Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to________
Commission file number 0-22208
QCR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
42-1397595
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3551 7th Street, Moline, Illinois 61265
(Address of principal executive offices, including zip code)
(309) 736-3580
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 Par Value
QCRH
The Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of May 1, 2022, the Registrant had outstanding 17,651,425 shares of common stock, $1.00 par value per share.
1
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 March 31, 2022 and December 31, 2021
4
Consolidated Statements of Income For the Three Months Ended March 31, 2022 and 2021
5
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2022 and 2021
6
Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2022 and 2021
7
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2022 and 2021
8
Notes to Consolidated Financial Statements
9
Note 1. Summary of Significant Accounting Policies
Note 2. Investment Securities
11
Note 3. Loans/Leases Receivable
14
Note 4. Derivatives and Hedging Activities
23
Note 5. Income Taxes
25
Note 6. Earnings Per Share
26
Note 7. Fair Value
Note 8. Business Segment Information
28
Note 9. Regulatory Capital Requirements
29
Note 10. Acquisition
30
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
31
General
Impact of COVID-19
Critical Accounting Policies and Critical Accounting Estimates
32
Executive Overview
33
Strategic Financial Metrics
34
Strategic Developments
35
GAAP to Non-GAAP Reconciliations
36
Net Interest Income - (Tax Equivalent Basis)
38
Results of Operations
40
Interest Income
Interest Expense
41
Provision for Credit Losses
Noninterest Income
42
Noninterest Expense
44
Income Taxes
45
2
Financial Condition
46
Investment Securities
Loans/Leases
47
Allowance for Credit Losses on Loans/Leases and OBS Exposures
49
Nonperforming Assets
50
Deposits
51
Borrowings
52
Stockholders' Equity
53
Liquidity and Capital Resources
54
Special Note Concerning Forward-Looking Statements
55
Item 3
Quantitative and Qualitative Disclosures About Market Risk
57
Item 4
Controls and Procedures
59
Part II
OTHER INFORMATION
60
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
61
Signatures
62
Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of March 31, 2022 and December 31, 2021
March 31,
December 31,
2022
2021
(dollars in thousands)
Assets
Cash and due from banks
$
50,540
37,490
Federal funds sold
9,635
12,370
Interest-bearing deposits at financial institutions
56,755
75,292
Securities held to maturity, at amortized cost, net of allowance for credit losses
476,625
472,385
Securities available for sale, at fair value
346,686
337,830
Total securities
823,311
810,215
Loans receivable held for sale
2,968
3,828
Loans/leases receivable held for investment
4,824,900
4,676,304
Gross loans/leases receivable
4,827,868
4,680,132
Less allowance for credit losses
(74,786)
(78,721)
Net loans/leases receivable
4,753,082
4,601,411
Bank-owned life insurance
62,770
62,424
Premises and equipment, net
80,634
78,530
Restricted investment securities
30,722
19,353
Goodwill
74,066
Intangibles
8,856
9,349
Derivatives
107,326
222,220
Other assets
118,122
93,412
Total assets
6,175,819
6,096,132
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
1,275,493
1,268,788
Interest-bearing
3,564,196
3,653,984
Total deposits
4,839,689
4,922,772
Short-term borrowings
1,190
3,800
Federal Home Loan Bank advances
290,000
15,000
Subordinated notes
113,890
113,850
Junior subordinated debentures
38,190
38,155
116,193
225,135
Other liabilities
108,743
100,410
Total liabilities
5,507,895
5,419,122
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 March 2022 and December 2021 - no shares issued or outstanding
—
Common stock, $1 par value; shares authorized 20,000,000 March 2022 - 15,579,605 shares issued and outstanding December 2021 - 15,613,460 shares issued and outstanding
15,580
15,613
Additional paid-in capital
272,370
273,768
Retained earnings
405,762
386,077
Accumulated other comprehensive income (loss):
Securities available for sale
(16,171)
5,925
(9,617)
(4,373)
Total stockholders' equity
667,924
677,010
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 2022 and 2021
(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees
44,196
41,333
Securities:
Taxable
2,398
2,042
Nontaxable
4,150
3,934
37
281
219
Total interest and dividend income
51,062
47,565
Interest expense:
3,137
3,427
82
1,554
1,594
556
559
Total interest expense
5,329
5,590
Net interest income
45,733
41,975
Provision for credit losses
(2,916)
6,713
Net interest income after provision for credit losses
48,649
35,262
Noninterest income:
Trust department fees
2,963
2,801
Investment advisory and management fees
1,036
940
Deposit service fees
1,555
1,408
Gains on sales of residential real estate loans, net
493
1,337
Gains on sales of government guaranteed portions of loans, net
19
Swap fee income/capital markets revenue
6,422
13,557
Earnings on bank-owned life insurance
346
471
Debit card fees
1,007
975
Correspondent banking fees
277
314
Other
1,515
1,686
Total noninterest income
15,633
23,489
Noninterest expense:
Salaries and employee benefits
23,627
24,847
Occupancy and equipment expense
3,937
4,108
Professional and data processing fees
3,671
3,443
Acquisition costs
1,851
Disposition costs
FDIC insurance, other insurance and regulatory fees
1,310
1,065
Loan/lease expense
267
300
Net cost of (income from) and gains/losses on operations of other real estate
(1)
39
Advertising and marketing
761
627
Bank service charges
541
523
Correspondent banking expense
199
200
Intangibles amortization
508
1,669
1,560
Total noninterest expense
38,325
37,228
Net income before income taxes
25,957
21,523
Federal and state income tax expense
2,333
3,541
Net income
23,624
17,982
Basic earnings per common share
1.51
1.14
Diluted earnings per common share
1.49
1.12
Weighted average common shares outstanding
15,625,112
15,803,643
Weighted average common and common equivalent shares outstanding
15,852,256
16,025,548
Cash dividends declared per common share
0.06
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
Other comprehensive income (loss):
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax
(29,170)
(5,759)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax
(6,858)
3,153
Less reclassification adjustment for caplet amortization before tax
(221)
(151)
(6,637)
3,304
Other comprehensive loss, before tax
(35,807)
(2,455)
Tax benefit
(8,467)
(704)
Other comprehensive loss, net of tax
(27,340)
(1,751)
Comprehensive income (loss)
(3,716)
16,231
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
(Loss) Income
Total
Balance December 31, 2021
1,552
Other comprehensive (loss), net of tax
Common cash dividends declared, $0.06 per share
(939)
Repurchase and cancellation of 77,500 shares of common stock
as a result of a share repurchase program
(77)
(1,338)
(3,000)
(4,415)
Stock-based compensation expense
751
Issuance of common stock under employee benefit plans
(811)
(767)
Balance, March 31, 2022
(25,788)
(Loss)
Balance December 31, 2020
15,806
275,807
300,804
1,376
593,793
Impact of adoption of ASU 2016-13
(937)
(949)
841
(298)
(260)
Balance, March 31, 2021
15,844
276,350
316,900
(375)
608,719
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
1,297
1,331
Deferred compensation expense accrued
1,026
1,289
Gains on other real estate owned, net
Amortization of premiums on securities, net
336
597
Caplet amortization
221
151
Mark to market gains on unhedged derivatives, net
(906)
(164)
Loans originated for sale
(25,749)
(59,785)
Proceeds on sales of loans
27,121
59,216
Gains on sales of residential real estate loans
(493)
(1,337)
Gains on sales of government guaranteed portions of loans
(19)
Gains on sales and disposals of premises and equipment
(10)
(21)
Amortization of intangibles
Accretion of acquisition fair value adjustments, net
(118)
(504)
Increase in cash value of bank-owned life insurance
(346)
(471)
Increase in other assets
(16,243)
(8,243)
Decrease in other liabilities
(1,123)
(6,959)
Net cash provided by operating activities
6,946
11,143
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold
2,735
7,730
Net decrease in interest-bearing deposits at financial institutions
18,537
32,890
Proceeds from sales of other real estate owned
Activity in securities portfolio:
Purchases
(52,403)
(53,567)
Calls, maturities and redemptions
7,213
48,988
Paydowns
10,113
19,308
Sales
19,540
Activity in restricted investment securities:
(11,389)
(1,680)
Redemptions
20
Net increase in loans/leases originated and held for investment
(148,521)
(107,996)
Purchase of premises and equipment
(3,428)
(1,800)
Proceeds from sales of premises and equipment
21
Net cash used in investing activities
(177,086)
(36,506)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts
(83,083)
32,645
Net increase (decrease) in short-term borrowings
(2,610)
1,410
Activity in Federal Home Loan Bank advances:
Net change in short-term and overnight advances
275,000
10,000
Payment of cash dividends on common stock
(935)
(947)
Payment from issuance of common stock, net
Repurchase and cancellation of shares
Net cash provided by financing activities
183,190
42,848
Net increase in cash and due from banks
13,050
17,485
Cash and due from banks, beginning
61,329
Cash and due from banks, ending
78,814
Supplemental disclosure of cash flow information, cash payments for:
Interest
6,271
7,674
Income/franchise taxes
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net
Change in retained earnings from adoption of ASU 2016-13
Transfers of loans to other real estate owned
153
Due to broker for purchases of securities
7,533
2,568
Decrease in the fair value of back-to-back interest rate swap assets and liabilities
(119,357)
(100,886)
Dividends payable
939
949
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2022
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2022. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.
