Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to________
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
42-1397595
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices, including zip code)
(309) 736-3580
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 Par Value
QCRH
The Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of August 1, 2021, the Registrant had outstanding 15,769,161 shares of common stock, $1.00 par value per share.
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PageNumber(s)
Part I
FINANCIAL INFORMATION
Item 1
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets As of June 30, 2021 and December 31, 2020
4
Consolidated Statements of Income For the Three Months Ended June 30, 2021 and 2020
5
Consolidated Statements of Income
For the Six Months Ended June 30, 2021 and 2020
6
Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2021 and 2020
7
Consolidated Statements of Changes in Stockholders' Equity For the Three and Six Months Ended June 30, 2021 and 2020
8
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2021 and 2020
9
Notes to Consolidated Financial Statements
11
Note 1. Summary of Significant Accounting Policies
Note 2. Investment Securities
21
Note 3. Loans/Leases Receivable
25
Note 4. Derivatives and Hedging Activities
36
Note 5. Income Taxes
39
Note 6. Earnings Per Share
Note 7. Fair Value
40
Note 8. Business Segment Information
42
Note 9. Regulatory Capital Requirements
43
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
45
General
Impact of COVID-19
Executive Overview
47
Strategic Financial Metrics
48
Strategic Developments
49
GAAP to Non-GAAP Reconciliations
50
Net Interest Income - (Tax Equivalent Basis)
52
Critical Accounting Policies
57
Goodwill
Allowance for Credit Losses
58
Results of Operations
Interest Income
Interest Expense
2
Provision for Credit Losses
59
Noninterest Income
60
Noninterest Expense
63
Income Taxes
65
Financial Condition
66
Investment Securities
Loans/Leases
67
Allowance for Credit Losses on Loans/Leases and OBS Exposures
69
Nonperforming Assets
71
Deposits
72
Borrowings
73
Stockholders' Equity
74
Liquidity and Capital Resources
Special Note Concerning Forward-Looking Statements
76
Item 3
Quantitative and Qualitative Disclosures About Market Risk
77
Item 4
Controls and Procedures
79
Part II
OTHER INFORMATION
80
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5
Other Information
Item 6
Exhibits
81
Signatures
82
Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2021 and December 31, 2020
June 30,
December 31,
2021
2020
(dollars in thousands)
Assets
Cash and due from banks
$
55,598
61,329
Federal funds sold
1,340
9,080
Interest-bearing deposits at financial institutions
87,440
86,596
Securities held to maturity, at amortized cost, net of allowance for credit losses
473,159
476,165
Securities available for sale, at fair value
337,286
361,966
Total securities
810,445
838,131
Loans receivable held for sale
4,459
3,758
Loans/leases receivable held for investment
4,413,246
4,247,371
Gross loans/leases receivable
4,417,705
4,251,129
Less allowance for credit losses
(78,894)
(84,376)
Net loans/leases receivable
4,338,811
4,166,753
Bank-owned life insurance
61,509
60,586
Premises and equipment, net
74,765
72,693
Restricted investment securities
20,337
18,103
Other real estate owned, net
1,820
20
74,066
Intangibles
10,365
11,381
Derivatives
193,395
222,757
Other assets
75,274
61,302
Total assets
5,805,165
5,682,797
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
1,258,885
1,145,378
Interest-bearing
3,430,050
3,453,759
Total deposits
4,688,935
4,599,137
Short-term borrowings
7,070
5,430
Federal Home Loan Bank advances
40,000
15,000
Subordinated notes
113,771
118,691
Junior subordinated debentures
38,067
37,993
196,092
229,270
Other liabilities
90,754
83,483
Total liabilities
5,174,689
5,089,004
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 June 2021 and December 2020 - no shares issued or outstanding
—
Common stock, $1 par value; shares authorized 20,000,000 June 2021 - 15,763,522 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding
15,764
15,806
Additional paid-in capital
275,485
275,807
Retained earnings
335,424
300,804
Accumulated other comprehensive income (loss):
Securities available for sale
8,244
9,008
(4,441)
(7,632)
Total stockholders' equity
630,476
593,793
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, 2021 and 2020
(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees
42,448
42,614
Securities:
Taxable
2,132
2,048
Nontaxable
4,052
3,565
34
134
237
288
Total interest and dividend income
48,903
48,650
Interest expense:
3,235
5,766
22
16
347
1,570
994
564
573
Total interest expense
5,387
7,702
Net interest income
43,516
40,948
Provision for credit losses
19,915
Net interest income after provision for loan/lease losses
21,033
Noninterest income:
Trust department fees
2,848
2,227
Investment advisory and management fees
1,039
1,399
Deposit service fees
1,492
1,286
Gains on sales of residential real estate loans, net
1,184
1,196
Swap fee income/capital markets revenue
9,568
19,927
Securities gains (losses), net
(88)
Earnings on bank-owned life insurance
451
612
Debit card fees
1,084
775
Correspondent banking fees
269
198
Other
1,449
941
Total noninterest income
19,296
28,626
Noninterest expense:
Salaries and employee benefits
23,044
21,304
Occupancy and equipment expense
3,965
3,748
Professional and data processing fees
3,702
3,646
Post-acquisition compensation, transition and integration costs
70
Disposition costs
(83)
FDIC insurance, other insurance and regulatory fees
986
908
Loan/lease expense
457
339
Net income from and gains/losses on operations of other real estate
(113)
(332)
Advertising and marketing
853
552
Bank service charges
572
501
Losses on liability extinguishment
429
Correspondent banking expense
212
Intangibles amortization
508
548
1,503
1,280
Total noninterest expense
35,675
33,122
Net income before income taxes
27,137
16,537
Federal and state income tax expense
4,788
2,798
Net income
22,349
13,739
Basic earnings per common share
1.41
0.87
Diluted earnings per common share
1.39
0.86
Weighted average common shares outstanding
15,813,932
15,747,056
Weighted average common and common equivalent shares outstanding
16,045,239
15,895,336
Cash dividends declared per common share
0.06
Six Months Ended June 30, 2021 and 2020
83,781
85,774
4,174
3,775
7,986
7,024
495
456
546
18
96,468
97,632
6,662
14,972
86
796
3,164
1,988
1,123
1,144
10,977
18,986
85,491
78,646
6,713
28,282
78,778
50,364
5,649
4,539
1,979
3,126
2,900
2,763
2,521
1,848
Swap fee income/capitals markets revenue
23,125
26,731
922
2,059
1,533
583
413
3,135
1,863
42,785
43,822
Noninterest expenses:
47,891
39,823
8,073
7,780
7,145
7,015
221
434
2,051
1,591
757
567
(74)
(319)
1,480
1,234
1,095
1,005
576
398
428
1,016
1,097
Goodwill impairment
500
3,063
2,585
Total noninterest expenses
72,903
64,537
48,660
29,649
8,329
4,682
40,331
24,967
2.55
1.58
2.52
1.56
15,808,788
15,771,926
16,035,394
15,956,958
0.12
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three and Six Months Ended June 30, 2021 and 2020
Three Months Ended June 30,
Other comprehensive income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during the period before tax
4,663
5,336
Less reclassification adjustment for gains (losses) included in net income before tax
4,751
5,271
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax
492
(654)
Less reclassification adjustment for caplet amortization before tax
(163)
(124)
655
(530)
Other comprehensive income, before tax
5,406
4,741
Tax expense
1,227
1,119
Other comprehensive income, net of tax
4,179
3,622
Comprehensive income
26,528
17,361
Six Months Ended June 30,
Other comprehensive income (loss):
(1,096)
7,817
(1,008)
7,752
3,725
(7,815)
(314)
(234)
4,039
(7,581)
3,031
171
603
240
Other comprehensive income (loss), net of tax
2,428
(69)
42,759
24,898
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
(Loss) Income
Total
Balance December 31, 2020
1,376
17,982
Other comprehensive loss, net of tax
(1,751)
Impact of adoption of ASU 2016-13
(937)
Common cash dividends declared, $0.06 per share
(949)
Stock-based compensation expense
841
Issuance of common stock under employee benefit plans
38
(298)
(260)
Balance, March 31, 2021
15,844
276,350
316,900
(375)
608,719
(951)
Repurchase and cancellation of 100,000 shares of common stock
as a result of a share repurchase program
(100)
(1,826)
(2,874)
(4,800)
520
440
460
Balance, June 30, 2021
3,803
(Loss)
Balance December 31, 2019
15,828
274,785
245,836
(1,098)
535,351
11,228
(3,691)
(942)
Repurchase and cancellation of 100,932 shares of common stock
(101)
(1,844)
(1,835)
(3,780)
641
285
332
Balance, March 31, 2020
15,774
273,867
254,287
(4,789)
539,139
(945)
423
17
Balance, June 30, 2020
15,791
274,315
267,081
(1,167)
556,020
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
2,701
2,690
1,361
1,064
Deferred compensation expense accrued
2,302
1,705
Gains on other real estate owned, net
(389)
(369)
Amortization of premiums on securities, net
1,092
557
Caplet amortization
314
234
Mark to market gains on unhedged derivatives, net
(91)
Securities (gains) losses, net
88
(65)
Loans originated for sale
(115,649)
(98,837)
Proceeds on sales of loans
117,469
96,031
Gains on sales of residential real estate loans
(2,521)
(1,848)
Loss on liability extinguishment, net
Gains on sales of premises and equipment
(22)
(8)
Amortization of intangibles
Accretion of acquisition fair value adjustments, net
(795)
(1,361)
Increase in cash value of bank-owned life insurance
(922)
(941)
Increase in other assets
(14,322)
(2,255)
Decrease in other liabilities
(5,941)
(12,729)
Net cash provided by operating activities
32,735
39,290
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold
7,740
7,675
Net decrease (increase) in interest-bearing deposits at financial institutions
(844)
7,116
Proceeds from sales of other real estate owned
1,407
4,341
Activity in securities portfolio:
Purchases
(108,565)
(166,743)
Calls, maturities and redemptions
70,539
11,946
Paydowns
40,395
22,541
Sales
23,874
4,592
Activity in restricted investment securities:
(2,280)
(4,274)
Redemptions
46
4,317
Net increase in loans/leases originated and held for investment
(170,969)
(447,385)
Purchase of premises and equipment
(4,773)
(1,828)
Proceeds from sales of premises and equipment
Net cash used in investing activities
(143,408)
(557,614)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts
89,798
408,849
Net increase in short-term borrowings
1,640
111,395
Activity in Federal Home Loan Bank advances:
Term advances
85,000
Calls and maturities
(40,000)
Net change in short-term and overnight advances
25,000
(59,300)
Prepayments on brokered and public time deposits
29,359
Prepayments of subordinated notes
(5,000)
Payment of cash dividends on common stock
(1,896)
(1,884)
Proceeds from issuance of common stock, net
200
1,008
Repurchase and cancellation of shares
Net cash provided by financing activities
104,942
530,647
Net increase (decrease) in cash and due from banks
(5,731)
12,323
Cash and due from banks, beginning
76,254
Cash and due from banks, ending
88,577
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
Supplemental disclosure of cash flow information, cash payments for:
Interest
12,257
19,377
Income/franchise taxes
21,310
(1,099)
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains (losses) on securities available for sale and derivative instruments, net
2,427
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised
(636)
Transfers of loans to other real estate owned
2,812
Due to broker for purchases of securities
1,000
4,338
Due from broker for sales of securities
1,735
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities
(31,297)
140,048
Dividends payable
951
945
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2021
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.
