EDGAR 10-K Filing

Company CIK: 906465
Filing Year: 2021
Filename: 906465_10-K_2021_0001558370-21-002889.json

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ITEM 1. BUSINESS
Item 1. Business
General. QCR Holdings, Inc. is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. In 2016, the Company elected to operate as a financial holding company under the BHCA. The Company serves the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny and Springfield communities through the following four wholly-owned banking subsidiaries (collectively, the “Banks”), which provide full-service commercial and consumer banking and trust and asset management services:
● Quad City Bank & Trust (QCBT), which is based in Bettendorf, Iowa, and commenced operations in 1994;
● Cedar Rapids Bank & Trust (CRBT), which is based in Cedar Rapids, Iowa, and commenced operations in 2001;
● Community State Bank (CSB), which is based in Ankeny, Iowa, and was acquired in 2016; and
● Springfield First Community Bank (SFCB), which is based in Springfield, Missouri, and was acquired in 2018.
On August 12, 2020, the Company sold the Bates Companies, headquartered in Rockford, Illinois. Since October 1, 2018, the date of acquisition, the Company provided wealth management services to the Rockford community through the Bates Companies.
On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. Prior to this time, the Company provided full service banking services to the Rockford community through RB&T.
On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFCB, headquartered in Springfield, Missouri. From that time, the Company has operated SFCB as an independent banking subsidiary.
See Note 2 to the Consolidated Financial Statements for further discussion on mergers, acquisitions and sales.
The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT based in Brookfield, Wisconsin.
Subsidiary Banks. Segments of the Company have been established by management as defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters. The Company’s Commercial Banking business is geographically divided by markets into the operating segments corresponding to the four subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB and SFCB. See the Consolidated Financial Statements incorporated herein generally, and Note 23 to the Consolidated Financial Statements specifically, for additional business segment information.
QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. QCBT provides full service commercial, correspondent, and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices located in Bettendorf and Davenport, Iowa and in Moline, Illinois. QCBT, on a consolidated basis with m2, had total segment assets of $2.15 billion and $1.68 billion as of December 31, 2020 and 2019, respectively.
CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September of 2001. Acquired branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.” CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Marion and Waterloo/Cedar Falls, Iowa and adjacent communities through its eight facilities. The headquarters for CRBT is located in downtown Cedar Rapids with three other branches located in Cedar Rapids, one branch in Marion, two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $1.95 billion and $1.57 billion as of December 31, 2020 and 2019, respectively.
CSB is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. CSB was acquired by the Company in 2016. CSB provides full-service commercial and consumer banking to Des Moines, Iowa and adjacent communities through its headquarters located in Ankeny, Iowa and its nine other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $1.0 billion and $853.8 million as of December 31, 2020 and 2019, respectively.
SFCB is a Missouri-chartered commercial bank that is a member of the Federal Reserve System. SFCB was acquired by the Company in 2018 through a merger with Springfield Bancshares. SFCB provides full-service commercial and consumer banking to the Springfield, Missouri area through its headquarters located on Glenstone Avenue in Springfield and its branch facility located on East Primrose in Springfield. SFCB had total segment assets of $780.0 million and $748.8 million as of December 31, 2020 and 2019, respectively.
Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to C&I businesses under direct financing lease contracts.
Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2020 and 2019:
Amount Outstanding
Amount Outstanding
Interest
Interest
as of
as of
Rate as of
Rate as of
Name
Date Issued
December 31, 2020
December 31, 2019
Interest Rate
December 31, 2020
December 31, 2019
QCR Holdings Statutory Trust II
February 2004
$
10,310
$
10,310
2.85% over 3-month LIBOR
3.10
%
4.79
%
QCR Holdings Statutory Trust III
February 2004
8,248
8,248
2.85% over 3-month LIBOR
3.10
%
4.79
%
QCR Holdings Statutory Trust V
February 2006
10,310
10,310
1.55% over 3-month LIBOR
1.79
%
3.54
%
Community National Statutory Trust II
September 2004
3,093
3,093
2.17% over 3-month LIBOR
2.41
%
4.08
%
Community National Statutory Trust III
March 2007
3,609
3,609
1.75% over 3-month LIBOR
1.97
%
3.64
%
Guaranty Bankshares Statutory Trust I
May 2005
4,640
4,640
1.75% over 3-month LIBOR
1.97
%
3.64
%
$
40,210
$
40,210
Weighted Average Rate
2.48
%
4.18
%
Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust.
Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities, as described more fully in this Form 10-K, including in Appendix A “Supervision and Regulation.” Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, swap fee income, gains on the sale of residential real estate and government guaranteed loans, earnings from BOLI and other noninterest income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.
The Company and its subsidiaries collectively employed 714 and 697 FTEs at December 31, 2020 and 2019, respectively. The increase in FTEs during 2020 was primarily due to the addition of new positions created to build scale.
The Federal Reserve is the primary federal regulator of the Company, QCBT, CRBT, CSB and SFCB. QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking and SFCB is regulated by the Missouri Division of Finance. The FDIC, as administrator of the DIF, also has regulatory authority over the subsidiary banks. See Appendix A “Supervision and Regulation” for more information on the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.
Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending/leasing and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.
In accordance with Iowa regulation, the legal lending limit to one borrower for QCBT, CRBT and CSB, calculated as 15% of aggregate capital, was $31.4 million, $36.5 million, and $17.3 million, respectively, as of December 31, 2020. In accordance with Missouri regulation, the legal lending limit to one borrower for SFCB, calculated as 15% of aggregate capital, totaled $13.6 million as of December 31, 2020.
The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.
The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. The Company implements a tiered approach, based on the risk rating of the borrower. Under the most recent in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:
High Quality
Medium Quality
Low Quality
(Risk Ratings 1-3)
(Risk Rating 4)
(Risk Ratings 5-8)
(dollars in thousands)
QCBT
$
17,250
$
14,750
$
10,000
CRBT
$
16,000
$
13,500
$
9,250
CSB
$
9,500
$
8,000
$
5,500
SFCB
$
9,000
$
7,500
$
5,000
QCRH Consolidated
$
25,000
$
19,000
$
12,500
The QCRH Consolidated amount represents the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.
In addition, m2’s in-house lending limit is $2.5 million to a single leasing entity or group of related entities, subject to certain exceptions.
As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Historically, management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.
The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.
Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the subsidiary banks as of December 31, 2020 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s gross loans:
QCBT
CRBT
CSB
SFCB
Maximum
Maximum
Maximum
Maximum
Percentage
As of
Percentage
As of
Percentage
As of
Percentage
As of
per Loan
December 31,
per Loan
December 31,
per Loan
December 31,
per Loan
December 31,
Type of Loan *
Policy
Policy
Policy
Policy
One-to-four family residential
%
%
%
%
%
%
%
%
Multi-family
%
%
%
%
%
%
%
%
Farmland
%
-
%
%
-
%
%
%
%
%
Non-farm, nonresidential
%
%
%
%
%
%
%
%
Construction and land development
%
%
%
%
%
%
%
%
C&I
%
%
%
%
%
%
%
%
Loans to individuals
%
%
%
%
%
%
%
%
Lease financing
%
%
%
-
%
%
-
%
%
-
%
Bank stock loans
**
-
%
-
%
-
%
-
%
%
-
%
All other loans
%
%
%
%
%
%
%
%
%
%
%
%
* The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).
** QCBT’s maximum percentage for bank stock loans is 150% of risk-based capital (bank stock loan commitments are limited to 200% of risk-based capital). At December 31, 2020, QCBT’s bank stock loans totaled 41% of risk-based capital.
The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2020 and 2019. Residential real estate loans held for sale are included in residential real estate loans below.
Consolidated
QCBT
CRBT
CSB
SFCB
Total
$
%
$
%
$
%
$
%
$
%
(dollars in thousands)
As of December 31, 2020
C&I loans
$
732,363
%
$
601,387
%
$
230,835
%
$
162,138
%
$
1,726,723
%
CRE loans
588,167
%
690,539
%
423,029
%
405,894
%
2,107,629
%
Direct financing leases
66,016
%
-
-
%
-
-
%
-
-
%
66,016
%
Residential real estate loans
134,712
%
45,493
%
41,673
%
30,243
%
252,121
%
Installment and other consumer loans
26,916
%
25,986
%
12,376
%
26,024
%
91,302
%
Deferred loan/lease origination costs, net of fees
8,588
%
(1,349)
-
%
(231)
-
%
-
%
7,338
-
%
$
1,556,762
%
$
1,362,056
%
$
707,682
%
$
624,629
%
$
4,251,129
%
As of December 31, 2019
C&I loans
$
616,241
%
$
536,294
%
$
234,527
%
$
120,763
%
$
1,507,825
%
CRE loans
455,389
%
554,101
%
350,159
%
376,747
%
1,736,396
%
Direct financing leases
87,869
-
%
-
-
%
-
-
%
-
-
%
87,869
%
Residential real estate loans
122,675
%
49,544
%
40,224
%
27,461
%
239,904
%
Installment and other consumer loans
38,706
%
35,362
%
14,272
%
21,012
%
109,352
%
Deferred loan/lease origination costs, net of fees
8,786
-
%
(338)
-
%
-
%
-
%
8,859
-
%
$
1,329,666
%
$
1,174,963
%
$
639,270
%
$
546,306
%
$
3,690,205
%
Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established by the subsidiary banks’ internal loan committees, includes consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk for more discussion on the Company’s management of interest rate risk.
In an effort to manage interest rate risk, the subsidiary banks will consider entering into back-to-back interest rate swaps with select commercial borrowers. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. The Banks enter an interest rate swap with the commercial borrower and an equal and offsetting interest rate swap with a larger financial institution counterparty. The Company has increased its focus on this business which has led to significantly increased noninterest income, stronger overall loan growth, and improved management of its interest rate risk. The Company will continue to review opportunites to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from year to year. Future levels of swap fee income can be dependent upon prevailing interest rates and other market activity.
C&I Lending
As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the SBA and USDA. Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.
Loan approval is generally based on the following factors:
● Ability and stability of current management of the borrower;
● Stable earnings with positive financial trends;
● Sufficient cash flow to support debt repayment;
● Earnings projections based on reasonable assumptions;
● Financial strength of the industry and business; and
● Value and marketability of collateral.
For C&I loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the Consolidated Financial Statements for additional information, including the internal risk rating scale.
As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain C&I loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:
● Minimum debt service coverage ratio;
● Minimum current ratio;
● Maximum debt to tangible net worth ratio; and/or
● Minimum tangible net worth.
Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry in which the borrower is engaged.
Collateral for these loans generally includes accounts receivable, inventory, equipment, and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each collateral type are listed below.
Approved Collateral Type
Maximum Advance %
Financial Instruments
U.S. Government Securities
90% of market value
Securities of Federal Agencies
90% of market value
Municipal Bonds rated by Moody’s As “A” or better
80% of market value
Listed Stocks
75% of market value
Mutual Funds
75% of market value
Cash Value Life Insurance
95%, less policy loans
Savings/Time Deposits (Bank)
100% of current value
Penny Stocks
0%
General Business
Accounts Receivable
80% of eligible accounts
Inventory
50% of value
Crop and Grain Inventories
80% of current market value
Livestock
80% of purchase price, or current market value; or higher if cross-collateralized with other assets
Fixed Assets (Existing)
50% of net book value, or 75% of orderly liquidation appraised value
Fixed Assets (New)
80% of cost, or higher if cross-collateralized with other assets
Leasehold Improvements
0%
Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.
The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years. Generally, term loans range from three to five years. For lines of credit, the maximum term is typically 365 days. For low income housing tax credits permanent loans, the maximum term is generally up to 20 years.
In addition, the subsidiary banks often take personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
Following is a summary of the five largest industry concentrations within the C&I portfolio as of December 31, 2020 and 2019:
Amount
Amount
(dollars in thousands)
Administration of urban planning & rural development
$
138,514
$
133,157
Bank holding companies
80,383
92,185
Hotels & motels
76,194
64,867
Offices of physicians
38,569
25,090
Skilled nursing care facilities
35,867
39,881
These loan categories are defined by industry-standard NAICS codes - refer to NAICS.com for a description of each category.
CRE Lending
The subsidiary banks also make CRE loans. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the Company’s lending policy for the major categories of CRE loans:
Maximum
CRE Loan Types
Maximum Advance Rate **
Term
CRE Loans on Improved Property *
80%
7 years
Raw Land
Lesser of 90% of project cost, or 65% of "as is" appraised value
12 months
Land Development***
Lesser of 85% of project cost, or 75% of "as-completed" appraised value
24 months
Commercial Construction Loans
Lesser of 85% of project cost, or 80% of "as-completed" appraised value
12 months
Residential Construction Loans to Builders
Lesser of 90% of project cost, or 80% of "as-completed" appraised value
12 months
* Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitize this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.
** These maximum rates are consistent with, or in some situations, more conservative than those established by regulatory authorities.
*** Generally, the maximum term for land development loans is 12 months but there are some situations where the maximum term would be 24 months.
The Company’s lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.
In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied CRE loans. Owner-occupied CRE loans are generally considered to have less risk. As of December 31, 2020 and 2019, approximately 24% and 26%, respectively, of the CRE loan portfolio was owner-occupied.
In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied CRE lending exceeds 300% of total risk-based capital or construction, land development and other land loans exceed 100% of total risk-based capital. Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfolio levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate loan portfolio.
Following is a listing of the significant industries within the Company’s CRE loan portfolio as of December 31, 2020 and 2019:
Amount
%
Amount
%
(dollars in thousands)
Lessors of Residential Buildings
$
786,066
%
$
465,172
%
Lessors of Nonresidential Buildings
567,759
%
553,142
%
Hotels
72,718
%
63,720
%
Nonresidential Property Managers
46,764
%
48,059
%
New Housing For-Sale Builders
45,619
%
55,525
%
Other Activities Related to Real Estate
41,197
%
42,060
%
Land Subdivision
40,720
%
46,318
%
Lessors of Other Real Estate Property
39,344
%
39,297
%
Other *
467,442
%
423,103
%
Total CRE Loans
$
2,107,629
%
$
1,736,396
%
* “Other” consists of all other industries. None of these had concentrations greater than $29.6 million, or 1.4%, of total CRE loans as of December 31, 2020.
Following is a breakdown of non owner-occupied income-producing CRE by property type as of December 31, 2020 and 2019:
Amount
%
Amount
%
(dollars in thousands)
Multi-family
$
599,774
%
$
359,469
%
Office
174,578
%
193,381
%
Retail
156,589
%
175,602
%
Industrial/warehouse
82,568
%
68,978
%
Hotel/motel
77,165
%
71,611
%
Other
480,292
%
381,762
%
Total income-producing CRE
$
1,570,966
%
$
1,250,803
%
A portion of the Company’s construction portfolio is considered non-residential construction. Following is a summary of industry concentrations within that category as of December 31, 2020 and 2019:
Amount
%
Amount
%
(dollars in thousands)
Multi-family
$
281,986
%
$
169,523
%
Office
17,126
%
24,950
%
Industrial/warehouse
10,884
%
8,388
%
Retail
8,665
%
14,584
%
Hotel/motel
5,715
%
5,715
%
Other
170,153
%
115,349
%
Total non-residential construction loans
$
494,529
%
$
338,509
%
Additionally, the Company had approximately $48.8 million and $48.4 million of residential construction loans outstanding as of December 31, 2020 and 2019, respectively. Of this amount, approximately 54% was considered speculative, while 46% was pre-sold at December 31, 2020, and approximately 66% was considered speculative, while 34% was pre-sold at December 31, 2019.
Direct Financing Leasing
m2 leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.
The following private and public sector business assets are generally acceptable to consider for lease funding:
● Computer systems;
● Photocopy systems;
● Fire trucks;
● Specialized road maintenance equipment;
● Medical equipment;
● Commercial business furnishings;
● Vehicles classified as heavy equipment;
● Trucks and trailers;
● Equipment classified as plant or office equipment; and
● Marine boat lifts.
m2 will generally refrain from funding leases of the following type:
● Leases collateralized by non-marketable items;
● Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.;
● Leases collateralized by used equipment, unless its remaining useful life can be readily determined; and
● Leases with a repayment schedule exceeding seven years.