The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended March 31, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022, or for any other period.
The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.
ACL: Allowance for credit losses
AFS: Available for sale
FTEs: Full-time equivalents
GAAP: Generally Accepted Accounting Principles
Allowance: Allowance for credit losses
GFED: Guaranty Federal Bancshares
AOCI: Accumulated other comprehensive income (loss)
HTM: Held to maturity
ASC: Accounting Standards Codification
LIBOR: London Inter-Bank Offered Rate
ASU: Accounting Standards Update
LIHTC: Low-income housing tax credit
Bates Companies: Bates Financial Advisors, Inc., Bates
m2: m2 Equipment Finance, LLC
Financial Services, Inc., Bates Securities, Inc. and
NIM: Net interest margin
Bates Financial Group, Inc.
NPA: Nonperforming asset
BOLI: Bank-owned life insurance
NPL: Nonperforming loan
Caps: Interest rate cap derivatives
OBS: Off-balance sheet
CARES Act: Coronavirus Aid, Relief and Economy
OREO: Other real estate owned
Security Act
OTTI: Other-than-temporary impairment
CECL: Current Expected Credit Losses
PCAOB: Public Company Accounting Oversight Board
Community National: Community National Bancorporation
PCD: Purchased credit deteriorated loan
COVID-19: Coronavirus Disease 2019
PCI: Purchased credit impaired
CRBT: Cedar Rapids Bank & Trust Company
PPP: Paycheck Protection Program
CRE: Commercial real estate
Provision: Provision for credit losses
CSB: Community State Bank
QCBT: Quad City Bank & Trust Company
C&I: Commercial and industrial
ROAA: Return on average assets
EBA: Excess balance account
ROAE: Return on average equity
EPS: Earnings per share
SBA: U.S. Small Business Administration
Exchange Act: Securities Exchange Act of 1934, as
SEC: Securities and Exchange Commission
amended
SFCB: Guaranty Bank, formerly known as Springfield First
FASB: Financial Accounting Standards Board
Community Bank
FDIC: Federal Deposit Insurance Corporation
SFG: Specialty Finance Group
Federal Reserve: Board of Governors of the Federal
TA: Tangible assets
Reserve System
TCE: Tangible common equity
FHLB: Federal Home Loan Bank
TDRs: Troubled debt restructurings
FRB: Federal Reserve Bank of Chicago
TEY: Tax equivalent yield
The Company: QCR Holdings, Inc.
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks: QCBT, CRBT, CSB and SFCB. All are state-chartered commercial banks and all are members of the Federal Reserve system. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.
Pending accounting developments: In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
Management has assessed the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition. Specifically, management has identified all of the financial instruments with LIBOR exposure which includes certain commercial loans, interest rate swaps, interest rate caps, and certain securities. In all cases, management has determined a plan of transition from LIBOR to a different index. The transition will happen prior to the expiration of published LIBOR rates on June 30, 2023. Management expects the transition to have a minimal impact to the Company’s financial statements.
In April 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. Under the standard, the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 is eliminated and guidance on “vintage disclosures” is amended to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. For public companies that have adopted ASC 326, the changes take effect in reporting periods beginning after December 15, 2022. Management is currently analyzing the impact of the statement on the Company’s financial statements.
10
NOTE 2– INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31, 2022 and December 31, 2021 are summarized as follows:
Gross
Amortized
Unrealized
Fair
Cost*
Gains
(Losses)
Value
March 31, 2022:
Securities HTM:
Municipal securities
475,773
10,649
(3,095)
483,327
Other securities
1,050
476,823
484,377
Securities AFS:
U.S. treasuries and govt. sponsored agency securities
22,655
(1,312)
21,380
Residential mortgage-backed and related securities
88,935
207
(2,762)
86,380
209,052
701
(18,280)
191,473
Asset-backed securities
22,859
449
(76)
23,232
24,519
142
(440)
24,221
368,020
1,536
(22,870)
* HTM securities shown on the balance sheet of $476.6 million represents amortized cost of $476.8 million, net of allowance for credit losses of $198 thousand as of March 31, 2022.
December 31, 2021:
471,533
49,715
521,248
1,049
472,583
522,297
U.S. govt. sponsored agency securities
23,370
254
(296)
23,328
92,431
2,672
(780)
94,323
163,253
5,228
(215)
168,266
26,372
752
27,124
24,568
251
(30)
24,789
329,994
9,157
(1,321)
* HTM securities shown on the balance sheet of $472.4 million represents amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.
The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.
The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021, are summarized as follows:
Less than 12 Months
12 Months or More
Losses
87,662
13,725
(850)
2,675
(462)
16,400
40,124
(869)
18,455
(1,893)
58,579
139,706
(17,719)
4,914
(561)
144,620
10,853
13,267
217,675
(19,954)
26,044
243,719
9,802
(156)
3,035
(140)
12,837
5,363
(67)
19,406
(713)
24,769
13,287
(211)
1,001
(4)
14,288
4,528
32,980
(464)
23,442
(857)
56,422
At March 31, 2022, the investment portfolio included 649 securities. Of this number, 286 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 3.07% of the total amortized cost of the portfolio. Of these 286 securities, there were 19 securities that had an unrealized loss for twelve months or more.
The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three months ended March 31, 2022 and 2021.
Three Months Ended March 31, 2022
Three Months Ended March 31, 2021
Municipal
securities
Allowance for credit losses:
Beginning balance
198
Impact of adopting ASU 2016-13
182
183
Provision for credit loss expense
(9)
Balance, ending
173
174
There were no proceeds or gains/losses from the sales of securities in the first quarter of 2022. There were $19.5 million in proceeds during the first quarter of 2021 with no gains/losses from those sales.
12
The amortized cost and fair value of securities as of March 31, 2022 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.
Amortized Cost
Fair Value
Due in one year or less
3,666
3,672
Due after one year through five years
20,506
20,571
Due after five years
452,651
460,134
5,259
5,282
5,809
5,878
245,158
225,914
256,226
237,074
Portions of the U.S. government sponsored agency securities and municipal securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity, summarized as follows:
281,122
281,819
204,976
187,341
24,220
229,495
211,561
As of March 31, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $112.5 million and revenue bonds issued by 174 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $562.3 million. The Company also held investments in general obligation bonds in 22 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 14 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company also held investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 13 states in which the aggregate fair value exceeded $5.0 million.
Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2022 and as of December 31, 2021, the Company held revenue bonds of two issuers, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.
13
The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of March 31, 2022, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.
As of March 31, 2022, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.
NOTE 3 – LOANS/LEASES RECEIVABLE
The composition of the loan/lease portfolio as of March 31, 2022 and December 31, 2021 is presented as follows:
December 31, 2021
C&I:
C&I - revolving
263,441
248,483
C&I - other *
1,374,221
1,346,602
1,637,662
1,595,085
CRE - owner occupied
439,257
421,701
CRE - non-owner occupied
679,898
646,500
Construction and land development
863,116
918,571
Multi-family
711,682
600,412
Direct financing leases**
43,330
45,191
1-4 family real estate***
379,613
377,361
Consumer
73,310
75,311
Allowance for credit losses
** Direct financing leases:
Net minimum lease payments to be received
47,410
49,362
Estimated unguaranteed residual values of leased assets
165
Unearned lease/residual income
(4,245)
(4,336)
Plus deferred lease origination costs, net of fees
484
568
43,814
45,759
(1,465)
(1,546)
42,349
44,213
* Includes equipment financing agreements outstanding at m2, totaling $242.5 million and $225.1 million as of March 31, 2022 and December 31, 2021, respectively and PPP loans totaling $6.3 million and $28.2 million as of March 31, 2022 and December 31, 2021, respectively.
** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.
*** Includes residential real estate loans held for sale totaling $3.0 million and $3.8 million as of March 31, 2022 and December 31, 2021, respectively.
Changes in accretable yield for the loans acquired in mergers and acquisitions are as follows:
Three months ended
March 31, 2021
Performing
Loans
Balance at the beginning of the period
(1,533)
(3,139)
Accretion recognized
161
609
Balance at the end of the period
(1,372)
(2,530)
The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2022 and December 31, 2021 is presented as follows:
As of March 31, 2022
Accruing Past
30-59 Days
60-89 Days
Due 90 Days or
Nonaccrual
Classes of Loans/Leases
Current
Past Due
More
C&I - other
1,370,189
2,083
476
1,469
863,095
Direct financing leases
42,253
136
121
820
1-4 family real estate
378,032
1,156
425
73,278
4,821,125
3,377
618
2,744
As a percentage of total loan/lease portfolio
99.86
%
0.07
0.01
0.00
100.00
As of December 31, 2021
C&I
1,337,034
859
7,308
1,400
918,498
73
44,174
160
847
374,912
1,325
716
408
75,272
4,666,986
2,202
8,184
2,759
99.57
0.05
0.17
15
NPLs by classes of loans/leases as of March 31, 2022 and December 31, 2021 are presented as follows:
Percentage of
with an ACL
without an ACL
Total NPLs
-
1,212
257
1,473
53.60
29.84
15.47
1.09
2,487
2,748
1,130
270
1,401
50.77
2.64
115
732
30.69
14.78
1,757
1,002
2,760
The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2022 and 2021.
Changes in the ACL loans/leases by portfolio segment for the three months ended March 31, 2022 and 2021, respectively, are presented as follows:
CRE
Construction
1-4
C&I -
Owner
Non-Owner
and Land
Multi-
Family
Revolving
Other*
Occupied
Development
Real Estate
Balance, beginning
3,907
25,982
8,501
8,549
16,972
9,339
4,541
930
78,721
Provision
(288)
(331)
(609)
(820)
(2,301)
997
(387)
(110)
(3,849)
Charge-offs
(449)
(7)
(456)
Recoveries
235
128
370
3,619
25,437
7,897
7,857
14,671
10,336
4,154
815
74,786
* Included within the C&I – Other column are ACL on leases with a beginning balance of $1.5 million, negative provision of $27 thousand, charge-offs of $114 thousand and recoveries of $60 thousand. ACL on leases was $1.5 million as of March 31, 2022.
16
Direct
Residential
Financing
Real
Leases
Estate
35,421
42,161
1,764
3,732
1,298
84,376
Adoption of ASU 2016-13
(35,421)
2,982
29,130
(42,161)
8,696
11,428
11,999
5,836
(1,764)
(3,732)
5,042
(137)
(8,102)
565
4,549
451
(286)
328
442
(217)
5,993
(668)
(44)
156
102
3,547
33,167
9,147
11,155
12,327
6,278
5,165
1,045
81,831
* Included within the C&I – Other column are ACL on leases with adoption impact of $685 thousand, provision of $135 thousand, charge-offs of $198 thousand and recoveries of $76 thousand. ACL on leases was $2.2 million as of March 31, 2021.
The composition of the ACL loans/leases by portfolio segment based on evaluation method are as follows:
Amortized Cost of Loans Receivable
Allowance for Credit Losses
Individually
Collectively
Evaluated for
Credit Losses
C&I :
260,640
181
3,438
C&I - other*
14,806
1,402,745
1,417,551
2,185
23,252
17,607
1,663,385
1,680,992
2,366
26,690
29,056
3,567
435,690
1,253
6,644
24,765
655,133
10,362
852,754
14,670
3,166
376,447
361
3,793
385
72,925
768
59,852
4,768,016
4,028
70,758
* Included within the C&I – Other category are leases individually evaluated of $820 thousand with a related allowance for credit losses of $128 thousand and leases collectively evaluated of $42.5 million with a related allowance for credit losses of $1.5 million.
2,638
245,845
168
3,739
13,456
1,378,337
1,391,793
743
25,239
16,094
1,624,182
1,640,276
911
28,978
29,889
3,841
417,860
1,264
7,237
25,006
621,494
10,436
908,135
16,961
2,950
374,411
329
4,212
350
74,961
891
58,677
4,621,455
2,554
76,167
* Included within the C&I – Other category are leases individually evaluated of $847 thousand with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.
17
The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses as of March 31, 2022 and December 31, 2021:
Non
Commercial
Owner-Occupied
Owner Occupied
Securities
Equipment
C & I:
2,681
120
1,427
2,467
8,412
2,372
8,532
804
2,362
376
35,932
8,772
2,380
* Included within the C&I – Other category are leases individually evaluated of $820 thousand with primary collateral of equipment.
2,518
683
2,471
134
9,877
291
3,201
9,997
74
817
2,133
340
36,185
8,859
9,998
* Included within the C&I – Other category are leases individually evaluated of $847 thousand with primary collateral of equipment.
For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.
For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.
18
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of March 31, 2022:
Term Loans
Amortized Cost Basis by Origination Year
Internally Assigned
Risk Rating
2020
2019
2018
Prior
Cost Basis
Pass (Ratings 1 through 5)
260,449
Special Mention (Rating 6)
191
Substandard (Rating 7)
Doubtful (Rating 8)
Total C&I - revolving
134,078
329,424
317,610
127,119
79,548
127,637
1,115,416
255
3,578
4,194
2,519
2,969
6,107
377
99
12,071
Total C&I - other
134,333
335,521
320,586
133,251
79,925
128,065
1,131,681
41,459
99,653
140,078
49,753
31,419
59,392
10,745
432,499
56
148
2,987
3,191
576
1,246
1,229
516
Total CRE - owner occupied
42,091
50,999
32,796
62,895
70,649
164,063
149,524
83,183
65,477
72,195
3,417
608,508
1,169
4,873
18,713
1,780
12,150
7,951
46,636
1,054
6,240
15,476
1,048
936
24,754
Total CRE - non-owner occupied
71,818
169,990
174,477
100,439
78,675
81,082
67,369
366,918
246,856
95,054
34,661
452
15,112
826,422
800
7,070
717
8,587
Total Construction and land development
68,169
384,350
247,573
845,371
45,350
252,544
196,255
97,500
106,138
11,329
2,515
711,631
Total Multi-family
252,595
14,717
43,640
22,315
14,481
6,154
7,755
2,159
111,221
223
220
772
177
430
805
Total 1-4 family real estate
43,969
22,715
6,804
7,953
112,798
984
473
100
210
780
2,915
5,462
131
Total Consumer
341
5,593
376,478
1,287,062
1,102,157
491,824
339,340
292,556
300,304
4,189,721
Delinquency Status *
90,552
92,958
37,588
14,734
4,689
755
241,276
Nonperforming
1,021
157
86
93,979
37,745
14,820
242,540
15,181
6,535
8,554
6,874
4,093
1,273
42,510
801
Total Direct financing leases
7,336
8,573
5,626
10,768
707
17,745
19,739
92,023
77,036
18,020
10,009
49,489
266,390
96
10,105
49,818
266,815
2,048
3,834
3,733
1,816
1,460
1,489
53,307
67,687
1,830
1,505
67,717
133,146
207,940
127,794
41,544
20,831
53,351
53,541
638,147
* Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual and accruing loans/leases that are greater than or equal to 90 days past due.
