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, 2023
☐ 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, 2023, the Registrant had outstanding 16,718,077 shares of common stock, $1.00 par value per share.
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, 2023 and December 31, 2022
4
Consolidated Statements of Income For the Three Months Ended March 31, 2023 and 2022
5
Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2023 and 2022
6
Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended March 31, 2023 and 2022
7
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2023 and 2022
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
27
Note 8. Business Segment Information
29
Note 9. Regulatory Capital Requirements
30
Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
32
General
Critical Accounting Policies and Critical Accounting Estimates
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
46
Financial Condition
Investment Securities
2
Loans/Leases
47
Allowance for Credit Losses on Loans/Leases and OBS Exposures
49
Nonperforming Assets
51
Deposits
52
Borrowings
53
Stockholders' Equity
54
Liquidity and Capital Resources
55
Special Note Concerning Forward-Looking Statements
57
Item 3
Quantitative and Qualitative Disclosures About Market Risk
59
Item 4
Controls and Procedures
61
Part II
OTHER INFORMATION
Legal Proceedings
62
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
63
Signatures
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, 2023 and December 31, 2022
March 31,
December 31,
2023
2022
(dollars in thousands)
Assets
Cash and due from banks
$
64,295
59,723
Federal funds sold
16,365
56,910
Interest-bearing deposits at financial institutions
237,632
67,360
Securities held to maturity, at amortized cost, net of allowance for credit losses
561,969
587,142
Securities available for sale, at fair value
315,477
340,960
Total securities
877,446
928,102
Loans receivable held for sale
140,633
1,480
Loans/leases receivable held for investment
6,049,389
6,137,391
Gross loans/leases receivable
6,190,022
6,138,871
Less allowance for credit losses
(86,573)
(87,706)
Net loans/leases receivable
6,103,449
6,051,165
Bank-owned life insurance
107,287
106,580
Premises and equipment, net
117,641
117,948
Restricted investment securities
31,914
42,501
Other real estate owned, net
133
Goodwill
138,474
137,607
Intangibles
15,993
16,759
Derivatives
130,350
177,631
Other assets
195,997
186,418
Total assets
8,036,904
7,948,837
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
1,189,858
1,262,981
Interest-bearing
5,311,805
4,721,236
Total deposits
6,501,663
5,984,217
Short-term borrowings
1,100
129,630
Federal Home Loan Bank advances
135,000
415,000
Subordinated notes
232,746
232,662
Junior subordinated debentures
48,634
48,602
150,401
200,701
Other liabilities
165,866
165,301
Total liabilities
7,235,410
7,176,113
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 March 2023 and December 2022 - no shares issued or outstanding
—
Common stock, $1 par value; shares authorized 20,000,000 March 2023 - 16,713,775 shares issued and outstanding December 2022 - 16,795,942 shares issued and outstanding
16,714
16,796
Additional paid-in capital
368,302
370,712
Retained earnings
472,051
450,114
Accumulated other comprehensive (loss):
Securities available for sale
(38,378)
(44,677)
(17,195)
(20,221)
Total stockholders' equity
801,494
772,724
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 31, 2023 and 2022
(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees:
Taxable
66,634
37,428
Nontaxable
17,312
6,768
Securities:
3,366
2,398
5,337
4,150
821
513
281
234
Total interest and dividend income
94,217
51,062
Interest expense:
29,780
3,137
99
3,521
82
3,311
1,554
696
556
Total interest expense
37,407
5,329
Net interest income
56,810
45,733
Provision for credit losses
3,928
(2,916)
Net interest income after provision for credit losses
52,882
48,649
Noninterest income:
Trust fees
2,906
2,963
Investment advisory and management fees
879
1,036
Deposit service fees
2,028
1,555
Gains on sales of residential real estate loans, net
312
493
Gains on sales of government guaranteed portions of loans, net
19
Capital markets revenue
17,023
6,422
Securities losses, net
(463)
Earnings on bank-owned life insurance
707
346
Debit card fees
1,466
1,007
Correspondent banking fees
391
277
Loan related fee income
651
480
Fair value gain (loss) on derivatives
(427)
906
Other
339
129
Total noninterest income
25,842
15,633
Noninterest expense:
Salaries and employee benefits
32,003
23,627
Occupancy and equipment expense
5,914
3,937
Professional and data processing fees
3,514
3,671
Acquisition costs
1,851
Post-acquisition compensation, transition and integration costs
207
FDIC insurance, other insurance and regulatory fees
1,374
1,310
Loan/lease expense
267
Net income from and gains/losses on operations of other real estate
(67)
(1)
Advertising and marketing
1,237
761
Communication and data connectivity
665
403
Supplies
305
246
Bank service charges
605
541
Correspondent banking expense
210
199
Intangibles amortization
766
Payment card processing
545
262
Trust expense
214
187
737
571
Total noninterest expense
48,785
38,325
Net income before income taxes
29,939
25,957
Federal and state income tax expense
2,782
2,333
Net income
27,157
23,624
Basic earnings per common share
1.62
1.51
Diluted earnings per common share
1.60
1.49
Weighted average common shares outstanding
16,776,289
15,625,112
Weighted average common and common equivalent shares outstanding
16,942,132
15,852,256
Cash dividends declared per common share
0.06
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax
7,392
(29,170)
Less: reclassification adjusted for impairment losses included in net income before tax
(989)
Less reclassification adjustment for sales losses included in net income before tax
8,844
Unrealized gains (losses) on derivatives:
3,446
(6,858)
Less reclassification adjustment for caplet amortization before tax
(201)
(221)
3,647
(6,637)
Other comprehensive income (loss), before tax
12,491
(35,807)
Tax expense (benefit)
3,166
(8,467)
Other comprehensive income (loss), net of tax
9,325
(27,340)
Comprehensive income (loss)
36,482
(3,716)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
(Loss)
Total
Balance December 31, 2022
(64,898)
Other comprehensive income, net of tax
Common cash dividends declared, $0.06 per share
(1,010)
Repurchase and cancellation of 152,500 shares of common stock
(153)
(3,356)
(4,210)
(7,719)
as a result of a share repurchase program
Stock-based compensation expense
953
Issuance of common stock under employee benefit plans
71
(7)
64
Balance, March 31, 2023
(55,573)
Income (Loss)
Balance December 31, 2021
15,613
273,768
386,077
1,552
677,010
Impact of adoption of ASU 2016-13
Other comprehensive (loss), net of tax
(939)
Repurchase and cancellation of 77,500 shares of common stock
(77)
(1,338)
(3,000)
(4,415)
751
(811)
(767)
Balance, March 31, 2022
15,580
272,370
405,762
(25,788)
667,924
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
2,006
1,297
Deferred compensation expense accrued
1,272
1,026
Gains on other real estate owned, net
(85)
Amortization of premiums on securities, net
389
336
Caplet amortization
201
221
Fair value (gain) loss on derivatives
427
(906)
463
Loans originated for sale
(13,353)
(25,749)
Proceeds on sales of loans
13,766
27,121
Gains on sales of residential real estate loans
(312)
(493)
Gains on sales of government guaranteed portions of loans
(30)
(19)
Gains on sales and disposals of premises and equipment
(10)
Amortization of intangibles
Accretion of acquisition fair value adjustments, net
(828)
(118)
Increase in cash value of bank-owned life insurance
(707)
(346)
Increase in other assets
(13,148)
(16,243)
Decrease in other liabilities
(1,101)
(1,123)
Net cash provided by operating activities
21,764
6,946
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold
40,545
2,735
Net (increase) decrease in interest-bearing deposits at financial institutions
(170,272)
18,537
Proceeds from sales of other real estate owned
218
Activity in securities portfolio:
Purchases
(23,022)
(52,403)
Calls, maturities and redemptions
45,685
7,213
Paydowns
5,915
10,113
Sales
28,628
Activity in restricted investment securities:
(3,177)
(11,389)
Redemptions
13,764
20
Net increase in loans/leases originated and held for investment
(54,025)
(148,521)
Purchase of premises and equipment
(1,699)
(3,428)
Proceeds from sales of premises and equipment
37
Net cash used in investing activities
(117,440)
(177,086)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts
517,446
(83,083)
Net decrease in short-term borrowings
(128,530)
(2,610)
Activity in Federal Home Loan Bank advances:
Term advances
Net change in short-term and overnight advances
(415,000)
275,000
Payment of cash dividends on common stock
(1,013)
(935)
Proceeds from issuance of common stock, net
Repurchase and cancellation of shares
Net cash provided by financing activities
100,248
183,190
Net increase in cash and due from banks
4,572
13,050
Cash and due from banks, beginning
37,490
Cash and due from banks, ending
50,540
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest
38,053
6,271
Income/franchise taxes
(299)
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale and derivative instruments, net
Transfers of loans to other real estate owned
Due to broker for purchases of securities
7,533
Decrease in the fair value of back-to-back interest rate swap assets and liabilities
(46,248)
(119,357)
Dividends payable
1,010
939
Transfer of loans to loans held for sale
139,224
Measurement period adjustment to goodwill
867
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2023
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, 2022, included in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2023. 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, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023, 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
GFED: Guaranty Federal Bancshares, Inc.