Residential Real Estate Lending
Generally, the subsidiary banks’ residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that adjust in one to five years, and then retain these loans in their portfolios. Servicing rights are generally not retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.
The following table presents the originations and sales of residential real estate loans for the Company. Included in originations is activity related to the refinancing of previously held in-house mortgages.
For the year ended December 31,
(dollars in thousands)
Originations of residential real estate loans
$
281,662
$
183,491
$
87,133
Sales of residential real estate loans
$
234,512
$
141,195
$
51,010
Percentage of sales to originations
%
%
%
Installment and Other Consumer Lending
The consumer lending department of each subsidiary bank provides many types of consumer loans, including home improvement, home equity, motor vehicle, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 650. For both home equity loans and lines of credit, the maximum advance rate is 90% of value with a minimum credit bureau score of 650. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 10 years.
In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.
Human Capital Resources. As of December 31, 2020, the Company employed 668 full-time employees and 71 part-time employees across all locations. The employees are not represented by a collective bargaining unit. The Company is a relationship driven company and its ability to attract and retain exceptional employees is key to its success.
The Company encourages and supports the growth and development of its employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and external training opportunities. Educational reimbursement is available to employees enrolled in degree or certification programs and for seminars, conferences, and other training events employees attend in connection with their job duties.
As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive total rewards programs for its employees in order to attract and retain exceptional talent. In addition to competitive base wages, additional programs include annual bonus opportunities, an Employee Stock Purchase Plan, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, sabbaticals, flexible work schedules, an employee assistance program, and various wellness programs.
The Company is committed to fostering and preserving a culture of diversity, equity, and inclusion, and believe its differences of every kind make the company and its communities better. During the year, the Company focused on several initiatives to promote diversity, equity, and inclusion across its organization. A few specific actions were adding inclusion as a core value for the organization, rolling out a diversity assessment to gather feedback from all employees, and a company-wide training on unconscious bias. Additionally the Company provided webcasts and videos to raise awareness and educate its employees on diversity and inclusion.
The safety, health and wellness of the Company’s employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of management and staff, the Company was able to quickly transition half of its employees to effectively work from remote locations and incorporated safety measures in its locations for employees performing customer-facing activities. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness. In addition, the Company incorporated frequent communication updates using a variety of methods to ensure that all employees were kept informed of updates regarding the ongoing pandemic.
Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield, Missouri markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, FinTech companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to traditional banking services. The Company also competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.
Appendices. The commercial banking business is a highly regulated business. See Appendix A “Supervision and Regulation” for a discussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.
See Appendix B for tables and schedules that show selected financial statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in this Annual Report on Form 10-K, results are presented as of and for the fiscal years ended December 31, 2020, 2019, and 2018, as applicable.
Internet Site, Securities Filings and Governance Documents. The Company maintains an Internet site at www.qcrh.com. The Company makes available free of charge through this site its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material
with, or furnishes it to, the SEC. These filings are available at http://www.snl.com/IRW/Docs/1024092. Also available are many of the Company’s corporate governance documents, including its Business Code of Conduct and Ethics Policy (https://qcrh.q4ir.com/governance/documents/default.aspx).

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:
COVID-19 Pandemic-Related Risks
The COVID-19 pandemic has had an adverse impact on our business, financial condition and results of operations, and the duration and extent of this impact is subject to a high degree of uncertainty.
COVID-19 is continuing to spread through the United States and the world. The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. The resulting concerns on the part of the U.S. and global populations have resulted in a recessionary environment, reduced economic activity and caused significant volatility in the global stock markets. The Company has experienced disruptions across the Company’s business due to these effects, leading to slowdowns in loan collections.
The outbreak of COVID-19 has resulted in a decline in certain of our clients’ businesses, a decrease in consumer confidence, an increase in unemployment and a disruption in the services provided by our vendors. Certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, arts/entertainment/recreation and retail industries and are located in areas that are or were quarantined or under stay-at-home orders Continued disruption to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.
The initial distribution of vaccines has been slow, and there may continue to be challenges with producing and distributing sufficient quantities of the vaccines. If the general public is unwilling or unable to access effective vaccines and therapies, this may also prolong the COVID-19 pandemic. In addition, new variants of COVID-19 may increase the spread or severity of COVID-19 and previously developed vaccines and therapies may not be as effective against new COVID-19 variants.
As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:
● increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures;
● ratings downgrades, credit deterioration and defaults in many industries, including hotel, restaurant, transportation, long-term healthcare, retail and commercial real estate, which may lead to increased provision expense;
● a sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets;
● as a result of the decline in the Federal Reserve’s target federal funds rate to near 0% (or possibly below 0% in the future), the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income;
● a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being recorded for that period, and adversely impact our results of operations and the ability of our subsidiary banks to pay dividends to us;
● the negative effect on earnings resulting from the subsidiary banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;
● a decrease in fees for customer services;
● a reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company’s services;
● increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business continuity plan;
● the potential for reduced liquidity and its negative effect on our capital and leverage ratios;
● federal and state taxes may increase, including as a result of the effects of the pandemic on governmental budgets, which could reduce our net income;
● FDIC premiums could increase if the agency experiences additional resolution costs;
● increased cyber and payment fraud risk due to increased online and remote activity; and
● other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.
Overall, we believe that the economic impact from COVID-19 may be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. The speed and strength of any economic recovery from the pandemic is subject to a high degree of uncertainty, but is expected to be affected by further developments in the pandemic. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets, the development, distribution and supply of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets in response to the recent surge in the number of COVID-19 cases. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.
The federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:
● requiring banks to focus on business continuity and pandemic planning;
● adding pandemic scenarios to stress testing;
● encouraging bank use of capital buffers and reserves in lending programs;
● permitting certain regulatory reporting extensions;
● reducing margin requirements on swaps;
● permitting certain otherwise prohibited investments in investment funds;
● issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and
● providing credit under the CRA for certain pandemic-related loans, investments and public service.
The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.
COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic area in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market area, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.
As a participating lender in the PPP, the Company and the subsidiary banks are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the subsidiary banks may be exposed to the risk of similar litigation, from both customers and non-customers that approached the banks regarding PPP loans, regarding their process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the subsidiary banks and is not resolved in a manner favorable to the Company or the banks, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The subsidiary banks also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the banks, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Economic and Market Risks
Conditions in the financial market and economic conditions, including conditions in the markets in which we operate, generally may adversely affect our business.
We operate primarily in the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny, Iowa and Springfield, Missouri markets. Our general financial performance is highly dependent upon the business environment in the markets where we operate and in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it offers. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity
or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, pandemics or a combination of these or other factors.
Uncertainty regarding economic conditions may result in changes in consumer and business spending, borrowing and savings habits. Downturns in the markets where our banking operations occur could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults, high or increased levels of problem assets and foreclosures and reduced wealth management fees resulting from lower asset values. Such conditions could adversely affect the credit quality of our loans, financial condition and results of operations.
Interest rates and other conditions impact our results of operations.
Our profitability is in large part a function of the spread between the interest rates earned on investments and loans/leases and the interest rates paid on deposits and other interest bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan/lease terms, and the mix of adjustable and fixed rate loans/leases in our portfolio, the length of time deposits and borrowings and the rate sensitivity of our deposit customers could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at "Quantitative and Qualitative Disclosures about Market Risk" included under Item 7A of Part II of this Annual Report on Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
In March 2020, the Federal Reserve reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest it pays on excess reserves. The reductions in interest rates, especially if prolonged, is likely to continue to have an adverse effect our net interest income and margins and our profitability. In December 2020, the Federal Open Market Committee held the target rate at its effective floor of 0.00-0.25% with panelists projecting the target rate to remain at these levels through 2021 and potentially 2022. There is potential that the rate cuts could pose additional risks to the economy primarily through higher inflation and financial-stability concerns driven by low borrowing costs. There is a possibility that labor markets could tighten causing inflationary pressures to build faster than the expected gradual pace. There is additional risk that persistently low interest rates could lead consumers and firms to take on riskier financial investments in search of better returns, increasing asset prices to unsustainable levels. The potential rise in asset prices to unsustainable levels could pose potential financial-stability risks in the commercial real estate and corporate borrowing sectors. Sustained low interest rate periods were something that preceded the 1990 and 2007 recessions, placing significant pressure on real estate asset prices through reach-for-yield investor behavior.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.
The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2020, we had gross unrealized losses of $772 thousand, or 0.9% of amortized cost, in our investment
portfolio (offset by gross unrealized gains of $57.8 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if our investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the OTTI, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur. Based on management's evaluation, it was determined that the gross unrealized losses at December 31, 2020 were temporary and primarily a function of the changes in certain market interest rates.
The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could also adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results and the impact of these risk factors on our operating results or financial position.
Secondary mortgage, government guaranteed loan and interest rate swap market conditions could have a material impact on our financial condition and results of operations.
Currently, we sell a portion of the residential real estate and government guaranteed loans we originate. The profitability of these operations depends in large part upon our ability to make loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.
In addition to being affected by interest rates, the secondary markets are also subject to investor demand for residential mortgages and government guaranteed loans and investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.
The interest rate swap market is dependent upon market conditions. If interest rates move, interest rate swap transactions may no longer make sense for the Company and/or its customers. Interest rate swaps are generally appropriate for commercial customers with a certain level of expertise and comfort with derivatives, so our success is dependent upon the ability to make loans to these types of commercial customers. Additionally, our ability to execute interest rate swaps is also dependent upon counterparties that are willing to enter into the interest rate swap that is equal and offsetting to the interest rate swap we enter into with the commercial customer.
Regulatory and Legal Risks
We may be materially and adversely affected by the highly regulated environment in which we operate.
The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.
As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT, CRBT and CSB, as Iowa-chartered state member banks, are subject to regulation and supervision primarily by both the Iowa Superintendent and the Federal Reserve. SFCB, as a Missouri-chartered commercial bank, is subject to regulation by both the Missouri Division of Finance and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. The primary federal and state banking laws and regulations that affect us are
described in Appendix A “Supervision and Regulation” to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time.
U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.
Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.
Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations, which have recently increased due to the effectiveness of the Basel III regulatory capital reforms. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. Consumers and businesses may also change their behavior on their own as a result of these concerns. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Given the lack of empirical data on the credit and other financial risks posed by climate change, it is difficult to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks. For example, weather disasters, shifts in local climates and other disruptions related to climate change may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local economic
activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities.
Evolving law impacting cannabis-related businesses in Illinois may have an impact on the Company's operations and risk profile.
The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries. It is the Banks' current policy to avoid knowingly providing banking products or services to entities or individuals that: (i) directly or indirectly manufacture, distribute, or dispense marijuana or hemp products, or those who have a significant financial interest in such entities; and (ii) derive a significant percentage of revenue from providing products or services to, or other involvement with, such entities. The Banks are taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers do not engage in any such activities. Nonetheless, the shift in Illinois law is increasing the number of direct and indirect cannabis-related businesses in Illinois, and therefore increasing the likelihood that the Banks could interact with such businesses, as well as their owners and employees. Such interactions could create additional legal, regulatory, strategic, and reputational risk to the Banks and the Company.
Credit and Lending Risks
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks' loan portfolios are invested in C&I and CRE loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area's largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to C&I and CRE loans, our subsidiary banks are also active in residential mortgage and consumer lending. Our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.
C&I loans make up a large portion of our loan/lease portfolio.
C&I loans were $1.7 billion, or approximately 41% of our total loan/lease portfolio, as of December 31, 2020. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee or cosigner on commercial loans. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may lose value over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, a prolonged recovery period could harm or continue to harm the businesses of our C&I customers and reduce the value of the collateral securing these loans.
Our loan/lease portfolio has a significant concentration of CRE loans, which involve risks specific to real estate values.
CRE lending comprises a significant portion of our lending business. Specifically, CRE loans were $2.1 billion, or approximately 50% of our total loan/lease portfolio, as of December 31, 2020. Of this amount, $496.5 million, or approximately 24%, was owner-occupied. The market value of real estate securing our CRE loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
Capital and Liquidity Risks
Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities, repayments, and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the FRB or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered deposits, and the ability to borrow at the FRB's Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
During periods of economic turmoil, the financial services industry and the credit markets generally may be materially and adversely affected by significant declines in asset values and depressed levels of liquidity. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans/leases, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
As a bank holding company, our sources of funds are limited.
We are a bank holding company, and our operations are primarily conducted by our subsidiary banks, which are subject to significant federal and state regulation. When available, cash to pay dividends to our stockholders is derived primarily from dividends received from our subsidiary banks. Our ability to receive dividends or loans from our subsidiary banks is restricted. Dividend payments by our subsidiaries to us in the future will require generation of future earnings by them and could require regulatory approval if any proposed dividends are in excess of prescribed guidelines. Further, as a structural matter, our right to participate in the assets of our subsidiary banks in the event of a liquidation or reorganization of any of the banks would be subject to the claims of the creditors of such bank, including depositors, which would take priority except to the extent we may be a creditor with a recognized claim. As of December 31, 2020, our subsidiary banks had deposits, borrowings and other liabilities in the aggregate of approximately $5.2 billion.
Our allowance may prove to be insufficient to absorb losses in our loan/lease portfolio.
We establish our allowance for loan and lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2020, our allowance as a percentage of total gross loans/leases was 1.98%, and as a percentage of total NPLs was 574.61%. In accordance with GAAP for acquisition accounting, the loans acquired through the acquisitions of SFCB, Guaranty Bank and CSB were recorded at fair value; therefore, there was no allowance associated with SFCB's, Guaranty Bank's and CSB's loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($3.1 million at December 31, 2020).
In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.18% for the year ended December 31, 2020. Because of the concentration of C&I and CRE loans in our loan portfolio, which tend to be larger in amount than residential real estate and installment loans, the movement of a small number of loans to nonperforming status can have a significant impact on these ratios. Although management believes that the allowance as of December 31, 2020 was adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan/lease losses with certainty, and we cannot assure you that our allowance will prove sufficient to cover actual loan/lease losses in the future, particularly if economic conditions are more difficult than what management currently expects. Additional provisions and loan/lease losses in excess of our allowance may adversely affect our business, financial condition and results of operations.
Competitive and Strategic Risks
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, Fintech companies, money market mutual funds, credit unions, online lenders and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.
Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks.
Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan/lease rates and deposit rates or loan/lease terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending and leasing activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and offer a broader range of financial services than we can offer.
Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.
As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:
● difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;
● difficulties in supporting and transitioning customers of the target company;
● diversion of financial and management resources from existing operations;
● the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;
● risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;
● potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;
● risks of acquiring loans with deteriorated credit quality;
● assumption of unanticipated problems or latent liabilities; and
● inability to generate sufficient revenue to offset acquisition costs.
Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of business in our current markets or new markets. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible, which could in turn have a material negative effect on our operating results.
If securities or industry analysts do not publish or cease publishing research reports about us, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, the price of our stock could decline.
The trading market for our common stock can be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If there is limited or no securities or industry analyst coverage of us, the market price for our stock could be negatively impacted. Moreover, if any of the analysts who elect to cover us downgrade our common stock, provide more favorable relative recommendations about our competitors or if our operating results or prospects do not meet their expectations, the market price of our common stock may decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Our reputation could be damaged by negative publicity.
Reputational risk, or the risk to our business, financial condition or results of operations from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, ethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.
Accounting and Tax Risks
The FASB has issued an accounting standard update that will result in a significant change in how the Company recognizes credit losses and may have a material impact on our financial condition or results of operations.
In June 2016, the FASB issued an accounting standard update, "Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaced the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. Under the CECL model, the Company will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity investment securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based
on information from past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset initially recorded on the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The CECL model may create more volatility in the level of the allowance for loan losses.
The new CECL standard became effective for the Company for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of the enactment, March 27, 2020 until the earlier of the two following dates: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020. The Company elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. The Company anticipates recognizing a one-time cumulative-effect adjustment to retained earnings and our allowance for loan losses as of January 1, 2021, as allowed by guidance in 2020. The Company incurred transition costs and expects to incur ongoing costs in maintaining the additional CECL models and methodology, including acquiring forecasts used within the models, which will result in increased capital costs upon initial adoption and over time. The Company estimates an increase in the allowance for estimated losses on loans/leases in the range of $1 million to $3 million upon adoption of CECL at January 1, 2021. See Note 1 to the Consolidated Financial Statements “Summary of Significant Accounting Policies,” for additional information on the Company’s impact of adopting CECL.
