 109,352 | | 3 | % | | | 119,381 | | 3 | % | | | 118,611 | | 4 | % | | | 81,666 | | 3 | % | | | 73,669 | | 4 | % | Total loans/leases | | $ | 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 | | | 8,859 | | | | | | 9,124 | | | | | | 7,773 | | | | | | 8,073 | | | | | | 7,736 | | | | Less allowance | | | (36,001) | | | | | | (39,847) | | | | | | (34,356) | | | | | | (30,757) | | | | | | (26,141) | | | | Net loans/leases | | $ | 3,654,204 | | | | | $ | 3,692,907 | | | | | $ | 2,930,130 | | | | | $ | 2,374,730 | | | | | $ | 1,771,882 | | | |
| | | | | | | | | As of | | | December 31, 2021 | | | | Amount | | % | | | | | (dollars in thousands) | | | | | | | | C&I - revolving | | $ | 248,483 | | 5 | % | C&I - other * | | | 1,346,602 | | 29 | % | CRE - owner occupied | | | 421,701 | | 9 | % | CRE - non-owner occupied | | | 646,500 | | 14 | % | Construction and land development | | | 918,571 | | 20 | % | Multi-family | | | 600,412 | | 12 | % | Direct financing leases | | | 45,191 | | 1 | % | 1-4 family real estate | | | 377,361 | | 8 | % | Consumer | | | 75,311 | | 2 | % | Total loans/leases | | $ | 4,680,132 | | 100 | % | Less allowance | | | (78,721) | | | | Net loans/leases | | $ | 4,601,411 | | | |
| | | | | | | | | | | | | | | | | | | 2020 | | | | | Amount | | % | | | | | | (dollars in thousands) | | | | | | | | | C&I loans* | | | $ | 1,726,723 | | 41 | % | CRE loans | | | | 2,107,629 | | 50 | % | Direct financing leases | | | | 66,016 | | 1 | % | Residential real estate loans | | | | 252,121 | | 6 | % | Installment and other consumer loans | | | | 91,302 | | 2 | % | Total loans/leases | | | $ | 4,243,791 | | 100 | % | Plus deferred loan/lease origination costs, net of fees | | | | 7,338 | | | | Less allowance | | | | (84,376) | | | | Net loans/leases | | | $ | 4,166,753 | | | | | | | | | | | |
*Includes PPP loans totaling $28.2 million and $273.1 million at December 31, 2021 and 2020, respectively. The Company experienced strong loan growth in 2021. The growth was broad-based with some stronger growth in multi-family and construction related to our increased focus on LIHTC lending. 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. The following tables set forth the remaining maturities by loan/lease type as of December 31, 20192021 and 2018.2020. Maturities are based on contractual dates. | | | | | | | | | | | | | | | | | | | As of December 31, 2019 | | | | | | | | | | | | | 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 | | $ | 448,045 | | $ | 660,687 | | $ | 399,093 | | $ | 701,633 | | $ | 358,147 | | CRE loans | | | 269,687 | | | 876,481 | | | 590,228 | | | 890,149 | | | 576,560 | | Direct financing leases | | | 7,612 | | | 76,297 | | | 3,960 | | | 80,257 | | | — | | Residential real estate loans | | | 16,352 | | | 15,143 | | | 208,409 | | | 186,853 | | | 36,699 | | Installment and other consumer loans | | | 28,786 | | | 44,534 | | | 36,032 | | | 38,970 | | | 41,596 | | | | $ | 770,482 | | $ | 1,673,142 | | $ | 1,237,722 | | $ | 1,897,862 | | $ | 1,013,002 | | Percentage of total loans/leases | | | 21 | % | | 45 | % | | 34 | % | | 65 | % | | 35 | % |
| | | | | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | | | | | | | | | | | | | | Maturities After One Year | | | | Due in one | | Due after one | | Due after 5 | | Due after | | Predetermined | | Adjustable | | | | year or less | | through 5 years | | through 15 years | | 15 years | | interest rates | | interest rates | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | C&I - revolving | | $ | 198,861 | | $ | 44,927 | | $ | 4,695 | | $ | — | | $ | 10,852 | | $ | 38,770 | | C&I - other | | | 320,932 | | | 591,103 | | | 222,408 | | | 212,159 | | | 725,568 | | | 300,102 | | CRE - owner occupied | | | 39,959 | | | 188,408 | | | 163,862 | | | 29,472 | | | 228,247 | | | 153,495 | | CRE - non-owner occupied | | | 97,300 | | | 347,215 | | | 156,558 | | | 45,427 | | | 342,349 | | | 206,851 | | Construction and land development | | | 144,624 | | | 159,408 | | | 45,608 | | | 568,931 | | | 161,195 | | | 612,752 | | Multi-family | | | 27,483 | | | 67,407 | | | 134,919 | | | 370,603 | | | 67,055 | | | 505,874 | | Direct financing leases | | | 2,514 | | | 42,253 | | | 424 | | | — | | | 42,677 | | | — | | 1-4 family real estate | | | 21,190 | | | 92,443 | | | 113,049 | | | 150,679 | | | 316,356 | | | 39,815 | | Consumer | | | 8,968 | | | 32,787 | | | 32,654 | | | 902 | | | 17,860 | | | 48,483 | | | | $ | 861,831 | | $ | 1,565,951 | | $ | 874,177 | | $ | 1,378,173 | | $ | 1,912,159 | | $ | 1,906,142 | |
| | | | | | | | | | | | | | | | | | | | 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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | | | | | | 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 | | | $ | 362,104 | | $ | 942,702 | | $ | 421,917 | | | $ | 995,910 | | $ | 368,709 | | CRE loans | | | 275,540 | | | 1,010,093 | | | 480,478 | | | 1,054,286 | | | 436,285 | | | | 277,248 | | | 866,614 | | | 963,767 | | | | 788,442 | | | 1,041,939 | | Direct financing leases | | | 7,897 | | | 104,318 | | | 5,753 | | | 110,071 | | | — | | | | 3,617 | | | 61,504 | | | 895 | | | | 62,399 | | | — | | Residential real estate loans | | | 10,430 | | | 23,373 | | | 256,956 | | | 207,344 | | | 72,985 | | | | 19,717 | | | 12,335 | | | 220,069 | | | | 200,028 | | | 32,376 | | Installment and other consumer loans | | | 21,652 | | | 59,760 | | | 37,970 | | | 47,067 | | | 50,663 | | | | 17,671 | | | 41,634 | | | 31,997 | | | | 30,975 | | | 42,656 | | | | $ | 883,112 | | $ | 1,663,058 | | $ | 1,177,460 | | $ | 2,002,587 | | $ | 837,931 | | | Percentage of total loans/leases | | | 24 | % | | 45 | % | | 31 | % | | 71 | % | | 29 | % | | | | | $ | 680,357 | | $ | 1,924,789 | | $ | 1,638,645 | | | $ | 2,077,754 | | $ | 1,485,680 | |
As CRE loans have historically been the Company’s largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company’s CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2019 and 2018, respectively, approximately 26% and 28% of the CRE loan portfolio was owner-occupied.
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 $38.2 million and $40.8 million as of December 31, 2019 and 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, 2019 and 2018.
See Note 4 to the Consolidated Financial Statements for additional information on the Company’s loan/lease portfolio. ALLOWANCE FOR ESTIMATEDCREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES The allowance totaled $36.0 million at December 31, 2019,On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326),” which wasreplaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a decrease of $3.8 million, or 10%, from $39.8 million at December 31, 2018. Provision (excluding provision related to assets held for sale during the year) totaled $6.6 million for 2019 and outpaced net charge-offs of $4.4 million (or 11 basis points of average loans/leases outstanding).
The decrease in allowance in 2019 was primarily attributable to the sale of loans and leases of RB&T as well as continued asset quality improvements.