Allowance: Allowance for credit losses
HTM: Held to maturity
AOCI: Accumulated other comprehensive income (loss)
LIBOR: London Inter-Bank Offered Rate
ASC: Accounting Standards Codification
LIHTC: Low-income housing tax credit
ASU: Accounting Standards Update
m2: m2 Equipment Finance, LLC
BOLI: Bank-owned life insurance
NIM: Net interest margin
Caps: Interest rate cap derivatives
NPA: Nonperforming asset
CECL: Current Expected Credit Losses
NPL: Nonperforming loan
Community National: Community National Bancorporation
OBS: Off-balance sheet
Company: QCR Holdings, Inc.
OREO: Other real estate owned
COVID-19: Coronavirus Disease 2019
OTTI: Other-than-temporary impairment
CRBT: Cedar Rapids Bank & Trust Company
PCAOB: Public Company Accounting Oversight Board
CRE: Commercial real estate
PCD: Purchase credit deteriorated loan
CSB: Community State Bank
PCI: Purchased credit impaired
C&I: Commercial and industrial
PPP: Paycheck Protection Program
EBA: Excess balance account
Provision: Provision for credit losses
EPS: Earnings per share
QCBT: Quad City Bank & Trust Company
Exchange Act: Securities Exchange Act of 1934, as
ROAA: Return on average assets
amended
ROAE: Return on average equity
FASB: Financial Accounting Standards Board
SEC: Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation
SFCB: Springfield First Community Bank
Federal Reserve: Board of Governors of the Federal
SFG: Specialty Finance Group
Reserve System
TA: Tangible Assets
FHLB: Federal Home Loan Bank
TBV: Tangible book value
FRB: Federal Reserve Bank of Chicago
TCE: Tangible common equity
Guaranty: Guaranty Bank, formerly known as Springfield First
TDRs: Troubled debt restructurings
Community Bank
TEY: Tax equivalent yield
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 GB. All four banks are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. The company also engages in wealth management services through its banking subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
The acquisition of GFED, the holding company of GB, headquartered in Springfield, Missouri, occurred on April 1, 2022 and on April 2, 2022, GB was merged into SFCB, the Company’s Springfield-based charter. The combined bank changed its name to Guaranty Bank. The financial results for the periods since the acquisition/merger are included in this report. See Note 2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for additional information about the acquisition and merger.
Recent 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. In December 2022, in response to the postponement of the cessation date of LIBOR, the FASB issued ASU 2022-06 which defers the sunset date of the ASU 2020-4 guidance to December 31, 2024, after which entities will no longer be permitted to apply the relief.
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. This standard was adopted on January 1, 2023 and did not have a significant impact on the Company’s financial statements.
Reclassifications: Certain amounts in the prior year’s Consolidated Financial Statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.
10
NOTE 2– INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31, 2023 and December 31, 2022 are summarized as follows:
Allowance
Gross
Amortized
for Credit
Unrealized
Fair
Cost
(Losses)
Gains
Value
March 31, 2023:
Securities HTM:
Municipal securities
561,099
(180)
10,578
(43,563)
527,934
Other securities
1,050
(18)
1,032
562,149
(43,581)
528,966
Securities AFS:
U.S. treasuries and govt. sponsored agency securities
21,697
16
(2,393)
19,320
Residential mortgage-backed and related securities
69,415
(6,311)
63,104
209,875
(39,294)
170,590
Asset-backed securities
18,087
(167)
17,967
48,562
(3,084)
44,496
367,636
79
(51,249)
December 31, 2022:
586,272
5,292
(56,798)
534,586
587,322
535,636
U.S. govt. sponsored agency securities
19,745
(2,783)
16,981
73,438
(7,223)
66,215
239,812
66
(46,700)
193,178
18,885
48
(205)
18,728
48,631
(2,800)
45,858
400,511
160
(59,711)
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, 2023 and December 31, 2022, are summarized as follows. Securities available-for-sale, for which an allowance for credit losses has been provided, are not included in these disclosures.
Less than 12 Months
12 Months or More
Losses
275,950
(33,259)
70,015
(10,304)
345,965
276,982
(33,277)
346,997
2,212
(4)
14,401
(2,389)
16,613
17,277
(814)
45,807
(5,497)
63,084
43,572
(3,340)
124,603
(35,954)
168,175
3,303
(5)
10,781
(162)
14,084
26,142
(1,612)
12,113
(1,472)
38,255
92,506
(5,775)
207,705
(45,474)
300,211
347,651
5,138
(326)
10,591
(2,457)
15,729
48,469
(3,327)
17,690
(3,896)
66,159
178,172
(42,661)
9,809
(4,039)
187,981
13,684
35,206
(2,404)
4,122
(396)
39,328
280,669
(48,923)
42,212
(10,788)
322,881
At March 31, 2023, the investment portfolio included 646 securities. Of this number, 524 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 10.2% of the total amortized cost of the portfolio. Of these 524 securities, there were 276 securities that had an unrealized loss for twelve months or more due to the current rate environment.
For the quarter ended March 31, 2023, the Company’s impairment evaluation determined that one publicly traded debt security experienced a decline in fair value due to credit quality, rather than market factors. As a result, the Company recognized a credit loss expense of $989 thousand and established an ACL on the related AFS security.
The following table presents the activity in the allowance for credit losses for held to maturity and available for sale securities by major security type for the three ended March 31, 2023 and 2022.
Three Months Ended March 31, 2023
Three Months Ended March 31, 2022
Securities HTM
Securities AFS
Municipal
Corporate
securities
Allowance for credit losses:
Beginning balance
180
198
Provision for credit loss expense
989
Balance, ending
12
All sales of securities for the three months ended March 31, 2023 were securities identified as AFS. There were no sales of securities for the three months ended March 31, 2022.
Three Months Ended
Proceeds from sales of securities
Gross gains from sales of securities
Gross losses from sales of securities
(507)
The amortized cost and fair value of securities as of March 31, 2023 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
9,064
9,149
Due after one year through five years
32,996
35,709
Due after five years
520,089
484,108
6,561
6,556
2,500
2,468
271,073
225,382
280,134
234,406
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:
268,957
242,766
206,954
167,686
47,610
43,559
254,564
211,245
As of March 31, 2023, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 85 issuers with fair values totaling $91.8 million and revenue bonds issued by 169 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $606.7 million. The Company also held investments in general obligation bonds in 18 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 29 states, including 12 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 118 issuers with fair values totaling $110.6 million and revenue bonds issued by 181 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $617.2 million. The Company also held
13
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 29 states, including 12 states in which the aggregate fair value exceeded $5.0 million.
Both general obligation and revenue bonds are diversified across many issuers. As of March 31, 2023 and as of December 31, 2022, the Company held revenue bonds of two issuers, both located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial conditions are strong and the sources of repayment are 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 the Company’s loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.
The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of March 31, 2023, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.