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and general reporting practices within the financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have a material adverse effect on our financial condition or results of operations in subsequent periods.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations.
Operational Risks
The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions.
LIBOR represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. On July 27, 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR rates after 2021 (the "July 27th Announcement"). The July 27th Announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and on November 30, 2020 the Federal Reserve Board, the FDIC and the OCC issued supervisory guidance encouraging banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has proposed a paced-market transition plan to SOFR from U.S. dollar-LIBOR and organizations are working on industry-wide and company-specific transition plans relating to derivatives and cash markets exposed to LIBOR.
At this time, it is not possible to predict whether and to what extent any additional reforms to LIBOR may be enacted. Similarly, it is not possible to predict whether SOFR or another rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the value of LIBOR-linked securities.
Although the Financial Stability Oversight Council has recommended a transition to an alternative reference rate in the event LIBOR is no longer available after 2021, such plans are still in development and, if enacted, could present challenges. Moreover, contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. The downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact the financial markets and individual institutions. The uncertainty surrounding the sustainability of LIBOR more generally could undermine market integrity and threaten individual financial institutions and the U.S. financial system more broadly.
The Company's information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material adverse effect on the Company's business.
The Company relies heavily on internal and outsourced technologies, communications, and information systems to conduct its business. Additionally, in the normal course of business, the Company collects, processes and retains sensitive and confidential information regarding our customers. As the Company's reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-attacks (such as unauthorized access to the Company's systems). These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others have also increased. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions, retailers and government agencies, particularly denial of service attacks that are designed to disrupt key business or government services, such as customer-facing web sites. The Company is not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. It is also possible that a cyber incident, such as a security breach, may remain undetected for a period of time, further exposing the Company to technology-related risks.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card and debit card transactions that typically involve the transmission of sensitive information regarding the Company's customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in increased costs, all of which could have a material adverse effect on the Company's business. To the extent we are involved in any future cyber-attacks or other breaches, the Company's reputation could be affected, which could also have a material adverse effect on the Company's business, financial condition or results of operations.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to
encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The Company may also need to spend additional resources to enhance protective and detective measures or to conduct investigations to remediate any vulnerabilities that arise.
We are subject to certain operational risks, including, but not limited to, customer or employee misconduct or fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Despite having business continuity plans and other safeguards, the Company could still be affected. Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.
The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.
As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender's SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.
Historically we have sold the guaranteed portion of our SBA loans in the secondary market. These sales have resulted in our earning premium income and/or have created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA loans, we incur credit risk on the retained, non-guaranteed portion of the loans.
In the event of a loss resulting from default and the SBA determines there is a deficiency in the manner in which the loan was originated, funded or serviced by the us, the SBA may require us to repurchase the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us, any of which could adversely affect our business, results of operations and financial condition.
Our community banking strategy relies heavily on our subsidiaries' independent management teams, and the unexpected loss of key managers may adversely affect our operations.
We rely heavily on the success of our bank subsidiaries' independent management teams. Accordingly, much of our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain the executive officers and current management teams of our operating subsidiaries will continue to be important to the successful implementation of our strategy. It is also critical, as we manage our existing portfolio and grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key management personnel,
or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
We have a substantial amount of debt outstanding and may incur additional indebtedness in the future, which could restrict our operations.
As of December 31, 2020, we had approximately $151.7 million of total indebtedness outstanding at the holding company level. In the future, it is possible that we may not generate sufficient revenues to service or repay our debt, and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, and to pay dividends to our common stockholders. Moreover, the degree to which we are leveraged could have important consequences for our stockholders, including:
● limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
● making it more difficult for us to satisfy our debt and other obligations;
● limiting our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;
● increasing our vulnerability to general adverse economic and industry conditions, including changes in interest rates; and
● placing us at a competitive disadvantage compared to our competitors that have less debt.
Severe weather, natural disasters, pandemic, acts of terrorism or war or other adverse external events could significantly impact the Company's business.
As the Company's operating and market footprint continues to grow, severe weather, natural disasters, pandemic, acts of terrorism or war and other adverse external events could have a significant impact on the Company's ability to conduct business. The Company's current footprint poses a wide variety of potential weather, natural disaster, or other adverse events that could impact the Company in various ways. In addition, such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event could have a material adverse effect on the Company's business, which in turn, could have a material adverse effect on the financial condition and results of operation.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
There are no unresolved staff comments.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company’s headquarters is located at 3551 7th Street, Moline, Illinois. The Company and its subsidiaries maintain numerous other facilities, including bank branch locations, which are occupied by the Company and its subsidiaries and which house the executive and primary administrative offices of each respective entity or otherwise facilitate the business operations of the Company and its subsidiaries. Each such property is leased or owned by the Company or its subsidiaries and no such property is subject to any material encumbrance.
The subsidiary banks intend to limit their investment in premises to no more than 50% of their capital. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured, and are adequately equipped for carrying on the business of the Company.
No individual real estate property amounts to 10% or more of consolidated assets.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information. The common stock, par value $1.00 per share, of the Company is listed on The Nasdaq Global Market under the symbol “QCRH”. The stock began trading on Nasdaq on October 6, 1993. As of February 28, 2021, there were 15,826,953 shares of common stock outstanding held by 684 holders of record. Additionally, there are an estimated 3,500 beneficial holders whose stock was held in the street name by brokerage houses and other nominees as of that date.
Dividends on Common Stock. The Company is heavily dependent on dividend payments from its subsidiary banks to provide cash flow for the operations of the holding company and dividend payments on the Company’s common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Applicable Iowa and Missouri laws provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. See Appendix A “Supervision and Regulation” for additional information regarding regulatory restrictions on the payment of dividends.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued debt securities in public offerings and in private placements. Under the terms of the securities, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Annual Report on Form 10-K. See Note 17 to the Consolidated Financial Statements for additional information regarding dividend restrictions.
Purchase of Equity Securities by the Company. On February 18, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain whether or when the Company will resume the repurchase of shares as part of this program in the future. All shares that were repurchased under the share repurchase program were retired. There were no repurchases of common stock by the Company during the fourth quarter of 2020.
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
October 1-31, 2020
-
-
100,932
699,068
November 1-30, 2020
-
-
100,932
699,068
December 1-31, 2020
-
-
100,932
699,068
There were no purchases of common stock by the Company during the years ended December 31, 2019 and 2018.
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2015 and ending December 31, 2020, a comparison of cumulative total returns for the Company, the Nasdaq Composite Index, and the SNL Bank Nasdaq Index prepared by S&P Global, Charlottesville, Virginia. The graph was prepared at the Company’s request by S&P Global. The information assumes that $100 was invested at the closing price on December 31, 2015 in the common stock of the Company and in each index, and that all dividends were reinvested.
QCR Holdings, Inc.
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
QCR Holdings, Inc.
100.00
179.22
178.16
134.20
184.62
167.92
Nasdaq Composite Index
100.00
108.87
141.13
137.12
187.44
271.64
SNL Bank Nasdaq Index
100.00
138.65
145.97
123.04
154.47
132.56

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following “Selected Financial Data” of the Company is derived in part from, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto. See Item 8. Financial Statements. Results for past periods are not necessarily indicative of results to be expected for any future period.
Year Ended December 31,
(dollars in thousands, except per share data)
STATEMENT OF INCOME DATA
Interest income
$
198,373
$
216,076
$
182,879
$
135,517
$
106,468
Interest expense
31,423
60,517
40,484
19,452
11,951
Net interest income
166,950
155,559
142,395
116,065
94,517
Provision for loan/lease losses
55,704
7,066
12,658
8,470
7,478
Non-interest income
113,798
78,768
41,541
30,482
31,037
Non-interest expense (1)
151,755
155,234
119,143
97,424
81,486
Income tax expense
12,707
14,619
9,015
4,946
8,903
Net income
60,582
57,408
43,120
35,707
27,687
PER COMMON SHARE DATA
Net income - Basic (2)
$
3.84
$
3.65
$
2.92
$
2.68
$
2.20
Net income - Diluted (2)
3.80
3.60
2.86
2.61
2.17
Cash dividends declared
0.24
0.24
0.24
0.20
0.16
Dividend payout ratio
6.25
%
6.58
%
8.22
%
7.46
%
7.27
%
Closing stock price
$
39.59
$
43.86
$
32.09
$
42.85
$
43.30
BALANCE SHEET DATA
Total assets
$
5,682,797
$
4,909,050
$
4,949,710
$
3,982,665
$
3,301,944
Securities
838,131
611,341
662,969
652,382
574,022
Total loans/leases
4,251,129
3,690,205
3,732,754
2,964,485
2,405,487
Allowance
84,376
36,001
39,847
34,356
30,757
Deposits
4,599,137
3,911,051
3,977,031
3,266,655
2,669,261
Borrowings
177,114
278,955
404,968
309,480
290,952
Stockholders' equity: common
593,793
535,351
473,138
353,287
286,041
KEY RATIOS
ROAA (2)
1.08
%
1.12
%
0.98
%
1.01
%
0.97
%
ROACE (2)
10.70
11.31
10.62
11.51
10.56
ROAE (2)
10.70
11.31
10.62
11.51
10.56
Loans/leases to assets
74.81
75.36
75.41
74.43
72.85
Loans/leases to deposits
92.43
94.35
93.86
90.75
90.12
NPAs to total assets
0.26
0.27
0.56
0.81
0.82
Allowance to total loans/leases
1.98
0.98
1.07
1.16
1.28
Allowance to NPLs
574.61
403.87
214.79
184.28
144.85
Net charge-offs to average loans/leases
0.18
0.11
0.21
0.19
0.14
Average total stockholders' equity to average total assets
10.10
9.94
9.24
8.81
9.21
(1) Non-interest expense includes several one-time expenses - most notably, $904 thousand, $6.9 million and $3.9 million of acquisition, disposition and post-acquisition compensation, transition and integration costs for 2020, 2019 and 2018, respectively. See Note 2 to the Consolidated Financial Statements for additional information regarding sales/mergers/acquisitions. In addition, $500 thousand and $3.0 million of goodwill impairment expense is included in non-interest expense for 2020 and 2019, respectively. See Note 6 to the Consolidated Financial Statements for additional information. Additionally, non-interest expense includes $3.9 million and $4.6 million of losses on liability extinguishment were related to the prepayment of certain borrowings and deposits for 2020 and 2016, respectively.
(2) Numerator is net income.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section generally discusses 2020 and 2019 items and annual comparison between our fiscal 2020 performance compared to our fiscal 2019 performance. A detailed review of our fiscal 2019 performance compared to our fiscal 2018 performance can be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion should be read in conjunction with Part II, Item 6 hereof, “Selected Financial Data” and our Consolidated Financial Statements and the accompanying notes thereto included or incorporated by reference elsewhere in this document.
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.
GENERAL
The Company was formed in February 1993 for the purpose of organizing QCBT. Over the past twenty-seven years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2020, the Company had $5.7 billion in consolidated assets, including $4.3 billion in total loans/leases, and $4.6 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has had an adverse impact on the Company’s financial condition and results of operations as of and for the year ended December 31, 2020, and could continue to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty.
Effects on the Company’s Market Areas
The Company offers commercial and consumer banking products and services primarily in Iowa, Missouri and Illinois. Each of these three states has recently taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. The continuation and scope of re-openings in each jurisdiction are subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic. Currently all of the subsidiary banks’ branches are limiting lobby access to appointment only.
Each state experienced rapidly increasing unemployment levels as a result of the curtailment of business activities, rising from an average of 4.6% in Illinois in March 2020 to an average of 7.5% in December 2020, according to the Illinois Department of Employment Security. The unemployment rate in Illinois has improved from its highest point this year in May 2020 of an average of 15.2%. Unemployment rose from an average of 4.5% in Missouri in March 2020 to 5.8% in December 2020, according to the Missouri Department of Labor and Industrial Relations. The unemployment rate in Missouri has improved from its highest point this year in May 2020 of an average of 10.1%. In Iowa, the unemployment rate dropped to pre-pandemic levels from an average of 3.7% in March 2020 to 3.1% in December 2020, according to the Iowa Workforce Development. The unemployment rate in Iowa improved from its highest point this year in May 2020 of an average of 10.0%.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
● The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 - 0.25%.
● On March 27, 2020, former President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provided for cash payments to individuals, supplemental unemployment
insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to limitations and eligibility criteria. In December 2020, former President Trump signed into law a $900 billion pandemic relief bill to extend several aid programs in the CARES Act that were set to expire on December 31, 2020. The SBA reopened the PPP in January 2021 to allow certain eligible borrowers that previously received a PPP loan to apply for a second draw PPP loan. At least $25 billion has been set aside from second draw PPP loans. The subsidiary banks are participating as lenders in the PPP.
● In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, existing loan could not be more than 30 days past due as of December 31, 2019 and modification executed between March 1, 2020 and earlier of 60 days after the termination of the National Emergency or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. If a modification does not meet the criteria of the CARES act, a deferral can still be excluded from TDR treatment as long as the modifications meet the regulatory criteria discussed in Note 4 of the Consolidated Financial Statements.
● On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.
● On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: the MSNLF and the MSELF. The combined size of the program will be up to $600 billion. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. As of December 31, 2020, the Company is only participating in the PPP and not the Main Street Business Lending Program.
Effects on the Company’s Business
The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, arts/entertainment/recreation and retail industries could continue to endure significant economic distress, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. In addition, the Company’s loan and lease growth could slow exclusive of the PPP loans, while deposit growth could accelerate as businesses and consumers navigate the impact. As a result, the Company anticipates that its asset quality and results of operations could be adversely affected, as described in further detail below.
The Company’s Response
The Company has taken numerous steps in response to the COVID-19 pandemic, including the following:
● The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of December 31, 2020 there were 126 Bank modifications of loans to commercial and consumer clients totaling $21 million and 71 m2 modifications of loans and leases totaling $7 million for a combined 197 modifications totaling $28 million, representing 0.66% of the total loan and lease portfolio that were currently on deferral.
● As the Company moved to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical. The Company is using virtual meetings to stay connected with its clients and customers are leveraging the Company’s mobile banking capabilities. The Company’s digital communications tool is a modern enterprise video application, with an easy, reliable and secure cloud platform for video and audio conferencing, chat and web conferencing across mobile, desktop and room systems. It has enabled the Company to continue to collaborate in real-time across the enterprise and to meet face-to-face with our clients while working remotely to adhere to the Center for Disease Control’s physical distancing guidelines. Clients are using the Company’s existing mobile banking and mobile payment capabilities including: on-line banking, remote deposit, on-line retail loan applications and person-to-person payment applications that are available across multiple form factors. These applications have enabled customers to engage with the Company virtually to meet their community banking needs. The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit features. The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel.
● The Company implemented its Public Emergency Preparedness Plan (“PEP”). The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions. The goals were to maximize the continuity of the essential services to our customers, protect the health and safety of employees and customers, and minimize adverse financial impact to our institutions. The following strategies were executed:
o Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic;
o increased cash reserves at all charters were established and the charters began monitoring cash outflows;
o IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home;
o reviewed cross training lists for each department in case of staff shortages;
o split specific departments into shifts so not all employees were working together at the same time; and
o communication sites were activated in case emergency information needed to be communicated to employees.
● The Company has processed 1,698 loans for a total of $357.5 million as of December 31, 2020 under the PPP. The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding. PPP loans are included in the C&I category of loans in Note 3 of the Consolidated Financial Statements.
● The Company has implemented a number of actions to support a healthy workforce, including:
o adopting alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for approximately half of our workforce;
o discontinued business travel, large events and meetings; and
o utilizing online meeting platforms.
● On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if the Company does not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain whether or when the Company will resume the repurchase of shares as part of this program in the future.