The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended June 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021, or for any other period.
The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.
ACL: Allowance for credit losses
Allowance: Allowance for credit losses
GAAP: Generally Accepted Accounting Principles
HTM: Held to maturity
AOCI: Accumulated other comprehensive income (loss)
LIBOR: London Inter-Bank Offered Rate
AFS: Available for sale
LRP: Loan Relief Program
ASC: Accounting Standards Codification
m2: m2 Equipment Finance, LLC
ASU: Accounting Standards Update
MSELF: Main Street Expanded Loan Facility
Bates Companies: Bates Financial Advisors, Inc., Bates
MSNLF: Main Street New Loan Facility
Financial Services, Inc., Bates Securities, Inc. and
NIM: Net interest margin
Bates Financial Group, Inc.
NPA: Nonperforming asset
BOLI: Bank-owned life insurance
NPL: Nonperforming loan
Caps: Interest rate cap derivatives
OBS: Off-balance sheet
CARES Act: Coronavirus Aid, Relief and Economy
OREO: Other real estate owned
Security Act
OTTI: Other-than-temporary impairment
CECL: Current Expected Credit Losses
PCAOB: Public Company Accounting Oversight Board
Community National: Community National Bancorporation
PCD: Purchased credit deteriorated loan
COVID-19: Coronavirus Disease 2019
PCI: Purchased credit impaired
CRBT: Cedar Rapids Bank & Trust Company
PPP: Paycheck Protection Program
CRE: Commercial real estate
Provision: Provision for credit losses
CSB: Community State Bank
QCBT: Quad City Bank & Trust Company
C&I: Commercial and industrial
RB&T: Rockford Bank & Trust Company
EPS: Earnings per share
ROAA: Return on average assets
Exchange Act: Securities Exchange Act of 1934, as
SBA: U.S. Small Business Administration
amended
SEC: Securities and Exchange Commission
FASB: Financial Accounting Standards Board
SFCB: Springfield First Community Bank
FDIC: Federal Deposit Insurance Corporation
Springfield Bancshares: Springfield Bancshares, Inc.
Federal Reserve: Board of Governors of the Federal
TA: Tangible assets
Reserve System
TCE: Tangible common equity
FHLB: Federal Home Loan Bank
TDRs: Troubled debt restructurings
FRB: Federal Reserve Bank of Chicago
TEY: Tax equivalent yield
The Company: QCR Holdings, Inc.
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.
Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). Under the standard, assets measured at amortized cost (including loans, leases and HTM securities) are presented at the net amount expected to be collected. Rather than the “incurred” model previously utilized, the standard requires the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate would be required to comply with ASU 2016-13, beginning on the date of CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. Based upon guidance from regulators, it was determined the Company could adopt ASU 2016-13 on January 1, 2021, and the Company did adopt on January 1, 2021. The Company has developed a CECL allowance model which calculates allowances over the life of a loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given the default framework. The Company utilizes economic and other forecasts over a reasonable and supportable forecast period and then fully reverts back to average historical losses.
Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, established an ACL on held to maturity debt securities of $183 thousand and established an ACL on OBS credit exposures of $9.1 million. The company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.
The Company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-Q.
The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.
12
The following table illustrates the impact of ASU 2016-13 as of January 1, 2021:
As Reported
Pre-
Impact of
Under
ASU 2016-13
Adoption
Assets:
Allowance for credit losses HTM securities
183
Loans*:
C&I
35,421
(35,421)
C&I - revolving
2,982
C&I - other
29,130
CRE
42,161
(42,161)
CRE - owner occupied
8,696
CRE - non owner occupied
11,428
Construction & Land Development
11,999
Multi-family
5,836
Direct financing leases
1,764
(1,764)
1-4 family real estate
5,042
Residential real estate
3,732
(3,732)
Consumer
1,161
1,298
(137)
Allowance for credit losses on loans
76,274
84,376
(8,102)
Allowance for credit losses on OBS credit exposures
9,117
* Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven.
Further discussion contained in this quarterly report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discission in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $17 million at June 30, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 3.
The Company’s portfolio segments and class of loans receivable are as follows:
13
The Company’s classes of loans receivable are as follows:
Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.
Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.
For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:
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:
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are
14
recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.
Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at the lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.
TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.
The following criteria, related to granting a concession, together or separately, create a TDR:
Allowance:
Allowance for Credit Losses on Loans and Leases
The ACL on loans is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the eight portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectibility of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company’s methodologies for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable -- to the identified pools of
15
financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.
A discussion of the risk characteristics and the allowance by each loan portfolio segment follows:
For C&I loans, both revolving lines of credit and other C&I, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:
Collateral for C&I loans generally includes accounts receivable, inventory, equipment and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.
The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally 7 years with average terms ranging from 3 to 5 years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.
In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.
Multi-family loans provide a source of repayment from rental income.
The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.
Construction loans include any loans to finance the construction of any new residential property, CRE property or major rehabilitation or expansion of existing commercial structures. Construction lending carries a high degree of risk because of the difficulty of protecting the bank against a myriad of pitfalls. The following factors are evaluated when underwriting these types of loans:
The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the Bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.
For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.
Quantitative Factors:
The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.
Qualitative Factors:
The Company’s allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.
The Company utilizes the following qualitative factors:
The qualitative adjustments are based on the current condition and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.
Economic Forecasting:
The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity. This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.
Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectibility based on current information and events. Such events include past due status of 90 days or more, non-accrual status or classification of a substandard or doubtful risk rating. Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell. However if the repayment is dependent on the operations of the company the fair market value less estimated cost to sell cannot be used. Thus the net present value of the cash-flow will be utilized.
For non-homogenous loans, the Company utilizes the following internal risk rating scale:
For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.
The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.
The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I – Other segment and allowance is established in the same manner as C&I loans.
Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.
The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.
For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.
TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.
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Allowance for Credit Losses on Off-Balance Sheet Exposures
The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on unfunded commitments is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases. The allowance for OBS exposures is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheet.
Allowance for Credit Losses on Held to Maturity Debt Securities
The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions.
Allowance for Credit Losses on Available for Sale Debt Securities
ASU 2016-13 modifies the impairment model for available for sale debt securities. Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.
The Company did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13.
Risks and Uncertainties:
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic will continue to have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, have impacted and are expected to continue to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations could be adversely affected in the future, as described in further detail in this report.
Pending accounting developments:
In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Management is currently assessing the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.
NOTE 2– INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of June 30, 2021 and December 31, 2020 are summarized as follows:
Gross
Amortized
Unrealized
Fair
Cost*
Gains
(Losses)
Value
June 30, 2021:
Securities HTM:
Municipal securities
472,283
50,129
(20)
522,392
Other securities
1,050
473,333
523,442
Securities AFS:
U.S. govt. sponsored agency securities
14,310
504
(144)
14,670
Residential mortgage-backed and related securities
102,625
4,094
(581)
106,138
163,607
5,861
(148)
169,320
Asset-backed securities
30,707
1,072
31,779
15,139
250
(10)
15,379
326,388
11,781
(883)
Cost
December 31, 2020:
475,115
45,360
(248)
520,227
521,277
14,936
447
(47)
15,336
127,670
5,510
(338)
132,842
147,241
5,215
(48)
152,408
39,663
1,111
40,683
20,550
147
20,697
350,060
12,430
(524)
* HTM securities shown on the balance sheet of $473.2 million represents amortized cost of $473.3 million, net of allowance for credit losses of $174 thousand as of June 30, 2021.
The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.
The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2021 and December 31, 2020, are summarized as follows:
Less than 12 Months
12 Months or More
Losses
14,440
3,067
26,967
(580)
153
(1)
27,120
13,608
4,207
47,849
(882)
48,002
8,407
3,199
37,549
10,110
6,884
(52)
9,945
(39)
16,829
57,742
(485)
67,687
At June 30, 2021, the investment portfolio included 630 securities. Of this number, 44 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.11% of the total amortized cost of the portfolio. Of these 44 securities, there were four securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At June 30, 2021, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.
On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the six months ended June 30, 2021.
Three Months Ended June 30, 2021
Six Months Ended June 30, 2021
Municipal
securities
Allowance for credit losses:
Beginning balance
173
174
Impact of adopting ASU 2016-13
182
Provision for credit loss expense
(9)
Balance, ending
The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.