As of March 31, 2023, 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, 2023 and December 31, 2022 is presented as follows:
December 31, 2022
C&I:
C&I - revolving
307,612
296,869
C&I - other *
1,420,331
1,451,693
1,727,943
1,748,562
CRE - owner occupied
616,922
629,367
CRE - non-owner occupied
982,716
963,239
Construction and land development**
1,208,185
1,192,061
Multi-family**
969,870
963,803
Direct financing leases***
35,373
31,889
1-4 family real estate****
532,491
499,529
Consumer
116,522
110,421
Allowance for credit losses
*** Direct financing leases:
Net minimum lease payments to be received
39,075
34,754
Estimated unguaranteed residual values of leased assets
165
Unearned lease/residual income
(3,867)
(3,030)
Plus deferred lease origination costs, net of fees
174
226
35,547
32,115
(1,053)
(970)
34,494
31,145
* Includes equipment financing agreements outstanding at m2, totaling $286.1 million and $278.0 million as of March 31, 2023 and December 31, 2022, respectively.
** As of March 31, 2023, there were construction and land development and multi-family loans held for sale in preparation for securitization. The balances in these loan classes as of March 31, 2023 were $30.3 million and $108.9 million, 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 held for sale totaling $1.4 million and $1.5 million as of March 31, 2023 and December 31, 2022, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $27.2 million and $24.3 million at March 31, 2023 and December 31, 2022, respectively, and was included in other assets on the consolidated balance sheets.
Changes in discounts on acquired loans for the three months ended March 31, 2023 and 2022, respectively, are presented as follows:
For the Three Months Ended
March 31, 2022
Performing
Loans
Balance at the beginning of the period
(6,088)
(1,533)
Accretion recognized
849
161
Balance at the end of the period
(5,239)
(1,372)
The aging of the loan/lease portfolio by classes of loans/leases as of March 31, 2023 and December 31, 2022 is presented as follows:
As of March 31, 2023
Accruing Past
30-59 Days
60-89 Days
Due 90 Days or
Nonaccrual
Classes of Loans/Leases
Current
Past Due
More
C&I - other
1,406,944
4,718
3,899
15
4,755
612,379
1,899
2,644
980,498
2,218
Construction and land development
1,197,526
10,659
Multi-family
Direct financing leases
34,951
220
84
118
1-4 family real estate
529,263
865
76
2,287
116,030
67
159
266
6,155,073
7,769
4,218
22,947
As a percentage of total loan/lease portfolio
99.43
%
0.13
0.07
0.00
0.37
100.00
As of December 31, 2022
C&I
1,442,629
4,800
1,124
3,135
625,611
1,166
2,590
962,444
421
374
1,191,929
132
31,557
141
56
135
495,936
1,030
517
2,046
110,041
353
6,120,819
7,585
1,697
8,765
98.88
0.12
0.03
0.14
NPLs by classes of loans/leases as of March 31, 2023 and December 31, 2022 are presented as follows:
Percentage of
with an ACL
without an ACL
Total NPLs
-
3,891
864
4,770
20.77
2,197
447
11.52
1,267
951
9.66
9,292
1,367
46.42
0.51
1,893
394
9.96
1.16
18,924
4,023
22,962
2,775
360
3,140
35.80
1,738
852
29.53
68
306
4.26
80
1.54
1,641
405
23.33
4.03
6,787
1,978
8,770
The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2023 and 2022.
Changes in the ACL loans/leases by portfolio segment for the three months ended March 31, 2023 and 2022, 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
4,457
27,753
9,965
11,749
14,262
13,186
4,963
1,371
87,706
Reduction of ACL for writedown of LHFS to fair value
(354)
(1,355)
(1,709)
Provision
557
(668)
878
1,349
(210)
302
70
2,458
Charge-offs
(2,055)
(208)
(12)
(2,275)
Recoveries
382
1
393
4,637
26,637
9,089
12,632
15,245
11,621
5,270
1,442
86,573
* Included within the C&I – Other column are ACL on leases with a beginning balance of $970 thousand, provision of $69 thousand, charge-offs of $4 thousand and recoveries of $18 thousand. ACL on leases was $1.1 million as of March 31, 2023.
3,907
25,982
8,501
8,549
16,972
9,339
4,541
930
78,721
(288)
(331)
(609)
(820)
(2,301)
997
(387)
(110)
(3,849)
(449)
(456)
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 adoption impact 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.
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 :
3,657
303,955
998
3,639
C&I - other*
14,446
1,441,258
1,455,704
1,231
25,406
18,103
1,745,213
1,763,316
2,229
29,045
31,274
23,751
593,171
2,746
6,343
23,217
959,499
1,025
11,607
10,756
1,197,429
826
14,419
1,351
968,519
406
11,215
3,223
529,268
326
4,944
693
115,829
72
1,370
81,094
6,108,928
7,630
78,943
* Included within the C&I – Other category are leases individually evaluated of $118 thousand with a related allowance for credit losses of $36 thousand and leases collectively evaluated of $35.3 million with a related allowance for credit losses of $1.0 million.
3,386
293,483
961
3,496
9,358
1,474,224
1,483,582
1,445
26,308
12,744
1,767,707
1,780,451
2,406
29,804
32,210
24,880
604,487
2,853
7,112
21,588
941,651
869
10,880
10,394
1,181,667
14,249
1,302
962,501
395
12,791
3,177
496,352
317
4,646
741
109,680
75
1,296
74,826
6,064,045
6,928
80,778
* Included within the C&I – Other category are leases individually evaluated of $135 thousand with a related allowance for credit losses of $24 thousand and leases collectively evaluated of $31.8 million with a related allowance for credit losses of $946 thousand.
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, 2023 and December 31, 2022:
Non
Commercial
Owner-occupied
Owner-Occupied
Owner Occupied
Securities
Equipment
C & I:
3,552
105
5,738
209
102
7,983
414
9,290
8,088
23,685
31
3,192
121
562
23,894
35,476
3,820
424
* Included within the C&I – Other category are leases individually evaluated of $118 thousand with primary collateral of equipment.
3,281
1,589
108
7,289
162
4,870
7,394
24,814
3,144
120
608
25,024
33,437
3,818
175
* Included within the C&I – Other category are leases individually evaluated of $135 thousand with primary collateral of equipment.