EXECUTIVE OVERVIEW
The Company reported net income of $60.6 million for the year ended December 31, 2020, and diluted EPS of $3.80. For the same period in 2019 the Company reported net income of $57.4 million and diluted EPS of $3.60.
The year ended December 31, 2020 was highlighted by several significant items:
● Record net income of $60.6 million, or $3.80 per diluted share
● Adjusted net income (non-GAAP) of $63.2 million, or $3.96 per diluted share;
● Adjusted NIM (TEY)(non-GAAP) at 3.38%;
● Noninterest income of $113.8 million for the year;
● Core deposit growth of 22.3% for the year;
● Core loan and lease growth of 7.8% for the year, excluding PPP loans;
● Provision expense of $55.7 million for the year, increasing ALLL to total loans and leases, excluding PPP loans (non-GAAP) by 114 basis points to 2.12%; and
● Nonperforming assets to total assets improved to 0.26% at December 31, 2020.
Following is a table that represents the various net income measurements for the years ended December 31, 2020 and 2019.
Year Ended December 31,
(dollars in thousands, except per share data)
Net income
$
60,582
$
57,408
Diluted earnings per common share
$
3.80
$
3.60
Weighted average common and common equivalent shares outstanding
15,952,637
15,967,775
The Company reported adjusted net income (non-GAAP) of $63.2 million, with adjusted diluted EPS of $3.96. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the year excludes a number of non-recurring items, after-tax, most significantly:
● $3.1 million of liability extinguishment losses;
● $2.0 million of securities gains;
● $545 thousand of disposition costs; and
● $500 thousand of goodwill impairment expense.
Following is a table that represents the major income and expense categories.
Year Ended December 31,
(dollars are in thousands)
Net interest income
$
166,950
$
155,559
Provision expense
55,704
7,066
Noninterest income
113,798
78,768
Noninterest expense
151,755
155,234
Federal and state income tax expense
12,707
14,619
Net income
$
60,582
$
57,408
The following are some noteworthy developments in the Company’s financial results:
● Net interest income grew $11.4 million, or 7.3%, in 2020 compared to the prior year. The increase in 2020 was primarily due to loan growth led by the Company’s specialty finance group and new relationships from PPP loan customers.
● Provision expense increased $48.6 million when comparing 2020 to 2019. The increase in 2020 was primarily attributable to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19. See the “Provision for Loan/Lease Losses” section of this report for additional details.
● Noninterest income increased $35.0 million, or 44%, when compared to the prior year. The increase in 2020 was primarily attributable to higher swap fee income.
● Noninterest expense decreased $3.5 million, or 2.2%, in 2020 compared to the prior year, primarily due to a decrease in post-acquisition compensation, transition and integration costs as well as disposition costs, goodwill impairment expense and net cost and gains/losses on operations of other real estate.
STRATEGIC FINANCIAL METRICS
The Company has established strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company’s ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of this Annual Report on Form 10-K. The Company’s strategic financial metrics are as follows:
● Organic loan and lease growth of 9% per year, funded by core deposits;
● Grow fee-based income by at least 6% per year; and
● Limit our annual operating expense growth to 5% per year.
The following table shows the evaluation of the Company’s strategic financial metrics:
Year to Date
Strategic Financial Metric*
Key Metric
Target
December 31, 2020*
Loans and leases growth organically **
Loans and leases growth
> 9% annually
7.8
%
Fee income growth
Fee income growth
> 6% annually
67.8
%
Improve operational efficiencies and hold noninterest expense growth
Noninterest expense growth
< 5% annually
1.5
%
* The calculations provided exclude non-core noninterest income and noninterest expense.
** Loans and leases growth excludes PPP loans.
STRATEGIC DEVELOPMENTS
The Company took the following actions in 2020 to support our corporate strategy and further the strategic financial metrics shown above:
● The Company grew loans and leases organically in 2020 by 7.8%, excluding PPP loans (non-GAAP), reflecting healthy demand across all markets.
● Correspondent banking continues to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states it currently serves - Iowa, Wisconsin, Missouri and Illinois. The Company acts as the correspondent bank for 192 downstream banks with total average noninterest bearing deposits of $280.4 million and total average interest bearing deposits of $547.6 million for 2020. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.
● As a result of the relatively low interest rate environment including a flat yield curve, the Company is focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company.
● Noninterest expense in 2020 totaled $151.8 million as compared to $155.2 million in 2019. Post-acquisition compensation, transition and integration costs were $3.4 million higher in 2019 from the acquisition of SFCB. Disposition expenses from the sale of RB&T were $3.3 million in 2019 as compared to disposition costs in 2020 of $690 thousand from the sale of the Bates Companies. Goodwill impairment expense decreased $2.5 million in 2020 as compared to 2019 for goodwill impairment related to the Bates Companies. Net cost of (income from) and gains/losses on operations of other real estate decreased $4.1 million in 2020 as compared to 2019 from a write-down of OREO property in 2019.
GAAP TO NON-GAAP RECONCILIATIONS
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “TCE/TA ratios excluding PPP loans”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “pre-provision/pre-tax adjusted income”, “pre-provision/pre-tax adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”, “ALLL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
● TCE/TA ratio (non-GAAP) is reconciled to stockholders’ equity and total assets;
● TCE/TA ratio excluding PPP loans (non-GAAP) is reconciled to stockholders’ equity and total assets;
● Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;
● Pre-provision/pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA (all non-GAAP measures) are reconciled to net income;
● NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM;
● Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and
● ALLL to total loans and leases excluding PPP loans and loan growth annualized excluding PPP loans (all non-GAAP measures) are reconciled to ALLL and total loans and leases.
The TCE/TA non-GAAP ratio has been a focus for our investors and management believes that this ratio may assist investors in analyzing the Company’s capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the year 2020 were materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company’s management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
The pre-provision/pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA are measurements of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items. The Company’s management believes this financial measure is important to investors as the provision for the year ended December 31, 2020 was materially higher due to the impact of COVID-19. By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.
NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a great deal, making comparisons difficult.
The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is standard in the banking industry and widely utilized by investors.
ALLL to total loans and leases, excluding PPP loans, and loan growth annualized, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the year ended December 31, 2020 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ALLL. By excluding the PPP loans, the investor is provided a better comparison to prior years for analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
As of
GAAP TO NON-GAAP
December 31,
December 31,
RECONCILIATIONS
(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)
$
593,793
$
535,351
Less: Intangible assets
85,447
89,717
TCE (non-GAAP)
$
508,346
$
445,634
Total assets (GAAP)
$
5,682,797
$
4,909,050
Less: Intangible assets
85,447
89,717
TA (non-GAAP)
$
5,597,350
$
4,819,333
TCE/TA ratio (non-GAAP)
9.08
%
9.25
%
TCE/TA RATIO EXCLUDING PPP LOANS
Stockholders' equity (GAAP)
593,793
535,351
Less: PPP loan interest income (post-tax)
7,691
-
Less: Intangible assets
85,447
89,717
TCE (non-GAAP)
500,655
445,634
Total assets (GAAP)
5,682,797
4,909,050
Less: PPP loans
273,146
-
Less: Intangible assets
85,447
89,717
TA (non-GAAP)
5,324,204
4,819,333
TCE/TA ratio excluding PPP loans (non-GAAP)
9.40
%
9.25
%
For the Year Ended
December 31,
December 31,
ADJUSTED NET INCOME
Net income (GAAP)
$
60,582
$
57,408
Less non-coore items (post-tax) (*):
Income:
Securities gains (losses), net
$
1,962
$
(22)
Loss on syndicated loan
(210)
-
Gain on sale of assets and liabilities of subsidiary
-
8,539
Total non-core income (non-GAAP)
$
1,752
$
8,517
Expense:
Losses on liability extinguishment
$
3,087
$
Goodwill impairment
3,000
Disposition costs
2,627
Tax expense on expected liquidation of RB&T BOLI
-
Post-acquisition compensation, transition and integration costs
2,828
Loss on sale of subsidiary
-
Total non-core expense (non-GAAP)
$
4,411
$
9,590
Adjusted net income (non-GAAP)
$
63,240
$
58,480
PRE-PROVISION/PRE-TAX ADJUSTED INCOME
Net income (GAAP)
$
60,582
$
57,408
Less: Non-core income not tax-effected
2,218
12,258
Plus: Non-core expense not tax-effected
5,469
11,132
Provision expense
55,704
7,066
Federal and state income tax expense
12,707
14,619
Pre-provision/pre-tax adjusted income (non-GAAP)
$
132,244
$
77,966
PRE-PROVISION/PRE-TAX ADJUSTED RETURN ON AVERAGE ASSETS (NON-GAAP)
Pre-provision/pre-tax adjusted income (non-GAAP)
$
132,244
$
77,966
Average assets
5,604,074
5,102,980
Pre-provision/pre-tax adjusted return on average assets (non-GAAP)
2.36
%
1.53
%
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)
$
63,240
$
58,480
Weighted average common shares outstanding
15,771,650
15,730,016
Weighted average common and common equivalent shares outstanding
15,952,637
15,967,775
Adjusted EPS (non-GAAP):
Basic
$
4.01
$
3.72
Diluted
$
3.96
$
3.66
ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)
$
63,240
$
58,480
Average Assets
$
5,604,074
$
5,102,980
Adjusted ROAA (annualized) (non-GAAP)
1.13
%
1.15
%
ADJUSTED NIM (TEY)*
Net interest income (GAAP)
$
166,950
$
155,559
Plus: Tax equivalent adjustment
8,216
6,727
Net interest income - tax equivalent (non-GAAP)
$
175,166
$
162,286
Less: Accquisition accounting net accretion
3,271
4,344
Adjusted net interest income
171,895
157,942
Average earning assets
$
5,085,659
$
4,703,289
NIM (GAAP)
3.28
%
3.31
%
NIM (TEY) (non-GAAP)
3.44
%
3.45
%
Adjusted NIM (TEY) (non-GAAP)
3.38
%
3.36
%
EFFICIENCY RATIO
Noninterest expense (GAAP)
$
151,755
$
155,234
Net interest income (GAAP)
$
166,950
$
155,559
Noninterest income (GAAP)
113,798
78,768
Total income
$
280,748
$
234,327
Efficiency ratio (noninterest expense/total income) (non-GAAP)
54.05
%
66.25
%
ALLLTO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ALLL
$
84,376
$
36,001
Total loans and leases
$
4,251,129
$
3,690,205
Less: PPP loans
273,146
-
Total loans and leases, excluding PPP loans
$
3,977,983
$
3,690,205
ALLL to total loans and leases, excluding PPP loans
2.12
%
0.98
%
LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS
Total loans and leases
$
4,251,129
$
3,690,205
Less: PPP loans
273,146
-
Total loans and leases, excluding PPP loans
$
3,977,983
$
3,690,205
Loan growth annualized, excluding PPP loans
7.80
%
(0.07)
%
* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain on sale of subsidiary which has an estimated effective tax rate of 30.5%.
NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS) (Non-GAAP)
Net interest income, on a tax equivalent basis, increased 8% to $175.2 million for the year ended December 31, 2020, as compared to the prior year. Excluding the tax equivalent adjustments, net interest income increased 7% for the year ended December 31, 2020 compared to the prior year. Net interest income improved due to several factors:
● Continued organic loan and deposit growth;
● Significant growth in PPP loans in 2020;
● Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and
● Significant reduction in cost of funds.
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
Tax Equivalent Basis
GAAP
For the Year Ended
For the Year Ended
December 31,
December 31,
December 31,
December 31,
Average Yield on Interest-Earning Assets
4.06
%
4.74
%
3.97
%
4.46
%
Average Cost of Interest-Bearing Liabilities
0.85
%
1.66
%
0.63
%
1.44
%
Net Interest Spread
3.21
%
3.08
%
3.34
%
3.02
%
NIM
3.44
%
3.45
%
3.28
%
3.31
%
NIM Excluding Acquisition Accounting Net Accretion
3.38
%
3.36
%
3.27
%
3.28
%
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it's important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
For the Year Ended
December 31,
December 31,
(dollars in thousands)
Acquisition Accounting Net Accretion in NIM
$
3,271
$
4,344
NIM on a tax equivalent basis was down one basis point on a linked-year basis. Excluding acquisition accounting net accretion, NIM was up two basis points on a linked-year basis.
The Company's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies which included better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate increases and finding additional ways to manage cost of funds through derivatives.
In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2020 and 2019.
The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:
Year Ended December 31,
Interest
Average
Interest
Average
Interest
Average
Average
Earned
Yield or
Average
Earned
Yield or
Average
Earned
Yield or
Balance
or Paid
Cost
Balance
or Paid
Cost
Balance
or Paid
Cost
(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold
$
2,398
$
0.79
%
$
8,898
$
2.29
%
$
20,472
$
1.65
%
Interest-bearing deposits at financial institutions
315,616
0.21
179,635
3,910
2.18
66,275
1,267
1.91
Investment securities (1)
715,808
26,773
3.74
635,650
24,151
3.80
659,017
23,621
3.58
Restricted investment securities
20,270
1,031
5.00
21,559
1,174
5.45
22,023
1,093
4.96
Gross loans/leases receivable (1) (2) (3)
4,031,567
178,097
4.42
3,857,547
193,365
5.01
3,352,357
163,197
4.87
Total interest earning assets
$
5,085,659
206,589
4.06
$
4,703,289
222,803
4.74
$
4,120,144
189,516
4.60
Noninterest-earning assets:
Cash and due from banks
$
80,208
$
81,645
$
72,920
Premises and equipment
73,063
78,189
68,602
Less allowance
(55,275)
(40,953)
(38,200)
Other
420,419
280,810
168,655
Total assets
$
5,604,074
$
5,102,980
$
4,392,121
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
$
2,797,669
11,980
0.43
%
$
2,443,989
29,898
1.22
%
$
2,043,314
18,651
0.91
%
Time deposits
690,222
11,289
1.64
966,745
20,977
2.17
766,020
12,024
1.57
Short-term borrowings
22,625
0.37
16,837
2.16
19,458
1.51
FHLB advances
74,167
1,087
1.44
108,536
2,895
2.67
202,715
4,768
2.35
Other borrowings
-
-
-
13,563
3.77
69,623
2,749
3.95
Subordinated notes
83,404
4,697
5.63
60,883
3,564
5.85
-
-
-
Junior subordinated debentures
37,913
2,286
5.93
37,751
2,308
6.11
37,578
1,999
5.32
Total interest-bearing liabilities
$
3,706,000
31,423
0.85
$
3,648,304
60,517
1.66
$
3,138,708
40,484
1.29
Noninterest-bearing demand deposits
$
1,052,375
$
817,473
$
792,885
Other noninterest-bearing liabilities
279,459
129,794
54,555
Total liabilities
$
5,037,834
$
4,595,571
$
3,986,148
Stockholders' equity
566,240
507,409
405,973
Total liabilities and stockholders' equity
$
5,604,074
$
5,102,980
$
4,392,121
Net interest income
$
175,166
$
162,286
$
149,032
Net interest spread
3.21
%
3.08
%
3.31
%
Net interest margin
3.28
%
3.31
%
3.46
%
Net interest margin (TEY)(Non-GAAP)
3.44
%
3.45
%
3.62
%
Adjusted net interest margin (TEY)(Non-GAAP)
3.38
%
3.36
%
3.48
%
Ratio of average interest-earning assets to average interest-bearing liabilities
137.23
%
128.92
%
131.27
%
(1) Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
(2) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
The Company’s components of change in net interest income are presented in the following table:
For the years ended December 31, 2020 and 2019
Inc./(Dec.)