The following table summarizes the activity in the allowance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | Average amount of loans/leases outstanding, before allowance | | $ | 3,857,547 | | $ | 3,352,357 | | $ | 2,611,888 | | $ | 2,042,555 | | $ | 1,707,523 | | | | | | | | | | | | | | | | | | | Allowance: | | | | | | | | | | | | | | | | | Balance, beginning of fiscal year | | $ | 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 | | | (1,476) | | | (5,359) | | | (1,150) | | | (527) | | | (454) | | CRE | | | (1,722) | | | (387) | | | (1,795) | | | (24) | | | (2,560) | | Direct financing leases | | | (1,647) | | | (2,002) | | | (2,285) | | | (2,503) | | | (1,789) | | Residential real estate | | | (191) | | | (127) | | | (102) | | | (77) | | | (170) | | Installment and other consumer | | | (98) | | | (44) | | | (41) | | | (113) | | | (252) | | Subtotal charge-offs | | | (5,134) | | | (7,919) | | | (5,373) | | | (3,244) | | | (5,225) | | | | | | | | | | | | | | | | | | | Recoveries: | | | | | | | | | | | | | | | | | C&I | | | 276 | | | 295 | | | 191 | | | 109 | | | 634 | | CRE | | | 208 | | | 50 | | | 43 | | | 33 | | | 502 | | Direct financing leases | | | 190 | | | 344 | | | 186 | | | 93 | | | 136 | | Residential real estate | | | 47 | | | 23 | | | 29 | | | 1 | | | 4 | | Installment and other consumer | | | 51 | | | 40 | | | 53 | | | 146 | | | 145 | | Subtotal recoveries | | | 772 | | | 752 | | | 502 | | | 382 | | | 1,421 | | Net charge-offs | | | (4,362) | | | (7,167) | | | (4,871) | | | (2,862) | | | (3,804) | | Provision charged to expense | | | 6,638 | | | 12,658 | | | 8,470 | | | 7,478 | | | 6,871 | | Balance, end of fiscal year | | $ | 36,001 | | $ | 39,847 | | $ | 34,356 | | $ | 30,757 | | $ | 26,141 | | | | | | | | | | | | | | | | | | | Net charge-offs to average loans/leases outstanding | | | 0.11 | % | | 0.21 | % | | 0.19 | % | | 0.14 | % | | 0.22 | % |
current expected credit loss methodology. The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowanceACL was maintained, provisions were made based on a number of factors, including the increase/decreaseincrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio wasis reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” as described in Note 1 to the Consolidated Financial Statements and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance wasis monitored by the credit administration staff and reported to management and the boardBoard of directors.Directors. Changes in the ACL for loans/leases for the years ended December 31, 2021, 2020 and 2019 are presented as follows: | | | | | | | | | | | | Year Ended | | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 | | | | (dollars in thousands) | | | | | | | | | | | Balance, beginning | | $ | 84,376 | | $ | 36,001 | | $ | 39,847 | Impact of adopting ASU 2016-13 | | | (8,102) | | | — | | | — | Reclassification of allowance related to held for sale loans | | | — | | | — | | | (6,122) | Provision | | | 5,702 | | | 55,704 | | | 6,638 | Charge-offs | | | (4,538) | | | (8,383) | | | (5,134) | Recoveries | | | 1,283 | | | 1,054 | | | 772 | Balance, ending | | $ | 78,721 | | $ | 84,376 | | $ | 36,001 | | | | | | | | | | |
Net charge-offs by segment and their percentage of average loans and leases are as follows: | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | | | 2021 | | 2020 | | | | | Amount | % of Average Loans | | | Amount | % of Average Loans | | | | | (dollars in thousands) | | | | | | | | | | | Average amount of loans/leases outstanding, before allowance | | $ | 4,456,461 | | | $ | 4,031,567 | | | | | | | | | | | | | Net charge-offs: | | | | | | | | | | C&I | | $ | — | 0.00 | % | $ | (3,550) | 0.09 | % | C&I - Revolving | | | — | 0.00 | | | — | 0.00 | | C&I - Other | | | (1,697) | 0.04 | | | — | 0.00 | | CRE | | | — | 0.00 | | | (1,889) | 0.05 | | CRE owner occupied | | | 3 | 0.00 | | | — | 0.00 | | CRE non-owner occupied | | | (1,791) | 0.04 | | | — | 0.00 | | Construction and land development | | | — | 0.00 | | | — | 0.00 | | Multi-family | | | (150) | 0.00 | | | — | 0.00 | | Direct financing leases | | | — | 0.00 | | | (1,848) | 0.05 | | Residential real estate | | | — | 0.00 | | | 29 | 0.00 | | 1-4 family real estate | | | 102 | 0.00 | | | — | 0.00 | | Consumer | | | 278 | (0.01) | | | (71) | 0.00 | | Total net charge-offs | | $ | (3,255) | | | $ | (7,329) | | |
Changes in the ACL for OBS exposures for the year ended December 31, 2021: | | | | | | Year Ended | | | December 31, 2021 | | | (dollars in thousands) | | | | | Balance, beginning (1) | | $ | — | Impact of adopting ASU 2016-13 | | | 9,117 | Provisions credited to expense | | | (2,231) | Balance, ending | | $ | 6,886 | | | | |
| (1) | Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table. |
The ACL for OBS exposures totaled $9.1 million at the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded negative $2.2 million of provision for credit losses related to OBS exposures, specifically unfunded commitments, in 2021 primarily due to increased line of credit usage resulting in lower exposure. At December 31, 2021, the allowance for OBS exposures was $6.9 million. The following is a table that reports the criticized and classified loan totals as of December 31, 20192021 and 2018.2020. | | | | | | | | | | As of December 31, | | | | | | | | | | | | | | | | As of December 31, | Internally Assigned Risk Rating * | | 2019 | | 2018 | | | | 2021 | | | 2020 | | | | (dollars in thousands) | | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | | Special Mention (Rating 6) | | $ | 19,952 | | $ | 42,058 | | | $ | 62,510 | | $ | 71,481 | | Substandard (Rating 7) | | 33,649 | | | 28,593 | | | | 53,296 | | | 66,081 | | Doubtful (Rating 8) | | | — | | | — | | | | — | | | — | | | | $ | 53,601 | | $ | 70,651 | | | | | | | | | | | | | | $ | 115,806 | | $ | 137,562 | | | | | | | | | | | Criticized Loans ** | | $ | 53,601 | | $ | 70,651 | | | $ | 115,806 | | $ | 137,562 | | Classified Loans *** | | $ | 33,649 | | $ | 28,593 | | | $ | 53,296 | | $ | 66,081 | | | | | | | | | | | | | | | | | | | Criticized Loans as a % of Total Loans/Leases | | 1.47 | % | | 1.91 | % | | | 2.47 | % | | 3.24 | % | Classified Loans as a % of Total Loans/Leases | | 0.92 | % | | 0.77 | % | | | 1.14 | % | | 1.55 | % |
* 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%16% and classified loans increased 18%decreased 20% in 20192021 as compared to 2018.2020. The changes were primarily dueCompany continues its strong focus on improving credit quality in an effort to the sale of RB&T in addition to the downgrading of $5.4 million of loans from criticized to classified during the year.limit NPLs. NPLs (consisting of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing TDRs) decreased $9.6 million, or 52%, during 2019. See the table in the following section for further detail on NPLs and NPAs.
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 ($7.0 million and $11.6 million at December 31, 2019 and 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, 20192021 and 2018.2020. | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Allowance / Gross Loans/Leases | | 0.98 | % | 1.07 | % | Allowance / NPLs | | 403.87 | % | 214.79 | % |
| | | | | | | | As of December 31, | | | 2021 | | 2020 | | ACL on loans/leases / Gross loans/leases | | 1.68 | % | 1.98 | % | ACL on loans/leases / NPLs | | 2,825.21 | % | 574.61 | % |
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, | | | 2021 | | | | Amount | | % | | | | (dollars in thousands) | | | | | | | | C&I - revolving | | | 3,907 | | 5 | % | C&I - other | | | 25,982 | | 30 | % | CRE - owner occupied | | | 8,501 | | 9 | % | CRE - non-owner occupied | | | 8,549 | | 14 | % | Construction and land development | | | 16,972 | | 20 | % | Multi-family | | | 9,339 | | 12 | % | 1-4 family real estate | | | 4,541 | | 8 | % | Consumer | | | 930 | | 2 | % | | | $ | 78,721 | | 100 | % |
* Included within the C&I – Other segment is an ACL on leases of $1.5 million. Leases represent 1% of to total loans/leases. | | | | | | | | | As of December 31, | | | 2020 | | | | Amount | | % | | | | (dollars in thousands) | | | | | | | | C&I loans | | | 35,421 | | 41 | % | CRE loans | | | 42,161 | | 50 | % | Direct financing leases | | | 1,764 | | 1 | % | Residential real estate loans | | | 3,732 | | 6 | % | Installment and other consumer loans | | | 1,298 | | 2 | % | | | $ | 84,376 | | 100 | % |
%Represents the percentage of the certain type of loan/lease to total loans/leases Although management believes that the allowanceACL for loans/leases at December 31, 20192021 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 may require additional increases in the provision.provision for credit losses. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and 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. ACL. NONPERFORMING ASSETS The table below presents the amounts of NPAs.NPAs and related ratios. | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | 2021 | | 2020 | | | | | (dollars in thousands) | | | | | | | | | | Nonaccrual loans/leases (1) (2) | | $ | 7,902 | | $ | 14,260 | | $ | 11,441 | | $ | 13,919 | | $ | 10,648 | | | $ | 2,759 | | $ | 13,940 | | 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 | | | Accruing loans/leases past due 90 days or more | | | | 1 | | | 3 | | Total NPLs | | | 8,914 | | | 18,551 | | | 18,643 | | | 21,233 | | | 11,705 | | | | 2,760 | | | 13,943 | | OREO | | | 4,129 | | | 9,378 | | | 13,558 | | | 5,523 | | | 7,151 | | | | — | | | 20 | | Other repossessed assets | | | 41 | | | 8 | | | 80 | | | 202 | | | 246 | | | | — | | | 135 | | Total NPAs | | $ | 13,084 | | $ | 27,937 | | $ | 32,281 | | $ | 26,958 | | $ | 19,102 | | | $ | 2,760 | | $ | 14,098 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | NPLs to total loans/leases | | | 0.24 | % | | 0.50 | % | | 0.63 | % | | 0.88 | % | | 0.65 | % | | | 0.06 | % | | 0.33 | % | NPAs to total loans/leases plus repossessed property | | | 0.35 | % | | 0.75 | % | | 1.08 | % | | 1.12 | % | | 1.06 | % | | | 0.06 | % | | 0.33 | % | NPAs to total assets | | | 0.27 | % | | 0.56 | % | | 0.81 | % | | 0.82 | % | | 0.74 | % | | | 0.05 | % | | 0.25 | % | Nonccrual loans/leases to total loans/leases | | | | 0.06 | % | | 0.33 | % | ACL to nonaccrual loans | | | | 2853.24 | % | | 605.28 | % |
| (1) | (1)
| | Includes government guaranteed portions of loans, if applicable. |
| (2) | (2)
| | Includes TDRs of $65 thousand, $984 thousand and $747 thousand at December 31, 2019 and $2.3 million at2021, December 31, 2018. |
| (3)
| | Includes TDRs of $496 thousand at2020 and December 31, 2018.