For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans, certain 1-4 family residential loans and certain consumer 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 certain 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, 2023:
Term Loans
Amortized Cost Basis by Origination Year
Internally Assigned
Risk Rating
2021
2020
2019
Prior
Cost Basis
Pass (Ratings 1 through 5)
277,135
Special Mention (Rating 6)
26,820
Substandard (Rating 7)
Doubtful (Rating 8)
Total C&I - revolving
112,239
399,604
236,117
108,134
83,522
158,843
1,098,459
11,886
3,603
5,557
3,724
1,033
299
26,102
5,207
252
3,776
377
9,649
Total C&I - other
124,125
408,414
241,926
111,895
88,331
159,519
1,134,210
18,359
143,926
177,112
128,136
32,639
71,449
7,552
579,173
4,268
791
6,383
479
24
15,990
2,684
16,187
1,215
1,160
21,759
Total CRE - owner occupied
23,140
147,401
179,847
150,706
34,333
73,919
7,576
49,906
297,573
221,657
162,545
82,633
93,906
7,969
916,189
596
5,402
833
17,544
18,934
43,309
4,065
3,623
156
15,216
158
23,218
Total CRE - non-owner occupied
54,567
306,598
222,490
180,245
97,849
112,840
8,127
48,281
492,375
313,670
232,318
31,275
28,640
25,117
1,171,676
10,210
11,310
98
1,487
9,172
10,757
Total Construction and land development
49,479
493,862
333,052
1,193,743
15,948
237,962
250,949
222,923
135,619
103,474
127
967,002
1,517
Total Multi-family
250,990
224,233
137,136
37,624
55,100
56,644
31,349
12,218
9,792
5,380
208,107
Total 1-4 family real estate
55,127
12,222
208,138
97
499
743
711
831
9,406
12,320
45
282
106
444
Total Consumer
142
781
722
937
12,764
305,025
1,650,145
1,285,692
931,468
401,179
489,121
363,345
5,425,975
Delinquency Status *
43,765
145,880
62,307
22,270
6,566
1,176
281,964
Nonperforming
2,666
1,390
4,157
148,546
63,697
22,334
6,603
286,121
3,059
10,978
331
14,442
5,256
15,409
4,710
4,926
3,753
1,201
35,255
28
22
Total Direct financing leases
4,738
4,948
3,767
1,255
23,843
61,010
90,018
74,002
16,392
56,749
83
322,097
512
460
672
2,256
61,143
90,530
74,481
16,852
57,421
324,353
6,041
12,171
3,329
3,340
945
2,379
75,460
103,665
93
12,178
2,420
75,505
103,758
81,964
248,254
162,625
105,113
28,170
62,333
75,588
764,047
* 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 table shows the gross charge-offs of loans and leases by class of receivable and year of origination for the three months ended March 31, 2023:
Gross Charge-off by Origination Year
740
794
2,051
208
752
489
204
2,275
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of December 31, 2022:
2018
275,888
17,595
496,445
279,412
127,803
87,054
59,675
105,184
1,155,573
9,542
679
901
723
308
12,153
125
661
4,535
310
5,924
506,174
280,216
129,365
92,312
59,985
105,598
1,173,650
146,211
182,440
142,596
33,571
27,088
45,993
13,460
591,359
6,190
6,379
484
1,346
269
14,668
3,750
171
16,336
1,396
1,197
490
23,340
156,151
182,611
165,311
35,451
28,285
47,829
13,729
310,163
221,953
173,478
89,337
56,898
40,923
7,510
900,262
2,824
882
18,920
12,917
6,198
41,741
5,651
157
15,217
211
21,236
318,638
222,835
192,555
104,554
69,815
47,121
7,721
479,016
330,434
240,778
31,607
30,300
29,647
1,141,782
1,465
9,200
10,665
10,262
480,613
349,896
1,162,841
237,839
254,056
224,920
134,378
99,695
7,875
2,227
960,990
1,467
1,511
254,100
226,222
135,845
61,953
57,731
33,737
12,687
5,813
6,002
5,855
183,778
61,981
12,692
183,811
511
801
122
254
621
10,226
13,028
112
793
505
366
13,434
1,762,189
1,348,190
988,473
412,583
294,259
215,046
366,274
5,387,014
21
170,180
69,694
25,540
8,066
1,804
275,363
1,110
1,320
155
95
2,680
171,290
71,014
25,695
8,161
278,043
28,785
29,220
14,578
5,172
5,700
4,398
1,536
31,754
88
5,204
5,788
4,405
1,544
69,094
92,762
75,153
17,089
11,381
48,136
90
313,705
524
487
279
448
2,013
69,361
93,286
75,640
17,368
11,389
48,584
315,718
14,685
3,844
3,717
1,123
1,140
1,325
70,974
96,808
110
179
14,692
1,143
1,384
71,084
96,987
298,706
173,708
110,850
31,060
15,942
50,417
71,174
751,857
During the quarter ended March 31, 2023, there were no modifications of loans and leases made to borrowers experiencing financial difficulty.
Changes in the ACL for OBS exposures for the three months ended March 31, 2023 and 2022 are presented as follows:
5,552
6,886
Provisions (credited) to expense
481
933
6,033
7,819
NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES
Derivatives are summarized as follows as of March 31, 2023 and December 31, 2022:
Assets:
Interest rate caps - hedged
6,714
8,327
Interest rate caps
1,786
2,213
Interest rate swaps - hedged
1,484
477
Interest rate swaps
120,366
166,614
Interest rate collars - hedged
(57)
(263)
(29,978)
(33,824)
(120,366)
(166,614)
(150,401)
(200,701)
The Company uses interest rate swap, cap and collar 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
(50)
1/1/2024
515
714
50,000
1.57
1,191
1,566
1.80
783
1/1/2025
1,264
2,253
2,700
1,127
1,350
225,000
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:
1/3/2023
1.90
2/1/2020
2/1/2024
635
822
3/1/2020
3/3/2025
1,151
1,388
75,000
The Company uses interest rate collars in an effort to manage future interest rate exposure on variable rate loans. The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap. The collar is designated as a cash flow hedge in accordance with ASC 815. The details of the interest rate collars are as follows:
Cap Strike Rate
Floor Strike Rate
10/1/2022
10/1/2026
Derivatives - Liabilities
4.40
2.44
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
35,000
1.40
4.86
(4,809)
(5,646)
(6,871)
(8,066)
40,000
(5,508)
(6,464)
1.30
4.87
(3,403)
(4,018)
4/1/2022
4/1/2027
15,000
1.91
(1,144)
(3,129)
(3,812)
(2,190)
(2,669)
300,000
(35,631)
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
10,000
7.60
5.85
464
QCR Holdings Statutory Trust III
8,000
223
372
QCR Holdings Statutory Trust V
7/7/2018
7/7/2028
6.38
4.54
459
Community National Statutory Trust II
9/20/2018
9/20/2028
3,000
7.13
5.17
140
Community National Statutory Trust III
9/15//2018
9/15/2028
3,500
6.62
4.75
96
163
Guaranty Bankshares Statutory Trust I
9/15/2018
4,500
124
Guaranty Statutory Trust II*
5/23/2019
2/23/2026
10,310
6.37
4.09
400
49,310
2,284
*Acquired on 4/1/2022 with GFED acquisition.
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
2,855,239
2,528,949
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, 2023 and March 31, 2022 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
(1,581)
Interest rate swaps and collars on variable rate loans
471
Interest rate swaps on junior subordinated debentures
(227)
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
1,661
3,954
8,227
5,987
29,257
11,602
38,756
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 ratings 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, 2023 and March 31, 2022:
For the Three Months Ended March 31,
% of
Pretax
Amount
Income
Computed "expected" tax expense
6,287
21.0
5,451
Tax exempt income, net
(3,216)
(10.7)
(2,222)
(8.6)
(148)
(0.5)
(73)
(0.3)
State income taxes, net of federal benefit, current year
1,189
4.0
1,291
5.0
Provision adjustment from accounting method change
(1,181)
(4.5)
Tax credits
(177)
(0.6)
(242)
(0.9)
Income from tax credit equity investments
(413)
(1.4)
(301)
(1.2)
130
0.5
Excess tax benefit on stock options exercised and restricted stock awards vested
(398)
(1.3)
(434)
(1.7)
(342)
(86)
9.3
9.0
NOTE 6 - EARNINGS PER SHARE
The following information was used in the computation of EPS on a basic and diluted basis:
Three months ended
Basic EPS
Diluted EPS
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan*
165,843
227,144
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, 2023 and December 31, 2022:
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
445,827
Total liabilities measured at fair value
518,591
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, swaps and collars are used for the purpose of hedging interest rate risk on various financial assets and liabilities, further described in Note 4 to the Consolidated Financial Statements. Interest rate swaps are also executed for select commercial customers. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (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 comprised the following at March 31, 2023 and December 31, 2022:
Level 1
Level 2
Level 3
Loans/leases evaluated individually
42,354
OREO
181,644
30,765
144
30,909
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.
Loans receivable held for sale are valued at the lower of cost or fair value in the aggregate by type and are classified as Level 3 in the fair value hierarchy. Fair value is estimated considering the loans have a floating interest rate with a spread that is commensurate with current market pricing, in addition to factoring in a discount for credit risk.
OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as a Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraise and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.
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
Market prices for similar loans
Market price adjustments
n/a
-35.00
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.
For the loans receivable held for sale, the Company records carrying value at fair value factoring in a discount for credit risk.
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, 2023 and 2022.