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of December 31, 2021:
2017
245,212
633
391,532
362,256
133,678
82,177
83,419
53,310
1,106,372
3,580
373
349
4,640
506
7,138
396
10,507
395,618
364,995
141,165
82,573
83,810
53,358
1,121,519
118,014
143,045
47,660
30,523
17,038
46,185
11,477
413,942
637
233
1,846
1,202
3,918
2,080
1,239
522
118,651
49,740
31,995
47,387
176,813
145,712
88,697
63,849
55,752
28,808
8,592
568,223
7,295
20,881
1,802
12,230
5,494
5,580
53,282
1,105
6,297
15,563
1,087
943
24,995
185,213
172,890
106,062
77,166
62,189
34,388
394,045
248,360
126,941
106,790
3,012
13,277
892,425
404,407
902,787
266,120
197,224
74,033
47,486
5,609
7,376
2,564
47,097
24,029
16,188
7,569
5,845
5,213
3,079
109,020
178
437
201
816
47,134
24,207
8,006
6,046
109,873
1,558
487
108
216
824
2,031
5,224
137
353
5,361
1,418,701
1,151,208
514,237
354,369
180,072
148,546
289,503
4,056,636
117,163
54,261
33,390
14,274
4,200
455
223,743
95
644
368
1,340
117,258
54,438
34,034
14,642
4,242
469
225,083
6,690
12,130
11,638
9,235
3,695
956
44,344
12,862
9,287
3,713
12,857
494
280
15,711
15,784
104,005
78,713
19,001
10,784
10,533
43,976
68
267,080
106
302
10,890
44,278
267,488
4,891
4,020
2,114
1,660
593
1,230
55,411
69,919
2,129
608
1,231
69,950
245,701
152,113
66,802
36,973
19,169
46,979
55,759
623,496
As of March 31, 2022 and December 31, 2021, TDRs totaled $120 thousand and $494 thousand, respectively.
There were no TDRs restructured during the first three months of 2022 or 2021. For the three months ended March 31, 2022 and March 31, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. There were no TDRs that were restructured and charged off for the three months ended March 31, 2022.
Changes in the ACL for OBS exposures for the three months ended March 31, 2022 and 2021 are presented as follows:
Three Months Ended
6,886
9,117
Provisions credited to expense
933
729
7,819
9,846
22
NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES
Derivatives are summarized as follows as of March 31, 2022 and December 31, 2021:
Assets:
Interest rate caps - hedged
4,484
927
Interest rate caps
1,144
238
Interest rate swaps
101,698
221,055
Interest rate swaps - hedged
(14,495)
(4,080)
(101,698)
(221,055)
(116,193)
(225,135)
The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.
The Company has entered into interest rate caps to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps executed. The details of the interest rate caps are as follows:
Balance Sheet
Fair Value as of
Hedged Item
Effective Date
Maturity Date
Location
Notional Amount
Strike Rate
1/1/2020
1/1/2023
Derivatives - Assets
25,000
1.75
48
50,000
1.57
97
1.80
1/1/2024
355
723
125
1/1/2025
695
1,438
332
719
166
300,000
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
369
3/1/2020
3/1/2025
734
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
7/1/2021
7/1/2031
Derivatives - Liabilities
35,000
1.40
0.23
(2,387)
(17)
(3,411)
(25)
40,000
(2,742)
(34)
(1,705)
(13)
4/1/2022
4/1/2027
1.91
N/A
(281)
(938)
(656)
(13,059)
(89)
The Company has entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
QCR Holdings Statutory Trust II
9/30/2018
9/30/2028
3.86
5.85
(1,035)
QCR Holdings Statutory Trust III
8,000
(300)
(828)
QCR Holdings Statutory Trust V
7/7/2018
7/7/2028
1.79
4.54
(350)
(996)
Community National Statutory Trust II
9/20/2018
9/20/2028
3,000
3.10
5.17
(112)
(309)
Community National Statutory Trust III
9/15//2018
9/15/2028
3,500
2.58
4.75
(131)
(360)
Guaranty Bankshares Statutory Trust I
9/15/2018
4,500
(168)
(463)
39,000
(1,436)
(3,991)
Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.
The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third-party financial institution. Additionally, the Company receives an upfront, non-refundable fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.
Interest rate swaps that are not designated as hedging instruments are summarized as follows:
Estimated Fair Value
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts
2,069,977
2,024,599
Non-Hedging Interest Rate Derivatives Liabilities:
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended March 31, 2022 and March 31, 2021 are as follows:
Interest and
Dividend Income
Expense
Income and expense line items presented in the consolidated statements of income
The effects of cash flow hedging:
Gain (loss) on cash flow hedges:
Interest rate caps on deposits
Interest rate swaps on variable rate loans
Interest rate swaps on junior subordinated debentures
269
24
The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:
Cash
4,193
21,100
U.S treasuries and govt. sponsored agency securities
3,518
3,555
123,763
139,166
59,683
65,104
191,157
228,925
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.
The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. The majority of the Company’s swapped loan portfolio consists of loans on projects, with loan-to-values including the potential swap exposure that is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
NOTE 5 – INCOME TAXES
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three months ended March 31, 2022 and March 31, 2021:
For the Three Months Ended March 31,
% of
Pretax
Amount
Income
Computed "expected" tax expense
5,451
21.0
4,520
Tax exempt income, net
(2,222)
(8.6)
(1,719)
(8.0)
(73)
(0.3)
(99)
(0.5)
State income taxes, net of federal benefit, current year
1,291
5.0
1,024
4.8
Provision adjustment from accounting method change
(1,181)
(4.5)
Tax credits
(242)
(0.9)
(57)
Income from tax credit equity investments
(301)
(1.2)
130
0.5
Excess tax benefit on stock options exercised and restricted stock awards vested
(434)
(1.7)
(0.8)
(86)
0.2
9.0
16.4
NOTE 6 - EARNINGS PER SHARE
The following information was used in the computation of EPS on a basic and diluted basis:
Basic EPS
Diluted EPS
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan
227,144
221,905
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 March 31, 2022 and December 31, 2021:
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
454,012
Total liabilities measured at fair value
560,050
The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Interest rate caps are used for the purpose of hedging interest rate risk on deposits. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).
Interest rate swaps are used for the purpose of hedging interest rate risk on loans and subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Interest rate swaps are also executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).
Assets measured at fair value on a non-recurring basis comprise the following at March 31, 2022 and December 31, 2021:
Level 1
Level 2
Level 3
Loans/leases evaluated individually
19,913
6,618
Loans/leases evaluated individually are valued at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level Fair Value Measurements
Valuation Technique
Unobservable Input
Range
Appraisal of collateral
Appraisal adjustments
-10.00
to
-30.00
For the loans/leases evaluated individually, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
27
There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended March 31, 2022 and 2021.