All sales of securities for the three and six months ended June 30, 2021 and June 30, 2020 were securities identified as AFS.
Three Months Ended
Six Months Ended
June 30, 2020
Proceeds from sales of securities
4,334
6,327
Gross gains from sales of securities
Gross losses from sales of securities
The amortized cost and fair value of securities as of June 30, 2021 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.
Amortized Cost
Fair Value
Due in one year or less
2,882
2,910
Due after one year through five years
29,592
30,281
Due after five years
440,859
490,251
1,471
11,927
12,175
179,658
185,702
193,056
199,369
106,139
31,778
Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:
272,039
283,607
158,149
163,595
173,288
178,974
23
As of June 30, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.6 million and revenue bonds issued by 175 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.1 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.
Both general obligation and revenue bonds are diversified across many issuers. As of June 30, 2021 and as of December 31, 2020, the Company held revenue bonds of two issuers, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.
The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of June 30, 2021, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.
As of June 30, 2021, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.
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NOTE 3 – LOANS/LEASES RECEIVABLE
The composition of the loan/lease portfolio by classes of loans/leases as of June 30, 2021 and December 31, 2020 is presented as follows:
C&I:
182,882
C&I - other *
1,505,384
1,688,266
427,734
CRE - non-owner occupied
618,879
Construction and land development
708,289
466,804
Direct financing leases**
56,153
1-4 family real estate***
382,142
69,438
Allowance for credit losses
** Direct financing leases:
Net minimum lease payments to be received
61,781
Estimated unguaranteed residual values of leased assets
165
Unearned lease/residual income
(5,793)
Plus deferred lease origination costs, net of fees
783
56,936
(1,976)
54,960
December 31, 2020
C&I loans*
1,726,723
CRE loans
Owner-occupied CRE
496,471
Commercial construction, land development, and other land
541,455
Other non owner-occupied CRE
1,069,703
2,107,629
Direct financing leases **
66,016
Residential real estate loans ***
252,121
Installment and other consumer loans
91,302
4,243,791
Plus deferred loan/lease origination costs, net of fees
7,338
Less allowance
72,940
239
(7,163)
67,088
65,324
* Includes equipment financing agreements outstanding at m2, totaling $202.4 million and $171.5 million as of June 30, 2021 and December 31, 2020, respectively and PPP loans totaling $147.5 million and $273.1 million as of June 30, 2021 and December 31, 2020, respectively.
** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.
*** Includes residential real estate loans held for sale totaling $4.5 million and $3.8 million as of June 30, 2021 and December 31, 2020, respectively.
Changes in accretable yield for acquired loans were as follows:
Three months ended June 30, 2021
Six months ended June 30, 2021
PCI
Performing
Loans
Balance at the beginning of the period
(2,530)
(3,139)
Accretion recognized
341
950
Balance at the end of the period
(2,189)
Three months ended June 30, 2020
Six months ended June 30, 2020
(59)
(5,725)
(5,784)
(57)
(6,378)
(6,435)
Reclassification of nonaccretable discount to accretable
(30)
790
791
29
1,443
1,472
(58)
(4,935)
(4,993)
The aging of the loan/lease portfolio by classes of loans/leases as of June 30, 2021 and December 31, 2020 is presented as follows:
As of June 30, 2021
Accruing Past
30-59 Days
60-89 Days
Due 90 Days or
Nonaccrual
Classes of Loans/Leases
Current
Past Due
More
1,498,911
1,252
205
4,959
426,603
865
266
618,483
396
708,214
75
55,779
137
161
378,314
228
631
2,969
69,320
4,405,310
2,473
1,635
8,230
As a percentage of total loan/lease portfolio
99.72
%
0.05
0.04
0.00
0.19
100.00
As of December 31, 2020
1,720,058
1,535
323
4,807
496,459
Other non-owner occupied CRE
1,062,215
7,488
64,918
191
406
249,364
1,512
223
1,022
Installment and other consumer
91,047
4,225,516
3,591
741
13,940
99.57
0.08
0.02
0.33
26
NPLs by classes of loans/leases as of June 30, 2021 and December 31, 2020 are presented as follows:
Percentage of
with an ACL
without an ACL
Total NPLs
-
4,736
5,016
60.52
0.91
110
51
1.94
35.83
0.80
7,956
274
8,287
The Company did not recognize any interest income on nonaccrual loans during the three and six months ended June 30, 2021.
Loans/Leases *
Accruing TDRs
606
5,413
36.87
50.99
135
541
3.68
6.96
208
1.42
14,684
* Nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, $48 thousand in installment loans.
27
Changes in the ACL-loans/leases by portfolio segment for the three and six months ended June 30, 2021 and 2020, respectively, are presented as follows:
Construction
Direct
Residential
1-4
C&I -
Owner
Non-Owner
and Land
Multi-
Financing
Real
Family
Revolving
Other*
Occupied
Development
Leases
Estate
Real Estate
Balance, beginning
3,547
33,167
9,147
11,155
12,327
6,278
5,165
1,045
81,831
Provision
(370)
(2)
(1,121)
(376)
1,313
849
(105)
(329)
(141)
Charge-offs
(998)
(1,876)
(150)
(646)
(4)
(3,674)
Recoveries
158
(6)
511
207
878
3,177
32,325
8,020
8,911
13,640
6,977
4,925
919
78,894
CRE -
Multi
Other**
Adoption of ASU 2016-13
195
4,547
(670)
(662)
1,641
1,291
56
(546)
5,852
(1,666)
(690)
(5)
(4,387)
517
309
1,155
* Included within the C&I – Other column are ACL on leases with a beginning balance of $2.2 million, negative provision of $144 thousand, charge-offs of $130 thousand and recoveries of $58 thousand. ACL on leases was $2.0 million as of June 30, 2021.
** Included within the C&I – Other column are ACL on leases with a beginning balance of $1.8 million, adoption impact of $685 thousand, negative provision of $279 thousand, charge-offs of $328 thousand and recoveries of $134 thousand. ACL on leases was $2.0 million as of June 30, 2021.
Three Months Ended June 30, 2020
Direct Financing
Residential Real
Installment and
Other Consumer
18,151
19,269
1,303
2,313
1,197
42,233
7,859
887
697
107
(340)
(511)
(595)
(1,450)
78
44
129
25,748
29,123
1,639
3,010
1,307
60,827
Six Months Ended June 30, 2020
16,072
1,464
1,948
1,138
36,001
Provisions
11,556
14,181
1,281
1,033
231
(1,979)
(1,195)
(3,785)
99
89
329
28
The composition of the ACL-loans/leases by portfolio segment based on evaluation method are as follows:
Amortized Cost of Loans Receivable
Individually
Collectively
Evaluated for
Credit Losses
C&I :
C&I – Revolving
2,725
180,157
189
2,988
C&I - Other*
40,175
1,521,362
1,561,537
3,762
28,563
42,900
1,701,519
1,744,419
3,951
31,551
35,502
5,425
422,309
283
7,737
19,879
599,000
8,865
Construction and Land Development
10,553
697,736
13,628
4,683
377,459
491
4,434
271
69,167
883
83,711
4,333,994
4,819
74,075
* Included within the C&I – Other category are leases individually evaluated of $161 thousand with a related allowance for credit losses of $33 thousand and leases collectively evaluated of $56.0 million with a related allowance for credit losses of $1.9 million.
Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the six months ended June 30, 2020 are presented as follows:
Average
Recognized for
Recorded
Unpaid Principal
Related
Cash Payments
Investment
Balance
Allowance
Recognized
Received
Impaired Loans/Leases with No Specific Allowance Recorded:
1,978
320
577
128
965
742
1,364
1,379
624
652
474
562
525
5,813
6,171
4,760
Impaired Loans/Leases with Specific Allowance Recorded:
569
479
6,530
1,692
5,329
55
260
206
7,492
2,154
6,140
Total Impaired Loans/Leases:
2,547
2,620
1,991
7,495
6,071
1,419
1,438
884
912
680
640
592
13,305
13,663
10,900
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended June 30, 2020 are presented as follows:
1,742
Owner-Occupied CRE
Commercial Construction, Land Development, and Other Land
Other Non Owner-Occupied CRE
978
Direct Financing Leases
1,411
Residential Real Estate
524
Installment and Other Consumer
550
5,379
568
6,560
220
7,475
2,310
7,538
1,468
744
620
12,854
30
Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2020 are presented as
follows:
1,441
1,002
33
1,133
1,933
494
578
483
719
476
133
121
3,924
4,804
2,576
4,020
650
1,555
6,354
1,938
5,726
258
227
10,704
2,680
7,578
5,381
5,461
2,557
7,487
6,220
977
703
14,628
15,508
10,154
Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.
31
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:
Non
Commercial
Owner-Occupied
Owner Occupied
Securities
Equipment
C & I:
C&I - Revolving
2,475
852
2,591
6,224
30,508
3,327
30,758
10,478
1-4 Family Real Estate
2,532
2,151
248
32,889
10,490
* Included within the C&I – Other category are leases individually evaluated of $161 thousand with primary collateral of equipment.
For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.
For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans. Delinquency status is updated daily by the Company’s loan system.