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
178,441
181,578
28,486
5,925,008
5,749,501
6,022,679
5,896,443
Nonmaturity deposits
5,288,242
5,199,633
Time deposits
1,213,421
1,201,496
784,584
766,294
FHLB advances
138,588
249,647
250,613
40,368
41,545
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 GB. 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, 2023 and 2022:
Commercial Banking
Intercompany
Consolidated
QCBT
CRBT
CSB
GB*
All other
Eliminations
Total revenue
33,124
43,123
16,568
27,621
34,669
(35,046)
120,059
16,988
17,179
10,890
15,372
(3,963)
344
Provision for loan/lease losses
1,573
1,516
492
347
Net income (loss) from continuing operations
7,038
16,400
4,760
5,387
27,680
(34,108)
14,980
9,888
110,383
1,108
1,878
13,007
2,548,473
2,196,560
1,286,227
2,147,776
1,116,694
(1,258,826)
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)
9,970
11,129
4,126
3,104
23,827
(28,532)
45,975
74,066
1,583
2,497
4,776
8,856
2,195,894
1,947,737
1,184,708
956,345
839,362
(948,227)
6,175,819
* On April 1, 2022, the Company acquired GFED and merged its subsidiary bank, Guaranty Bank, into Springfield First Community Bank with the combined bank operating under the Guaranty Bank name.
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, 2023 and December 31, 2022, 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, 2023 and
December 31, 2022 are presented in the following tables (dollars in thousands). As of March 31, 2023 and December 31, 2022, 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, 2023:
Company:
Total risk-based capital
1,078,343
14.68
587,728
>
8.00
771,392
10.50
734,659
10.00
Tier 1 risk-based capital
754,221
10.27
440,796
6.00
624,460
8.50
Tier 1 leverage
9.73
310,214
4.00
387,768
5.00
Common equity Tier 1
705,587
9.60
330,597
4.50
514,262
7.00
477,529
6.50
Quad City Bank & Trust:
282,911
13.15
172,050
225,816
215,063
256,016
11.90
129,038
182,804
11.06
92,599
115,748
96,778
150,544
139,791
Cedar Rapids Bank & Trust:
323,605
16.24
159,422
209,241
199,277
298,757
14.99
119,566
169,386
13.95
85,658
107,073
89,675
139,494
129,530
Community State Bank:
147,754
12.53
94,349
123,833
117,936
133,007
11.28
70,762
100,246
10.45
50,899
63,624
53,071
82,555
76,659
Guaranty Bank:
246,979
12.41
159,267
209,038
199,084
223,668
11.23
119,450
169,221
11.02
81,171
101,464
89,588
139,359
129,404
As of December 31, 2022:
1,055,177
14.28
591,132
775,861
738,915
734,977
9.95
443,349
628,078
9.61
305,959
382,449
686,375
9.29
332,512
517,241
480,295
275,337
13.07
168,588
221,272
210,735
248,978
11.81
126,441
179,125
11.01
90,419
133,023
94,831
147,514
136,978
308,153
14.84
166,168
218,096
207,711
282,258
13.59
124,626
176,554
13.17
85,707
107,134
93,470
145,397
135,012
142,974
12.04
94,981
124,662
118,726
128,130
10.79
71,236
100,917
10.09
50,799
63,499
53,427
83,108
77,172
243,106
12.24
158,903
208,560
198,629
218,647
119,177
168,834
10.90
80,229
100,286
89,383
139,040
129,109
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, 2023. 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 thirty years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of March 31, 2023, the Company had $8.0 billion in consolidated assets, including $6.1 billion in net loans/leases, and $6.5 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.
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:
A more detailed discussion of these critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
EXECUTIVE OVERVIEW
The Company reported net income of $27.2 million and diluted EPS of $1.60 for the quarter ended March 31, 2023. By comparison, for the quarter ended December 31, 2022 the Company reported net income of $30.9 million and diluted EPS of $1.81. For the quarter ended March 31, 2022, the Company reported net income of $23.6 million, and diluted EPS of $1.49.
The first quarter of 2023 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
30,906
1.81
17,047,976
The Company reported adjusted net income (non-GAAP) of $28.0 million, with adjusted diluted EPS of $1.65 for the three months ended March 31, 2023. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the three months ended March 31, 2023 excludes a number of non-recurring items, after-tax, as set forth in the GAAP to Non-GAAP Reconciliation section, most significantly $366 thousand of securities losses, fair value loss on derivatives of $337 thousand and post-acquisition compensation, transition and integration costs of $164 thousand.
The increase in weighted average common shares outstanding when comparing the three months ended March 31, 2023 to March 31, 2022 was primarily due to the common stock issuance in connection with the acquisition of GFED on April 1, 2022.
Following is a table that represents the major income and expense categories for the Company:
65,218
Noninterest income
21,219
Noninterest expense
49,697
5,834
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 may 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, 2022. 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
3.3
14.6
Fee income growth ***
Fee income growth
> 6% annually
30.0
(21.5)
(41.3)
Improve operational efficiencies and hold noninterest expense growth
Noninterest expense growth
< 5% annually
7.5
18.8
(4.1)
* 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 the initial loan balances from the GFED acquisition.
***Fee income growth and noninterest expense growth are both impacted by the GFED acquisition.
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 2023 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 and adjusted ROAE”, “NIM (TEY)”, “adjusted NIM (TEY)” and “efficiency ratio”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
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.
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
154,467
154,366
82,922
TCE (non-GAAP)
647,027
618,358
585,002
Total assets (GAAP)
TA (non-GAAP)
7,882,437
7,794,471
6,092,897
TCE/TA ratio (non-GAAP)
8.21
7.93
For the Quarter Ended
ADJUSTED NET INCOME
Net income (GAAP)
Less non-core items (post-tax) (*):
Income:
(366)
Fair value gain(loss) on derivatives
(337)
(211)
715
Total non-core income (non-GAAP)
(703)
Expense:
(517)
1,462
164
529
Total non-core expense (non-GAAP)
Adjusted net income (non-GAAP)
28,024
31,129
24,371
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)
16,855,973
Adjusted EPS (non-GAAP):
Basic
1.67
1.85
1.56
Diluted
1.65
1.83
ADJUSTED ROAA and ADJUSTED ROAE (non-GAAP)
Average Assets
7,906,830
7,800,229
6,115,127
Adjusted ROAA (non-GAAP)
1.42
1.59
Adjusted ROAE (non-GAAP)
14.11
16.44
14.25
ADJUSTED NIM (TEY)*
Net interest income (GAAP)
Plus: Tax equivalent adjustment
6,057
5,554
2,933
Net interest income - tax equivalent (non-GAAP)
62,867
70,772
48,666
Less: Acquisition accounting net accretion
828
5,688
Adjusted net interest income
62,039
65,084
48,548
Average earning assets
7,247,605
7,148,578
5,625,813
NIM (GAAP)
3.18
3.62
3.30
NIM (TEY) (non-GAAP)
3.52
3.93
3.50
Adjusted NIM (TEY) (non-GAAP)
3.47
3.61
EFFICIENCY RATIO
Noninterest expense (GAAP)
Noninterest income (GAAP)
Total income
82,652
86,437
61,366
Efficiency ratio (noninterest expense/total income) (non-GAAP)
59.02
57.50
62.45
* Nonrecurring items (after-tax) are calculated using an estimated effective federal tax rate of 21% with the exception of acquisition costs which have an estimated effective federal tax rate of 13.62%.
NET INTEREST INCOME - (TAX EQUIVALENT BASIS)
Net interest income, on a GAAP basis, increased 24% for the quarter ended March 31, 2023 compared to the same quarter of the prior year. Net interest income, on a tax equivalent basis (non-GAAP), increased 29% to $62.9 million for the quarter ended March 31, 2023 compared to the same quarter of the prior year. Net interest income improved with the GFED acquisition and strong organic loan growth.