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
Hierarchy
Carrying
Estimated
Level
Investment securities:
HTM
AFS
Loans/leases receivable, net
18,438
6,128
4,734,644
4,670,679
4,595,283
4,478,899
Nonmaturity deposits
4,454,329
4,501,424
Time deposits
385,360
376,546
421,348
419,453
FHLB advances
116,113
116,203
31,350
31,072
NOTE 8 – BUSINESS SEGMENT INFORMATION
Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company's internal organization, focusing on the financial information that the Company's operating decision-makers routinely use to make decisions about operating matters.
The Company’s Commercial Banking business is geographically divided by markets into the operating segments which are the four subsidiary banks wholly owned by the Company: QCBT, CRBT, CSB, and SFCB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.
Selected financial information on the Company's business segments is presented as follows as of and for the three months ended March 31, 2022 and 2021:
Commercial Banking
Intercompany
Consolidated
QCBT
CRBT
CSB
SFCB
All other
Eliminations
Total revenue
22,480
25,211
11,316
7,844
28,912
(29,068)
66,695
17,314
14,323
9,331
6,528
(2,109)
(1,259)
(770)
(385)
(502)
Net income (loss) from continuing operations
9,970
11,129
4,126
3,104
23,827
(28,532)
3,223
14,980
9,888
45,975
1,583
2,497
4,776
2,195,894
1,947,737
1,184,708
956,345
839,362
(948,227)
21,284
30,357
10,423
8,746
23,223
(22,979)
71,054
15,786
13,606
8,368
6,069
(2,102)
248
Provision for loan/lease losses
2,112
2,184
1,366
1,051
7,164
11,396
2,062
2,269
17,948
(22,857)
2,067
3,143
5,663
10,873
2,101,634
1,847,070
1,041,861
818,605
791,254
(955,277)
5,645,147
NOTE 9 – REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the subsidiary banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of March 31, 2022 and December 31, 2021, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.
Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of March 31, 2022 and December 31, 2021 are presented in the following tables (dollars in thousands). As of March 31, 2022 and December 31, 2021, each of the subsidiary banks met such capital requirements to be “well capitalized”.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
With Capital
Prompt Corrective
Actual
Conservation Buffer
Action Provisions
Ratio
( dollars in thousands)
As of March 31, 2022:
Company:
Total risk-based capital
836,493
14.50
461,539
>
8.00
605,770
10.50
576,924
10.00
Tier 1 risk-based capital
650,356
11.27
346,154
6.00
490,385
8.50
Tier 1 leverage
10.78
241,343
4.00
301,679
5.00
Common equity Tier 1
612,166
10.61
259,616
4.50
403,847
7.00
375,000
6.50
Quad City Bank & Trust:
259,332
13.42
154,616
202,934
193,270
235,098
12.16
115,962
164,280
10.81
86,996
108,745
86,972
135,289
125,626
Cedar Rapids Bank & Trust:
269,223
14.18
151,921
199,396
189,901
245,509
12.93
113,941
161,416
12.36
79,428
99,285
85,456
132,921
123,436
Community State Bank:
128,273
11.81
86,889
114,042
108,612
114,660
10.56
65,167
92,320
45,868
57,336
48,875
76,028
70,597
Springfield First Community Bank:
104,588
12.91
64,795
85,043
80,994
94,945
11.72
48,596
68,845
11.21
33,886
42,357
36,447
56,696
52,646
As of December 31, 2021:
814,629
14.77
441,100
578,944
551,375
631,649
11.46
330,825
468,669
10.46
241,579
301,974
593,494
10.76
248,119
385,962
358,394
247,658
13.29
149,126
195,727
186,407
224,253
12.03
111,844
158,446
10.45
85,873
107,341
83,883
130,485
121,164
277,673
14.85
149,595
196,343
186,993
254,279
13.60
112,196
158,944
12.59
80,777
100,971
84,147
130,895
121,546
123,365
11.95
82,601
108,413
103,251
110,410
10.69
61,951
87,763
9.67
45,676
57,095
46,463
72,276
67,113
101,067
13.39
60,369
79,235
75,462
91,625
12.14
45,277
64,142
11.08
33,088
41,360
33,958
52,823
49,050
NOTE 10 –ACQUISITION
On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank.
Stockholders of GFED received for each share of GFED common stock owned, at the election of each stockholder, and subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock. On March 31, 2022, the last trading date before the closing, the Company’s common stock closed at $56.59, resulting in stock consideration valued at $117.2 million and total cash consideration paid by the Company of $26.9 million. The Company funded the cash portion of the purchase price through operating cash.
As of the acquisition date, GFED had $1.2 billion in assets, $821 million in loans and $1.1 billion in deposits. The Company is in the process of determining the fair value of the individual assets and liabilities purchased/assumed, including goodwill and core deposit intangible.
Acquisition costs totaled $1.9 million in the first quarter of 2022. These acquisition costs are primarily comprised of legal, accounting and other professional expenses.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending March 31, 2022. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. Page locations and specific sections and notes that are referred to in this discussion are listed in the table of contents.
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.
GENERAL
The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of March 31, 2022, the Company had $6.2 billion in consolidated assets, including $4.8 billion in net loans/leases, and $4.8 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger. On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. The financial results of GFED are not included in this report.
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has had an impact on the Company’s financial condition and results of operations as of and for the three months ended March 31, 2022 and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on the Company’s Business
The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic. The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to continue to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, the Company’s market areas, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.
The Company currently expects that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill and the fair value of financial instruments.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies and estimates:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
As of November 30, 2021 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology. A more detailed discussion of this critical accounting policy can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities. A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
FAIR VALUE OF SECURITIES
The fair value of securities is determined monthly and the securities are stated at fair value. A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
EXECUTIVE OVERVIEW
The Company reported net income of $23.6 million and diluted EPS of $1.49 for the quarter ended March 31, 2022. By comparison, for the quarter ended December 31, 2021 the Company reported net income of $27.0 million and diluted EPS of $1.71. For the quarter ended March 31, 2021, the Company reported net income of $18.0 million, and diluted EPS of $1.12.
The first quarter of 2022 was also highlighted by the following results and events:
Following is a table that represents various net income measurements for the Company.
For the three months ended
27,009
1.71
15,838,246
The Company reported adjusted net income (non-GAAP) of $24.4 million, with adjusted diluted EPS of $1.54. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the three months ended excludes a number of non-recurring items, after-tax, most significantly $1.5 million of acquisition costs.
Following is a table that represents the major income and expense categories for the Company:
46,513
(3,227)
Noninterest income
22,985
Noninterest expense
39,412
6,304
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, 2021. 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
14.6
16.9
14.0
Fee income growth
> 6% annually
(41.3)
(10.1)
(15.9)
Improve operational efficiencies and hold noninterest expense growth
Noninterest expense growth
< 5% annually
(4.1)
4.0
1.2
* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison. The calculations provided exclude non-core noninterest income and noninterest expense.
** Loan and lease growth excludes PPP loans.
It should be noted that these initiatives are long-term targets.
STRATEGIC DEVELOPMENTS
The Company has taken the following actions during the first quarter of 2022 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”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.
The efficiency ratio is a ratio that management utilizes to compare the Company to its peers. It is a standard ratio used to calculate overhead as a percentage of revenue in the banking industry and is widely utilized by investors.