2019, respectively. |
The large majority of the Company’s NPAs consists of nonaccrual loans/leases, accruing TDRs and OREO.leases. 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; 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 2019,2021, the Company’s NPAs decreased $14.9$11.3 million, or 53%80% as compared to $27.9$14.1 million in 2018. OREO decreased $5.2 million as compared to $9.4 million2020. The decrease in 2018NPAs in 2021 was primarily due to $3.4 millionseveral isolated relationships that paid off in subsequent writedowns of2021 as well as one loan that was charged off to OREO property.and subsequently sold. The Company’s lending/leasing practices remain unchanged and asset quality remains a top priority for management. DEPOSITSDue to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three-month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. The Company believes that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of December 31, 2021 there were no Bank modifications of loans to commercial and consumer clients and six m2 modifications of loans and leases totaling $2.4 million representing 0.05% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
ExcludingOn March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of deposits soldthe COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as partpayment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the sale of RB&T, depositsFASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators clarified that this guidance could continue to be applied through December 31, 2021.
DEPOSITS Deposits grew $335.3$323.6 million, or 10.3%7.0%, during 2019.2021, primarily due to an increase in both non-interest bearing and interest bearing deposits. The table below presents the composition of the Company’s deposit portfolio. | | | | | | | | | | | | | | 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 | % |
| | | | | | | | | | | | | | As of December 31, | | | 2021 | | 2020 | | | | Amount | | % | | Amount | | % | | | | (dollars in thousands) | | | | | | | | | | | | | Noninterest bearing demand deposits | | $ | 1,268,788 | | 26 | % | $ | 1,145,378 | | 25 | % | Interest bearing demand deposits | | | 3,232,633 | | 65 | % | | 2,987,469 | | 65 | % | Time deposits | | | 421,348 | | 9 | % | | 460,659 | | 10 | % | Brokered deposits | | | 3 | | — | % | | 5,631 | | — | % | | | $ | 4,922,772 | | 100 | % | $ | 4,599,137 | | 100 | % | | | | | | | | | | | | |
The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 3%21% in 2019.2021. Year-end balances can fluctuate a great deal due to large customer and correspondent bank activity. TrendsDuring the year, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to the Company carrying excess liquidity during the year. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits. The Company’s correspondent bank deposits have shown that this fluctuationgrown significantly over the past two years. The correspondent bank deposit portfolio consists of the following: | ● | Noninterest-bearing deposits which represent the correspondent banks’ operating cash used for processing transactions with the Federal Reserve, |
| ● | Money market deposits which represent some excess liquidity, and |
| ● | The correspondent banks’ EBA at the FRB. |
The Company has modified the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest bearing deposits and the money market deposits. This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB which is generally temporary.managed by the Company, but is off the Company’s balance sheet. On average, over the past two years, the correspondent banks’ EBA ranges from $1.3 billion to $1.5 billion which is approximately $1 billion more than pre-pandemic levels. The Company had total uninsured deposits of $1.9 billion and $1.8 billion as of December 31, 2021 and 2020 respectively. The table below represents the time deposits in FDIC uninsured accounts by maturity: | | | | | | | | | As of December 31, | | As of December 31, | | | 2021 | | 2020 | | | | (dollars in thousands) | | | | | | | | U.S. Time Deposits in Amounts in Excess of FDIC insurance limit: | | | | | | | One to three months | | $ | 61,278 | | $ | 88,295 | Three to six months | | | 45,451 | | | 35,977 | Six to twelve months | | | 81,290 | | | 76,478 | Over twelve months | | | 37,038 | | | 46,939 | | | $ | 225,058 | | $ | 247,690 | | | | | | | |
There were no other time deposits otherwise uninsured. The Company had no deposits by foreign depositors in domestic offices as of December 31, 2021 and 2020. Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management 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 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, | | | | 2019 | | 2018 | | | | | (dollars in thousands) | | | | | | | | | | | Overnight repurchase agreements | | $ | 2,193 | | $ | 2,084 | | | Federal funds purchased | | | 11,230 | | | 26,690 | | | | | $ | 13,423 | | $ | 28,774 | | |
| | | | | | | | | | As of, December 31, | | | 2021 | | 2020 | | | | (dollars in thousands) | | | | | | | | | Federal funds purchased | | | 3,800 | | | 5,430 | | | | $ | 3,800 | | $ | 5,430 | | | | | | | | | |
The Company’s federal funds purchased 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 AND OTHER BORROWINGS As a result of their membership in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provide a less costly source of funds than customer deposits. For 2019,There was no change in FHLB advances decreased $107.2 million, or 40%, primarily duefrom 2020 to deposit growth which outpaced the Company’s loan growth.2021. | | | | | | | | | | | | As of December 31, | | | | 2019 | | 2018 | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | 2021 | | 2020 | | | | (dollars in thousands) | | | | | | | | | | | FHLB Advances | | $ | 159,300 | | | $ | 266,492 | | | $ | 15,000 | | | $ | 15,000 | | Weighted Average Interest Rate at Year-End | | | 1.74 | % | | | 2.55 | % | | | 0.31 | % | | | 0.29 | % |
The table below presents the composition of the Company’s other borrowings.
| | | | | | | | | | As of, December 31, | | | 2019 | | 2018 | | | | (dollars in thousands) | | | | | | | | | Wholesale structured repurchase agreements | | $ | — | | $ | 35,000 | | Term notes | | | — | | | 23,250 | | Revolving line of credit | | | — | | | 9,000 | | | | $ | — | | $ | 67,250 | |
During 2019, the Company prepaid $25 million of wholesale structured repurchase agrements and the other $10 million matured without replacement. For the term notes and revolving line of credit, these were paid off with the proceeds from the issuance of 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.
It is management’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. SUBORDINATED NOTES
During 2019, theThe Company issuedhad 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$113.9 million and the outstanding balance$118.7 million as of $9.0December 31, 2021 and 2020, respectively. The Company prepaid $5.0 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. subordinated debt in 2021 with no gain/loss.
See Note 12 to the Consolidated Financial Statements for additional information regarding the subordinated notes. STOCKHOLDERS’ EQUITY The table below presents the composition of the Company’s stockholders’ equity. | | | | | | | | | | | As of December 31, | | | | 2019 | | 2018 | | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | 2021 | | 2020 | | | | | (dollars in thousands) | | | | | | | | | | Common stock | | $ | 15,828 | | $ | 15,718 | | | $ | 15,613 | | $ | 15,806 | | Additional paid in capital | | | 274,785 | | | 270,761 | | | | 273,768 | | | 275,807 | | Retained earnings | | | 245,836 | | | 192,203 | | | | 386,077 | | | 300,804 | | AOCI (loss) | | | (1,098) | | | (5,544) | | | AOCI | | | | 1,552 | | | 1,376 | | Total stockholders' equity | | $ | 535,351 | | $ | 473,138 | | | $ | 677,010 | | $ | 593,793 | | | | | | | | | | | | | | | | | | | | TCE / TA ratio (non-GAAP) | | | 9.25 | % | | 7.78 | % | | | 9.87 | % | | 9.05 | % |
* 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, 20192021 and 2018,2020, no preferred stock was outstanding. In connection with the merger with Springfield Bancshares in the third quarter of 2018, the Company issued 1,699,414 shares of its common stock. This issuance 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’ equity for the years ended December 31, 20192021 and 2018,2020, respectively. | | | | | | | | | | | For the Year Ended December 31, | | | | 2021 | | 2020 | | | | | | | | | | | For the Year Ended December 31, | | | | 2019 | | 2018 | | | | (dollars in thousands) | | | | | | | | | | | | | (dollars in thousands) | | | | | | | | | Beginning balance | | $ | 473,138 | | $ | 353,287 | | $ | 593,793 | | $ | 535,351 | Impact of adoption of ASU 2016-13 | | | | (937) | | | — | Net income | | | 57,408 | | | 43,120 | | | 98,905 | | | 60,582 | Other comprehensive income (loss), net of tax | | | 4,446 | | | (3,206) | | Other comprehensive income, net of tax | | | | 176 | | | 2,474 | Repurchase and cancellation of shares of common stock as a result of a share repurchase program | | | | (14,168) | | | (3,779) | Common cash dividends declared | | | (3,775) | | | (3,546) | | | (3,781) | | | (3,779) | 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 * | | | 4,134 | | | 1,952 | | | 3,022 | | | 2,944 | Ending balance | | $ | 535,351 | | $ | 473,138 | | $ | 677,010 | | $ | 593,793 |
* Includes mostlyprimarily common stock issued for options exercised and the employee stock purchase plans, as well as stock-based compensation. On February 18,13, 2020, the Board of Directors of the Company announcedapproved a share repurchase program permittingunder which the Company is authorized to repurchase, offrom time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The 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 byTo date, the Company in its discretionhas purchased 394,085 shares under the program 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.all shares purchased have been retired. LIQUIDITY AND CAPITAL RESOURCES Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks, cash and due from banks and federal funds sold, which averaged $270.2$178.7 million and $159.7$398.2 million during 20192021 and 2018,2020, respectively. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans. The Federal Reserve Bank has provided a lending facility that will allow the Company, if desired, to obtain funding specifically for loans that the Company makes under the PPP, which will allow the Company to retain existing sources of liquidity for traditional operations. The Company has been able to access other available funding sources to address liquidity needs during the COVID-19 pandemic. The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repos,repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities available for sale,AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular principalmonthly payments on its securities portfolio. At December 31, 2019,2021, the subsidiary banks had 2731 lines of credit totaling $380.6$517.7 million, of which $45.3$61.7 million was secured and $335.3$456.0 million was unsecured. At December 31, 2019,2021, all of the $380.6$517.7 million was available. At December 31, 2018,2020, the subsidiary banks had 3328 lines of credit totaling $363.7$743.1 million, of which $1.7$287.1 million was secured and $362.0$456.0 million was unsecured. At December 31, 2018, $343.7 million2020, all of the $363.7$743.1 million was available. The Company maintains a $20.0$25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2020.2022. At December 31, 2019,2021, the full $20.0$25.0 million was available. See Note 11 to the Consolidated Financial Statements for additional information. Investing activities used cash of $308.7$411.8 million during 20192021 compared to $333.6$704.5 million during 2018.2020. Proceeds from calls, maturities, pay downs, and sales of securities were $106.1$195.7 million for 20192021 compared to $70.2$138.9 million for 2018.2020. Purchases of securities used cash of $72.0$173.2 million for 20192021 compared to $84.0$356.1 million for 2018.2020. The net increase in loans/leases used cash of $320.4$433.5 million for 20192021 compared to $292.7$564.7 million for 2018. The Company received net cash of $46.6 million related to the sale of RB&T assets and liabilities for 2019. Purchases of interest rate caps used cash of $4.3 million for 2019. There were no purchases of interest rate caps in 2018. The Company paid net cash of $5.2 million related to the acquisition of the Bates Companies and the merger with Springfield Bancshares in 2018.2020. Financing activities provided cash of $222.9$299.7 million for 20192021 compared to $279.2$577.4 million for 2018.2020. Net increases in deposits totaled $355.6$323.6 million for 20192021 as compared to $271.3$716.9 million for 2018.2020. Net short-term borrowings decreased $14.2$1.6 million for 20192021 and increased $13.6decreased $8.0 million for 2018.2020. In 20192021 the Company used $30.3$5.0 million to prepay select subordinated notes. In 2020 the Company used $55.3 million to prepay select FHLB advances and $46.3$29.2 million to prepay other borrowings. In 2018 the Company did not prepay any FHLB advancesbrokered and other borrowings.public time deposits. Short-term FHLB advances decreased $52.5$94.3 million in 2019 and increased $24.8 million in 2018.2020. Total cash provided by operating activities was $76.5$88.2 million for 20192021 compared to $64.3$112.2 million for 2018.2020. Throughout its history, the Company has secured additional capital through various resources, including common and preferred stock and the issuance of trust preferred securities and subordinated notes. As of December 31, 20192021 and 2018,2020, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 17 to the Consolidated Financial Statements for detail of the capital amounts and ratios for the Company and its subsidiary banks. COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS 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. 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’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’s credit evaluation of the counter-party.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 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. At December 31, 20192021 and 2018,2020, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees. As of December 31, 20192021 and 2018,2020, commitments to extend credit aggregated $1.2 billion.billion and $1.4 billion, respectively. As of December 31, 20192021 and 2018,2020, standby letters of credit aggregated $23.8$21.7 million and $20.3$24.8 million, respectively. Management does not expect that all of these commitments will be funded. Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 19 to the Consolidated Financial Statements. The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2019, significant fixed and determinable contractual obligations to third parties by payment date. Further discussionare deposits without a stated maturity, certificates of the naturedeposit, short-term borrowings, subordinated notes, and junior subordinated debentures and totaled $5.1 billion as of each obligation is included in the referenced note to the 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 | | $ | 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 |
December 31, 2021. The Company’s operating contract obligations represent short and long-term contractual payments for data processing equipment and services, software, and other equipment and professional services. 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 requires 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’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. 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, national and national economy (including the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation). international economies. |
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● | | Changes in the interest rate environment.
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| | The economic impact of past and any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), acts of war or threats thereof and other adverse events that could cause economic deterioration or instability in credit markets, and the response of the U.S.local, state and national governments to any such threats and attacks. adverse events. |
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● | | The impact of cybersecurity risks.
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| | The costs, effects and outcomes of existing or future litigation.
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| | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB. PCAOB, including FASB’s CECL impairment standards. |
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● | Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business. |
| ● | Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out). |
| ● | Increased competition in the financial services sector and the inability to attract new customers. |
| ● | Changes in technology and the ability to develop and maintain secure and reliable electronic systems. |
| ● | Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.acquisitions and the possibility that transaction costs may be greater than anticipated. |
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● | The loss of key executives and employees. |
| ● | Changes in consumer spending. |
| ● | The costs, effects and outcomes of existing or future litigation. |
| ● | Unexpected outcomes of existing or new litigation involving the Company. |
| ● | The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards. |
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● | | The ability of the Company to manage the risks associated with the foregoing as well as anticipated. |
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| | The imposition of tariffs or other governmental policies impacting the value of the agricultural or other products of our borrowers.
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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 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’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of theits 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’ management meet bi-weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board’s objectives in 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’s asset/liability position, the boardBoard of directorsDirectors 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 boardBoard of directorsDirectors and management may decide to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates. One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300 and 400 basis point upward shifts; and 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date. The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period. Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis. The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios. Application of the simulation model analysis for select interest rate scenarios at December 31, 20192021 and 20182020 demonstrated the following: | | | | | | | | | | | NET INTEREST INCOME EXPOSURE in YEAR 1 | | | | | | As of December 31, | | As of December 31, | | | | | | | | | | | | | | | NET INTEREST INCOME EXPOSURE in YEAR 1 | | | | | | As of December 31, | | As of December 31, | | INTEREST RATE SCENARIO | | POLICY LIMIT | | 2019 | | 2018 | | | POLICY LIMIT | | 2021 | | 2020 | | | | | | | | | | | | | | | | | | | | 100 basis point downward shift | | (10.0) | % | 0.5 | % | 0.7 | % | | (10.0) | % | (0.1) | % | — | % | 200 basis point upward shift | | (10.0) | % | 1.2 | % | (2.7) | % | | (10.0) | % | 3.1 | % | 2.5 | % | 300 basis point upward shock | | (25.0) | % | 4.9 | % | (9.0) | % | | (30.0) | % | 11.6 | % | 10.3 | % |
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 20192021 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’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. Item 8. Financial Statements QCR HOLDINGS, INC. Index to Consolidated Financial Statements | Report of Independent Registered Public Accounting Firm (PCAOB ID: 49) | 59 | | �� | Financial Statements | | | | Consolidated Balance Sheets as of December 31, 20192021 and 20182020 | 62 | | | Consolidated Statements of Income for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 | 63 | | | Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 | 64 | | | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 | 65 | | | Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 | 66 | | | Notes to Consolidated Financial Statements: | | | | ● Note 1: Nature of Business and Significant Accounting Policies
| 68 | ● Note 2: Sales/Mergers/Acquisitions
| 85 | ● Note 3: Investment Securities
| 87 | ● Note 4: Loans/Leases Receivable
| 91 | ● Note 5: Premises and Equipment
| 105 | ● Note 6: Goodwill and Intangibles
| 107 | ● Note 7: Derivatives and Hedging Activities
| 109 | ● Note 8: Deposits
| 112 | ● Note 9: Short-Term Borrowings
| 113 | ● Note 10: FHLB Advances
| 113 | ● Note 11: Other Borrowings and Unused Lines of Credit
| 114 | ● Note 12: Subordinated Notes
| 114 | ● Note 13: Junior Subordinated Debentures
| 115 | ● Note 14: Federal and State Income Taxes
| 117 | ● Note 15: Employee Benefit Plans
| 119 | ● Note 16: Stock-Based Compensation
| 120 | ● Note 17: Regulatory Capital Requirements and Restrictions on Dividends
| 123 | ● Note 18: Earnings Per Share
| 125 | ● Note 19: Commitments and Contingencies
| 125 |
| Note 21: Parent Company Only Financial Statements
| 127 | | 130 | | 133 | | 133 | Note 22: Fair Value
| Note 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, 20192021 and 2018,2020, 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, 2019,2021, 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, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, 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, 2019,2021, 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 13, 202011, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Adoption of New Accounting Standard As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses on financial instruments in 2021 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses). Basis for Opinion These financial statements are the responsibility of the Company’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. 