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
GAAP
Tax Equivalent Basis
Average Yield on Interest-Earning Assets
5.20
4.41
3.63
5.60
5.53
3.88
Average Cost of Interest-Bearing Liabilities
2.71
1.28
0.55
2.74
2.13
0.56
Net Interest Spread
2.49
3.13
3.08
2.86
3.40
3.32
NIM (TEY) (Non-GAAP)
3.49
NIM Excluding Acquisition Accounting Net Accretion
3.09
3.36
3.25
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
For the Year Ended
Acquisition Accounting Net Accretion in NIM
8,581
1,340
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
ASSETS
Interest earning assets:
19,275
4.93
4,564
0.15
73,584
4.53
69,328
0.20
Investment securities (1)
951,865
10,157
4.27
802,260
7,682
3.83
37,766
5.43
22,183
5.06
Gross loans/leases receivable (1) (2) (3)
6,165,115
88,548
5.82
4,727,478
45,995
3.95
Total interest earning assets
100,273
53,995
Noninterest-earning assets:
71,315
53,684
Premises and equipment
118,097
79,501
Less allowance
(87,924)
(78,899)
557,737
435,028
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
4,067,405
23,776
2.37
3,228,083
2,338
0.29
869,912
6,003
2.80
398,897
799
0.81
7,573
5.28
1,951
0.05
296,333
85,778
0.38
232,679
5.69
113,868
5.46
48,613
5.72
38,171
5.83
Total interest-bearing liabilities
5,522,515
37,406
3,866,748
Noninterest-bearing demand deposits
1,242,327
1,276,374
Other noninterest-bearing liabilities
347,303
287,879
7,112,145
5,431,001
Stockholders' equity
794,685
684,126
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
131.24
145.49
39
Analysis of Changes of Interest Income/Interest Expense
For the Three Months Ended March 31, 2023
Inc./(Dec.)
Components
from
of Change (1)
Prior Period (1)
Rate
Volume
2023 vs. 2022
INTEREST INCOME
232
786
784
Investment securities (2)
2,475
Gross loans/leases receivable (2) (3)
42,553
25,910
16,643
Total change in interest income
46,278
29,423
16,855
INTEREST EXPENSE
21,438
20,688
750
3,515
1,689
3,439
2,834
1,757
(70)
Total change in interest expense
32,077
27,131
4,946
Total change in net interest income
14,201
2,292
11,909
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, capital markets revenue, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
RESULTS OF OPERATIONS
Interest income increased $43.2 million, comparing the first quarter of 2023 to the same period of 2022. Interest income (tax equivalent) increased $46.3 million, comparing the first quarter of 2023 to the same period of 2022. This was primarily due to the GFED acquisition, but also due to continued organic loan growth and repricing of the Company’s floating rate loan portfolio with the rapidly rising interest rates.
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 increased $32.1 million, comparing the first quarter of 2023 to the same period of 2022. The increase is primarily due to the GFED acquisition in conjunction with a significant increase in cost of funds given the sharp rising rate environment. The Company’s cost of funds was 2.74% for the quarter ended March 31, 2023, which was up from 0.56% for the quarter ended March 31, 2022. The Company has experienced a shift in mix from noninterest and low interest bearing deposits to higher cost funding.
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, 2023 and 2022.
Provision for credit losses - loans and leases
Provision for credit losses - off-balance sheet exposures
Provision for credit losses - held to maturity securities
Provision for credit losses - available for sale securities
Total provision for credit losses
The Company had total provision for credit losses on loans and leases of $2.5 million for the first three months of 2023, which was up from a negative $3.8 million in the first three months of 2022. The negative provision for the three months ended March 31, 2022 was related to the elimination of the qualitative factor associated with the COVID pandemic. The increase in provision from that period last year was substantially due to the removal of that factor. The provision related to OBS was $481 thousand for the first three months of 2023 compared to $933 thousand for the for the first three months of 2022. The decrease was due to the decrease in the balance of those OBS exposures. There was no provision related to HTM securities for the first three months of 2023 or 2022. The provision related to AFS securities was $989 thousand for the first three months of 2023 as compared to no provision for the first three months of 2022. The increase was entirely due to an impairment of a subordinated debt investment in a recently failed bank. This was a legacy investment acquired as part of the 2022 GFED acquisition and an allowance was established for the entire balance of the bond.
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 and Critical Accounting Estimates” section.
The Company had an ACL on loans/leases held for investment of 1.43% of total gross loans/leases held for investment at March 31, 2023, compared to 1.43% at December 31, 2022 and 1.55% at March 31, 2022. Management evaluates the allowance needed on the loans acquired prior to the adoption of ASU 2016-13 on January 1, 2021, factoring in the remaining discount, which was $5.2 million and $2.5 million at March 31, 2023 and March 31, 2022, respectively.
Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.
NONINTEREST INCOME
The following table sets forth the various categories of noninterest income for the three months ended March 31, 2023 and 2022.
$ Change
% Change
(1.9)
(157)
(15.2)
473
30.4
(181)
(36.7)
57.9
10,601
165.1
Securities gains (losses), net
(100.0)
361
104.3
45.6
114
41.2
35.6
(1,333)
147.1
162.8
10,209
65.3
The Company continues to be successful in expanding its wealth management client base. Trust fees continue to be a significant contributor to noninterest income. Assets under management increased by $291.1 million in the first quarter of 2023 and increased by $585.5 million since March 31, 2022. 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 fees are determined based on the market value of the investments within the fully-managed trusts. Trust fees decreased 2%, comparing the first quarter of 2023 to the same period of the prior year due to market volatility. The Company expects trust fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.
Investment advisory and management fees decreased 15%, comparing the first quarter of 2023 to the same period of the prior year. Similar to trust fees, investment advisory and management fees are largely determined based on the market value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.
Deposit service fees increased 30% comparing the first quarter of 2023 to the same period of the prior year. This increase was primarily due to the GFED acquisition. The Company continues to focus on expanding its core deposit base. The Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees.
Gains on sales of residential real estate loans, net, decreased 37% when comparing the first quarter of 2023 to the same period of the prior year. The decrease was primarily due to decreased volume of residential real estate purchases and the refinancing of residential real estate loans with a sharp increase in mortgage rates.
Gains on sales of government-guaranteed portions of loans for the first quarter of 2023 increased 58% as compared to the same period of the prior year. The increase was primarily due to the GFED acquisition with GB having a larger focus on this business.
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.
Capital markets revenue totaled $17.0 million for the first quarter of 2023, compared to $6.4 million for the first quarter of 2022. The increase was primarily due to higher capital markets revenue from swap fees as the project delays our clients have been experiencing in recent quarters due to ongoing supply chain disruptions, inflationary pressures and higher interest rates have begun to subside and several previously delayed projects funded during the first quarter. Swap fees relative to the increase in notional amount of the non-hedging interest rate swap contracts was 5.2% for the three months ended March 31, 2023, and 14.2% for the same period of the prior year. The decrease in the ratio was primarily due to the steepening of the yield curve. 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 fees 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.
Securities losses totaled $463 thousand for the three months ended March 31, 2023. There were no securities gains or losses for the three months ended March 31, 2022. The Company sold $29 million of securities during the three months ended March 31, 2023. The securities sold were part of a strategy to partially deleverage the balance sheet with a rapid earn back of the modest loss before the end of the calendar year.
Earnings on BOLI increased 104% comparing the first quarter of 2023 to the first quarter of 2022. There were no purchases of BOLI in the first quarter of 2023. BOLI purchases totaled $10.0 million in 2022 and also increased due to the GFED acquisition. 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 46% comparing the first quarter of 2023 to the same period of the prior year. The increase was primarily due to the GFED acquisition. The fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 41% comparing the first quarter of 2023 to the same period of the prior year. The increase was primarily due to a shift of correspondent banking balances from non-interest bearing accounts to interest bearing accounts. Fees from correspondent banks generally increase when non-interest bearing account balances decrease. 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 182 banks in Iowa, Illinois, Missouri and Wisconsin.
Loan related fee income increased 36% comparing the first quarter of 2023 to the same period of the prior year. The increase was primarily due to the increase in loan volume with the GFED acquisition.
Fair value gain (loss) on derivatives was $427 thousand in losses in the first quarter of 2023, as compared to $906 thousand in gains in the same period of the prior year due to the rapidly rising interest rate environment. The Company uses cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates. See Note 4 to the Consolidated Financial Statements for additional information.
Other noninterest income increased 163% comparing the first quarter of 2023 to the first quarter of the prior year. The increase was primarily due to higher equity investment income.
43
NONINTEREST EXPENSE
The following tables set forth the various categories of noninterest expense for the three months ended March 31, 2023 and 2022.