Loan growth annualized, excluding PPP loans, is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes this financial measure is important to investors as total loans and leases for the quarters ended March 31, 2021 were materially higher due to the addition of PPP loans. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
As of
GAAP TO NON-GAAP
RECONCILIATIONS
(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)
Less: Intangible assets
82,922
83,415
84,939
TCE (non-GAAP)
585,002
593,595
523,780
Total assets (GAAP)
TA (non-GAAP)
6,092,897
6,012,717
5,560,208
TCE/TA ratio (non-GAAP)
9.60
9.87
9.42
For the Quarter Ended
ADJUSTED NET INCOME
Net income (GAAP)
Less non-core items (post-tax) (*):
Income:
715
77
129
Total non-core income (non-GAAP)
Expense:
1,462
Separation agreement
Total non-core expense (non-GAAP)
496
741
Adjusted net income (non-GAAP)
24,371
27,428
18,594
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)
15,582,276
Adjusted EPS (non-GAAP):
Basic
1.56
1.76
1.18
Diluted
1.54
1.73
1.16
ADJUSTED ROAA
Average Assets
6,115,127
6,121,446
5,668,850
Adjusted ROAA (non-GAAP)
1.59
1.31
ADJUSTED NIM (TEY)*
Net interest income (GAAP)
Plus: Tax equivalent adjustment
2,933
2,800
2,267
Net interest income - tax equivalent (non-GAAP)
48,666
49,313
44,242
Less: Acquisition accounting net accretion
118
88
504
Adjusted net interest income
48,548
49,225
43,738
Average earning assets
5,625,813
5,602,222
5,218,198
NIM (GAAP)
3.30
3.29
3.26
NIM (TEY) (non-GAAP)
3.50
3.43
Adjusted NIM (TEY) (non-GAAP)
3.49
3.40
EFFICIENCY RATIO
Noninterest expense (GAAP)
Noninterest income (GAAP)
Total income
61,366
69,498
65,464
Efficiency ratio (noninterest expense/total income) (non-GAAP)
62.45
56.71
56.87
LOAN GROWTH, EXCLUDING PPP LOANS
Total loans and leases
4,361,051
Less: PPP loans
6,340
28,181
243,860
Total loans and leases, excluding PPP loans
4,821,528
4,651,951
4,117,191
Loan growth, excluding PPP loans
14.58
14.00
* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain/loss on sale of subsidiary which has an estimated effective tax rate of 30.5%.
NET INTEREST INCOME - (TAX EQUIVALENT BASIS)
Net interest income, on a tax equivalent basis, increased 10% to $48.7 million for the quarter ended March 31, 2022 compared to the same quarter of the prior year. Net interest income, on a GAAP basis, increased 9% to $45.7 million for the quarter ended March 31, 2022 compared to the same quarter of the prior year. Net interest income improved due to lower sequential PPP loan forgiveness fees, a favorable mix in our interest earning assets, lower deposit costs and a rotation of excess liquidity into higher average loan/lease balances.
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
Tax Equivalent Basis
GAAP
Average Yield on Interest-Earning Assets
3.88
3.89
3.63
3.71
3.65
Average Cost of Interest-Bearing Liabilities
0.56
0.57
0.63
0.55
0.62
Net Interest Spread
3.32
3.23
3.08
3.14
3.03
NIM (TEY) (Non-GAAP)
NIM Excluding Acquisition Accounting Net Accretion
3.25
3.21
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
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 which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage cost of funds through derivatives.
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:
Average
Earned
Yield or
Balance
or Paid
Cost
ASSETS
Interest earning assets:
4,564
0.15
1,847
69,328
0.20
116,446
0.13
Investment securities (1)
802,260
7,682
3.83
810,059
7,050
3.48
22,183
5.06
18,064
4.84
Gross loans/leases receivable (1) (2) (3)
4,727,478
45,995
3.95
4,271,782
42,525
4.04
Total interest earning assets
53,995
49,832
Noninterest-earning assets:
53,684
66,627
Premises and equipment
79,501
73,170
Less allowance
(78,899)
(86,418)
435,028
397,273
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
3,228,083
2,338
0.29
2,981,306
1,986
0.27
398,897
799
0.81
448,035
1,441
1.30
1,951
7,141
85,778
0.38
13,078
0.28
113,868
5.46
118,706
5.37
38,171
5.83
38,007
5.88
Total interest-bearing liabilities
3,866,748
3,606,273
Noninterest-bearing demand deposits
1,276,374
1,199,548
Other noninterest-bearing liabilities
287,879
259,017
5,431,001
5,064,838
Stockholders' equity
684,126
604,012
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
145.49
144.70
Analysis of Changes of Interest Income/Interest Expense
For the Three Months Ended March 31, 2022
Inc./(Dec.)
Components
from
of Change (1)
Prior Period (1)
Rate
Volume
2022 vs. 2021
INTEREST INCOME
(2)
69
(71)
Investment securities (2)
632
Gross loans/leases receivable (2) (3)
3,470
(5,762)
9,232
Total change in interest income
4,163
(5,050)
9,213
INTEREST EXPENSE
352
187
(642)
(498)
(144)
Other borrowings
(40)
(3)
(15)
Total change in interest expense
(261)
(343)
Total change in net interest income
4,424
(4,707)
9,131
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
RESULTS OF OPERATIONS
Interest income (tax equivalent) increased 8%, comparing the first quarter of 2022 to the same period of 2021. This was primarily due to an increase in the yield of average securities and volume of average loans/leases partially offset by a decline in yields on loans/leases. Average gross loans and leases increased 11% when comparing the quarter ended March 31, 2022 to March 31, 2021.
The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.
Interest expense (tax equivalent) for the first quarter of 2022 decreased 5% from the first quarter of 2021. The Company has grown organically at a significant pace over the past several years and core deposit growth has funded that growth. The cost of funds on the Company’s average interest-bearing liabilities declined in conjunction with the declining rate environment. The Company’s cost of funds was 0.56% for the quarter ended March 31, 2022, which was down from 0.63% for the quarter ended March 31, 2021.
The Company's management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
PROVISION FOR CREDIT LOSSES
The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three months ended March 31, 2022 and 2021.
Provision for credit losses - loans and leases
Provision for credit losses - off-balance sheet exposures
Provision for credit losses - held to maturity securities
Total provision for credit losses
The Company’s total provision for credit losses was a negative $2.9 million for the first quarter of 2022, compared to $6.7 million for the first quarter of 2021, primarily due to continued strong asset quality and a corresponding reduction in the qualitative factor related to the pandemic. The adoption of ASU 2016-13 now requires an allowance on HTM debt securities and OBS exposures, specifically unfunded commitments. For the first quarter of 2022, there was no provision related to HTM debt securities. The provision related to HTM debt securities in the first quarter of 2021 was negative due to the decrease in the balance of those HTM debt securities. For the three months ended March 31, 2022, the provision related to OBS was $933 thousand, compared to $729 thousand for the three months ended March 31, 2021. The increase was due to the increase in the balance of those OBS exposures with increase of line of credit usage. In the three months ended March 31, 2022, loans/leases saw a decrease in provision from the same periods in the prior year. The decrease in provision on loans and leases was substantially driven by continued strong asset quality and decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19.
The ACL for loans and leases is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economies and risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an ACL on loans/leases of 1.55% of total gross loans/leases at March 31, 2022, compared to 1.68% of total gross loans/leases at December 31, 2021 and 1.88% at March 31, 2021.
Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the three months ended March 31, 2022 and 2021.
$ Change
% Change
162
5.8
10.2
147
10.4
(844)
(63.1)
100.0
(7,135)
(52.6)
(125)
(26.5)
3.3
(37)
(11.8)
(171)
(7,856)
(33.4)
In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $389.3 million in the first quarter of 2022 due to market volatility but increased by $192.1 million since March 31, 2021. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. Trust department fees increased 6%, comparing the first quarter of 2022 to the same period of the prior year. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.
Investment advisory and management fees increased 10%, comparing the first quarter of 2022 to the same period of the prior year. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.
Deposit service fees increased 10% comparing the first quarter of 2022 to the same period of the prior year. This increase was primarily due to higher transactional volume due to improving economic conditions. The Company continues to emphasize shifting the mix of deposits from retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, decreased 63% when comparing the first quarter of 2022 to the same period of the prior year. The decrease was primarily due to decreased residential real estate purchase and the refinancing of residential real estate loans with higher interest rates in 2022.