32
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of June 30, 2021:
Term Loans
Amortized Cost Basis by Origination Year
Internally Assigned
Risk Rating
2019
2018
2017
Prior
Cost Basis
Pass (Ratings 1 through 5)
177,045
Special Mention (Rating 6)
3,112
Substandard (Rating 7)
Doubtful (Rating 8)
Total C&I - revolving
316,725
437,339
208,611
125,116
117,406
56,478
1,261,675
146
693
1,259
2,662
8,481
6,952
16,690
366
6,131
38,680
Total C&I - other
325,352
444,984
225,301
125,551
117,961
63,868
1,303,017
65,781
159,219
63,344
32,677
23,452
64,232
10,344
419,049
901
178
244
672
1,266
3,261
214
1,921
1,261
2,028
5,424
Total CRE - owner occupied
66,896
65,443
34,182
26,152
65,498
81,897
177,081
91,579
76,121
72,401
51,555
6,570
557,204
5,019
8,617
1,846
15,288
4,201
5,673
1,151
41,795
419
17,000
499
957
19,880
Total CRE - non-owner occupied
87,335
185,698
110,425
91,908
77,559
57,228
8,726
144,416
231,399
171,796
117,381
7,770
2,613
8,634
684,009
593
Total Construction and land development
182,274
117,974
695,080
125,743
206,255
66,161
47,105
7,420
11,359
2,761
Total Multi-family
27,769
33,721
19,874
12,928
7,333
8,990
6,122
116,737
152
190
Total 1-4 family real estate
30,339
7,485
119,459
780,081
1,261,276
669,478
429,648
244,347
209,556
219,469
3,813,855
Delinquency Status *
63,299
65,043
43,563
21,207
7,542
751
201,405
Nonperforming
290
85
962
63,368
65,333
43,986
21,279
7,627
774
202,367
4,358
15,240
15,002
12,725
6,349
2,318
55,992
Total Direct financing leases
12,782
6,380
2,391
3,111
9,299
213
13,134
13,209
67,843
86,487
24,356
13,340
13,954
56,239
262,247
364
436
24,428
56,603
262,683
3,418
6,882
2,788
2,321
848
3,034
50,081
69,372
Total Consumer
3,465
3,035
50,082
142,145
183,241
86,417
50,233
28,901
62,803
50,110
603,850
* Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual and accruing loans/leases that are greater than or equal to 90 days past due.
For each class of financing receivable, the following table presents the recorded investment by credit quality indicator as of December 31, 2020:
Non-Owner Occupied
Construction,
Land
Development,
As a % of
Internally Assigned Risk Rating
and Other Land
Other CRE
1,506,578
488,478
530,297
999,931
3,525,284
96.25
23,929
3,087
43,785
71,481
1.95
24,710
4,906
25,987
66,081
1.80
1,555,217
3,662,846
170,712
65,475
251,099
91,094
578,380
99.56
794
2,565
0.44
171,506
580,945
* Prior to Adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.
As of June 30, 2021 and December 31, 2020, TDRs totaled $3.1 million and $1.7 million, respectively.
For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and six months ended June 30, 2021 and June 30, 2020. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.
For the three months ended June 30, 2021
For the six months ended June 30, 2021
Post-
Number of
Modification
Loans/
Specific
CONCESSION - Extension of Maturity
CONCESSION - Interest Rate Adjusted Below Market
1-4 Family
54
TOTAL
2,599
For the three months ended June 30, 2020
For the six months ended June 30, 2020
CONCESSION - Significant Payment Delay
111
145
256
Of the loans restructured during the three and six months ended June 30, 2021, two with a post-modification recorded investment totaling $2.6 million were on nonaccrual and of the loans restructured during the three and six months ended June 30, 2020, none were on nonaccrual.
For the three and six months ended June 30, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.
For the three months ended June 30, 2020, two of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs were related to one equipment financing agreement customer whose loans were restructured in fourth quarter of 2019 with pre-modification balances totaling $93 thousand. For the six months ended June 30, 2020, three of the Company’s TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. These TDRs included the two that defaulted in the three months ended June 30, 2020 as well as a lease that was restructured in the fourth quarter of 2019 with pre-modification balances totaling $55 thousand.
Not included in the table above are seven TDRs that were restructured and charged off for the six months ended June 30, 2020, totaling $354 thousand.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to
35
COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators clarified that this guidance may continue to be applied in 2021.
In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be (1) related to COVID-19, (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the National Emergency or (B) December 31, 2020. If a modification does not meet the criteria of the CARES Act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.
The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of June 30, 2021, there were no bank modifications and 29 m2 modifications of loans and leases totaling $4.7 million, representing 0.11% of the total loan and lease portfolio, that were on deferral as of such date.
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended the debt relief program to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
The adoption of ASU 2016-13 required an allowance for OBS exposures, specifically on unfunded commitments. Changes in the ACL for OBS exposures for the three and six months ended June 30, 2021 and 2020 are presented as follows:
9,846
Provisions charged to expense
141
870
9,987
NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES
Derivatives are summarized as follows as of June 30, 2021 and December 31, 2020:
Interest rate caps - hedged
613
259
Interest rate caps
Interest rate swaps - hedged
1,490
Interest rate swaps
191,134
222,431
(4,958)
(6,839)
(191,134)
(222,431)
(196,092)
(229,270)
The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.
The Company entered into interest rate caps to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps executed. The details of the interest rate caps are as follows:
Balance Sheet
Fair Value as of
Hedged Item
Effective Date
Maturity Date
Location
Notional Amount
Strike Rate
1/1/2020
1/1/2023
Derivatives - Assets
1.75
50,000
1.57
1/1/2024
37
1/1/2025
229
94
115
300,000
In December 2020, the Company redesignated three of its interest rate caps, which had been purchased in 2019 for $800 thousand. The caps, which were designated as cash flow hedges at the time of purchase, were redesignated as unhedged. For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows:
1.90
2/1/2020
2/1/2024
3/1/2020
3/1/2025
120
75,000
The Company has entered into interest rate swaps to hedge against the risk of declining interest rates on floating rate loans. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
Receive Rate
Pay Rate
QCBT - Loans
7/1/2021
7/1/2031
35,000
1.40
2.81
351
N/A
CRBT - Loans
502
CSB - Loans
386
SFCB - Loans
251
150,000
The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
QCR Holdings Statutory Trust II
9/30/2018
9/30/2028
Derivatives - Liabilities
10,000
3.00
5.85
(1,282)
(1,767)
QCR Holdings Statutory Trust III
8,000
(1,025)
(1,414)
QCR Holdings Statutory Trust V
7/7/2018
7/7/2028
1.74
4.54
(1,246)
(1,721)
Community National Statutory Trust II
9/20/2018
9/20/2028
3,000
2.30
5.17
(383)
(529)
Community National Statutory Trust III
9/15//2018
9/15/2028
3,500
1.87
4.75
(447)
(616)
Guaranty Bankshares Statutory Trust I
9/15/2018
4,500
(575)
(792)
39,000
Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.
The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution counterparty. Additionally, the Company receives an upfront fee from the financial institution counterparty, dependent upon the pricing that is recognized upon receipt from the financial institution counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.
Interest rate swaps that are not designated as hedging instruments are summarized as follows:
Estimated Fair Value
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts
3,149,265
1,539,602
Non-Hedging Interest Rate Derivatives Liabilities:
Swap fee income totaled $9.6 million and $19.9 million for the three months ended June 30, 2021 and 2020, respectively. Swap fee income totaled $23.1 million and $26.7 million for the six months ended June 30, 2021 and 2020, respectively.
The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:
Cash
22,660
45,719
U.S govt. sponsored agency securities
3,612
3,628
85,895
85,937
78,733
89,646
190,900
224,930
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. For the majority of the Company’s swapped loan portfolio, the loan-to-value including the potential swap exposure is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
NOTE 5 – INCOME TAXES
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three and six months ended June 30, 2021 and June 30, 2020:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
% of
Pretax
Amount
Income
Computed "expected" tax expense
5,699
21.0
3,472
10,219
6,226
Tax exempt income, net
(1,802)
(6.6)
(1,247)
(7.5)
(3,521)
(7.2)
(2,472)
(8.3)
(95)
(0.4)
(115)
(0.7)
(194)
(170)
(0.6)
State income taxes, net of federal benefit, current year
1,247
4.6
776
4.7
2,271
1,453
4.9
Tax credits
(0.2)
(116)
(114)
(232)
(0.8)
Excess tax benefit on stock options exercised and restricted stock awards vested
(40)
(0.1)
(204)
(262)
(0.9)
(164)
0.1
(128)
(0.3)
139
0.5
17.6
16.9
17.2
15.8
NOTE 6 - EARNINGS PER SHARE
The following information was used in the computation of EPS on a basic and diluted basis:
Three months ended
Six months ended
Basic EPS
Diluted EPS
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan
231,307
148,280
226,606
185,032
NOTE 7 – FAIR VALUE
Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
Assets and liabilities measured at fair value on a recurring basis comprise the following at June 30, 2021 and December 31, 2020:
Fair Value Measurements at Reporting Date Using
Quoted Prices
Significant
in Active
Markets for
Observable
Unobservable
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Total assets measured at fair value
530,681
Total liabilities measured at fair value
584,723
The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).
Interest rate swaps are used for the purpose of hedging interest rate risk on loans, FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements.
The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Interest rate swaps are also executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).
Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2021 and December 31, 2020:
Level 1
Level 2
Level 3
Loans/leases evaluated individually
85,276
OREO
1,966
87,242
9,926
9,948
The increase in loans/leases evaluated individually is due to the change in ACL methodology with the adoption of ASU 2016-13 as well as the downgrading of one large relationship.
Loans/leases evaluated individually are valued at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.
OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.
41
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level Fair Value Measurements
Valuation Technique
Unobservable Input
Range
Appraisal of collateral
Appraisal adjustments
-10.00
to
-30.00
-35.00
For the loans/leases evaluated individually and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and six months ended June 30, 2021 and 2020.
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
Hierarchy
Carrying
Estimated
Level
Investment securities:
HTM
AFS
Loans/leases receivable, net
78,959
9,191
4,259,852
4,174,761
4,157,562
4,112,735
Nonmaturity deposits
4,232,439
4,138,478
Time deposits
456,496
453,483
460,659
465,681
FHLB advances
39,996
14,998
116,441
112,406
30,799
30,618
NOTE 8 – BUSINESS SEGMENT INFORMATION
Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company's internal organization, focusing on the financial information that the Company's operating decision-makers routinely use to make decisions about operating matters.
The Company's Commercial Banking business, is geographically divided by markets into the operating segments which are the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFCB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.