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements and | (2) | involved our especially challenging, subjective or complex judgments. The communication of critical |
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for credit losses on loans and leases As described in Notes 1 and 4 to the consolidated financial statements, the allowance for credit losses on loans and leases (allowance) totaled $78.7 million at December 31, 2021. On January 1, 2021, the Company adopted ASU 2016-13, which changes the impairment model from an incurred loss model to an expected loss model. Under the expected loss model, the allowance is measured on a collective (pool) basis when similar risk characteristics exist (general reserve). Loans that do not share similar risk characteristics are evaluated on an individual basis at the balance sheet date (specific reserve). At December 31, 2021 the general reserve on loans and leases collectively evaluated for impairment totaled $76.2 million and the specific reserve on loans and leases individually evaluated totaled $2.5 million. The measurement of the general reserve is based on relevant past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability. The Company’s reserve on collectively evaluated loans and leases includes a quantitative allowance based upon estimates of losses over the life of the loans and leases that is calculated using an existing probability of default and loss given default framework, as well as a qualitative component for factors not reflected in the historical loss experience. The qualitative component is determined based on an assessment of internal and external influences on credit quality at the present time (qualitative factors), as well as a projection of the impact in the future (future factors). Qualitative factors of significant influence include the general economic environment in the Company’s markets, both locally and nationally, as well as the impact of economic conditions on certain industries, the impact of the COVID-19 pandemic, and credit quality indicators. The Company’s future factors represent an estimate of forecasted economic conditions. The calculation also contemplates that the Company may not have sufficient information to make reasonable and supportable forecasts for the entire life of the loans and leases, which would result in a reversion to historical credit loss information. The evaluation of these qualitative factors and future factors requires that management make significant judgments, which may significantly impact the estimated allowance. We identified the implementation of ASU 2016-13 and both the qualitative and future factors, applied to the general reserve of the allowance as critical audit matters because auditing management’s implementation of the new standard as well as auditing management’s determination of the qualitative and future factors required significant auditor judgement as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty. Our audit procedures related to the implementation of ASU 2016-13 included the following, among others: | ● | We obtained an understanding of the relevant controls related to implementation of the new |
accounting guidance and tested such controls for design and operating effectiveness, including management’s review and approval of the methodology and assumptions in its model. | ● | We evaluated the reasonableness of managements assumptions and methodology as well as model selection and validation over the implementation of ASU 2016-13. |
| ● | We tested the completeness and accuracy of the data used in the initial calculations by management by agreeing the data to internal or external sources. |
Our audit procedures related to the Company’s qualitative factors and future factors in the general reserve included the following, among others: | ● | We obtained an understanding of the relevant controls related to the qualitative and future factors of |
the general reserve and tested such controls for design and operating effectiveness, including controls relating to management’s review and approval of the qualitative and future factors and the underlying data used in determining those factors. | ● | We tested management’s process and evaluated the reasonableness of their judgments and assumptions to develop the qualitative and future factors, which included: |
| o | Testing the accuracy and relevancy of the data inputs used by management as a basis for the adjustments for qualitative and future factors by comparing to internal and external source data. |
| o | Evaluating the magnitude and directional consistency of the adjustments for such. |
| o | Evaluating whether management’s conclusions were consistent with Company provided internal data and external, independently sourced data and agreeing the impact to the allowance calculation. |
/s/ RSM US LLP We have served as the Company's auditor since 1993. Davenport, Iowa March 13, 2020 11, 2022 QCR Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets December 31, 20192021 and 20182020 | | | | | | | | | 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 |
| | | | | | | | | December 31, | | December 31, | | | 2021 | | 2020 | | | | (dollars in thousands) | Assets | | | | | | | Cash and due from banks | | $ | 37,490 | | $ | 61,329 | Federal funds sold | | | 12,370 | | | 9,080 | Interest-bearing deposits at financial institutions | | | 75,292 | | | 86,596 | | | | | | | | Securities held to maturity, at amortized cost, net of allowance for credit losses | | | 472,385 | | | 476,165 | Securities available for sale, at fair value | | | 337,830 | | | 361,966 | Total securities | | | 810,215 | | | 838,131 | | | | | | | | Loans receivable held for sale | | | 3,828 | | | 3,758 | Loans/leases receivable held for investment | | | 4,676,304 | | | 4,247,371 | Gross loans/leases receivable | | | 4,680,132 | | | 4,251,129 | Less allowance for credit losses | | | (78,721) | | | (84,376) | Net loans/leases receivable | | | 4,601,411 | | | 4,166,753 | | | | | | | | Bank-owned life insurance | | | 62,424 | | | 60,586 | Premises and equipment, net | | | 78,530 | | | 72,693 | Restricted investment securities | | | 19,353 | | | 18,103 | Other real estate owned, net | | | — | | | 20 | Goodwill | | | 74,066 | | | 74,066 | Intangibles | | | 9,349 | | | 11,381 | Derivatives | | | 222,220 | | | 222,757 | Other assets | | | 93,412 | | | 83,548 | Total assets | | $ | 6,096,132 | | $ | 5,705,043 | | | | | | | | Liabilities and Stockholders' Equity | | | | | | | Liabilities: | | | | | | | Deposits: | | | | | | | Noninterest-bearing | | $ | 1,268,788 | | $ | 1,145,378 | Interest-bearing | | | 3,653,984 | | | 3,453,759 | Total deposits | | | 4,922,772 | | | 4,599,137 | | | | | | | | Short-term borrowings | | | 3,800 | | | 5,430 | Federal Home Loan Bank advances | | | 15,000 | | | 15,000 | Subordinated notes | | | 113,850 | | | 118,691 | Junior subordinated debentures | | | 38,155 | | | 37,993 | Derivatives | | | 225,135 | | | 229,270 | Other liabilities | | | 100,410 | | | 105,729 | Total liabilities | | | 5,419,122 | | | 5,111,250 | | | | | | | | | | | | | | | Stockholders' Equity: | | | | | | | Preferred stock, $1 par value; shares authorized 250,000 December 2021 and December 2020 - 0 shares issued or outstanding | | | — | | | — | Common stock, $1 par value; shares authorized 20,000,000 December 2021 - 15,613,460 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding | | | 15,613 | | | 15,806 | Additional paid-in capital | | | 273,768 | | | 275,807 | Retained earnings | | | 386,077 | | | 300,804 | Accumulated other comprehensive income (loss): | | | | | | | Securities available for sale | | | 5,925 | | | 9,008 | Derivatives | | | (4,373) | | | (7,632) | Total stockholders' equity | | | 677,010 | | | 593,793 | Total liabilities and stockholders' equity | | $ | 6,096,132 | | $ | 5,705,043 |
See Notes to Consolidated Financial Statements. QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 2019, 2018,2021, 2020, and 20172019 | | | | | | | | | | | | 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 | | | | | | | | | | |
| | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | | (dollars in thousands) | Interest and dividend income: | | | | | | | | | | Loans/leases, including fees | | $ | 173,940 | | $ | 173,967 | | $ | 190,324 | Securities: | | | | | ��� | | | | | Taxable | | | 8,923 | | | 7,787 | | | 6,607 | Nontaxable | | | 16,167 | | | 14,900 | | | 13,858 | Interest-bearing deposits at financial institutions | | | 173 | | | 669 | | | 3,910 | Restricted investment securities | | | 950 | | | 1,031 | | | 1,174 | Federal funds sold | | | 2 | | | 19 | | | 203 | Total interest and dividend income | | | 200,155 | | | 198,373 | | | 216,076 | | | | | | | | | | | Interest expense: | | | | | | | | | | Deposits | | | 13,300 | | | 23,269 | | | 50,875 | Short-term borrowings | | | 5 | | | 84 | | | 363 | Federal Home Loan Bank advances | | | 70 | | | 1,087 | | | 2,894 | Other borrowings | | | — | | | — | | | 513 | Subordinated notes | | | 6,272 | | | 4,697 | | | 3,564 | Junior subordinated debentures | | | 2,275 | | | 2,286 | | | 2,308 | Total interest expense | | | 21,922 | | | 31,423 | | | 60,517 | Net interest income | | | 178,233 | | | 166,950 | | | 155,559 | Provision for credit losses | | | 3,486 | | | 55,704 | | | 7,066 | Net interest income after provision for credit losses | | | 174,747 | | | 111,246 | | | 148,493 | | | | | | | | | | | Noninterest income: | | | | | | | | | | Trust department fees | | | 11,206 | | | 9,207 | | | 9,559 | Investment advisory and management fees | | | 4,080 | | | 5,318 | | | 6,995 | Deposit service fees | | | 6,132 | | | 6,041 | | | 6,812 | Gains on sales of residential real estate loans, net | | | 4,397 | | | 4,680 | | | 2,571 | Gains on sales of government guaranteed portions of loans, net | | | 227 | | | 224 | | | 748 | Swap fee income/capital markets revenue | | | 60,992 | | | 74,821 | | | 28,295 | Securities gains (losses), net | | | (88) | | | 2,484 | | | (30) | Earnings on bank-owned life insurance | | | 1,838 | | | 1,904 | | | 1,973 | Debit card fees | | | 4,216 | | | 3,402 | | | 3,357 | Correspondent banking fees | | | 1,114 | | | 903 | | | 773 | Gain on sale of assets and liabilities of subsidiary | | | — | | | — | | | 12,286 | Other | | | 6,308 | | | 4,814 | | | 5,429 | Total noninterest income | | | 100,422 | | | 113,798 | | | 78,768 | | | | | | | | | | | Noninterest expense: | | | | | | | | | | Salaries and employee benefits | | | 100,907 | | | 96,268 | | | 92,063 | Occupancy and equipment expense | | | 15,918 | | | 16,504 | | | 15,106 | Professional and data processing fees | | | 14,579 | | | 14,644 | | | 13,381 | Acquisition costs | | | 624 | | | — | | | — | Post-acquisition compensation, transition and integration costs | | | — | | | 214 | | | 3,582 | Disposition costs | | | 13 | | | 690 | | | 3,325 | FDIC insurance, other insurance and regulatory fees | | | 4,475 | | | 4,164 | | | 2,955 | Loan/lease expense | | | 1,671 | | | 1,435 | | | 1,097 | Net income from and gains/losses on operations of other real estate | | | (1,420) | | | (307) | | | 3,789 | Advertising and marketing | | | 4,254 | | | 3,260 | | | 4,548 | Bank service charges | | | 2,173 | | | 2,016 | | | 2,009 | Losses on liability extinguishment | | | — | | | 3,907 | | | 436 | Correspondent banking expense | | | 799 | | | 838 | | | 836 | Intangibles amortization | | | 2,032 | | | 2,149 | | | 2,266 | Goodwill impairment | | | — | | | 500 | | | 3,000 | Loss on sale of subsidiary | | | — | | | 158 | | | — | Other | | | 7,677 | | | 5,315 | | | 6,841 | Total noninterest expense | | | 153,702 | | | 151,755 | | | 155,234 | Net income before income taxes | | | 121,467 | | | 73,289 | | | 72,027 | Federal and state income tax expense | | | 22,562 | | | 12,707 | | | 14,619 | Net income | | $ | 98,905 | | $ | 60,582 | | $ | 57,408 | | | | | | | | | | | Basic earnings per common share | | $ | 6.30 | | $ | 3.84 | | $ | 3.65 | Diluted earnings per common share | | $ | 6.20 | | $ | 3.80 | | $ | 3.60 | | | | | | | | | | | Weighted average common shares outstanding | | | 15,708,744 | | | 15,771,650 | | | 15,730,016 | Weighted average common and common equivalent shares outstanding | | | 15,944,708 | | | 15,952,637 | | | 15,967,775 | | | | | | | | | | | Cash dividends declared per common share | | $ | 0.24 | | $ | 0.24 | | $ | 0.24 | | | | | | | | | | |