The Company has grown its interest rate swap program significantly over the past several years. The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans. Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience. The LIHTC industry is strong and growing with an increased need for affordable housing. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $6.4 million for the first quarter of 2022, compared to $13.6 million for the first quarter of 2021. Swap fee income relative to the
increase in notional amount of the non-hedging interest rate swap contracts was 14.1% for the three months ended March 31, 2022 and 10.1% for the same period of the prior year. The decrease was primarily due to project delays caused by ongoing supply chain disruptions and inflationary pressures. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans. The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.
There were no securities gains or losses for the three months ended March 31, 2022 or March 31, 2021.
Earnings on BOLI decreased 27% comparing the first quarter of 2022 to the first quarter of 2021. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.
Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 3% comparing the first quarter of 2022 to the first quarter of the prior year. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees decreased 12% comparing the first quarter of 2022 to the first quarter of the prior year. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 188 banks in Iowa, Illinois, Missouri and Wisconsin.
Other noninterest income decreased 10% comparing the first quarter of 2022 to the first quarter of the prior year. The decrease was primarily due to lower equity investment income and lower gains on disposal of leased assets in the first quarter of 2022 as compared to the first quarter of 2021.
43
NONINTEREST EXPENSE
The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2022 and 2021.
(1,220)
(4.9)
(4.2)
228
6.6
(8)
(100.0)
245
23.0
(33)
(11.0)
(102.6)
21.4
3.4
(3.0)
109
7.0
1,097
2.9
Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions and employment separation expenses impacted expense in 2022 and 2021.
Salaries and employee benefits, which is the largest component of noninterest expense, decreased from the first quarter of 2021 to the first quarter of 2022 by 5%. The decreased expense was primarily related to lower performance compensation from swap fee income/capital markets revenue.
Occupancy and equipment expense decreased 4% comparing the first quarter of 2022 to the same period of the prior year. The decrease was due to lower repair and maintenance costs.
Professional and data processing fees increased 7% comparing both the first quarter of 2022 to the same period in 2021. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.
Acquisition costs totaled $1.9 million in the first quarter of 2022. There were no acquisition costs incurred in the first quarter of 2021. The acquisition costs, which were primarily legal, accounting and other professional fees, relate to the acquisition of GFED as discussed in Note 10 of the consolidated financial statements.
There were no disposition costs for the first quarter of 2022 and there were $8 thousand for the first quarter of 2021. The costs were comprised primarily of legal, accounting and personnel costs related to the sale of the Bates Companies in the third quarter of 2020.
FDIC insurance, other insurance and regulatory fee expense increased 23%, comparing the first quarter of 2022 to the first quarter of 2021. The increase in expense was due to an increase in the asset size of the Company in 2021, which increased the Company’s rates.
Loan/lease expense decreased 11% when comparing the first quarter of 2022 to the same quarter of 2021. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled $1 thousand for the first quarter of 2022, compared to net cost from and gains/losses on operations of other real estate of $39 thousand for the first quarter of 2021.
Advertising and marketing expense increased 21% comparing the first quarter of 2022 to the first quarter of 2021. The increase in expense was primarily due to the return to more normal operations during the second half of 2021 and first quarter of 2022 after improvements in the general environment due to COVID-19 as compared to the first quarter of 2021.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 3% when comparing the first quarter of 2022 to the same quarter of 2021. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses are expected to also increase.
Correspondent banking expense decreased 1% when comparing the first quarter of 2022 to the first quarter of 2021. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.
Intangibles amortization expense decreased 3% when comparing the first quarter of 2022 to the same quarter of 2021. These expenses naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.
Other noninterest expense increased 7% when comparing the first quarter of 2022 to the first quarter of 2021 primarily due to increased travel. Also included in other noninterest expense are other items such as subscriptions, sales and use tax and expenses related to wealth management.
INCOME TAXES
In the first quarter of 2022, the Company incurred income tax expense of $2.3 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three months ended March 31, 2022 and 2021.
The effective tax rate for the quarter ended March 31, 2022 was 9.0%, which was a decrease from the effective tax rate of 16.4% for the quarter ended March 31, 2021. The decrease was primarily due to a $1.2 million provision adjustment from an accounting method change and excess tax benefit on stock compensation in the first quarter of 2022.
FINANCIAL CONDITION
Cash, federal funds sold, and interest-bearing deposits
116,930
125,152
133,870
799,825
Net loans/leases
75
4,279,220
122,668
375,170
337,134
309,564
78
80
4,631,782
Total borrowings
443,270
170,805
188,601
125,863
90,182
During the first quarter of 2022, the Company's total assets increased $79.7 million, or 1% from December 31, 2021, to a total of $6.2 billion. The Company’s net loans/leases increased $151.7 million in the first quarter of 2022. Total deposits decreased $83.1 million in the first quarter of 2022 primarily due to a decrease in interest-bearing demand deposits and time deposits. Borrowings increased $272.5 million in the first quarter of 2022 which consisted primarily of an increase in FHLB overnight borrowings of $275.0 million.
INVESTMENT SECURITIES
The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment and are generated by our specialty finance group.
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
667,048
81
639,601
79
614,476
76
118,052
39,815
25,271
25,839
12,901
Securities as a % of total assets
13.33
14.17
Net unrealized gains (losses) as a % of Amortized Cost
(1.63)
7.17
5.59
Duration (in years)
7.9
8.2
7.6
Yield on investment securities (tax equivalent)
3.66
Due to the sharp increase in intermediate and long-term interest rates during the first quarter ended March 31, 2022, the valuation of the Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gain as a percentage of amortized cost changed from 7.17% as of December 31, 2021 to a net unrealized loss as a percentage of amortized cost of -1.63% as of March 31, 2022.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.
See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 14.6% on an annualized basis during the first quarter of 2022. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.
168,842
1,616,144
461,272
610,582
607,798
396,272
60,134
368,927
71,080
Total loans/leases
(81,831)
*Includes PPP loans totaling $6.3 million, $28.2 million and $243.9 million as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively.
As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of March 31, 2022 and December 31, 2021, approximately 22% and 19% of the CRE loan portfolio was owner-occupied, respectively.
Following is a listing of significant industries within the Company's CRE loan portfolio. These include loans in the following portfolio segments as of March 31, 2022: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.
As of March 31,
As of December 31,
Lessors of Residential Buildings
1,383,986
1,316,851
845,547
Lessors of Nonresidential Buildings
578,399
557,859
573,026
Hotels
71,448
73,639
67,072
New Housing For-Sale Builders
71,285
61,028
46,867
Lessors of Other Real Estate Property
63,759
60,605
39,580
Other Activities Related to Real Estate
42,035
42,507
43,411
Other *
578,094
568,784
566,699
Total CRE Loans
2,789,006
2,681,273
2,182,202
* “Other” consists of all other industries. None of these had concentrations greater than $39.1 million, or approximately 1.4% of total CRE loans in the most recent period presented.
The Company's 1-4 family real estate loan portfolio includes the following:
The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
Following is a listing of significant equipment types within the m2 loan and lease portfolio:
Trucks, Vans and Vocational Vehicles
70,241
69,392
63,643
Manufacturing - General
17,350
17,320
18,196
Trailers
15,702
12,832
10,109
Marine - Travelifts
15,513
14,498
12,188
Food Processing Equipment
14,846
14,907
14,873
Freightliners
14,224
10,386
Construction - General
13,851
13,560
13,128
Tractor
12,858
10,508
6,739
Computer Hardware
10,792
11,223
11,942
100,493
95,648
97,429
Total m2 loans and leases
285,870
270,274
249,478
* “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
The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.