Components
from
of Change (1)
Prior Year
Rate
Volume
2020 vs. 2019
(dollars in thousands)
INTEREST INCOME
Federal funds sold
$
(184)
$
(88)
$
(96)
Interest-bearing deposits at financial institutions
(3,241)
(4,985)
1,744
Investment securities (2)
2,622
(382)
3,004
Restricted investment securities
(143)
(83)
(60)
Gross loans/leases receivable (2) (3)
(15,268)
(23,679)
8,411
Total change in interest income
$
(16,214)
$
(29,217)
$
13,003
INTEREST EXPENSE
Interest-bearing deposits
$
(17,918)
$
(21,725)
$
3,807
Time deposits
(9,688)
(4,462)
(5,226)
Short-term borrowings
(279)
(372)
Federal Home Loan Bank advances
(1,808)
(1,071)
(737)
Other borrowings
(512)
(256)
(256)
Subordinated notes
1,133
-
1,133
Junior subordinated debentures
(22)
-
(22)
Total change in interest expense
$
(29,094)
$
(27,886)
$
(1,208)
Total change in net interest income
$
12,880
$
(1,331)
$
14,211
(1) The column "Inc/(Dec) from Prior Year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
(2) Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The initial recognition of goodwill and subsequent impairment analysis requires us to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods, which may include using the current market price of stock or discounted cash flow analyses. Additionally, estimated cash flows may extend
beyond five years and, by their nature, are difficult to determine over an extended timeframe. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors, changes in revenue growth trends, cost structures, technology, changes in discount rates and market conditions. In determining the reasonableness of cash flow estimates, the Company reviews historical performance of the underlying assets or similar assets in an effort to assess and validate assumptions utilized in its estimates.
In assessing the fair value of reporting units, we may consider the stage of the current business cycle and potential changes in market conditions. We may also utilize other information to validate the reasonableness of our valuations, including public market comparables and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on tangible capital ratios of comparable companies and business segments. These multiples may be adjusted to consider competitive differences, including size, operating leverage and other factors. The carrying amount of a reporting unit is determined based on the capital required to support the reporting unit’s activities, including its tangible and intangible assets. The determination of a reporting unit’s capital allocation requires judgment and considers many factors, including the regulatory capital regulations and capital characteristics of comparably situated companies in relevant industry sectors. In certain circumstances, the Company will engage a third-party to independently validate our assessment of the fair value of our reporting units.
The Company assesses the impairment of goodwill whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors considered important, which could trigger an impairment review, include the following:
● Significant under-performance relative to expected historical or projected future operating results;
● Significant changes in the manner of use of the acquired assets or the strategy for the overall business;
● Significant negative industry or economic trends;
● Significant decline in the market price for our common stock over a sustained period; or
● Market capitalization relative to net book value.
Due to the economic impact of COVID-19 during the first quarter of 2020, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment. There was no occurrence of a triggering event in the second or third quarter of 2020, therefore no impairment test of goodwill was performed as of June 30, 2020 or September 30, 2020. When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of the sale of the Bates Companies as discussed in the Company’s financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K.
As of November 30, 2020 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existedfo.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, governmental guarantees, payment status, changes in nonperforming loans/leases, and other factors. Quantitative factors also incorporate known information about individual loans/leases, including borrowers’ sensitivity to interest rate movements.
Qualitative factors include the general economic environment in the Company’s markets, including economic conditions both locally and nationally, and in particular the economic health of certain industries. Size and complexity of individual credits in relation to loan/lease structure, existing loan/lease policies and pace of portfolio growth are other qualitative factors that are considered in the methodology. As the Company adds new products and increases the complexity of its loan/lease portfolio, it enhances its methodology accordingly.
Management may report a materially different amount for the provision in the statement of operations to change the allowance if its assessment of the above factors were different. The discussion regarding the Company’s allowance should be read in conjunction with the Company’s financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K, as well as the portion of this MD&A section entitled “Financial Condition - Allowance for Estimated Losses on Loans/Leases.”
The Company believes that as a result of the COVID-19 pandemic losses have been incurred that are not yet known and this could have an adverse effect in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the allowance for loan and lease losses.
Although management believes the level of the allowance as of December 31, 2020 was adequate to absorb losses inherent in the loan/lease portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2020 and 2019
INTEREST INCOME
For 2020, interest income decreased $17.7 million, or 8% primarily due to a decline in the yield of average loans/leases of 59 basis points. In total, the Company’s average interest-earning assets increased $382.4 million, or 8%, year-over-year. Average loans/leases grew 5%, while average securities increased 13%.
In 2020, the Company continued to grow its securities portfolio with increases in its portfolio of tax exempt municipal securities. The large majority of these securities are privately placed debt issuances by municipalities located in the Midwest and require a thorough underwriting process before investment. Execution of this strategy has led to increased interest income on a tax equivalent basis over the past several years. Management understands that this strategy has extended the duration of its securities portfolio and continually evaluates the combined benefit of increased interest income and reduced effective income tax rate and the impact on interest rate risk.
The Company intends to continue to grow quality loans and leases as well as diversify the securities portfolio to maximize yield while minimizing credit and interest rate risk.
INTEREST EXPENSE
Comparing 2020 to 2019, interest expense decreased $29.1 million, or 48%, year-over-year. Average interest-bearing liabilities increased 2% in 2020. The Company has grown organically at a significant pace over the past several years. Loan growth has been funded by core deposits and has also allowed the Company to prepay brokered deposits and FHLB advances. In the second half of 2019 and the full year of 2020, the Company’s cost of funds declined in conjunction with the now declining rate environment. The Company’s cost of funds was 0.85% at December 31, 2020, which was down from 1.66% at December 31, 2019.
Cost of funds decreased 81 basis points when comparing cost of funds in 2020 to cost of funds in 2019.
The Company’s management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company’s franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
PROVISION FOR LOAN/LEASE LOSSES
The Company’s provision totaled $55.7 million for 2020, an increase of $48.6 million from 2019. The increase in 2020 was primarily attributable to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19 and new qualitative allocations on acquired loans that previously had no allowance. The Company anticipates the provision could remain elevated in future periods due to the broad reach of COVID-19 across many impacted individuals and industries. The dramatic slowdown in economic activity will likely continue to negatively impact the credit quality of the Company’s loan portfolio with increased levels of loan defaults. The CARES Act provides
significant resources for individuals and industries that could lessen the impact of COVID-19, in addition to the Company’s own loan relief programs.
The allowance for loan/lease losses is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, the local and national economy and the risk associated with the loans/leases in the portfolio as described in more detail in the “Critical Accounting Policies” section.
The Company had an allowance of 1.98% of total gross loans/leases at December 31, 2020, compared to 0.98% of total gross loans/leases at December 31, 2019. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $3.1 million and $7.0 million at December 31, 2020 and 2019, respectively.
The Company’s allowance to total NPLs was 574.61% at December 31, 2020, which was up from 403.87% at December 31, 2019.
The fluctuations in these ratios were the result of the increase in ALLL related to the effects of COVID-19.
The Company estimates an increase in the allowance for estimated losses on loans/leases in the range of $1 million to $3 million upon adoption of CECL at January 1, 2021. The after-tax charge will result in an adjustment to the stockholders' equity effective January 1, 2021. See Note 1 Summary of Significant Accounting Policies of the notes to consolidated financial statements for additional information on the Company’s impact of adoption.
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the years ended December 31, 2020 and 2019.
Year Ended
December 31,
December 31,
$ Change
% Change
Trust department fees
$
9,207
$
9,559
$
(352)
(3.7)
%
Investment advisory and management fees
5,318
6,995
(1,677)
(24.0)
Deposit service fees
6,041
6,812
(771)
(11.3)
Gains on sales of residential real estate loans, net
4,680
2,571
2,109
82.0
Gains on sales of government guaranteed portions of loans, net
(524)
(70.1)
Swap fee income
74,821
28,295
46,526
164.4
Securities gains (losses), net
2,484
(30)
2,514
8380.0
Earnings on bank-owned life insurance
1,904
1,973
(69)
(3.5)
Debit card fees
3,402
3,357
1.3
Correspondent banking fees
16.8
Gain on sale of assets and liabilities of subsidiary
-
12,286
(12,286)
(100.0)
Other
4,814
5,429
(615)
(11.3)
Total noninterest income
$
113,798
$
78,768
$
35,030
44.5
%
In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income. Trust department fees decreased 4% in 2020 as compared to 2019 due to the sale of RB&T. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. The Company added $300.8 million of new trust assets in 2020.
Investment advisory and management fees decreased 24% in 2020 as compared to 2019. Similar to trust department fees, fees from these services are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of assets under management were negatively impacted by the decline in the market as a result of COVID-19 as well as the sale of the Bates Companies in August 2020.
Deposit service fees decreased 11% in 2020 as compared to 2019. The decrease was primarily due to the sale of RB&T, as well as lower transactional volume due to current economic conditions. The Company continues to emphasize shifting
the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, increased 82% in 2020 as compared to 2019. The increase was largely due to SFCB which recognized gains on sales of residential real estate of $3.5 million and $1.7 million in 2020 and 2019, respectively. Also, residential real estate loan rates reached historical lows during 2020 driving an increase in refinance activity.
The Company’s gains on the sale of government-guaranteed portions of loans for 2020 decreased 70% as compared to 2019. Over the past few years, competitors have been offering SBA and USDA loan candidates traditional financing without such a guarantee and the Company is not willing to relax its structure for those lending opportunities.
As a result of the relatively low interest rate environment, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from year to year. Swap fee income totaled $74.8 million in 2020 as compared to $28.3 million in 2019. The increase in swap fee income was due to both the volume and the size of the transactions executed as the Company focused on creating a sustainable revenue source. Future levels of swap fee income can be dependent upon prevailing interest rates and other market activity.
Securities gains, net of losses totaled $2.5 million in 2020 as compared to $30 thousand in securities losses, net of gains for 2019. Manaement sold select overvalued securities and utilized the gains to offset the cost of prepaying certain high cost wholesale funds.
Earnings on BOLI decreased 4% in 2020 primarily due to liquidation of BOLI policies after the sale of RB&T. There were no purchases of BOLI in 2020. Yields on BOLI (based on a simple average and excluding the impact of the federal income tax exemption) were 2.87% for 2020 and 2.10% for 2019. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.
Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 1% in 2020. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 17% in 2020. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves 192 banks in Iowa, Illinois, Missouri and Wisconsin.
There were no gains on sale of assets and liabilities of subsidiary in 2020. Gain on sale of assets and liabilities of subsidiary totaled $12.3 million in 2019 due to the sale of the assets and liabilities of RB&T on November 30, 2019. See Note 2 of the Consolidated Financial Statements for further detail.
Other noninterest income decreased 11% in 2020. The decrease due to the sale of RB&T.
NONINTEREST EXPENSES
The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2020 and 2019.
Year Ended
December 31,
December 31,
$ Change
% Change
Salaries and employee benefits
$
96,268
$
92,063
$
4,205
4.6
%
Occupancy and equipment expense
16,504
15,106
1,398
9.3
Professional and data processing fees
14,644
13,381
1,263
9.4
Post-acquisition compensation, transition and integration costs
3,582
(3,368)
(94.0)
Disposition costs
3,325
(2,635)
(79.2)
FDIC insurance, other insurance and regulatory fees
4,164
2,955
1,209
40.9
Loan/lease expense
1,435
1,097
30.8
Net cost of (income from) and gains/losses on operations of other real estate
(307)
3,789
(4,096)
(108.1)
Advertising and marketing
3,260
4,548
(1,288)
(28.3)
Bank service charges
2,016
2,009
0.3
Loss on liability extinguishment
3,907
3,471
796.1
Correspondent banking expense
0.2
Intangibles amortization
2,149
2,266
(117)
(5.2)
Goodwill impairment
3,000
(2,500)
(83.3)
Loss on sale of subsidiary
-
100.0
Other
5,315
6,841
(1,526)
(22.3)
Total noninterest expense
$
151,755
$
155,234
$
(3,479)
(2.2)
%
Management places strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. One-time charges relating to acquisitions, dispositions and goodwill impairment impacted expense in 2020 and 2019. In 2019, there was a $4.0 million write-down of a single OREO property.
Salaries and employee benefits, which is the largest component of noninterest expense, increased 5% in 2020 as compared to 2019. This increase was primarily related to increased incentive compensation driven by record financial results.
Occupancy and equipment expense increased 9% in 2020 as compared to 2019. This increase was due to higher investments in information technology, increases in repairs and maintenance costs and renovations to existing buildings.
Professional and data processing fees increased 9% in 2020 as compared to 2019. This increased expense was mostly due to legal costs associated with the sale of the Bates Companies. 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.
Post-acquisition compensation, transition and integration costs totaled $214 thousand and $3.6 million for 2020 and 2019, respectively. These costs were comprised primarily of personnel costs, IT integration, and conversion costs related to the acquisitions as described in Note 2 to the Consolidated Financial Statements. The increased costs in 2019 related to conversion of data processing software at SFCB.
Disposition costs totaled $690 thousand for 2020 as compared to $3.3 million for 2019. The costs were comprised primarily of legal, accounting, disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of the Bates Companies in 2020 and the sale of RB&T in 2019. See Note 2 to the Consolidated Financial Statements for further discussion.
FDIC insurance, other insurance and regulatory fee expense increased 41% in 2020. The increase in expense was due to an increase in the asset size of the Company in 2020 as well as a credit to FDIC insurance assessments received in 2019.
Loan/lease expense increased 31% in 2020 as compared to 2019. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost 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 operations totaled $307 thousand for 2020 as
compared to net cost of operations of $3.8 million for 2019. The higher amount in 2019 is due primarily to $3.4 million of subsequent write-down of one OREO property.
Advertising and marketing expense decreased 28% in 2020 as compared to 2019. The decrease in expense was primarily due to the sale of RB&T and the change in general environment due to COVID.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, remained flat in 2020 as compared to 2019.
Losses on liability extinguishment were $3.9 million in 2020 as compared to $436 thousand in 2019. These losses relate to the prepayment of certain brokered certificates of deposit and FHLB advances as well as terminations and changes in designation on certain derivatives.
Correspondent banking expense remained flat in 2020. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services.
Intangible amortization expense decreased 5% in 2020 as compared to 2019. Included in 2019 was a $109 thousand adjustment to intangible amortization expense related to the finalization of purchase accounting related to the acquisition of the Bates Companies.
Goodwill impairment expense totaled $500 thousand in 2020 and $3.0 million in 2019 related to the Bates Companies. See Note 6 to the Consolidated Financial Statements for further discussion.
Loss on sale of subsidiary totaled $158 thousand in 2020 due to the sale of Bates Companies. See Note 2 to the Consolidated Financial Statements for further discussion. There was no loss on sale of a subsidiary in 2019.
Other noninterest expense decreased 22% in 2020 as compared to 2019. This was primarily due to the sale of RB&T. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.
INCOME TAX EXPENSE
The provision for income taxes was $12.7 million for 2020, or an effective tax rate of 17.3%, compared to $14.6 million for 2019, or an effective tax rate of 20.3%. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 14 to the Consolidated Financial Statements for additional details.
FINANCIAL CONDITION AS OF DECEMBER 31, 2020 AND 2019
OVERVIEW
Following is a table that represents the major categories of the Company’s balance sheet. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly owned subsidiary, RB&T. As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of December 31, 2019, the removal of which impacts balance sheet comparisons to the prior period.
As of December 31,
(dollars in thousands)
Amount
%
Amount
%
Cash, federal funds sold, and interest-bearing deposits
$
157,005
%
$
233,945
%
Securities
838,131
%
611,341
%
Net loans/leases
4,166,753
%
3,654,204
%
Derivatives
222,757
%
87,827
%
Other assets
298,151
%
309,767
%
Assets held for sale
-
-
%
11,966
-
%
Total assets
$
5,682,797
%
$
4,909,050
%
Total deposits
$
4,599,137
%
$
3,911,051
%
Total borrowings
177,114
%
278,955
%
Derivatives
229,270
%
88,437
%
Other liabilities
83,483
%
90,253
%
Liabilities held for sale
-
-
%
5,003
-
%
Total stockholders' equity
593,793
%
535,351
%
Total liabilities and stockholders' equity
$
5,682,797
%
$
4,909,050
%
In 2020, total assets increased $773.7 million, or 16%. The Company’s securities portfolio increased $226.8 million, or 37%, during 2020. The Company’s loan/lease portfolio increased $512.5 million, or 14%, during 2020. The increase in the loan/lease portfolio was partially related to the addition of PPP loans (further described in Note 1 to the Consolidated Financial Statements). Excluding the PPP loans (non-GAAP), the Company’s loan/lease portfolio grew organically $287.8 million, or 7.8%, during 2020, which was funded by deposit growth. Deposits grew $688.1 million, or 18% during 2020. Borrowings decreased $101.8 million, or 37%, during 2020.