Selected financial information on the Company's business segments is presented as follows as of and for the three and six months ended June 30, 2021 and 2020.
Commercial Banking
Intercompany
Consolidated
QCBT
CRBT
CSB
SFCB
All other
Eliminations
Total revenue
21,676
26,498
10,809
9,181
(102)
68,199
16,152
14,005
8,672
6,479
(2,119)
327
136
(692)
756
(200)
Net income (loss) from continuing operations
8,679
11,145
3,109
3,685
22,320
(26,589)
3,223
14,980
9,888
45,975
1,946
2,979
5,440
2,059,634
1,913,761
1,079,930
850,067
81,076
(179,303)
21,712
35,505
9,853
9,533
18,461
(17,788)
77,276
15,653
12,820
6,201
(1,509)
245
Provision for loan/lease losses
7,539
7,160
2,811
2,405
3,999
11,043
1,899
13,650
(17,421)
74,248
2,437
3,643
6,344
1,448
13,872
1,984,245
2,021,043
903,648
745,470
715,740
(765,385)
5,604,761
42,960
56,855
21,232
17,927
503
(224)
139,253
31,938
27,611
17,040
12,548
(4,221)
575
2,248
2,122
851
Net income (loss)
15,843
5,171
5,954
40,268
(49,446)
43,399
58,384
20,074
18,224
34,875
(33,502)
141,454
30,080
24,206
15,038
11,843
(2,998)
477
10,722
9,410
4,775
3,375
9,723
17,504
4,105
24,674
(32,674)
NOTE 9 – REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of June 30, 2021 and December 31, 2020, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.
Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of June 30, 2021 and
December 31, 2020 are presented in the following tables (dollars in thousands). As of June 30, 2021 and December 31, 2020, each of the subsidiary banks met the requirements to be “well capitalized”.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
With Capital
Prompt Corrective
Actual
Conservation Buffer
Action Provisions
Ratio
As of June 30, 2021:
Company:
Total risk-based capital
760,593
14.72
413,445
>
8.00
542,647
10.50
516,806
10.00
Tier 1 risk-based capital
581,919
11.26
310,084
6.00
439,285
8.50
Tier 1 leverage
10.29
226,250
4.00
282,812
5.00
Common equity Tier 1
543,852
10.52
232,563
4.50
361,764
7.00
335,924
6.50
Quad City Bank & Trust:
228,180
13.15
138,799
182,174
173,499
206,355
11.89
104,099
147,474
9.75
84,699
105,874
78,075
121,449
112,774
Cedar Rapids Bank & Trust:
243,211
13.86
140,431
184,316
175,539
221,202
12.60
105,323
149,208
11.95
74,072
92,590
78,992
122,877
114,100
Community State Bank:
114,512
11.99
76,389
100,261
95,487
102,521
10.74
57,292
81,164
9.78
41,943
52,429
42,969
66,841
62,066
Springfield First Community Bank:
91,663
58,189
76,373
72,736
82,554
11.35
43,641
61,825
10.53
31,351
39,189
32,731
50,915
47,278
As of December 31, 2020:
721,004
14.95
385,832
506,404
482,290
546,729
11.34
289,374
409,946
9.49
230,345
287,931
508,736
10.55
217,030
337,603
313,488
213,608
12.24
139,581
183,200
174,477
191,693
10.99
104,686
148,305
8.48
90,430
113,038
78,514
122,134
113,410
217,227
13.14
132,269
173,603
165,336
196,438
11.88
99,202
140,536
10.01
78,535
98,169
74,401
115,735
107,469
108,040
12.69
68,117
89,404
85,146
97,350
11.43
51,088
72,374
10.27
37,930
47,412
38,316
59,602
55,345
90,334
14.35
50,357
66,094
62,947
77,668
12.34
37,768
53,505
10.87
28,575
35,719
28,326
44,063
40,915
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and six months ending June 30, 2021. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. Page locations and specific sections and notes that are referred to in this discussion are listed in the table of contents.
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.
GENERAL
The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of June 30, 2021, the Company had $5.8 billion in consolidated assets, including $4.3 billion in net loans/leases, and $4.7 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three and six months ended June 30, 2021, and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on the Company’s Market Areas
The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois. Each of these three states has taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Effects on the Company’s Business
The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have an on-going impact on its business. In particular, the Company anticipates that a portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries could continue to experience economic distress, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. As a result, the Company anticipates that its asset quality and results of operations could be adversely affected, as described in further detail below.
The Company’s Response
As previously disclosed, the Company has taken numerous steps in response to the COVID-19 pandemic, including the following:
EXECUTIVE OVERVIEW
The Company reported net income of $22.3 million and diluted EPS of $1.39 for the quarter ended June 30, 2021. By comparison, for the quarter ended March 31, 2021 the Company reported net income of $18.0 million and diluted EPS of $1.12. For the quarter ended June 30, 2020, the Company reported net income of $13.7 million, and diluted EPS of $0.86. For the six months ended June 30, 2021, the Company reported net income of $40.3 million, and diluted EPS of $2.52. By comparison, for the six months ended June 30, 2020, the Company reported net income of $25.0 million and diluted EPS of $1.56.
The second quarter of 2021 was also highlighted by the following results and events:
Following is a table that represents various income measurements for the Company.
For the three months ended
For the six months ended
March 31, 2021
1.12
16,025,548
The Company reported adjusted net income (non-GAAP) of $22.5 million, with adjusted diluted EPS of $1.40. See section titled “GAAP to Non-GAAP Reconciliations” for additional information.
Following is a table that represents the major income and expense categories for the Company:
41,975
Noninterest income
23,489
Noninterest expense
37,228
3,541
Following are some noteworthy changes in the Company's financial results:
STRATEGIC FINANCIAL METRICS
The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual
Report on Form 10-K for the year ended December 31, 2020. The Company's long-term strategic financial metrics are as follows:
The following table shows the evaluation of the Company’s strategic financial metrics:
Year to Date*
Strategic Financial Metric*
Key Metric
Target
Loan and lease growth organically **
Loans and leases growth
> 9% annually
14.7
14.0
5.0
Fee income growth
> 6% annually
(23.3)
(15.9)
31.7
Improve operational efficiencies and hold noninterest expense growth
Noninterest expense growth
< 5% annually
(1.0)
1.2
(11.6)
* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison. The calculations provided exclude non-core noninterest income and noninterest expense.
** Loan and lease growth excludes PPP loans.
It should be noted that these initiatives are long-term targets.
STRATEGIC DEVELOPMENTS
The Company has taken the following actions during the second quarter of 2021 to support its corporate strategy:
GAAP TO NON-GAAP RECONCILIATIONS
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “TCE/TA ratio excluding PPP loans”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”, “ACL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarters ended June 30, 2021 and March 31, 2021 were materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.
The efficiency ratio is a ratio that management utilizes to compare the Company to its peers. It is a standard ratio used to calculate overhead as a percentage of revenue in the banking industry and is widely utilized by investors.
ACL to total loans and leases, excluding PPP loans, and loan growth annualized, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarters ended June 30, 2021 and March 31, 2021 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ACL. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
As of
GAAP TO NON-GAAP
March 31,
RECONCILIATIONS
(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)
Less: Intangible assets
84,431
84,939
88,120
TCE (non-GAAP)
546,045
523,780
467,900
Total assets (GAAP)
5,645,147
TA (non-GAAP)
5,720,734
5,560,208
5,516,641
TCE/TA ratio (non-GAAP)
9.55
9.42
TCE/TA RATIO EXCLUDING PPP LOANS
Less: PPP loan interest income (post-tax)
10,788
9,479
2,085
535,257
514,301
465,815
Less: PPP loans
147,506
243,860
358,052
5,573,228
5,316,348
5,158,589
TCE/TA ratio excluding PPP loans (non-GAAP)
9.60
9.67
9.03
For the Quarter Ended
For the Six Months Ended
ADJUSTED NET INCOME
Net income (GAAP)
Less non-core items (post-tax) (*):
Income:
Mark to market gains (losses) on unhedged derivatives, net
Total non-core income (non-GAAP)
(127)
Expense:
455
(66)
343
175
Separation agreement
734
Total non-core expense (non-GAAP)
Adjusted net income (non-GAAP)
22,476
18,594
14,016
41,070
26,388
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)
15,803,643
Adjusted EPS (non-GAAP):
Basic
1.18
0.89
2.60
1.67
Diluted
1.16
0.88
2.56
1.65
ADJUSTED ROAA
Average Assets
5,739,067
5,668,850
5,800,164
5,704,151
5,374,224
Adjusted ROAA (annualized) (non-GAAP)
1.31
0.97
1.44
0.98
ADJUSTED NIM (TEY)*
Net interest income (GAAP)
Plus: Tax equivalent adjustment
2,444
2,267
1,728
4,702
3,517
Net interest income - tax equivalent (non-GAAP)
45,960
44,242
42,676
90,193
82,163
Less: Acquisition accounting net accretion
291
736
795
Adjusted net interest income
45,669
43,738
41,940
89,398
80,802
Average earning assets
5,320,881
5,218,198
5,252,663
5,269,820
4,856,842
NIM (GAAP)
3.28
3.26
3.14
3.27
NIM (TEY) (non-GAAP)
3.46
3.43
3.45
3.40
Adjusted NIM (TEY) (non-GAAP)
3.44
3.21
3.42
3.35
EFFICIENCY RATIO
Noninterest expense (GAAP)
Noninterest income (GAAP)
Total income
62,812
65,464
69,574
128,276
122,468
Efficiency ratio (noninterest expense/total income) (non-GAAP)
56.80
56.87
47.61
56.83
52.70
ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ACL
Total loans and leases
4,361,051
4,140,259
Total loans and leases, excluding PPP loans
4,270,199
4,117,191
3,782,207
ACL to total loans and leases, excluding PPP loans
1.85
1.99
1.61
LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Loan growth annualized, excluding PPP loans
14.87
14.00
8.37
12.90
4.99
* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain/loss on sale of subsidiary which has an estimated effective tax rate of 30.5%.