8,376
35.5
1,977
50.2
(4.3)
(1,851)
100.0
4.9
289
108.2
Net income from and gains/losses on operations of real estate
(66)
6,600.0
476
62.5
65.0
24.0
11.8
5.5
273
55.4
283
108.0
14.4
166
29.1
10,460
27.3
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 post-acquisition compensation, transition, and integration cost impacted expense in 2023 and 2022.
Salaries and employee benefits, which is the largest component of noninterest expense, increased from the first quarter of 2022 to the first quarter of 2023 by 36%. The increased expense was primarily related to the GFED acquisition, which resulted in an increase of 165 full-time equivalent employees.
Occupancy and equipment expense increased 50% comparing the first quarter of 2023 to the same period of the prior year. The increase was due to higher depreciation expense and computer hardware expense related to the GFED acquisition.
Professional and data processing fees decreased 4% comparing the first quarter of 2023 to the same period in 2022. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.
There were no acquisition costs incurred in the three months ending March 31, 2023. Acquisition costs totaled $1.9 million the first quarter of 2022. The acquisition costs, which were primarily legal, accounting and other professional fees, relate to the acquisition of GFED.
Post-acquisition compensation, transition and integration costs totaled $207 thousand in the first quarter of 2023. These costs were comprised primarily of IT integration and data conversion costs related to the acquisition of GFED. There were no post-acquisition compensation, transition and integration costs in the first quarter of 2022.
FDIC insurance, other insurance and regulatory fee expense increased 5%, comparing the first quarter of 2023 to the first quarter of 2022. The increase in expense was due to a 30% increase in the asset size of the Company in 2022, which increased the Company’s insurance rates and expenses.
Loan/lease expense increased 108% when comparing the first quarter of 2023 to the same quarter of 2022. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net 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 $67 thousand for the first quarter of 2023, compared to net income from and gains/losses on operations of other real estate of $1 thousand for the first quarter of 2022. The gain on sale of OREO for the three months ended March 31, 2023, was related to the sale of three properties.
Advertising and marketing expense increased 63% comparing the first quarter of 2023 to the first quarter of 2022. The increase in expense was primarily due to the GFED acquisition.
Communication and data connectivity expense increased 65% comparing the first quarter of 2023 to the first quarter of 2022. The increase is primarily due to the GFED acquisition.
Supplies expense increased 24% comparing the first quarter of 2023 to the first quarter of 2022. This increase is primarily due to the GFED acquisition.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 12% when comparing the first quarter of 2023 to the same quarter of 2022. 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 increased 6% when comparing the first quarter of 2023 to the first quarter of 2022. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.
Intangibles amortization expense increased 55% when comparing the first quarter of 2023 to the same quarter of 2022. The increase is due to the GFED acquisition. These expenses will naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.
Payment card processing expense increased 108% when comparing the first quarter of 2023 to the same quarter of 2022. The increase is due to the GFED acquisition.
Trust expense increased 14% when comparing the first quarter of 2023 to the same quarter of 2022. The increase was due to new relationships added in 2023 totaling $185.1 million of new assets under management.
Other noninterest expense increased 29% when comparing the first quarter of 2023 to the first quarter of 2022, primarily due to the GFED acquisition. Included in other noninterest expense are items such as meals and entertainment, subscriptions, sales and use tax and expenses related to wealth management.
INCOME TAXES
In the first quarter of 2023, the Company incurred income tax expense of $2.8 million. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 5 to the Consolidated Financial Statements for additional detail.
FINANCIAL CONDITION
Following is a table that represents the major categories of the Company’s balance sheet.
Cash, federal funds sold, and interest-bearing deposits
318,292
183,993
116,930
823,311
Net loans/leases
4,753,082
77
107,326
607,367
607,946
375,170
100
4,839,689
78
Total borrowings
417,480
825,894
443,270
116,193
108,743
During the first quarter of 2023, the Company's total assets increased $88.1 million, or 1%, from December 31, 2022, to a total of $8.0 billion. The Company’s net loans/leases increased $52.3 million in the first quarter of 2023. Total deposits increased $517.4 million in the first quarter of 2023. Borrowings decreased $408.4 million in the first quarter of 2023. The increases in total assets, net loans/leases and total deposits were primarily due to the GFED acquisition and increased on-balance sheet liquidity. The growth in deposits allowed for the paydown of borrowings.
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:
21,380
731,509
779,270
667,048
81
86,380
23,232
45,546
46,908
25,271
Securities as a % of total assets
10.92
11.68
13.33
Net unrealized losses as a % of Amortized Cost
(9.07)
(11.26)
(1.63)
Duration (in years)
5.6
7.7
7.9
Quarterly yield on investment securities (tax equivalent)
3.99
Due to the sharp increase in intermediate and long-term interest rates during 2022, the valuation of the Company’s AFS portfolio declined significantly when comparing March 31, 2023 to March 31, 2022. Net unrealized losses improved March 31, 2023 as compared to December 31, 2022 as intermediate and long-term interest rates declined.
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 grew 3.3% on an annualized basis during the first three months of 2023. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.
263,441
1,374,221
439,257
679,898
863,116
711,682
43,330
379,613
73,310
Total loans/leases
4,827,868
(74,786)
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, 2023 and December 31, 2022, approximately 15% and 16% of the CRE loan portfolio (as defined below) 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, 2023: CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate. Within the CRE Loan portfolio, there is minimal office exposure, totaling $187.5 million or 3.0% of total loans at March 31, 2023.
As of March 31,
As of December 31,
Lessors of Residential Buildings
1,902,965
1,861,197
1,383,986
50
Lessors of Nonresidential Buildings
581,615
537,940
578,399
Hotels
132,705
145,662
71,448
New Multifamily Housing Construction
86,228
82,905
27,635
New Housing For-Sale Builders
72,007
71,991
71,825
New Single-Family Housing Construction
63,370
62,303
38,475
Other *
1,145,062
1,154,376
617,778
Total CRE Loans
3,983,952
3,916,374
2,789,546
* “Other” consists of all other industries. None of these had concentrations greater than $59.0 million, or approximately 1.5% of total CRE loans in the most recent period presented.
The Company’s construction and land development loan portfolio includes the following:
LIHTC
759,924
705,487
556,717
65
Construction (commercial)
372,819
353,007
245,926
Construction (residential)
14,441
20,179
17,328
Land development
61,001
70,830
43,145
Total construction and land development
1,149,503
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
73,221
70,821
70,241
Freightliners
27,401
26,433
14,224
Trailers
24,061
23,186
15,702
Tractor
18,620
17,740
12,858
Manufacturing - General
17,105
17,493
17,350
Construction - General
17,040
16,256
13,851
Marine - Travelifts
14,484
14,653
15,513
Food Processing Equipment
13,853
14,304
14,846
Computer Hardware
12,823
9,617
10,792
Computer Equipment
10,032
7,736
5,770
92,854
91,693
94,723
Total m2 loans and leases
321,494
309,932
285,870
* “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, 2022, 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, 2023 and 2022 are presented as follows:
Reduction in ACL for writedown of LHFS to fair value
The Company's levels of criticized and classified loans are reported in the following table.
Internally Assigned Risk Rating *
125,048
98,333
63,622
70,866
66,021
54,491
195,914
164,354
118,113
Criticized Loans **
Classified Loans ***
Criticized Loans as a % of Total Loans/Leases
3.16
2.68
2.45
Classified Loans as a % of Total Loans/Leases
1.14
1.08
1.13
* 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 19% and classified loans increased 7% from December 31, 2022 to March 31, 2023 primarily due to the downgrading of three credits. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.