Changes in the ACL for loans/leases for the three months ended March 31, 2022 and 2021 are presented as follows:
The Company's levels of criticized and classified loans are reported in the following table.
Internally Assigned Risk Rating *
63,622
62,510
53,466
54,491
53,296
84,982
118,113
115,806
138,448
Criticized Loans **
Classified Loans ***
Criticized Loans as a % of Total Loans/Leases
2.45
2.47
3.17
Classified Loans as a % of Total Loans/Leases
1.13
1.95
* Amounts above include the government guaranteed portion, if any. For the calculation of ACL, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.
** Criticized loans are defined as non homogeneous loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as non homogeneous loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans increased 2% and classified loans increased 2% from December 31, 2021 to March 31, 2022. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.
ACL on loans/leases / Gross loans/leases
1.55
1.68
1.88
ACL on loans/leases / NPLs
2,721.47
2,825.21
590.28
Although management believes that the ACL at March 31, 2022 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision for credit losses. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's ACL.
NONPERFORMING ASSETS
The table below presents the amount of NPAs and related ratios.
Nonaccrual loans/leases (1)
13,863
Accruing loans/leases past due 90 days or more
OREO
Other repossessed assets
Total NPAs
14,086
NPLs to total loans/leases
0.32
NPAs to total loans/leases plus repossessed property
NPAs to total assets
0.04
0.25
Nonccrual loans/leases to total loans/leases
ACL to nonaccrual loans
2,725.44
2,853.24
NPAs at March 31, 2022 and December 31, 2021 were $2.7 million, down $11.3 million from March 31, 2021. The ratio of NPAs to total assets was 0.04% at March 31, 2022, down from 0.05% at December 31, 2021, and down from 0.25% at March 31, 2021.
The majority of the NPAs consist of nonaccrual loans/leases. For nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.
OREO is carried at the lower of carrying amount or fair value less costs to sell.
The Company's lending/leasing practices remain unchanged and asset quality remains a priority for management.
DEPOSITS
Deposits decreased $83.1 million during the first quarter of 2022, driven by typical seasonality with our commercial client base and further rotation from time deposits to interest-bearing demand deposits.
The table below presents the composition of the Company's deposit portfolio.
Noninterest bearing demand deposits
1,269,578
Interest bearing demand deposits
3,181,685
66
3,232,633
65
2,916,054
63
382,268
445,067
Brokered deposits
243
0
1,084
The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 21% in 2021. Balances can fluctuate a great deal due to large customer and correspondent bank activity. During the past year, the Company had significant core deposit growth mostly from its correspondent banking clients. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.
The Company’s correspondent bank deposit portfolio and funds managed consists of the following:
The Company has modified the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest-bearing deposits and the money market deposits. This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB which is managed by the Company, but is off the Company’s balance sheet. On average, over the past two years, the correspondent banks’ EBA portfolio ranges from $1.3 billion to $1.5 billion which is approximately $1 billion more than pre-pandemic levels.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committees.
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.
Federal funds purchased
6,840
The Company's federal funds purchased fluctuate based on the short-term funding needs of the Company's subsidiary banks.
As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.
The table below presents the Company's overnight FHLB advances. The Company did not have any term FHLB advances for the dates in the table below.
Overnight FHLB advances
FHLB advances (all overnight) increased $275.0 million in the current quarter compared to the prior quarter due to strong loan growth and a decrease in core deposits driven by typical seasonality with our commercial client base.
The Company renewed its revolving credit note in the second quarter of 2021. At renewal, the line amount was $25.0 million. Interest on the revolving line of credit was calculated at the effective Prime Rate plus 2.25% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at March 31, 2022.
The Company had subordinated notes totaling $113.9 million as of both March 31, 2022 and December 31, 2021. The Company prepaid $5.0 million in subordinated debt in the second quarter of 2021 with no gain/loss.
It is management's intention to reduce its reliance on wholesale funding, including FHLB advances and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.
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:
290,243
0.53
15,003
0.31
2023
2024
2025
Total Wholesale Funding
During the first quarter of 2022, wholesale funding, primarily overnight FHLB advances, increased $275.2 million due to strong loan growth and decreased deposits.
STOCKHOLDERS' EQUITY
The table below presents the composition of the Company's stockholders' equity.
Common stock
Additional paid in capital
AOCI
TCE / TA ratio (non-GAAP)
* TCE is defined as total common stockholders' equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.
Due to the sharp increase in intermediate and long-term interest rates, the valuation of the Company’s AFS securities portfolio and certain hedged financial instruments declined significantly. The valuation change, net of taxes, that flows through the Company’s AOCI was a net decline of $27.3 million for the first quarter of 2022.
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As of March 31, 2022, the Company has purchased 471,585 shares under the program and all shares purchased have been retired.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $73.9 million during the first quarter of 2022. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.
At March 31, 2022, the subsidiary banks had 27 lines of credit totaling $482.5 million, of which $31.5 million was secured and $451.0 million was unsecured. At March 31, 2022, the full $451.0 million was available.
At December 31, 2021, the subsidiary banks had 31 lines of credit totaling $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, the full $517.7 million was available.
The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2022. At March 31, 2022, the full $25.0 million was available.
As of March 31, 2022, the Company had $620.8 million in average correspondent banking deposits spread over 188 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.
Investing activities used cash of $177.1 million during the first quarter of 2022, compared to $36.5 million for the same period of 2021. The net decrease in interest-bearing deposits at financial institutions was $18.5 million for the first quarter of 2022, compared to a net increase of $32.9 million for the same period of 2021. Proceeds from calls, maturities, and paydowns of securities were $17.3 million for the first three months of 2022, compared to $68.3 million for the same period of 2021. Purchases of securities used cash of $52.4 million for the first three months of 2022, compared to $53.6 million for the same period of 2021. There were no proceeds from the sales of securities in the first three months of 2022. Proceeds from sales of securities were $19.5 million for the first three months of 2021. The net increase in loans/leases used cash of $148.5 million for the first three months of 2022 compared to $108.0 million for the same period of 2021.
Financing activities provided cash of $183.2 million for the first three months of 2022, compared to $42.8 million for same period of 2021. Net increases in deposits totaled $83.1 million for the first three months of 2022, compared to $32.6 million for the same period of 2021. During the first three months of 2022, the Company's short-term borrowings decreased $2.6 million, compared to an increase in short-term borrowings of $1.4 million for the same period of 2021. There were no long-term FHLB advances during the first three months of 2022 and 2021. There were no maturities and principal payments on FHLB term advances in the first three months of 2022 and 2021. Net increase in overnight advances totaled $275.0 million for the first three months of 2022. In the first three months of 2021, the Company increased overnight FHLB advances by $10.0 million.
Total cash provided by operating activities was $6.9 million for the first three months of 2022, compared to $11.1 million for the same period of 2021.
Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities and, most recently, subordinated notes.
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 9 of the Consolidated Financial Statements for additional information regarding regulatory capital.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
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)
(0.1)
200 basis point upward shift
0.9
3.1
2.5
300 basis point upward shock
(30.0)
6.2
11.6
10.3
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at March 31, 2022 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
58
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of March 31, 2022. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A Risk Factors
There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The program was paused for a period of time during the pandemic and then restarted in March 2022. All shares repurchased under the share repurchase program during the first quarter were retired.
Total number of shares
Maximum number
purchased as part of
of shares that may yet
Total number of
Average price
publicly announced
be purchased under
Period
shares purchased
paid per share
plans or programs
the plans or programs
January 1-31, 2022
405,915
February 1-28, 2022
March 1-31, 2022
77,500
$ 56.98
328,415
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 March 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three months ended March 31, 2022 and March 31, 2021; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and March 31, 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2022 and March 31, 2021; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and March 31, 2021; and (vi) Notes to the Consolidated Financial Statements.
104
Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.
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
May 9, 2022
/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)