As of December 31, 2019, there were $12.0 million of assets held for sale, primarily comprised of bank-owned life insurance that was retained from the RB&T sale. There were $5.0 million of liabilities held for sale, primarily comprised of deferred compensation obligations to former RB&T employees as part of the sale transaction. These assets and liabilities were liquidated in 2020.
INVESTMENT SECURITIES
The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk and maximizing return, while minimizing credit risk. Over the recent years, the Company has continued to change the mix of the portfolio by decreasing U.S government sponsored agency securities, while increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company’s existing markets) that require a thorough underwriting process before investment.
Following is a breakdown of the Company’s securities portfolio by type, the percentage of net unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration as of December 31, 2020 and 2019.
Amount
%
Amount
%
(dollars in thousands)
U.S. govt. sponsored agency securities
$
15,336
%
$
20,078
%
Municipal securities
627,523
%
447,853
%
Residential mortgage-backed and related securities
132,842
%
120,587
%
Asset-backed securities
40,683
%
16,887
%
Other securities
21,747
%
5,936
%
$
838,131
%
$
611,341
%
Securities as a % of Total Assets
14.75
%
12.45
%
Net Unrealized Gains as a % of Amortized Cost
6.90
%
4.88
%
Duration (in years)
7.0
6.7
Yield on investment securities (tax equivalent)
3.74
%
3.80
%
Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in 2020 or 2019.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 7.8% in 2020 over 2019. The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following table.
As of December 31,
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(dollars in thousands)
C&I loans*
$
1,726,723
%
$
1,507,825
%
$
1,429,410
%
$
1,134,516
%
$
827,637
%
CRE loans
2,107,629
%
1,736,396
%
1,766,111
%
1,303,492
%
1,093,459
%
Direct financing leases
66,016
%
87,869
%
117,969
%
141,448
%
165,419
%
Residential real estate loans
252,121
%
239,904
%
290,759
%
258,646
%
229,233
%
Installment and other consumer loans
91,302
%
109,352
%
119,381
%
118,611
%
81,666
%
Total loans/leases
$
4,243,791
%
$
3,681,346
%
$
3,723,630
%
$
2,956,713
%
$
2,397,414
%
Plus deferred loan/lease origination costs, net of fees
7,338
8,859
9,124
7,773
8,073
Less allowance
(84,376)
(36,001)
(39,847)
(34,356)
(30,757)
Net loans/leases
$
4,166,753
$
3,654,204
$
3,692,907
$
2,930,130
$
2,374,730
*Includes PPP loans totaling $273.1 million at December 31, 2020.
Historically, the Company structures most residential real estate loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell the loans on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans and recognizing noninterest income from the gain on sale. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the table above. Historically, the subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. The Company holds a limited amount of 15-year fixed rate residential real estate loans originated in prior years that met certain credit guidelines. In addition, the Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
The following tables set forth the remaining maturities by loan/lease type as of December 31, 2020 and 2019. Maturities are based on contractual dates.
As of December 31, 2020
Maturities After One Year
Due in one
Due after one
Due after
Predetermined
Adjustable
year or less
through 5 years
5 years
interest rates
interest rates
(dollars in thousands)
C&I loans
$
362,104
$
942,702
$
421,917
$
995,910
$
368,709
CRE loans
277,248
866,614
963,767
788,442
1,041,939
Direct financing leases
3,617
61,504
62,399
-
Residential real estate loans
19,717
12,335
220,069
200,028
32,376
Installment and other consumer loans
17,671
41,634
31,997
30,975
42,656
$
680,357
$
1,924,789
$
1,638,645
$
2,077,754
$
1,485,680
Percentage of total loans/leases
%
%
%
%
%
As of December 31, 2019
Maturities After One Year
Due in one
Due after one
Due after
Predetermined
Adjustable
year or less
through 5 years
5 years
interest rates
interest rates
(dollars in thousands)
C&I loans
$
448,045
$
660,687
$
399,093
$
701,633
$
358,147
CRE loans
269,687
876,481
590,228
890,149
576,560
Direct financing leases
7,612
76,297
3,960
80,257
-
Residential real estate loans
16,352
15,143
208,409
186,853
36,699
Installment and other consumer loans
28,786
44,534
36,032
38,970
41,596
$
770,482
$
1,673,142
$
1,237,722
$
1,897,862
$
1,013,002
Percentage of total loans/leases
%
%
%
%
%
As CRE loans have historically been one of the Company’s larger portfolio segments, 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 December 31, 2020 and 2019, respectively, approximately 24% and 26% of the CRE loan portfolio was owner-occupied.
See Note 4 to the Consolidated Financial Statements for additional information on the Company’s loan/lease portfolio.
ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES
The allowance totaled $84.4 million at December 31, 2020, which was an increase of $48.4 million, or 134%, from $36.0 million at December 31, 2019. Provision totaled $55.7 million for 2020 and outpaced net charge-offs of $7.3 million (or 18 basis points of average loans/leases outstanding).
The following table summarizes the activity in the allowance.
Year ended December 31,
(dollars in thousands)
Average amount of loans/leases outstanding, before allowance
$
4,031,567
$
3,857,547
$
3,352,357
$
2,611,888
$
2,042,555
Allowance:
Balance, beginning of fiscal year
$
36,001
$
39,847
$
34,356
$
30,757
$
26,141
Reclassification of allowance related to held for sale loans
-
(6,122)
-
-
-
Charge-offs:
C&I
(4,199)
(1,476)
(5,359)
(1,150)
(527)
CRE
(2,071)
(1,722)
(387)
(1,795)
(24)
Direct financing leases
(1,993)
(1,647)
(2,002)
(2,285)
(2,503)
Residential real estate
-
(191)
(127)
(102)
(77)
Installment and other consumer
(120)
(98)
(44)
(41)
(113)
Subtotal charge-offs
(8,383)
(5,134)
(7,919)
(5,373)
(3,244)
Recoveries:
C&I
CRE
Direct financing leases
Residential real estate
Installment and other consumer
Subtotal recoveries
1,054
Net charge-offs
(7,329)
(4,362)
(7,167)
(4,871)
(2,862)
Provision charged to expense
55,704
6,638
12,658
8,470
7,478
Balance, end of fiscal year
$
84,376
$
36,001
$
39,847
$
34,356
$
30,757
Net charge-offs to average loans/leases outstanding
0.18
%
0.11
%
0.21
%
0.19
%
0.14
%
The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management’s judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on the increase/decrease in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio was reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance was monitored by the credit administration staff and reported to management and the board of directors.
The following is a table that reports the criticized and classified loan totals as of December 31, 2020 and 2019.
As of December 31,
Internally Assigned Risk Rating *
(dollars in thousands)
Special Mention (Rating 6)
$
71,481
$
19,952
Substandard (Rating 7)
66,081
33,649
Doubtful (Rating 8)
-
-
$
137,562
$
53,601
Criticized Loans **
$
137,562
$
53,601
Classified Loans ***
$
66,081
$
33,649
Criticized Loans as a % of Total Loans/Leases
3.24
%
1.45
%
Classified Loans as a % of Total Loans/Leases
1.55
%
0.91
%
* Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government
guaranteed portion.
** Criticized loans are defined as C&I and CRE loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as C&I and CRE loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans increased 157% and classified loans increased 96% in 2020 as compared to 2019. The changes were primarily due to the downgrading of $105.4 million of loans from pass to criticized during the year.
NPLs (consisting of nonaccrual loans/leases, accruing loans/leases past due 90 days or more, and accruing TDRs) increased $5.8 million, or 65%, during 2020. See the table in the following section for further detail on NPLs and NPAs.
In accordance with GAAP for acquisition accounting, acquired loans were recorded at fair value; therefore, there was no allowance associated with these loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($3.1 million and $7.0 million at December 31, 2020 and 2019, respectively).
The following table summarizes the trend in allowance as a percentage of gross loans/leases and as a percentage of NPLs as of December 31, 2020 and 2019.
As of December 31,
Allowance / Gross Loans/Leases
1.98
%
0.98
%
Allowance / NPLs
574.61
%
403.87
%
The following table presents the allowance by type and the percentage of loan/lease type to total loans/leases.
As of December 31,
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(dollars in thousands)
C&I loans
35,421
%
16,072
%
16,420
%
14,323
%
12,545
%
CRE loans
42,161
%
15,379
%
17,719
%
13,963
%
11,671
%
Direct financing leases
1,764
%
1,464
%
1,792
%
2,382
%
3,112
%
Residential real estate loans
3,732
%
1,948
%
2,557
%
2,466
%
2,342
%
Installment and other consumer loans
1,298
%
1,138
%
1,359
%
1,222
%
1,087
%
$
84,376
%
$
36,001
%
$
39,847
%
$
34,356
%
$
30,757
%
% Represents the percentage of the certain type of loan/lease to total loans/leases
Although management believes that the allowance at December 31, 2020 is at a level adequate to absorb probable losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions for loan/lease losses in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require additional increases in the provision. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and its leasing company with the intention to improve the overall quality of the Company’s loan/lease portfolio.
See Note 4 to the Consolidated Financial Statements for additional information on the Company’s allowance.
NONPERFORMING ASSETS
The table below presents the amounts of NPAs.
As of December 31,
Nonaccrual loans/leases (1) (2)
$
13,940
$
7,902
$
14,260
$
11,441
$
13,919
Accruing loans/leases past due 90 days or more
TDRs - accruing
3,659
7,113
6,347
Total NPLs
14,684
8,914
18,551
18,643
21,233
OREO
4,129
9,378
13,558
5,523
Other repossessed assets
Total NPAs
$
14,839
$
13,084
$
27,937
$
32,281
$
26,958
NPLs to total loans/leases
0.35
%
0.24
%
0.50
%
0.63
%
0.88
%
NPAs to total loans/leases plus repossessed property
0.35
%
0.35
%
0.75
%
1.08
%
1.12
%
NPAs to total assets
0.26
%
0.27
%
0.56
%
0.81
%
0.82
%
(1) Includes government guaranteed portions of loans, if applicable.
(2) Includes TDRs of $984 thousand at December 31, 2020 and $747 thousand at December 31, 2019.
Generally, the large majority of the Company’s NPAs consists of nonaccrual loans/leases, accruing TDRs and OREO. For nonaccrual loans/leases, management thoroughly reviewed these loans/leases and provided specific allowances as appropriate. OREO is carried at the lower of carrying amount or fair value less costs to sell.
The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.
In 2020, the Company’s NPAs increased $1.8 million, or 13% as compared to $13.1 million in 2019. The increase in NPAs in 2020 was primarily due to several isolated relationships that experienced degradation. OREO decreased $4.1 million as we effectively sold all of our OREO in 2020.
The Company’s lending/leasing practices remain unchanged and asset quality remains a top priority for management.
Due to the economic impacts of COVID-19, the Company established its LRP for its clients. The LRP allows borrowers to request the deferral of principal and interest payments for an agreed upon term. Those deferred payments will be added to the end of the original term of the loan through a three-month extension of the maturity date. The CARES Act includes provisions that allow financial institutions to elect to not apply GAAP requirements to loan modifications related to COVID-19 that would otherwise be categorized as a TDR, including arrangements that defer or delay payments of principal or interest for up to 90 days. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur beginning on March 1, 2020 until the earlier of sixty days after the date on which the national emergency related to COVID-19 is terminated or December 31, 2020. On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of December 31, 2020 there were 126 Bank modifications of loans to commercial and consumer clients totaling $21 million and 71 m2 modifications of loans and leases totaling $7 million for a combined 197 modifications totaling $28 million and representing 0.66% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.
DEPOSITS
Deposits grew $688.1 million, or 17.6%, during 2020, primarily due to an increase in both non-interest bearing and interest bearing commercial clients and correspondent deposits, net of prepayment of large brokered certificates of deposits. The table below presents the composition of the Company’s deposit portfolio.
As of December 31,
Amount
%
Amount
%
(dollars in thousands)
Noninterest bearing demand deposits
$
1,145,378
%
$
777,224
%
Interest bearing demand deposits
2,987,469
%
2,407,502
%
Time deposits
460,659
%
571,343
%
Brokered deposits
5,631
-
%
154,982
%
$
4,599,137
%
$
3,911,051
%
The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 29% in 2020. Year-end balances can fluctuate a great deal due to large customer and correspondent bank activity. During the year, the Company had significant core deposit growth mostly from its correspondent banking clients. The outsized deposit growth exceeded the strong loan growth and led to the Company carrying excess liquidity during the year. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committee. See discussion regarding policy limits on bank stock loans in the Lending/Leasing section under Item 1 - Business in Part I of this Annual Report on Form 10-K.
SHORT-TERM BORROWINGS
The subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company’s short-term borrowings.
As of, December 31,
(dollars in thousands)
Overnight repurchase agreements
$
-
$
2,193
Federal funds purchased
5,430
11,230
$
5,430
$
13,423
As of December 31, 2020, the Company is no longer offering overnight repurchase agreements with customers.
The Company’s federal funds purchased fluctuates based on the short-term funding needs of the Company’s subsidiary banks. See Note 9 to the Consolidated Financial Statements for additional information on the Company’s short-term borrowings.
FHLB ADVANCES AND OTHER BORROWINGS
As a result of their membership in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provide a less costly source of funds than customer deposits. For 2020, FHLB advances decreased $144.3 million, or 91%, primarily due to core deposit growth that allowed for overnight and term FHLB advances to be prepaid or mature without renewal.
As of December 31,
(dollars in thousands)
FHLB Advances
$
15,000
$
159,300
Weighted Average Interest Rate at Year-End
0.29
%
1.74
%
During 2019, the Company prepaid $25 million of wholesale structured repurchase agreements and the other $10 million matured without replacement. For the term notes and revolving line of credit, these were paid off with the proceeds from the issuance of subordinated notes in the first quarter of 2019. See Notes 10 and 11 to the Consolidated Financial Statements for additional information regarding FHLB advances, and other borrowings.
It is management’s intention to continue to reduce its reliance on wholesale funding, including FHLB advances, wholesale structured repurchase agreements, and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as the wholesale funding tends to be higher cost. However, the Company may choose to utilize wholesale funding sources to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.
SUBORDINATED NOTES
On September 14, 2020, the Company completed a private offering of $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 15, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, are at a fixed rate of 5.125% per year, from and including September 14, 2020 to, but excluding, September 15, 2025 or earlier redemption date. From and including September 15, 2025 to, but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then current three-month Term SOFR plus 500 basis points. Interest on the subordinated notes is payable quarterly, commencing on December 15, 2020. The subordinated notes are redeemable by the Company at its option, in whole or in part, on any interest payment date on or after September 15, 2025. The subordinated notes are redeemable by the Company in whole but not in part, under certain limited circumstances set forth in the subordinated notes. Any redemption by the Compay would be at a redemption price equal to 100% of the principal amount of the notes to be redeemed, together with an accrued and unpaid interest on the subordinated notes being redeemed to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.
During 2019, the Company issued subordinated notes of $65.0 million. Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million. The Company used a portion of the net proceeds from the offering to prepay term notes totaling $21.3 million and the outstanding balance of $9.0 million on its revolving line of credit. The term notes and revolving line of credit had been used to fund the acquisition of Springfield Bancshares, as described in Note 2 to the Consolidated Financial Statements.
See Note 12 to the Consolidated Financial Statements for additional information regarding subordinated notes.
STOCKHOLDERS’ EQUITY
The table below presents the composition of the Company’s stockholders’ equity.
As of December 31,
(dollars in thousands)
Common stock
$
15,806
$
15,828
Additional paid in capital
275,807
274,785
Retained earnings
300,804
245,836
AOCI (loss)
1,376
(1,098)
Total stockholders' equity
$
593,793
$
535,351
TCE / TA ratio (non-GAAP)
9.08
%
9.25
%
* TCE/TA ratio is a non-GAAP measure. Refer to the GAAP to Non-GAAP Reconciliations section of this report for more information.
As of December 31, 2020 and 2019, no preferred stock was outstanding.
The following table presents the rollforward of stockholders’ equity for the years ended December 31, 2020 and 2019, respectively.