See Notes to Consolidated Financial Statements. QCR HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years Ended December 31, 2019, 2018,2021, 2020, and 20172019 | | | | | | | | | | | | | | | | | | | 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 |
| | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | | (dollars in thousands) | | | | | | | | | | | Net income | | $ | 98,905 | | $ | 60,582 | | $ | 57,408 | | | | | | | | | | | Other comprehensive income: | | | | | | | | | | | | | | | | | | | | Unrealized gains (losses) on securities available for sale: | | | | | | | | | | Unrealized holding gains (losses) arising during the period before tax | | | (4,158) | | | 10,657 | | | 8,761 | Less reclassification adjustment for gains (losses) included in net income before tax | | | (88) | | | 2,484 | | | (30) | | | | (4,070) | | | 8,173 | | | 8,791 | | | | | | | | | | | Unrealized gains (losses) on derivatives: | | | | | | | | | | Unrealized holding gains (losses) arising during the period before tax | | | 3,427 | | | (6,854) | | | (3,806) | Less reclassification adjustment for unhedging caplet | | | — | | | (649) | | | — | Less reclassification adjustment for swap termination | | | — | | | (792) | | | — | Less reclassification adjustment for caplet amortization before tax | | | (697) | | | (551) | | | — | | | | 4,124 | | | (4,862) | | | (3,806) | Unrealized gains 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 ineffectiveness before tax | | | — | | | — | | | 422 | Less realized holding losses on derivatives sold | | | — | | | — | | | 392 | | | | — | | | — | | | 894 | | | | | | | | | | | Other comprehensive income, before tax | | | 54 | | | 3,311 | | | 5,879 | Tax expense (benefit) | | | (122) | | | 837 | | | 1,433 | Other comprehensive income, net of tax | | | 176 | | | 2,474 | | | 4,446 | | | | | | | | | | | Comprehensive income | | $ | 99,081 | | $ | 63,056 | | $ | 61,854 | | | | | | | | | | |
See Notes to Consolidated Financial Statements. QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2019, 2018,2021, 2020, and 20172019 | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | Additional | | | | | Other | | | | | | Common | | Paid-In | | Retained | | Comprehensive | | | | | | Stock | | Capital | | Earnings | | (Loss) Income | | Total | | | | (dollars in thousands) | | | | | | | | | | | | | | | | | 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 | Issuance of 9,400 shares of common stock as a result of the acquisition of the Bates Companies | | | 9 | | | 390 | | | — | | | — | | | 399 | Impact of adoption of ASU 2016-13 | | | — | | | — | | | — | | | — | | | — | Common cash dividends declared, $0.24 per share | | | — | | | — | | | (3,775) | | | — | | | (3,775) | Stock-based compensation expense | | | — | | | 2,469 | | | — | | | — | | | 2,469 | Issuance of common stock under employee benefit plans | | | 101 | | | 1,165 | | | — | | | — | | | 1,266 | Balance, December 31, 2019 | | $ | 15,828 | | $ | 274,785 | | $ | 245,836 | | $ | (1,098) | | $ | 535,351 | Net income | | | — | | | — | | | 60,582 | | | — | | | 60,582 | Other comprehensive income, net of tax | | | — | | | — | | | — | | | 2,474 | | | 2,474 | Common cash dividends declared, $0.24 per share | | | — | | | — | | | (3,779) | | | — | | | (3,779) | Repurchase and cancellation of 100,932 shares of common stock | | | | | | | | | | | | | | | | as a result of a share repurchase program | | | (101) | | | (1,843) | | | (1,835) | | | — | | | (3,779) | Stock-based compensation expense | | | — | | | 2,150 | | | — | | | — | | | 2,150 | Issuance of common stock under employee benefit plans | | | 79 | | | 714 | | | — | | | — | | | 794 | Balance, December 31, 2020 | | $ | 15,806 | | $ | 275,807 | | $ | 300,804 | | $ | 1,376 | | $ | 593,793 | Impact of adoption of ASU 2016-13 | | | — | | | — | | | (937) | | | — | | | (937) | Net income | | | — | | | — | | | 98,905 | | | — | | | 98,905 | Other comprehensive income, net of tax | | | — | | | — | | | — | | | 176 | | | 176 | Repurchase and cancellation of 293,153 shares of common stock | | | | | | | | | | | | | | | | as a result of a share repurchase program | | | (293) | | | (4,961) | | | (8,914) | | | — | | | (14,168) | Common cash dividends declared, $0.24 per share | | | — | | | — | | | (3,781) | | | — | | | (3,781) | Stock-based compensation expense | | | — | | | 2,352 | | | — | | | — | | | 2,352 | Issuance of common stock under employee benefit plans | | | 100 | | | 570 | | | — | | | — | | | 670 | Balance, December 31, 2021 | | $ | 15,613 | | $ | 273,768 | | $ | 386,077 | | $ | 1,552 | | $ | 677,010 | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements. QCR Holdings, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2019, 2018,2021, 2020, and 20172019 | | | | | | | | | | | | 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 |
| | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | | (dollars in thousands) | CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | Net income | | $ | 98,905 | | $ | 60,582 | | $ | 57,408 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation | | | 5,359 | | | 5,333 | | | 5,225 | Provision for credit losses | | | 3,486 | | | 55,704 | | | 7,066 | Deferred income taxes | | | 15,272 | | | (14,530) | | | 6,364 | Stock-based compensation expense | | | 2,352 | | | 2,150 | | | 2,469 | Deferred compensation expense accrued | | | 4,580 | | | 3,821 | | | 2,773 | (Gains) losses on other real estate owned, net | | | (1,754) | | | (317) | | | 3,361 | Amortization of premiums on securities, net | | | 1,933 | | | 969 | | | 1,561 | Caplet amortization | | | 697 | | | 551 | | | — | Mark to market gains on unhedged derivatives, net | | | (170) | | | — | | | — | Securities (gains) losses, net | | | 88 | | | (2,484) | | | 30 | Loans originated for sale | | | (204,449) | | | (236,734) | | | (151,692) | Proceeds on sales of loans | | | 209,003 | | | 241,553 | | | 152,633 | Gains on sales of residential real estate loans | | | (4,397) | | | (4,680) | | | (2,571) | Gains on sales of government guaranteed portions of loans | | | (227) | | | (224) | | | (748) | Loss on liability extinguishment, net | | | — | | | 3,907 | | | 436 | Losses (gains) on sales and disposals of premises and equipment | | | 1,059 | | | (19) | | | 753 | Amortization of intangibles | | | 2,032 | | | 2,149 | | | 2,266 | Accretion of acquisition fair value adjustments, net | | | (1,340) | | | (3,271) | | | (4,344) | Increase in cash value of bank-owned life insurance | | | (1,838) | | | (1,904) | | | (1,973) | Loss (gain) on sale of subsidiary/certain assets and liabilities of subsidiary | | | — | | | 158 | | | (12,286) | Goodwill impairment | | | — | | | 500 | | | 3,000 | Increase in other assets | | | (47,006) | | | (9,445) | | | (19,152) | Increase in other liabilities | | | 4,633 | | | 8,408 | | | 23,915 | Net cash provided by operating activities | | | 88,218 | | | 112,177 | | | 76,494 | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | Net decrease (increase) in federal funds sold | | | (3,290) | | | 720 | | | 16,598 | Net decrease (increase) in interest-bearing deposits at financial institutions | | | 11,304 | | | 61,295 | | | (69,984) | Proceeds from sales of other real estate owned | | | 4,742 | | | 4,477 | | | 840 | Activity in securities portfolio: | | | | | | | | | | Purchases | | | (173,204) | | | (356,127) | | | (71,963) | Calls, maturities and redemptions | | | 106,442 | | | 53,007 | | | 25,193 | Paydowns | | | 65,410 | | | 47,313 | | | 50,830 | Sales | | | 23,874 | | | 38,562 | | | 30,055 | Activity in restricted investment securities: | | | | | | | | | | Purchases | | | (1,280) | | | (4,600) | | | (5,859) | Redemptions | | | 30 | | | 9,749 | | | 7,621 | Proceeds from the liquidation of bank-owned life insurance | | | — | | | 10,999 | | | — | Net increase in loans/leases originated and held for investment | | | (433,544) | | | (564,748) | | | (320,368) | Purchase of premises and equipment | | | (13,981) | | | (4,268) | | | (12,429) | Proceeds from sales of premises and equipment | | | 1,726 | | | 101 | | | 2,562 | Purchase of derivatives | | | — | | | — | | | (4,347) | Payment for termination of derivative | | | — | | | (808) | | | — | Net cash (transferred out) transferred in sale of subsidiary | | | — | | | (154) | | | 42,587 | Net cash used in investing activities | | | (411,771) | | | (704,482) | | | (308,664) | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | Net increase in deposit accounts | | | 323,635 | | | 716,898 | | | 335,580 | Net decrease in short-term borrowings | | | (1,630) | | | (7,993) | | | (14,193) | Activity in Federal Home Loan Bank advances: | | | | | | | | | | Term advances | | | — | | | 125,000 | | | 25,000 | Calls and maturities | | | — | | | (121,600) | | | (35,000) | Net change in short-term and overnight advances | | | — | | | (94,300) | | | (52,465) | Prepayments | | | — | | | (55,274) | | | (30,323) | Activity in other borrowings: | | | | | | | | | | Calls, maturities and scheduled principal payments | | | — | | | — | | | (11,937) | Prepayments | | | — | | | — | | | (46,313) | Paydown of revolving line of credit | | | — | | | — | | | (9,000) | Prepayments on brokered and public time deposits | | | — | | | (29,153) | | | — | Prepayments of subordinated notes | | | (5,000) | | | — | | | — | Proceeds from subordinated notes | | | | | | 50,000 | | | 63,393 | Payment of cash dividends on common stock | | | (3,793) | | | (3,779) | | | (3,767) | Proceeds from issuance of common stock, net | | | 670 | | | 1,360 | | | 1,926 | Repurchase and cancellation of shares | | | (14,168) | | | (3,779) | | | — | Net cash provided by financing activities | | | 299,714 | | | 577,380 | | | 222,901 | | | | | | | | | | | Net decrease in cash and due from banks | | | (23,839) | | | (14,925) | | | (9,269) | | | | | | | | | | | Cash and due from banks, beginning | | | 61,329 | | | 76,254 | | | 85,523 | Cash and due from banks, ending | | $ | 37,490 | | $ | 61,329 | | $ | 76,254 | | | | | | | | | | |
QCR Holdings, Inc. and Subsidiaries - Continued Consolidated Statements of Cash Flows Years Ended December 31, 2019, 2018,2021, 2020, and 20172019 | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | |
| | | | | | | | | | | | 2021 | | 2020 | | 2019 | Supplemental disclosure of cash flow information, cash payments for: | | | | | | | | | | Interest | | $ | 23,373 | | $ | 32,178 | | $ | 59,292 | Income/franchise taxes | | | 48,988 | | | 24,567 | | | 2,719 | | | | | | | | | | | Supplemental schedule of noncash investing activities: | | | | | | | | | | Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net | | | 176 | | | 2,474 | | | 4,446 | Change in retained earnings from adoption of ASU 2016-13 | | | (937) | | | — | | | — | Transfers of loans to other real estate owned | | | 2,962 | | | 51 | | | 1,086 | Due to broker for purchases of securities | | | 1,000 | | | — | | | — | Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities | | | (1,376) | | | 137,752 | | | 62,483 | Dividends payable | | | 935 | | | 947 | | | 947 | Consideration received on sale of the Bates Companies | | | — | | | 1,523 | | | — | | | | | | | | | | | Supplemental disclosure of cash flow information for sale of subsidiary/certain assets and certain liabilities of subsidiary: | | | | | | | | | | Cash proceeds** | | $ | — | | $ | 195 | | $ | 46,560 | Assets Sold: | | | | | | | | | | Cash and due from banks | | $ | — | | $ | 349 | | $ | 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 | | | — | | | 19 | | | 5,612 | Restricted investment securities | | | — | | | — | | | 675 | Other real estate owned, net | | | — | | | — | | | 2,134 | Other assets | | | — | | | 2,259 | | | 3,228 | Total assets sold | | $ | — | | $ | 2,627 | | $ | 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 | | | — | | | 946 | | | 2,241 | Total liabilities sold | | $ | — | | $ | 946 | | $ | 419,687 | | | | | | | | | | | Net Assets Sold | | $ | — | | | 1,681 | | | 34,274 | | | | | | | | | | | Forgiveness of earn-out consideration | | $ | — | | $ | 880 | | $ | — | Note receivable consideration | | | — | | | 448 | | | — | Gain (loss) on sale of subsidiary and certain assets and certain liabilities of subsidiary: | | $ | — | | $ | (158) | | $ | 12,286 |
**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$42.6 million for the sale of certain assets and certain liabilities of RB&T in 2019.
**Net cash transferred at closing totaled $154 thousand for the sale of the Bates Companies in 2020. See Notes to Consolidated Financial Statements. Note 1. Nature of Business and Significant Accounting Policies
Basis of 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. ACL: Allowance for credit losses AFS: Available for sale | HTM: Held to maturity | Allowance: Allowance for estimatedcredit losses on loans/leases | HTM: Held to maturityIowa Superintendent: Iowa Superintendent of Banking
| AOCI: Accumulated other comprehensive income (loss) | IB&T: Illinois Bank & TrustLCR: Liquidity Coverage Ratio
| AFS: Available for saleARRC: Alternative Reference Rate Committee
| IDFPR: Illinois Department of Financial & ProfessionalLIBOR: London Inter-Bank Offered Rate
| ASC: Accounting Standards Codification | RegulationLIHTC: Low-income housing tax credit
| ASC 805: Business Combination Standard | Iowa Superintendent: Iowa Superintendent of BankingLRP: Loan Relief Program
| ASU: Accounting Standards Update | m2: m2 Equipment Finance, LLC | Bates Companies: Bates Financial Advisors, Inc., Bates | LCR: Liquidity Coverage Ratio
LIBOR: London Inter-Bank Offered Rate
| Financial Services, Inc., Bates Securities, Inc. and Batess
| m2: m2 Lease Funds, LLC
| Financial Group, Inc.
| MD&A: Management’s Discussion & Analysis | BBA: British Bankers’ Association.Financial Services, Inc., Bates Securities, Inc. and Bates
| Missouri Division of Finance: Missouri Department of | Financial Group, Inc. | Commerce and Insurance | BHCA: Bank Holding Company Act of 1956 | Commerce and InsuranceNIM: Net interest margin
| BOLI: Bank-owned life insurance | MSA: Metropolitan Statistical AreaNPA: Nonperforming asset
| Caps: Interest rate cap derivatives | NIM: Net interest marginNPL: Nonperforming loan
| CARES Act: Coronavirus Aid, Relief and Economy Security Act CECL: Current Expected Credit Losses | NPA: Nonperforming asset
| CFPB: Bureau of Consumer Financial Protection | NPL: Nonperforming loan
NSFR: Net Stable Funding Ratio | CDI: Core deposit intangibleOBS: Off-balance sheet
| 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 | Community National: Community National Bancorporation COVID-19: Coronavirus Disease 2019 CRA: Community Reinvestment Act | PCD: Purchased credit deteriorated loan PCI: Purchased credit impaired PPP: Paycheck Protection Program | CRBT: Cedar Rapids Bank & Trust Company | Provision: Provision for loan/leasecredit losses | CRE: Commercial real estate | PUD LOC: Public Unit Deposit Letter of Credit | CRE Guidance: Interagency Concentrations in Commercial | QCBT: Quad City Bank & Trust Company | Real Estate Lending, Sound Risk Management Practices | QCIA: Quad Cities Investment Advisors
| guidance
| RB&T: Rockford Bank & Trust Company | CSB: Community State Bankguidance
| ROAA: Return on Average Assets | CSB: Community State Bank | ROACE: Return on Average Common Equity | C&I: Commercial and industrial | ROACE:ROAE: Return on Average Common Equity
| Dodd-Frank Act: Dodd-Frank Wall Street Reform and | ROAE: Return on Average EquityROU: Right of use
| Consumer Protection Act | SBA: U.S. Small Business Administration | DGCL: Delaware General Corporation Law | SEC: Securities and Exchange Commission | DIF: Deposit Insurance Fund | SFC Bank:SERPs: Supplemental Executive Retirement Plans
| EBA: Excess Balance Account | SFCB: Springfield First Community Bank | EPS: Earnings per share | SERPs: Supplemental Executive Retirement PlansSFG: Specialty Finance Group
| ESG: Environmental, Social and Governance | SOFR: Secured Overnight Financing Rate | Exchange Act: Securities Exchange Act of 1934, as amended | Springfield Bancshares: Springfield Bancshares, Inc. | amended
| TA: Tangible assets
| FASB: Financial Accounting Standards Board | Tax Act: Tax Cuts and Jobs ActTA: Tangible assets
| FDIC: Federal Deposit Insurance Corporation | TCE: Tangible common equity | Federal Reserve: Board of Governors of the Federal Reserve | TDRs: Troubled debt restructurings | System | TEY: Tax equivalent yield | FHLB: Federal Home Loan Bank | The Company: QCR Holdings, Inc. | FICO: Financing Corporation
| Treasury: U.S. Department of the Treasury
| FRB: Federal Reserve Bank of Chicago | USA Patriot Act: Uniting and Strengthening America by TRBC: Total risk-based capital
| FTEs: Full-time equivalents | Providing Appropriate Tools Required to InterceptTreasury: U.S. Department of the Treasury
| GAAP: Generally Accepted Accounting Principles | USA Patriot Act: Uniting and Strengthening America by | GFED: Guaranty Federal Bancshares | Providing Appropriate Tools Required to Intercept | Goldman Sachs: Goldman Sachs and Company | and Obstruct Terrorism Act of 2001 | Guaranty: Guaranty Bankshares, Ltd. | USDA: U.S. Department of Agriculture | Guaranty Bank: Guaranty Bank and Trust Company | | | |
Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant AccountAccounting Policies (continued) Nature of 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 SFC Bank.SFCB. The Company also engages in direct financing lease contracts through its wholly-owned equity investment by QCBT in m2, headquartered in Milwaukee,Brookfield, Wisconsin. The Company also engages in wealth management services through its banking subsidiaries. On August 12, 2020, the Company sold the Company’s wholly-owned subsidiaries, and its subsidiary, the Bates Companies, headquartered in Rockford, Illinois. which were originally acquired on October 1, 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. 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. On December 2, 2017, the Company merged Guaranty Bank with and into CRBT, with CRBT as the surviving bank. The financial results of the Bates Companies and RB&T prior to its sale are included in this report. The financial results of acquired/merged entities for the periods since acquisition/mergertheir respective sales 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. SFC BankSFCB is a commercial bank that serves Springfield, Missouri. QCBT, CRBT, and CSB are chartered and regulated under the laws of the state of Iowa. SFC BankSFCB is chartered and regulated under the laws of the state of Missouri. All four4 subsidiary banks are insured and subject to regulation by the FDIC. All four4 subsidiary bankbanks are members of and regulated by the Federal Reserve System. The remaining direct subsidiaries of the Company consist of sixa consolidated subsidiary formed during 2021 for the risk management of insurance and 6 non-consolidated subsidiaries formed for the issuance of trust preferred securities. See Note 13 to the Consolidated Financial Statements 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.securities. Principles of consolidation: The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, except those six6 subsidiaries formed for the issuance of trust preferred securities which do not meet the criteria for consolidation. See Note 13 for a detailed listing of these subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Table of Contents
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Account 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 FHLB advances are treated as net increases or decreases. Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies (continued) Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. TheThere was 0 reserve requirement was approximately $38,060,000 and $33,372,000 as of December 31, 20192021 and 2018, respectively.2020. Investment securities: Investment securities HTM 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, net of ACL, 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’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.require an allowance. See further discussion in the Allowance section following. In estimating OTTI losses on debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the lack of intent of the Company to sell the security prior to recovery and whether it is 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 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. 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 statedreported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, the allowance,any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $15 million at December 31, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the Table of Contents
QCR Holdings, Inc. and Subsidiaries
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 ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the allowance for credit lossesACL (also known as the allowance) by portfolio segment, and credit quality information, impaired financing receivables, nonaccrual status, and TDRspast due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its allowance for credit losses.ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 4.4 to the Consolidated Financial Statements. The Company’s portfolio segments are as follows: | Residential●
| CRE – non-owner occupied |
| ● | Construction and land development |
| ·
● | | Installment and other consumer
Consumer |
Direct financing leases are considered a segment within the overall loan/lease portfolio.
Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies (continued) The Company’s classes of loans receivable are as follows: | ·
● | | Owner-occupied CRE
C&I - other |
| Commercial construction,●
| CRE – non-owner occupied |
| ● | Construction and land development and other land loans that are not owner-occupied CRE |
| ·
● | | Other non-owner-occupied CRE
Multi-family |
| ·
● | Direct financing leases |
| Residential●
| 1-4 family real estate |
| ·
● | | Installment and other consumer
Consumer |
Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio.portfolio and are included in the C&I – other loan segments for ACL. The accounting policies for direct financing leases are disclosed below. Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 3130 days or greater. For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist: | ·
● | | It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan; |
| ·
● | | When full repayment of principal and interest is not expected; |
| ·
● | | When the loan is graded “doubtful”; |
| ·
● | | When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or |
| ·
● | | When foreclosure action is initiated. |
Table of Contents
QCR Holdings, Inc. and Subsidiaries
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; |
| ·
● | | All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and |
| ·
● | | There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms: |
| o | Six months of repayment performance for contractual monthly payments, or |
| o | One year of repayment performance for contractual quarterly or semi-annual payments. |
Note 1. Nature of repayment performance for contractual quarterly or semi-annual payments.Business and Significant Accounting Policies (continued) 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’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than-temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded. The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables. The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. In periods prior to and including December 31, 2018, these initial direct leasing costs 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.
Table of Contents
QCR Holdings, Inc. and Subsidiaries
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: |
| o | The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk. |
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.
| o | ·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.
|
| o | The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement. |
| o | The reduction of accrued interest. |
| ● | A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan. |
| ·
● | | The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position. |
Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies (continued) Allowance: Allowance for Credit Losses on Loans and Leases The ACL on loans/leases is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the 8 portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Loan/leaseCredit losses on loans and leases, 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 Company’s methodologies for estimating the allowance is evaluated on a regular basis by management and is based upon management’s periodic review ofACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the loans/leases in light of historical experience,measurement date, and forecasts about future economic conditions that are expected to exist through the nature and volumecontractual lives of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateralfinancial assets 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 susceptiblereasonable and supportable – to significant revision as more information becomes available.the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.
A discussion of the risk characteristics and the allowance by each 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; |
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● | | Stable earnings with positive financial trends; |
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● | | Sufficient cash flow to support debt repayment; |
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● | | Earnings projections based on reasonable assumptions; |
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● | | Financial strength of the industry and business; and |
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● | | Value and marketability of collateral. |
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QCR Holdings, Inc. and Subsidiaries
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.equipment. 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 7seven years with average terms ranging from 3three to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20five years. For lines of credit, the maximum term is generally 365 days. In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. The Company is an active lender of LIHTC project loans which includes both the construction and permanent loan. CRE loans are subject to underwriting standards and processes similar Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies (continued) 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, or in some situations, more conservative than those established by regulatory authorities. Multi-family loans are typically repaid from rental income. LIHTC permanent loans are included in multi-family loans and the maximum term is generally up to 20 years. 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 tracksConstruction loans include any loans to finance the levelconstruction of owner-occupiedany new residential property, CRE loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. Asproperty, low-income housing project or major rehabilitation or expansion of December 31, 2019 and 2018, approximately 26% and 28%, respectively,existing commercial structures. Construction lending carries a higher degree of risk because of the CRE loan portfolio was owner-occupied.difficulty of protecting the bank against various factors. The following components are evaluated when underwriting these types of loans:
| ● | Borrowers/contractors experience and ability is analyzed with the type and size of project being considered. |
| ● | Financial ability to cover cost overruns. |
| ● | Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits. |
| ● | Reliability of the estimate of time to complete the project. |
The Company’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 andportfolio also includes other land loans in excess of 100% of total risk-based capital warrant the use of heightenedsuch as raw land. The raw land component involves considerable risk management practices. As of December 31, 2019 and 2018, QCBT and CRBT were in compliance with these limits. Although CSB’s and SFC Bank’s loan portfolio have historically been real estate dominated and the real estate portfolio levels at each bank exceed these policy limits, 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, 2019, have declined since December 31, 2018. In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelinesbank and limits established withinis reserved for the Company’s lending policy described above and below. In general, exceptionsbank’s most credit worthy borrowers. Land development loans are typically only made 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.experienced local developers with successful track records.
For C&I and CREall loans the allowance consists of specificpooled and generalindividually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool. Quantitative Factors: The specificquantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook. Qualitative Factors: The Company’s allowance methodology also has a qualitative component, relatesthe purpose of which is to loanstake into consideration changes in current conditions that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established whennot reflected in the discounted cash flows (or collateral value or observable market price) ofquantitative analysis performed in determining its base credit loss rates. The Company utilizes the impaired loan are lower than the carrying value of that loan.following qualitative factors: | ● | National and local economy |
Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant AccountAccounting Policies (continued) | ● | Loan policies and procedures |
| ● | Management and staff experience |
| ● | Regulatory environment and oversight |
For C&I loans and all classesThe Company also provides for unique circumstances with qualitative adjustments as needed. The Company has been providing a separate qualitative allocation for the COVID-19 pandemic since the second quarter of CRE loans, a loan is considered impaired when,2020. The qualitative adjustments are based on the current informationconditions and events, it is probable thatapplied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.
Economic forecasting: The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity. This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity. These forecasted adjustments are added to the qualitative adjustments and applied as a percentage adjustment in addition to the historical loss rates. It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be unableaffected by events that were unforeseen, such as, but not limited to, collecteconomic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period. Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. agreement, have a greater probability of uncollectability based on current information and events. Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating. Factors considered by management in determining impairmentrisk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment isAllowances for these low quality loans with outstanding principal balances greater than $250,000 are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The general component consists
Note 1. Nature of Business and covers non-impaired loans. The quantitative factorsSignificant Accounting Policies (continued) Low quality loans with principal balances equal to or less than $250,000 are based on historical charge-off experienceplaced into a unique pool and expectedhave the overall effective loss given default derived fromrate for that period applied to this low quality pool. However, should an asset within the Company’s internallow quality pool no longer have the same risk rating process. See below for a detailed descriptioncharacteristic of the Company’s internal risk rating scale. The qualitative factorsunique pool, it will be removed and individually analyzed as described above. Some loans that are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflectedto no longer share risk characteristics with other assets in the historical losssegmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or risk rating data.operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell. However, if the repayment is dependent on the operations of the company, the fair market value less estimated cost to sell cannot be used. Thus, the net present value of the cash-flow will be utilized. For C&I and CREnon-homogenous loans, the Company utilizes the following internal risk rating scale: | 1. | | Highest Quality (Pass) – loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities. |
| 2. | | Superior Quality (Pass) – loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees. |
| 3. | | Satisfactory Quality (Pass) – loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate. |
| 4. | | Fair Quality (Pass) – loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to 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. |
Table of Contents
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Account Policies (continued)
| 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 |
Table of Contents QCR Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1. Nature of Business and Significant Accounting Policies (continued) 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. |