NET INTEREST INCOME - (TAX EQUIVALENT BASIS)
Net interest income, on a tax equivalent basis, increased 8% to $46.0 million for the quarter ended June 30, 2021 compared to the same quarter of the prior year and increased 10% to $90.2 million for the six months ended June 30, 2021 as compared to the same period of the prior year. Net interest income, on a GAAP basis, increased 6% for the quarter ended June 30, 2021 compared to the same quarter of the prior year, and increased 9% for the six months ended June 30, 2021 compared to the same period of the prior year. Net interest income improved due to the following factors:
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
Tax Equivalent Basis
GAAP
Average Yield on Interest-Earning Assets
3.87
3.86
3.65
3.70
Average Cost of Interest-Bearing Liabilities
0.60
0.63
0.62
0.79
Net Interest Spread
3.23
3.06
3.08
3.03
2.91
NIM (TEY) (Non-GAAP)
NIM Excluding Acquisition Accounting Net Accretion
3.10
4.19
1.83
4.02
0.61
1.05
0.21
0.78
1.62
3.24
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
Acquisition Accounting Net Accretion in NIM
The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet strategies
53
which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage NIM through derivatives.
In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2021 and 2020.
The Company's average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:
Earned
Yield or
or Paid
ASSETS
Interest earning assets:
1,817
0.46
88,396
0.16
533,483
0.10
Investment securities (1)
798,732
7,294
3.66
697,559
6,536
3.77
19,614
238
4.79
21,234
5.46
Gross loans/leases receivable (1) (2) (3)
4,412,322
43,776
3.98
3,999,522
43,417
4.37
Total interest earning assets
51,344
50,377
Noninterest-earning assets:
62,876
82,171
Premises and equipment
74,328
73,376
(80,603)
(42,878)
361,585
434,865
5,800,197
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
2,978,382
2,050
0.28
2,840,860
2,429
0.34
440,599
1.08
809,233
3,337
1.66
10,883
25,064
0.35
21,802
95,616
1.46
115,339
5.45
68,480
5.84
38,044
5.86
37,891
6.07
Total interest-bearing liabilities
3,605,049
5,384
3,877,144
7,701
Noninterest-bearing demand deposits
1,290,751
1,082,532
Other noninterest-bearing liabilities
219,267
284,461
5,115,067
5,244,137
Stockholders' equity
624,000
556,060
Net interest spread
Net interest margin
Net interest margin (TEY)(Non-GAAP)
Adjusted net interest margin (TEY)(Non-GAAP)
Ratio of average interest-earning assets to average interest-bearing liabilities
147.60
135.48
Analysis of Changes of Interest Income/Interest Expense
For the Three Months Ended June 30, 2021
Inc./(Dec.)
Components
from
of Change (1)
Prior Period (1)
Rate
Volume
2021 vs. 2020
INTEREST INCOME
324
(424)
Investment securities (2)
758
(1,112)
1,870
(50)
(31)
(19)
Gross loans/leases receivable (2) (3)
359
(16,480)
16,839
Total change in interest income
967
(17,303)
18,270
INTEREST EXPENSE
(379)
(1,064)
685
(2,153)
(936)
(1,217)
(21)
(97)
(162)
(23)
Total change in interest expense
(2,317)
(2,117)
Total change in net interest income
3,284
(15,186)
18,470
1,830
3,095
1.17
102,343
0.14
331,048
0.30
804,364
14,344
3.57
658,433
12,616
3.85
18,843
4.81
21,300
5.16
4,342,440
86,299
4.01
3,842,966
87,474
4.58
101,171
101,149
64,741
90,799
73,752
73,641
Less allowance for estimated losses on loans/leases
(83,494)
(39,439)
379,332
392,401
5,374,242
Interest-bearing demand deposits
2,979,835
4,036
0.27
2,610,248
7,756
444,297
2,625
1.19
797,184
7,216
1.82
9,021
22,190
17,464
103,512
1.55
117,014
5.41
68,449
38,026
1,125
5.87
37,872
3,605,657
10,978
3,639,455
1,245,401
936,223
239,032
247,697
5,090,090
4,823,374
614,061
550,869
Ratio of average interest earning assets to average interest-bearing liabilities
146.15
133.45
(17)
(12)
Interest-bearing deposits at other financial institutions
(185)
(239)
(2,371)
4,099
(90)
(33)
(1,175)
(22,896)
21,721
(25,497)
25,519
(3,720)
(6,466)
2,746
(4,591)
(2,015)
(2,576)
(771)
(388)
1,176
(8,008)
(8,914)
906
8,030
(16,583)
24,613
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income/capital market revenue, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
There was no occurrence of a triggering event during the three and six months ended June 30, 2021, therefore no impairment test of goodwill was performed as of June 30, 2021.
As of November 30, 2020 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.
During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies.
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurrent loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology.
The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. A more detailed discussion of this critical accounting policy can be found in Note 1 to the Consolidated Financial Statements for June 30, 2021.
The Company believes that COVID-19 pandemic losses have been incurred that are not yet known and this could have an adverse effect on the Company’s ACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes individually analyzed loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL.
Although management believes the level of the ACL as of June 30, 2021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
RESULTS OF OPERATIONS
Interest income increased 1%, comparing the second quarter of 2021 to the same period of 2020, and was down 1% when comparing the first half of 2021 to the same period of 2020. This was primarily due to an increase in the volume of average securities and average loans/leases offset by a decline in yields in those categories with a downward fed rate adjustment of 150 bps in late March 2020. Average gross loans and leases increased 10%, while average investment securities increased 15%, when comparing the quarter ended June 30, 2021 to June 30, 2020. Average gross loans and leases increased 13%, while average investment securities increased 22%, when comparing the six months ended June 30, 2021 to June 30, 2020.
The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.
Interest expense for the second quarter of 2021 decreased 30% from the second quarter of 2020, and decreased 42% comparing the first half of 2021 to the same period of 2020. The Company has grown organically at a significant pace over the past several years. Outsized core deposit growth has funded loan growth and has allowed the Company to prepay
higher cost brokered deposits and FHLB advances. The cost of funds on the Company’s average interest-bearing liabilities declined in conjunction with the declining rate environment. The Company’s cost of funds was 0.60% for the quarter ended June 30, 2021, which was down from 0.80% for the quarter ended June 30, 2020. The Company’s cost of funds was 0.61% for the six months ended June 30, 2021, which was down from 1.05% for the six months ended June 30, 2020.
The Company's management intends to continue to minimize its level of wholesale funds with a focus on well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
PROVISION FOR CREDIT LOSSES
The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three and six months ended June 30, 2021 and 2020.
Provision for credit losses - loans and leases (1)
Provision for credit losses - off-balance sheet exposures (2)
Provision for credit losses - held to maturity securities (3)
Total provision for credit losses
The Company’s total provision for credit losses was zero for the second quarter of 2021, compared to $19.9 million for the second quarter of 2020. Provision for the first six months of 2021 totaled $6.7 million, which was down from $28.3 million in the first six months of 2020. The adoption of ASU 2016-13 now requires an allowance on held to maturity debt securities and OBS exposures, specifically unfunded commitments. For the six months ended June 30, 2021, the provision related to HTM debt securities was negative due to the decrease in the balance of those HTM debt securities. OBS required an additional provision of $141 thousand in the second quarter of 2021 and loans/leases saw a decrease in provision from the second quarter of 2020. OBS required a provision of $870 thousand in the first six months of 2021 and loans/leases saw a decrease in provision from the first six months of 2020. 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 as well as the change in methodology as related to ASU 2016-13.
The ACL for loans and leases is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economies and risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an ACL on loans/leases of 1.79% of total gross loans/leases at June 30, 2021, compared to 1.88% of total gross loans/leases at March 31, 2021 and 1.47% at June 30, 2020. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $2.2 million and $5.5 million at June 30, 2021 and June 30, 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 June 30,
% of Total Gross
Loans and Leases
Hotels
79,764
Restaurants (full service and limited service only)
30,074
0.68
Arts, Entertainment and Recreation
28,634
0.65
138,472
3.13
Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the three and six months ended June 30, 2021 and 2020.
$ Change
% Change
621
27.9
(360)
(25.7)
16.0
(10,359)
(52.0)
(153)
(235.4)
(161)
(26.3)
39.9
35.9
54.0
(9,330)
(32.6)
1,110
24.5
(1,147)
(36.7)
673
36.4
(3,606)
(13.5)
(2.0)
526
34.3
170
41.2
1,272
68.3
(1,037)
(2.4)
In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $273.7 million in the second quarter of 2021 and increased by $730.4 million in the first half of 2021. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Trust department fees increased 28%, comparing the second quarter of 2021 to the same period of the prior year and they increased 25% when comparing the first half of 2021 to the first half of 2020. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.
Investment advisory and management fees decreased 26%, comparing the second quarter of 2021 to the same period of the prior year and they decreased 37% when comparing the first half of 2021 to the first half of 2020. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The sale of the Bates Companies in August 2020 negatively impacted the results compared to 2020. Excluding the impact of the Bates Companies sale, investment advisory and management fees increased 18% when comparing the first half of 2021 to the first half of 2020.
Deposit service fees increased 16% comparing the second quarter of 2021 to the same period of the prior year, and increased 5% when comparing the first half of 2021 to the same period of the prior year. This increase was primarily due to higher transactional volume due to improving economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, decreased 1% when comparing the second quarter of 2021 to the same period of the prior year, but increased 36% when comparing the first half of 2021 to the same period of the prior year. The increase was primarily due to increased residential real estate purchase and the refinancing of residential real estate loans with lower interest rates in the first six months of 2021.