For the Year Ended December 31,
(dollars in thousands)
Beginning balance
$
535,351
$
473,138
Net income
60,582
57,408
Other comprehensive income, net of tax
2,474
4,446
Common cash dividends declared
(3,779)
(3,775)
Repurchase and cancellation of 100,932 shares of common stock as a result of a share repurchase program
(3,779)
-
Other *
2,944
4,134
Ending balance
$
593,793
$
535,351
* Includes primarily common stock issued for options exercised and the employee stock purchase plans, as well as stock-based compensation.
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic. It is undecided whether or when the Company will resume the repurchase of shares under this program in the future. All shares repurchased under the share repurchase program were retired.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks, cash and due from banks and federal funds sold, which averaged $398.2 million and $270.2 million during 2020 and 2019, respectively. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The Federal Reserve Bank has provided a lending facility that will allow the Company, if desired, to obtain funding specifically for loans that the Company makes under the PPP, which will allow the Company to retain existing sources of
liquidity for traditional operations. The Company has been able to access other available funding sources to address liquidity needs during the COVID-19 pandemic.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.
At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1 million was secured and $456.0 million was unsecured. At December 31, 2020, all of the $743.1 million was available.
At December 31, 2019, the subsidiary banks had 27 lines of credit totaling $380.6 million, of which $45.3 million was secured and $335.3 million was unsecured. At December 31, 2019, all of the $380.6 million was available.
The Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2021. At December 31, 2020, the full $25.0 million was available. See Note 11 to the Consolidated Financial Statements for additional information.
Investing activities used cash of $704.5 million during 2020 compared to $308.7 million during 2019. Proceeds from calls, maturities, pay downs, and sales of securities were $138.9 million for 2020 compared to $106.1 million for 2019. Purchases of securities used cash of $356.1 million for 2020 compared to $72.0 million for 2019. The net increase in loans/leases used cash of $564.7 million for 2020 compared to $320.4 million for 2019. The Company received net cash of $42.6 million related to the sale of RB&T assets and liabilities for 2019. Purchases of derivatives used cash of $4.3 million for 2019. There were no purchases of derivatives in 2020.
Financing activities provided cash of $577.4 million for 2020 compared to $222.9 million for 2019. Net increases in deposits totaled $658.6 million for 2020 as compared to $355.6 million for 2019. Net short-term borrowings decreased $8.0 million for 2020 and decreased $14.2 million for 2019. In 2020 the Company used $55.3 million to prepay select FHLB advances and $29.2 million to prepay brokered and public time deposits. In 2019 the Company used $30.3 million to prepay select FHLB advances and $46.3 million to prepay other borrowings. Short-term FHLB advances decreased $94.3 million in 2020 and decreased $52.5 million in 2019.
Total cash provided by operating activities was $112.2 million for 2020 compared to $76.5 million for 2019.
Throughout its history, the Company has secured additional capital through various resources, including common and preferred stock and the issuance of trust preferred securities and subordinated notes.
As of December 31, 2020 and 2019, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 17 to the Consolidated Financial Statements for detail of the capital amounts and ratios for the Company and its subsidiary banks.
COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the banks would be required to fund the commitments. The maximum potential amount of future payments the banks could be required to make is represented by the contractual amount. If the commitment is funded, the banks would be entitled to seek recovery from the customer. At December 31, 2020 and 2019, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2020 and 2019, commitments to extend credit aggregated $1.7 billion and $1.2 billion, respectively. As of December 31, 2020 and 2019, standby letters of credit aggregated $24.8 million and $23.8 million, respectively. Management does not expect that all of these commitments will be funded.
Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 19 to the Consolidated Financial Statements.
The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The following table presents, as of December 31, 2020, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the Consolidated Financial Statements.
Financial
Payments Due by Period
Statement
One Year
Description
Note Reference
Total
or Less
2 - 3 Years
4 - 5 Years
After 5 Years
(dollars in thousands)
Deposits without a stated maturity
N/A
$
4,138,478
$
4,138,478
$
-
$
-
$
-
Certificates of deposit
460,659
228,257
75,098
20,479
136,825
Short-term borrowings
5,430
5,430
-
-
-
FHLB advances
15,000
15,000
-
-
-
Other borrowings
-
-
-
-
-
Subordinated debentures
118,691
-
-
-
118,691
Junior subordinated debentures
37,993
-
-
-
37,993
Rental commitments
1,779
Operating contracts
N/A
50,285
24,378
11,748
9,600
4,559
Total contractual cash obligations
$
4,828,315
$
4,411,866
$
87,302
$
30,376
$
298,771
The Company’s operating contract obligations represent short and long-term contractual payments for data processing equipment and services, software, and other equipment and professional services.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and the accompanying notes have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
FORWARD LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar
expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A. of Part I of this Annual Report on Form 10-K. In addition to the risk factors described in that section, there are other factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:
● The strength of the local, state, national and international economies (including the impact of the new presidential administration).
● The economic impact of past and any future terrorist attacks, widespread disease or pandemics (including the COVID-19 pandemic), acts of war or threats thereof and other adverse events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse events.
● Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB, including FASB’s CECL impairment standards.
● Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business.
● Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out).
● Increased competition in the financial services sector and the inability to attract new customers.
● Changes in technology and the ability to develop and maintain secure and reliable electronic systems.
● Unexpected results of acquisitions which may include failure to realize the anticipated benefits of the acquisition.
● The loss of key executives and employees.
● The costs, effects and outcomes of existing or future litigation.
● The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.
● The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company’s net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage the Company’s exposure to changes in interest rates, management monitors the Company’s interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank’s interest rate risk position and profitability, and to make or recommend adjustments, as necessary, for consideration by the full board of each bank.
Internal asset/liability management teams consisting of members of the subsidiary banks’ management meet bi-weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks’ securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board’s objectives in the most effective manner. Notwithstanding the Company’s interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company’s asset/liability position, the board of directors and management attempt to manage the Company’s interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company’s interest rate risk position somewhat in order to increase its net interest margin. The Company’s results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300 and 400 basis point upward shifts; and 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.
The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.
Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.
The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.
Application of the simulation model analysis for select interest rate scenarios at December 31, 2020 and 2019 demonstrated the following:
NET INTEREST INCOME EXPOSURE in YEAR 1
As of December 31,
As of December 31,
INTEREST RATE SCENARIO
POLICY LIMIT
100 basis point downward shift
(10.0)
%
-
%
0.5
%
200 basis point upward shift
(10.0)
%
2.5
%
1.2
%
300 basis point upward shock
(30.0)
%
10.3
%
4.9
%
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 2020 were well within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn’t have a specific policy limit).
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company’s interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements
QCR HOLDINGS, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements:
● Note 1: Nature of Business and Significant Accounting Policies
● Note 2: Sales/Mergers/Acquisitions
● Note 3: Investment Securities
● Note 4: Loans/Leases Receivable
● Note 5: Premises and Equipment
● Note 6: Goodwill and Intangibles
● Note 7: Derivatives and Hedging Activities
● Note 8: Deposits
● Note 9: Short-Term Borrowings
● Note 10: FHLB Advances
● Note 11: Other Borrowings and Unused Lines of Credit
● Note 12: Subordinated Notes
● Note 13: Junior Subordinated Debentures
● Note 14: Federal and State Income Taxes
● Note 15: Employee Benefit Plans
● Note 16: Stock-Based Compensation
● Note 17: Regulatory Capital Requirements and Restrictions on Dividends
● Note 18: Earnings Per Share
● Note 19: Commitments and Contingencies
● Note 20: Quarterly Results of Operations (Unaudited)
● Note 21: Parent Company Only Financial Statements
● Note 22: Fair Value
● Note 23: Business Segment Information
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of QCR Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of QCR Holdings, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 12, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for estimated losses on loans/leases
As explained in Note 1 and Note 4 of the consolidated financial statements, the allowance for estimated losses on loans/leases (allowance), totaling $84.4 million at December 31, 2020, is an estimate based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The evaluation by the Company is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of two components: the valuation allowance for loans/leases individually evaluated for impairment (specific component), which represents $2.7 million, and the valuation allowance for loans/leases collectively evaluated for impairment (general component), which represents $81.7 million. The Company’s general component includes a quantitative allowance based upon historical charge-off experience derived from the Company’s internal risk rating process, as well as a qualitative component for factors not reflected in the historical loss experience. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. The evaluation of these qualitative factors requires that management make significant judgements regarding these factors, which may significantly impact the estimated allowance.
We identified the qualitative factors applied to the general component of the allowance as a critical audit matter as auditing management’s determination of these involved a high degree of auditor judgement given the highly subjective nature of management’s judgments.
Our audit procedures related to the Company’s qualitative factors in the general component of the allowance included the following, among others:
● We obtained an understanding of the relevant controls related to the qualitative factors of the general component and tested such controls for design and operating effectiveness, including controls relating to management’s review and approval of the qualitative factors and the data used in determining those factors.
● We tested management’s process and evaluated the reasonableness of their judgements and assumptions to develop the qualitative factors, which included:
o Testing the accuracy of the data inputs used by management as a basis for the adjustments for qualitative factors by comparing to internal and external source data and assessing the reasonableness of the magnitude and directional consistency of the adjustments for such.
o Evaluating whether management’s conclusions were consistent with Company provided internal data and external, independently sourced data and agreeing the impact to the allowance calculation.
Goodwill impairment
At December 31, 2020, the Company’s goodwill totaled $74.1 million. As explained in Note 1 of the consolidated financial statements, impairment testing is performed annually at November 30th, with additional tests, if necessary, due to certain triggering events. The initial recognition of goodwill and subsequent impairment analysis requires the Company to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods, which may include using the current market price of stock or discounted cash flow analyses. The Company assesses the valuation of goodwill at the reporting unit level. The assessment of goodwill impairment is complex due to the judgments and assumptions used in the reporting unit impairment tests as well as the inputs to the valuation models. Management’s decision on the inputs and assumptions in the valuations could have a significant effect on the consolidated balance sheets and net income if impairment is recognized.
We identified the valuation of goodwill as a critical audit matter because of certain significant assumptions management makes in determining the estimate, including cash flow projections, the discount rate, public market comparables, multiples of recent mergers and acquisitions of similar businesses and the control premium. Auditing management’s estimates of these assumptions involved a high degree of auditor judgment and increased audit effort, including the use of internal valuation specialists, as changes in these assumptions could have a significant impact on the fair value of the applicable reporting unit(s) and potential impairment charges.
Our audit procedures related to the Company’s impairment tests of goodwill included the following, among others:
● We obtained an understanding of the relevant controls related to the review of the fair value of the various reporting units and potential impairment charges, which included the development of cash flow projections, the discount rate, public market comparables, multiples of recent merger and acquisitions of similar businesses and the control premium, and tested such controls for design and operating effectiveness.
● We evaluated the reasonableness of management’s cash flow projections by comparing management’s prior projections to historical results for the Company.
● We utilized an internal valuation specialist to assist, as applicable, for the interim and annual impairment tests, as follows in:
o Reviewing the calculations for mathematical accuracy and evaluating if the computation methods were appropriate.
o Developing estimates of the discount rate, public market comparables, multiples of recent mergers and acquisitions and the control premium based on publicly available market data, incorporating into the valuation and comparing the resulting reporting unit fair values to management’s estimates.
/s/ RSM US LLP
We have served as the Company's auditor since 1993.
Davenport, Iowa
March 12, 2021
QCR Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2020 and 2019
December 31,
December 31,
(dollars in thousands)
Assets
Cash and due from banks
$
61,329
$
76,254
Federal funds sold
9,080
9,800
Interest-bearing deposits at financial institutions
86,596
147,891
Securities held to maturity, at amortized cost
476,165
400,646
Securities available for sale, at fair value
361,966
210,695
Total securities
838,131
611,341
Loans receivable held for sale
3,758
3,673
Loans/leases receivable held for investment
4,247,371
3,686,532
Gross loans/leases receivable
4,251,129
3,690,205
Less allowance for estimated losses on loans/leases
(84,376)
(36,001)
Net loans/leases receivable
4,166,753
3,654,204
Bank-owned life insurance
60,586
58,834
Premises and equipment, net
72,693
73,859
Restricted investment securities
18,103
23,252
Other real estate owned, net
4,129
Goodwill
74,066
74,748
Intangibles
11,381
14,970
Derivatives
222,757
87,827
Assets held for sale
-
11,966
Other assets
61,302
59,975
Total assets
$
5,682,797
$
4,909,050
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
$
1,145,378
$
777,224
Interest-bearing
3,453,759
3,133,827
Total deposits
4,599,137
3,911,051
Short-term borrowings
5,430
13,423
Federal Home Loan Bank advances
15,000
159,300
Subordinated notes
118,691
68,394
Junior subordinated debentures
37,993
37,838
Derivatives
229,270
88,437
Liabilities held for sale
-
5,003
Other liabilities
83,483
90,253
Total liabilities
5,089,004
4,373,699
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 December 2020 and December 2019 - no shares issued or outstanding
-
-
Common stock, $1 par value; shares authorized 20,000,000 December 2020 - 15,805,711 shares issued and outstanding December 2019 - 15,828,098 shares issued and outstanding
15,806
15,828
Additional paid-in capital
275,807
274,785
Retained earnings
300,804
245,836
Accumulated other comprehensive income (loss):
Securities available for sale
9,008
2,817
Derivatives
(7,632)
(3,915)
Total stockholders' equity
593,793
535,351
Total liabilities and stockholders' equity
$
5,682,797
$
4,909,050
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
Interest and dividend income:
Loans/leases, including fees
$
173,967
$
190,324
$
160,160
Securities:
Taxable
7,787
6,607
6,353
Nontaxable
14,900
13,858
13,668
Interest-bearing deposits at financial institutions
3,910
1,267
Restricted investment securities
1,031
1,174
1,093
Federal funds sold
Total interest and dividend income
198,373
216,076
182,879
Interest expense:
Deposits
23,269
50,875
30,675
Short-term borrowings
Federal Home Loan Bank advances
1,087
2,894
4,193
Other borrowings
-
3,207
Subordinated notes
4,697
3,564
Junior subordinated debentures
2,286
2,308
1,999
Total interest expense
31,423
60,517
40,484
Net interest income
166,950
155,559
142,395
Provision for loan/lease losses
55,704
7,066
12,658
Net interest income after provision for loan/lease losses
111,246
148,493
129,737
Noninterest income:
Trust department fees
9,207
9,559
8,707
Investment advisory and management fees
5,318
6,995
4,726
Deposit service fees
6,041
6,812
6,420
Gains on sales of residential real estate loans, net
4,680
2,571
Gains on sales of government guaranteed portions of loans, net
Swap fee income
74,821
28,295
10,787
Securities gains (losses), net
2,484
(30)
-
Earnings on bank-owned life insurance
1,904
1,973
1,632
Debit card fees
3,402
3,357
3,263
Correspondent banking fees
Gain on sale of assets and liabilities of subsidiary
-
12,286
-
Other
4,814
5,429
3,848
Total noninterest income
113,798
78,768
41,541
Noninterest expense:
Salaries and employee benefits
96,268
92,063
68,994
Occupancy and equipment expense
16,504
15,106
12,884
Professional and data processing fees
14,644
13,381
11,452
Acquisition costs
-
-
1,795
Post-acquisition compensation, transition and integration costs
3,582
2,086
Disposition costs
3,325
-
FDIC insurance, other insurance and regulatory fees
4,164
2,955
3,594
Loan/lease expense
1,435
1,097
1,544
Net cost of (income from) and gains/losses on operations of other real estate
(307)
3,789
2,489
Advertising and marketing
3,260
4,548
3,552
Bank service charges
2,016
2,009
1,838
Losses on liability extinguishment
3,907
-
Correspondent banking expense
Intangibles amortization
2,149
2,266
1,692
Goodwill impairment
3,000
-
Loss on sale of subsidiary
-
-
Other
5,315
6,841
6,402
Total noninterest expense
151,755
155,234
119,143
Net income before income taxes
73,289
72,027
52,135
Federal and state income tax expense
12,707
14,619
9,015
Net income
$
60,582
$
57,408
$
43,120
Basic earnings per common share
$
3.84
$
3.65
$
2.92
Diluted earnings per common share
$
3.80
$
3.60
$
2.86
Weighted average common shares outstanding
15,771,650
15,730,016
14,768,687
Weighted average common and common equivalent shares outstanding
15,952,637
15,967,775
15,064,730
Cash dividends declared per common share
$
0.24
$
0.24
$
0.24
See Notes to Consolidated Financial Statements.