ACL on loans/leases / Total loans/leases held for investment
1.43
1.55
ACL on loans/leases / NPLs
377.03
1,000.07
2,721.47
Although management believes that the ACL at March 31, 2023 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)
2,744
Accruing loans/leases past due 90 days or more
2,748
Total NPAs
23,023
8,903
NPLs to total loans/leases
NPAs to total loans/leases plus repossessed property
NPAs to total assets
0.11
0.04
Nonaccrual loans/leases to total loans/leases
ACL to nonaccrual loans
377.27
1,000.64
2,725.44
NPAs at March 31, 2023 were $23.0 million, up $14.1million from December 31, 2022, and up $20.3 million from March 31, 2022. The increase in the first quarter 2023 was primarily the result of a single credit relationship which was moved to nonaccrual status. The specific loan involves a newly constructed mixed-use property that is fully leased and we anticipate resolving this loan without further impairment. The increase from the prior year was primarily the result of the GFED acquisition and two specific legacy relationships from the Company’s other charters. The ratio of NPAs to total assets was 0.29% at March 31, 2023, up from 0.11% at December 31, 2022, and up from 0.06% at March 31, 2022.
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 increased $517.4 million during the first quarter of 2023. During the first quarter of 2023, the Company’s deposits, excluding brokered deposits, grew $19.9 million to a total of $5.9 billion, or 1.4% on an annualized basis. The Company also added short-term brokered deposits of $497.5 million during the quarter to intentionally bolster on-balance sheet liquidity and fully eliminate overnight borrowings from the FHLB.
The table below presents the composition of the Company's deposit portfolio.
Noninterest bearing demand deposits
1,275,493
Interest bearing demand deposits
4,033,193
3,875,497
3,181,685
679,946
744,593
382,268
Brokered deposits
598,666
101,146
243
0
Total uninsured and uncollateralized deposits represented 23.8% of total consolidated deposits at March 31, 2023. The Company maintained approximately $1.7 billion of immediately available liquidity at quarter-end with excess cash and borrowing capacity at FHLB and FRB as well as a $50.0 million revolving line of credit. Immediately available liquidity more than covers the Company’s uninsured and uncollateralized deposits.
The Company actively participates in the ICS/CDARS program which is a trusted resource that provides FDIC insurance coverage for clients that maintain larger deposit balances. Deposits in the ICS/CDARS program totaled $1.5 billion, or 22.4% of all deposits, as of March 31, 2023.
The Company’s correspondent bank deposit portfolio and funds managed consists of the following:
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
1,190
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 FHLB advances.
Term FHLB advances
Overnight FHLB advances
290,000
FHLB overnight advances decreased $415.0 million in the current quarter compared to the prior quarter. The Company added short-term brokered deposits of $497.5 million during the current quarter to intentionally bolster on-balance sheet liquidity and fully eliminate overnight borrowing from the FHLB.
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:
573,685
516,146
4.69
2024
24,981
4.65
2025
2026
45,000
5.01
2027
4.82
Thereafter
4.64
Total Wholesale Funding
733,666
4.90
During the first three months of 2023, wholesale funding, primarily brokered deposits, increased $217.5 million due to intentionally bolstering on-balance sheet liquidity and fully eliminating overnight borrowings from the FHLB.
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/TA ratio is defined as total common stockholders' equity excluding goodwill and other intangibles divided by total assets. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.
AOCI improved $9.3 million during the first quarter of 2023 due to an increase in value of the Company’s AFS securities portfolio and certain derivatives resulting from the change in interest rates during the first quarter.
On May 19, 2022, 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 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. As of March 31, 2023, the Company had purchased 722,500 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 customer credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid an 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 totaled $318.3 million at March 31, 2023. The Company’s liquidity sources as of March 31, 2023 are summarized as follows:
(dollars in billions)
Excess cash
0.3
Borrowing capacity at FHLB
1.0
Borrowing capacity at FRB
Secured line of credit with upstream counterparty
0.1
Immediately available liquidity
1.7
Fed funds lines of credit
Brokered deposit capacity limited by Company policy
Total available liquidity excluding unpledged AFS/HTM securities
3.2
Including unpledged AFS and HTM securities of approximately $800 million, the Company’s total liquidity is strong at nearly 50% of total assets.
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.
During the first quarter of 2023, the Company’s deposits, excluding brokered deposits, grew $19.9 million to a total of $5.9 billion, or 1.4% on an annualized basis. The Company also added short-term brokered deposits of $497.5 million during the quarter to intentionally bolster on-balance sheet liquidity and fully eliminate overnight borrowings from the FHLB. Total uninsured and uncollateralized deposits represented 23.8% of total consolidated deposits. The Company maintained approximately $1.7 billion of immediately available liquidity at quarter-end which more than covers the Company’s uninsured and uncollateralized deposits.
The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity.
At March 31, 2023, the subsidiary banks had 27 unsecured lines of credit totaling $470.8 million with upstream correspondent banks. The subsidiary banks also had availability of $210.2 million with the FRB which was secured. At March 31, 2023, the Company had the full $681.0 million available.
At December 31, 2022, the subsidiary banks had 27 unsecured lines of credit totaling $470.8 million with upstream correspondent banks. The subsidiary banks also had availability of $31.0 million with the FRB which was secured. At December 31, 2022, $372.8 million of the $501.8 million was available.
As of March 31, 2023, the Company had $612.0 million in actual correspondent banking deposits spread over 182 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 $117.4 million during the first three months of 2023, compared to $177.1 million for the same period of 2022. The net decrease in federal funds sold was $40.5 for the first three months of 2023, compared to a net decrease of $2.7 million for the same period of 2022. The net increase in interest-bearing deposits at financial institutions was $170.3 million for the first three months of 2023, compared to a net decrease of $18.5 million for the same period of 2022. Proceeds from calls, maturities, and paydowns of securities were $51.6 million for the first three months of 2023, compared to $17.3 million for the same period of 2022. Purchases of securities used cash of $23.0 million for the first three months of 2023, compared to $52.4 million for the same period of 2022. Proceeds from sales of securities were $28.6 million for the first three months of 2023. There were no proceeds from the sales of securities in the first three months of 2022. The net decrease in loans/leases used cash of $54.0 million for the first three months of 2023 compared to $148.5 million for the same period of 2022.
Financing activities provided cash of $100.2 million for the first three months of 2023, compared to $183.2 million for same period of 2022. Net increases in deposits totaled $517.4 million for the first three months of 2023, compared to net increases in deposits of $83.1 million for the same period of 2022. During the first three months of 2023, the Company's short-term borrowings decreased $128.5 million, compared to a decrease in short-term borrowings of $2.6 million for the same period of 2022. There were long-term FHLB advances of $135.0 million during the first three months of 2023 compared to no long-term FHLB advances during the same period of 2022. There were no maturities and principal payments on FHLB term advances in the first three months of 2023 and 2022. Net decrease in overnight advances totaled $415.0 million for the first three months of 2023 as compared to net increase of $275.0 million for the first three months of 2022. Repurchase and cancellation of shares totaled $7.7 million in the first three months of 2023, as compared to $4.4 million in the first three months of 2022.
Total cash provided by operating activities was $21.8 million for the first three months of 2023, compared to $6.9 million for the same period of 2022.
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, 2022.
58
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 bi-weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in 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 and downward shifts; 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 100, 200 and 300 basis point upward and 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 and downward of 100, 200, 300, and 400 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 and downward parallel shift. For the 300 basis point upward and downward shock, the established policy limit is a 30% 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
300 basis point downward shock
(30.0)
(5.1)
(6.1)
200 basis point downward shift
(10.0)
(0.2)
200 basis point upward shift
(3.1)
300 basis point upward shock
(2.4)
(2.3)
11.6
With the shift in funding from non-interest bearing and lower beta deposits to higher beta deposits, the Company’s balance sheet is now modestly liability sensitive. Notably, management is conservative with the repricing assumptions on loans and deposits. For example, management does not model any delay in deposit betas despite historical experience and practice of delays in deposit betas. Finally, management models a variety of scenarios including some that stress key assumptions to help capture and isolate the impact of the management’s more conservative approach to the assumptions in the base model.
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, 2023 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.
60
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, 2023. 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, 2022. 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 May 19, 2022, 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 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021. 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, 2023
1,424,085
930,000
February 1-28, 2023
60,000
53.61
870,000
March 1-31, 2023
92,500
48.62
1,516,585
777,500
152,500
$ 50.61
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, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three months ended March 31, 2023 and March 31, 2022; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and March 31, 2022; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2023 and March 31, 2022; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and March 31, 2022; 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, 2023
/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)