As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income/capital markets revenue totaled $9.6 million for the second quarter of 2021, compared to $19.9 million for the second quarter of 2020. Swap fee income/capital markets revenue totaled $23.1 million for the first half of 2021, compared to $26.7 million for the first half of 2020. The decrease was primarily due to a $4 million reduction in swap fee income/capital markets revenue as certain loans scheduled to close in the second quarter will now close in the third quarter due to factors outside of the Company’s control. Future levels of swap fee income/capital markets revenue are somewhat dependent upon prevailing interest rates.
Securities losses totaled $88 thousand for the three and six months ended June 30, 2021. By comparison, securities gains totaled $65 thousand for the three and six months ended June 30, 2020.
Earnings on BOLI decreased 26% comparing the second quarter of 2021 to the second quarter of 2020 and decreased 2% comparing the first half of 2021 to the first half of 2020. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.
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Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 40% comparing the second quarter of 2021 to the second quarter of the prior year, and increased 34% comparing the first half of 2021 to the first half of 2020. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 36% comparing the second quarter of 2021 to the second quarter of the prior year, and increased 41% comparing the first half of 2021 to the first half of 2020. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Correspondent bank deposit volumes are higher on average in 2021 than in 2020 which is driving the higher fee income. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 186 banks in Iowa, Illinois, Missouri and Wisconsin.
Other noninterest income increased 54% comparing the second quarter of 2021 to the second quarter of the prior year, and increased 68% comparing the first half of 2021 to the first half of 2020. The increase in the second quarter and first half of 2021 was primarily due to equity investment income and gains on disposal of leased assets.
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NONINTEREST EXPENSE
The following tables set forth the various categories of noninterest expense for the three months ended June 30, 2021 and 2020.
1,740
8.2
217
5.8
1.5
(70)
(100.0)
83
8.6
118
34.8
Net (income from) and gains/losses on operations of other real estate
219
(66.0)
301
54.5
14.2
Loss on liability extinguishment
(429)
(14)
(7.3)
17.4
2,553
7.7
8,068
20.3
293
3.8
130
1.9
(221)
(426)
(98.2)
28.9
33.5
(76.8)
246
19.9
90
9.0
Losses on liability extinguishment, net
(576)
(7.0)
(81)
(7.4)
Goodwill Impairment
(500)
478
18.5
8,366
13.0
Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2021 and 2020.
Salaries and employee benefits, which is the largest component of noninterest expense, increased from the second quarter of 2020 to the second quarter of 2021 by 8%, and increased from the first half of 2020 to the first half of 2021 by 20%. The increased expense was primarily related to increased incentive compensation driven by strong financial results.
Occupancy and equipment expense increased 6% comparing the second quarter of 2021 to the same period of the prior year, and increased 4% comparing the first half of 2021 to the first half of 2020. The increase was due to higher investments for information technology and repair and maintenance costs.
Professional and data processing fees increased 2% comparing both the second quarter of 2021 to the same period in 2020, and the first half of 2021 to the first half of 2020. The increase was primarily due to accounting and audit fees. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.
There were no post-acquisition costs incurred in the three and six months of 2021. There were $70 thousand and $221 thousand of post-acquisition costs incurred in the second quarter of 2020 and first half of 2020, respectively. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.
There were no disposition costs for the second quarter of 2021 and $8 thousand for the first half of 2021. Disposition costs totaled $434 thousand for the first half of 2020. The costs were comprised primarily of legal, accounting, personnel costs and IT deconversion costs related to the sale of the Bates Companies in the third quarter of 2020 and the sale of RB&T in the fourth quarter of 2019.
FDIC insurance, other insurance and regulatory fee expense increased 9%, comparing the second quarter of 2021 to the second quarter of 2020, and increased 29% comparing the first half of 2021 to the first half of 2020. The increase in expense was due to an increase in the asset size of the Company in 2020 and 2021 as well as FDIC insurance assessment credits applied in 2020.
Loan/lease expense increased 35% when comparing the second quarter of 2021 to the same quarter of 2020, and increased 34% comparing the first half of 2021 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled $113 thousand for the second quarter of 2021, compared to net income from and gains/losses on operations of other real estate of $332 thousand for the second quarter of 2020. Net income from and gains/losses on operations of other real estate totaled $74 thousand for the first half of 2021, compared to net income from and gains/losses on operations of other real estate of $319 thousand for the first half of 2020.
Advertising and marketing expense increased 55% comparing the second quarter of 2021 to the second quarter of 2020, and increased 20% comparing the first half of 2021 to the first half of 2020. The increase in expense was primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 14% when comparing the second quarter of 2021 to the same quarter of 2020, and increased 9% when comparing the first half of 2021 to the same period of 2020. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.
There were no losses on liability extinguishment during the three and six months of 2021. Losses on liability extinguishment were $429 thousand for the second quarter of 2020 and $576 thousand for the first half of 2020. These losses relate to the prepayment of certain FHLB advances.
Correspondent banking expense decreased 7% when comparing the second quarter of 2021 to the second quarter of 2020 and decreased 7% when comparing the first half of 2021 to the same period of the prior year. These are direct costs
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incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.
Intangibles amortization expense decreased 7% when comparing both the second quarter of 2021 to the same quarter of 2020 and the first half of 2021 to the same period of the prior year. These expenses naturally decrease unless there is an addition to intangible assets.
There was no goodwill impairment expense in the three and six months ended June 30, 2021. Goodwill impairment expense totaled $0 and $500 thousand for the three and six months ended June 30, 2020 related to the sale of the Bates Companies.
Other noninterest expense increased 17% when comparing the second quarter of 2021 to the second quarter of 2020 and increased 19% when comparing the first half of 2021 to the same period of the prior year. Included in other noninterest expense are items such as credit card processing expenses.
INCOME TAXES
In the second quarter of 2021, the Company incurred income tax expense of $4.8 million. During the first half of the year, the Company incurred income tax expense of $8.3 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and months ended June 30, 2021 and 2020.
The effective tax rate for the quarter ended June 30, 2021 was 17.6%, which was a modest increase from the effective tax rate of 16.9% for the quarter ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was 17.2%, which was an increase from the effective tax rate of 15.8% for the six months ended June 30, 2020. The increase for both periods was due to a decrease in tax exempt income as compared to total pretax income.
FINANCIAL CONDITION
Following is a table that represents the major categories of the Company’s balance sheet.
Cash, federal funds sold, and interest-bearing deposits
144,378
133,870
157,005
231,477
799,825
748,883
Net loans/leases
4,279,220
4,079,432
122,668
225,164
318,136
309,564
298,151
309,040
Assets held for sale
10,765
100
4,631,782
4,349,775
Total borrowings
198,908
188,601
177,114
376,250
125,863
233,589
90,182
87,539
Liabilities held for sale
1,588
0
During the second quarter of 2021, the Company's total assets increased $160.0 million, or 3% from March 31, 2021, to a total of $5.8 billion. The Company’s net loans/leases increased $59.6 million in the second quarter of 2021. Total deposits increased $57.2 million in the second quarter of 2021 primarily due to an increase in interest-bearing demand deposits. Borrowings increased $10.3 million in the second quarter of 2021 which consisted primarily of an increase in FHLB overnight borrowings of $15.0 million.
INVESTMENT SECURITIES
The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment.
Following is a breakdown of the Company's securities portfolio by type, the percentage of unrealized gains (losses) to carrying value, net of allowance for credit losses, on the total portfolio, and the portfolio duration:
14,581
17,472
641,430
614,476
627,523
526,192
118,052
145,672
39,815
39,797
16,428
12,901
21,747
19,750
Securities as a % of Total Assets
13.96
14.17
14.75
13.36
Net Unrealized Gains as a % of Amortized Cost
7.63
5.59
6.90
4.16
Duration (in years)
8.1
7.6
7.0
6.3
Yield on investment securities (tax equivalent)
3.48
3.74
At January 1, 2021, the Company adopted ASU 2016-13, which requires an allowance for credit losses related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.
See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 14.9% on an annualized basis during the first quarter of 2021. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for years prior to 2021 are shown in a separate table.
168,842
1,616,144
461,272
610,582
607,798
396,272
60,134
368,927
71,080
Total loans/leases
(81,831)
1,850,110
1,869,162
79,105
Residential real estate loans
241,069
99,150
4,138,596
1,663
(60,827)
*Includes PPP loans totaling $147.5 million, $243.9 million, $273.1 million and $358.1 million as of June 30, 2021, March 31, 2021, December 31, 2020 and June 30, 2020, respectively.
As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of June 30, 2021 and March 31, 2021, approximately 18% and 28% of the CRE loan portfolio was owner-occupied, respectively.
Following is a listing of significant industries within the Company's CRE loan portfolio. These include loans in the following portfolio segments as of June 30, 2021: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.
As of March 31,
As of December 31,
Lessors of Residential Buildings
1,002,902
845,547
786,066
593,063
Lessors of Nonresidential Buildings
557,786
573,026
567,759
545,026
75,850
67,072
72,718
70,675
New Housing For-Sale Builders
56,143
46,867
45,619
56,229
Lessors of Other Real Estate Property
41,707
39,580
39,344
40,248
Nonresidential Property Managers
39,502
39,933
46,764
44,887
Other Activities Related to Real Estate
39,057
43,411
41,197
Land Subdivision
36,603
40,767
40,720
55,555
Other *
478,406
485,999
467,442
425,435
Total CRE Loans
2,327,956
2,182,202
* “Other” consists of all other industries. None of these had concentrations greater than $42.9 million, or approximately 1.8% of total CRE loans in the most recent period presented.
The Company's 1-4 family real estate loan portfolio includes the following:
The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for
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sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
Following is a listing of significant equipment types within the m2 loan and lease portfolio:
Trucks, Vans and Vocational Vehicles
65,063
63,643
61,044
59,782
Manufacturing - General
18,474
18,196
18,599
16,939
Food Processing Equipment
14,569
14,873
16,110
16,244
Marine - Travelifts
13,279
12,188
12,682
11,642
Construction - General
12,918
13,128
14,052
15,156
Computer Hardware
12,745
11,942
10,790
11,385
Trailers
10,715
10,109
9,541
Tractor
8,478
6,739
3,679
1,529
102,279
98,660
91,558
90,542
Total m2 loans and leases
258,520
249,478
237,522
232,760
* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.
ALLOWANCE FOR CREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a current expected credit loss methodology.
The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.
Changes in the ACL for loans/leases for the three and six months ended June 30, 2021 and 2020 are presented as follows:
Changes in the ACL for OBS exposures for the three and six months ended June 30, 2021 and 2020 are presented as follows:
Balance, beginning (1)
(1) Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table.
The ACL for OBS exposures totaled $9.1 million after the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded $141 thousand and $870 thousand of provision for credit losses related to OBS exposures, specifically unfunded commitments, in the second quarter of 2021 and first half of 2021, respectively. At June 30, 2021, the allowance for OBS exposures was $10.0 million.
The Company's levels of criticized and classified loans are reported in the following table.
Internally Assigned Risk Rating *
51,613
53,466
71,482
104,608
79,719
84,982
39,855
131,332
138,448
137,563
144,463
Criticized Loans **
Classified Loans ***
Criticized Loans as a % of Total Loans/Leases
2.97
3.17
3.49
Classified Loans as a % of Total Loans/Leases
0.96
* Amounts above include the government guaranteed portion, if any. For the calculation of ACL, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.
** Criticized loans are defined as non homogeneous loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as non homogeneous loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans decreased 5% and classified loans decreased 6% from March 31, 2021 to June 30, 2021. The Company continues its strong focus on improving credit quality in an effort to limit NPLs. See further discussion on industries impacted by COVID-19 in the “Provision for Loan/Lease Losses” section of this report.
ACL on loans/leases / Gross loans/leases
1.79
1.88
1.98
1.47
ACL on loans/leases / NPLs
952.02
590.28
605.15
498.66
Although management believes that the ACL at June 30, 2021 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the ACL calculation. The Company anticipates that the ACL as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that
quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's ACL.
NONPERFORMING ASSETS
The table below presents the amount of NPAs and related ratios.
Nonaccrual loans/leases (1) (2)
13,863
12,099
Accruing loans/leases past due 90 days or more
13,943
12,198
157
Other repossessed assets
Total NPAs
10,107
14,086
14,098
12,380
NPLs to total loans/leases
0.32
NPAs to total loans/leases plus repossessed property
0.23
NPAs to total assets
0.17
0.25
0.22
NPAs at June 30, 2021 were $10.1 million, down $4.0 million from March 31, 2021, and down $2.3 million from June 30, 2020. The ratio of NPAs to total assets was 0.17% at June 30, 2021, down from 0.25% at March 31, 2021, and down from 0.22% at June 30, 2020.
The large majority of the NPAs consist of nonaccrual loans/leases. For nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.
OREO is carried at the lower of carrying amount or fair value less costs to sell. Increase in OREO was from a single property.
The Company's lending/leasing practices remain unchanged and asset quality remains a priority for management.
Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date the national emergency terminates or January 1, 2022. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of June 30, 2021, there were no Bank modifications and 29 m2 modifications of loans and leases totaling $4.7 million
representing 0.11% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.
DEPOSITS
Deposits increased $57.2 million during the second quarter of 2021, primarily due to an increase in interest bearing deposits. The table below presents the composition of the Company's deposit portfolio.
Noninterest bearing demand deposits
1,269,578
1,177,482
Interest bearing demand deposits
2,976,696
2,916,054
2,987,469
2,488,755
452,171
445,067
560,982
Brokered deposits
1,183
5,631
122,556
Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, the Company had core deposit growth mostly from its interest-bearing demand deposits. As a result of strong core deposit growth since June 2020, the Company reduced its reliance on higher cost CDs and brokered deposits.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committees.
BORROWINGS
The subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company's short-term borrowings.
Overnight repurchase agreements
2,368
Federal funds purchased
6,840
22,450
Overnight federal reserve borrowings
100,000
124,818
The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks.
As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.
The table below presents the Company's term and overnight FHLB advances.
Term FHLB advances
90,000
Overnight FHLB advances
55,000
145,000
FHLB advances increased $15.0 million in the current quarter compared to the prior quarter due to temporary changes in liquidity.
The Company renewed its revolving credit note in the second quarter of 2021. At renewal, the line amount was $25.0 million. Interest on the revolving line of credit was calculated at the effective Prime Rate plus 2.25% per annum (5.50% at June 30, 2021). The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at June 30, 2021.
The Company had subordinated notes totaling $113.8 million and $118.7 million as of June 30, 2021 and March 31, 2021, respectively. The Company prepaid $5.0 million in subordinated debt in the second quarter of 2021 with no gain/loss.
It is management's intention to reduce its reliance on wholesale funding, including FHLB advances and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.
The table below presents the maturity schedule including weighted average interest cost for the Company's combined wholesale funding portfolio (defined as FHLB advances and brokered deposits).
Weighted
Maturity:
Amount Due
Interest Rate
Year ending December 31:
41,183
0.26
20,631
2022
2023
2024
Total Wholesale Funding
During the first six months of 2021, wholesale funding increased $20.6 million due to temporary changes in liquidity, $15.0 million of which was overnight FHLB advances.
STOCKHOLDERS' EQUITY
The table below presents the composition of the Company's stockholders' equity.
Common stock
Additional paid in capital
AOCI (loss)
TCE / TA ratio (non-GAAP)
9.08
* TCE is defined as total common stockholders' equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.
Excluding the impact of PPP loans, the adjusted TCE/TA at June 30, 2021 was 9.60% (non-GAAP).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $90.2 million during the second quarter of 2021 and $104.2 million during the first six months of 2021. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The Company has been able to access available funding sources to address liquidity needs during the COVID-19 pandemic. In addition, the Company has been able to pledge the PPP loans to the Federal Reserve as part of its operational line of credit.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.
At June 30, 2021, the subsidiary banks had 28 lines of credit totaling $639.8 million, of which $183.8 million was secured and $456.0 million was unsecured. At June 30, 2021, the full $639.8 million was available.
At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1 million was secured and $456.0 million was unsecured. At December 31, 2020, the full $743.1 million was available.
The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2022. At June 30, 2021, the full $25.0 million was available.
As of June 30, 2021, the Company had $684.0 million in average correspondent banking deposits spread over 186 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.
Investing activities used cash of $143.4 million during the first six months of 2021, compared to $557.6 million for the same period of 2020. The net increase in interest-bearing deposits at financial institutions was $844 thousand for the first six months of 2021, compared to a net decrease of $7.1 million for the same period of 2020. Proceeds from calls, maturities, and paydowns of securities were $110.9 million for the first six months of 2021, compared to $34.5 million for the same period of 2020. Purchases of securities used cash of $108.6 million for the first six months of 2021, compared to $166.7 million for the same period of 2020. Proceeds from sales of securities were $23.9 million for the first six months of 2021, compared to $4.6 million for the same period of 2020. The net increase in loans/leases used cash of $171.0 million for the first six months of 2021 compared to $447.4 million for the same period of 2020.
Financing activities provided cash of $104.9 million for the first six months of 2021, compared to $530.6 million for same period of 2020. Net increases in deposits totaled $89.8 million for the first six months of 2021, compared to $409.0 million for the same period of 2020. During the first six months of 2021, the Company's short-term borrowings increased $1.6 million, compared to an increase in short-term borrowings of $111.4 million for the same period of 2020. There were no long-term FHLB advances during the first six months of 2021. There were no maturities and principal payments on FHLB term advances in the first six months of 2021. Net increase in overnight advances totaled $25.0 million for the first six months of 2021. In the first six months of 2020, the Company decreased short-term and overnight FHLB advances by $40.0 million. Prepayments on brokered and public time deposits totaled $29.2 million during the first six months of 2020. Prepayment of subordinated notes totaled $5.0 million during the first six months of 2021.
Total cash provided by operating activities was $32.7 million for the first six months of 2021, compared to $39.3 million for the same period of 2020.
Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities and, most recently, subordinated notes.
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 9 of the Consolidated Financial Statements for additional information regarding regulatory capital.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.
Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the board of directors and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.
The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.
Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.
The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.
Application of the simulation model analysis for select interest rate scenarios at the most recent quarter-end available is presented in the following table:
NET INTEREST INCOME EXPOSURE in YEAR 1
INTEREST RATE SCENARIO
POLICY LIMIT
100 basis point downward shift
(10.0)
200 basis point upward shift
2.1
2.5
300 basis point upward shock
(30.0)
9.5
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 June 30, 2021 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of June 30, 2021. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A Risk Factors
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The program was paused for a period of time during the pandemic and then restarted on May 24, 2021. All shares repurchased under the share repurchase program during the second quarter were retired.
Total number of shares
Maximum number
purchased as part of
of shares that may yet
Total number of
Average price
publicly announced
be purchased under
Period
shares purchased
paid per share
plans or programs
the plans or programs
April 1-30, 2021
699,068
May 1-31, 2021
12,000
47.45
687,068
June 1-30, 2021
88,000
48.04
599,068
Item 3 Defaults Upon Senior Securities
None
Item 4 Mine Safety Disclosures
Not applicable
Item 5 Other Information
Item 6 Exhibits
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2021 and June 30, 2020; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and June 30, 2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2021 and June 30, 2020; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and June 30, 2020; and (vi) Notes to the Consolidated Financial Statements.
104
Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date
August 6, 2021
/s/ Larry J. Helling
Larry J. Helling
Chief Executive Officer
/s/ Todd A. Gipple
Todd A. Gipple, President
Chief Operating Officer
Chief Financial Officer
/s/ Nick W. Anderson
Nick W. Anderson
Chief Accounting Officer
(Principal Accounting Officer)