QCR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
Net income
$
60,582
$
57,408
$
43,120
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax
10,657
8,761
(4,464)
Less reclassification adjustment for gains (losses) included in net income before tax
2,484
(30)
-
Less reclassification adjustment for adoption of ASU 2016-01
-
-
8,173
8,791
(3,609)
Unrealized gains (losses) on derivatives:
Unrealized holding losses arising during the period before tax
(6,854)
(3,806)
(1,199)
Less reclassification adjustment for unhedging caplet
(649)
-
-
Less reclassification adjustment for swap termination
(792)
-
-
Less reclassification adjustment for caplet amortization before tax
(551)
-
-
Less reclassification adjustment for caplet ineffectiveness before tax
-
-
(602)
(4,862)
(3,806)
(597)
Unrealized gains (losses) on assets held for sale:
Unrealized holding gains (losses) arising during the period before tax on securities held for sale
-
-
Less realized holding gains on securities sold
-
(61)
-
Unrealized holding losses arising during the period before tax on derivatives held for sale
-
(446)
-
Less reclassification adjustment for caplet ineffectiveness before tax
-
-
Less realized holding losses on derivatives sold
-
-
-
-
Other comprehensive income (loss), before tax
3,311
5,879
(4,206)
Tax expense (credit)
1,433
(1,000)
Other comprehensive income (loss), net of tax
2,474
4,446
(3,206)
Comprehensive income
$
63,056
$
61,854
$
39,914
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2020, 2019, and 2018
Accumulated
Additional
Other
Common
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
(Loss) Income
Total
(dollars in thousands)
Balance December 31, 2017
$
13,918
$
189,078
$
151,962
$
(1,671)
$
353,287
Net income
-
-
43,120
-
43,120
Other comprehensive loss, net of tax
-
-
-
(3,206)
(3,206)
Impact of adoption of ASU 2016-01
-
-
(667)
-
Common cash dividends declared, $0.24 per share
-
-
(3,546)
-
(3,546)
Issuance of 1,699,414 shares of common stock as a result of merger
with Springfield Bancshares, net of issuance costs of $106,327
1,699
78,832
-
-
80,531
Issuance of 23,501 shares of common stock as a result of
acquisition of Bates Companies
-
-
1,000
Issuance of 15,528 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan
-
-
Issuance of 60,127 shares of common stock as a result of
stock options exercised
-
-
Stock-based compensation expense
-
1,443
-
-
1,443
Restricted stock awards and restricted stock units- 22,660 shares
of common stock , net of restricted stock units
withheld for payment for taxes
(23)
-
-
-
Exchange of 21,190 shares of common stock in connection
with payroll taxes for restricted stock vested and in connection
with stock options exercised
(21)
(855)
-
-
(876)
Balance, December 31, 2018
$
15,718
$
270,761
$
192,203
$
(5,544)
$
473,138
Net income
-
-
57,408
-
57,408
Other comprehensive income, net of tax
-
-
-
4,446
4,446
Common cash dividends declared, $0.24 per share
-
-
(3,775)
-
(3,775)
Issuance of 9,400 shares of common stock as a result of
the acquisition of the Bates Companies
-
-
Issuance of 28,775 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan
-
-
Issuance of 59,393 shares of common stock as a result of
stock options exercised
-
-
Stock-based compensation expense
-
2,469
-
-
2,469
Restricted stock awards and restricted stock units- 19,869 shares
of common stock , net of restricted stock units withheld for payment of taxes
(63)
-
-
(43)
Exchange of 7,547 shares of common stock in connection
with payroll taxes for restricted stock vested and in
connection with stock options exercised
(7)
(211)
-
-
(218)
Balance, December 31, 2019
$
15,828
$
274,785
$
245,836
$
(1,098)
$
535,351
Net income
-
-
60,582
-
60,582
Other comprehensive income, net of tax
-
-
-
2,474
2,474
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program
(101)
(1,843)
(1,835)
-
(3,779)
Common cash dividends declared, $0.24 per share
-
-
(3,779)
-
(3,779)
Issuance of 37,114 shares of common stock as a result of
stock purchased under the Employee Stock Purchase Plan
-
-
Issuance of 41,650 shares of common stock as a result of
stock options exercised
-
-
Stock-based compensation expense
-
2,150
-
-
2,150
Restricted stock awards and restricted stock units- 8,838 shares
of common stock , net of restricted stock units
withheld for payment for taxes
-
-
Exchange of 9,057 shares of common stock in connection
with payroll taxes for restricted stock vested and in connection
with stock options exercised
(9)
(870)
-
-
(879)
Balance, December 31, 2020
$
15,806
$
275,807
$
300,804
$
1,376
$
593,793
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
60,582
$
57,408
$
43,120
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
5,333
5,225
4,451
Provision for loan/lease losses
55,704
7,066
12,658
Deferred income taxes
(14,530)
6,364
6,292
Stock-based compensation expense
2,150
2,469
1,443
Deferred compensation expense accrued
3,821
2,773
1,824
Losses (gains) on other real estate owned, net
(317)
3,361
2,585
Amortization of premiums on securities, net
1,561
1,614
Caplet amortization
-
-
Securities (gains) losses, net
(2,484)
-
Loans originated for sale
(236,734)
(151,692)
(57,698)
Proceeds on sales of loans
241,553
152,633
58,353
Gains on sales of residential real estate loans
(4,680)
(2,571)
(901)
Gains on sales of government guaranteed portions of loans
(224)
(748)
(405)
Loss on liability extinguishment, net
3,907
-
Losses (gains) on sales of premises and equipment
(19)
-
Amortization of intangibles
2,149
2,266
1,692
Accretion of acquisition fair value adjustments, net
(3,271)
(4,344)
(5,527)
Increase in cash value of bank-owned life insurance
(1,904)
(1,973)
(1,632)
Loss (gain) on sale of subsidiary/certain assets and liabilities of subsidiary
(12,286)
-
Goodwill impairment
3,000
-
Decrease (increase) in other assets
12,802
(19,152)
(11,137)
Increase (decrease) in other liabilities
(13,839)
23,915
7,539
Net cash provided by operating activities
112,177
76,494
64,271
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold
16,598
3,799
Net decrease (increase) in interest-bearing deposits at financial institutions
61,295
(69,984)
(14,508)
Proceeds from sales of other real estate owned
4,477
2,539
Activity in securities portfolio:
Purchases
(356,127)
(71,963)
(84,045)
Calls, maturities and redemptions
53,007
25,193
23,931
Paydowns
47,313
50,830
44,287
Sales
38,562
30,055
1,938
Activity in restricted investment securities:
Purchases
(4,600)
(5,859)
(5,409)
Redemptions
9,749
7,621
3,157
Proceeds from the liquidation of assets held for sale
10,999
-
-
Net increase in loans/leases originated and held for investment
(564,748)
(320,368)
(292,697)
Purchase of premises and equipment
(4,268)
(12,429)
(11,457)
Proceeds from sales of premises and equipment
2,562
-
Purchase of derivatives
-
(4,347)
-
Payment for ermination of derivative
(808)
-
-
Net cash received (transferred) for sale of subsidiary/certain assets and liabilities of subsidiary
(154)
42,587
-
Net cash paid for acquisition
-
-
(5,183)
Net cash (used in) investing activities
(704,482)
(308,664)
(333,648)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts
658,592
335,580
271,266
Net increase (decrease) in short-term borrowings
(7,993)
(14,193)
13,638
Activity in Federal Home Loan Bank advances:
Term advances
125,000
25,000
15,080
Calls and maturities
(121,600)
(35,000)
(40,000)
Net change in short-term and overnight advances
(94,300)
(52,465)
24,765
Prepayments
(55,274)
(30,323)
-
Activity in other borrowings:
Proceeds from other borrowings
-
-
9,000
Calls, maturities and scheduled principal payments
-
(11,937)
(12,550)
Prepayments
-
(46,313)
-
Paydown of revolving line of credit
-
(9,000)
-
Prepayments on brokered and public time deposits
29,153
-
-
Proceeds from subordinated notes
50,000
63,393
-
Payment of cash dividends on common stock
(3,779)
(3,767)
(3,300)
Proceeds from issuance of common stock, net
1,360
1,926
1,279
Repurchase and cancellation of shares
(3,779)
-
-
Net cash provided by financing activities
577,380
222,901
279,178
Net increase (decrease) in cash and due from banks
(14,925)
(9,269)
9,801
Cash and due from banks, beginning
76,254
85,523
75,722
Cash and due from banks, ending
$
61,329
$
76,254
$
85,523
QCR Holdings, Inc. and Subsidiaries - Continued
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019, and 2018
Supplemental disclosure of cash flow information, cash payments for:
Interest
$
32,178
$
59,292
$
38,782
Income/franchise taxes
24,567
2,719
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net
2,474
4,446
(3,206)
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised
(740)
(218)
(876)
Transfers of loans to other real estate owned
1,086
Increase in the fair value of back-to-back interest rate swap assets and liabilities
137,752
62,483
17,798
Dividends payable
Consideration received on sale of the Bates Companies
1,523
-
-
Transfer of equity securities from securities available for sale to other assets at fair value
-
-
2,614
Supplemental disclosure of cash flow information for sale of subsidiary/certain assets and certain liabilities of subsidiary:
Cash proceeds**
$
$
46,560
$
-
Assets Sold:
Cash and due from banks
$
$
3,973
$
-
Interest-bearing deposits at financial institutions
-
55,291
-
Securities held to maturity, at amortized cost
-
3,243
-
Securities available for sale, at fair value
-
21,874
-
Loans/leases receivable held for investment, net
-
357,931
-
Premises and equipment, net
5,612
-
Restricted investment securities
-
-
Other real estate owned, net
-
2,134
-
Other assets
2,259
3,228
-
Total assets sold
$
2,627
$
453,961
$
-
Liabilities Sold:
Noninterest-bearing deposits
$
-
$
69,802
$
-
Interest-bearing deposits
-
331,486
-
Short-term borrowings
-
1,158
-
Federal Home Loan Bank advances
-
15,000
-
Other liabilities
2,241
-
Total liabilities sold
$
$
419,687
$
-
Net Assets Sold
$
1,681
34,274
-
Forgiveness of earn-out consideration
$
$
-
$
-
Note receivable consideration
-
-
Gain (loss) on sale of subsidiary and certain assets and certain liabilities of subsidiary:
$
(158)
$
12,286
$
-
Supplemental disclosure of cash flow information for acquisitions:
Fair value of assets acquired:
Cash and due from banks
$
-
$
-
$
4,651
Interest-bearing deposits at financial institutions
-
-
62,924
Securities
-
-
4,845
Loans receivable, net
-
-
477,337
Bank-owned life insurance
-
-
7,092
Premises and equipment, net
-
-
6,092
Restricted investment securities
-
-
3,654
Intangibles
-
-
10,064
Other assets
-
-
2,255
Total assets acquired
$
-
$
-
$
578,914
Fair value of liabilities assumed:
Deposits
$
-
$
-
$
439,579
Short-term borrowings
-
-
1,143
FHLB advances
-
-
74,540
Other borrowings
-
-
9,544
Junior subordinated debentures
-
-
-
Other liabilities
-
-
8,878
Total liabilities assumed
-
-
533,684
Net assets acquired
$
-
$
-
$
45,230
Consideration paid:
Cash paid *
$
-
$
-
$
9,834
Promissory note
-
-
1,500
Contingent commitment
-
-
2,000
Common stock
-
-
81,637
Total consideration paid
-
-
94,971
Goodwill
$
-
$
-
$
49,741
*Net cash paid at closing totaled $1.4 million for acquisition of the Bates Companies in 2018.
Net cash paid at closing totaled $3.7 million for merger with Springfield Bancshares in 2018.
**Net cash received at closing totaled $42.6 million for the sale of certain assets and certain liabilities of RB&T in 2019.
Net cash transferred at closing totaled $154 thousand for the sale of the Bates Companies in 2020.
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Basis of presentation:
The acronyms and abbreviations identified below are used in the Notes to the Consolidated Financial Statements, as well as in the other sections of this Annual Report on Form 10-K (including appendices). It may be helpful to refer back to this page as you read this report.
Allowance: Allowance for estimated losses on loans/leases
Guaranty Bank: Guaranty Bank and Trust Company
AOCI: Accumulated other comprehensive income (loss)
IB&T: Illinois Bank & Trust
AFS: Available for sale
Iowa Superintendent: Iowa Superintendent of Banking
ASC: Accounting Standards Codification
LCR: Liquidity Coverage Ratio
ASC 805: Business Combination Standard
LIBOR: London Inter-Bank Offered Rate
ASU: Accounting Standards Update
LRP: Loan Relief Program
Bates Companies: Bates Financial Advisors, Inc., Bates
m2: m2 Equipment Finance, LLC
Financial Services, Inc., Bates Securities, Inc. and Bates
MD&A: Management’s Discussion & Analysis
Financial Group, Inc.
Missouri Division of Finance: Missouri Department of
BBA: British Bankers’ Association
Commerce and Insurance
BHCA: Bank Holding Company Act of 1956
MSA: Metropolitan Statistical Area
BOLI: Bank-owned life insurance
NIM: Net interest margin
Caps: Interest rate cap derivatives
NPA: Nonperforming asset
CARES Act: Coronavirus Aid, Relief and Economy Security
Act
CECL: Current Expected Credit Losses
NPL: Nonperforming loan
NSFR: Net Stable Funding Ratio
OREO: Other real estate owned
CFPB: Bureau of Consumer Financial Protection
OTTI: Other-than-temporary impairment
CDI: Core deposit intangible
CNB: Community National Bank
PCAOB: Public Company Accounting Oversight Board
PCI: Purchased credit impaired
Community National: Community National Bancorporation
PPP: Paycheck Protection Program
COVID-19: Coronavirus Disease 2019
Provision: Provision for loan/lease losses
CRA: Community Reinvestment Act
PUD LOC: Public Unit Deposit Letter of Credit
CRBT: Cedar Rapids Bank & Trust Company
QCBT: Quad City Bank & Trust Company
CRE: Commercial real estate
QCIA: Quad Cities Investment Advisors
CRE Guidance: Interagency Concentrations in Commercial
RB&T: Rockford Bank & Trust Company
Real Estate Lending, Sound Risk Management Practices
ROAA: Return on Average Assets
guidance
ROACE: Return on Average Common Equity
CSB: Community State Bank
ROAE: Return on Average Equity
C&I: Commercial and industrial
SBA: U.S. Small Business Administration
Dodd-Frank Act: Dodd-Frank Wall Street Reform and
SEC: Securities and Exchange Commission
Consumer Protection Act
SFCB: Springfield First Community Bank
DGCL: Delaware General Corporation Law
SERPs: Supplemental Executive Retirement Plans
DIF: Deposit Insurance Fund
Springfield Bancshares: Springfield Bancshares, Inc.
EPS: Earnings per share
TA: Tangible assets
Exchange Act: Securities Exchange Act of 1934, as
Tax Act: Tax Cuts and Jobs Act
amended
TCE: Tangible common equity
FASB: Financial Accounting Standards Board
TDRs: Troubled debt restructurings
FDIC: Federal Deposit Insurance Corporation
TEY: Tax equivalent yield
Federal Reserve: Board of Governors of the Federal Reserve
The Company: QCR Holdings, Inc.
System
Treasury: U.S. Department of the Treasury
FHLB: Federal Home Loan Bank
USA Patriot Act: Uniting and Strengthening America by
FRB: Federal Reserve Bank of Chicago
Providing Appropriate Tools Required to Intercept
FTEs: Full-time equivalents
and Obstruct Terrorism Act of 2001
GAAP: Generally Accepted Accounting Principles
USDA: U.S. Department of Agriculture
Goldman Sachs: Goldman Sachs and Company
Guaranty: Guaranty Bankshares, Ltd.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Nature of business:
QCR Holdings, Inc. is a bank holding company that has elected to operate as a financial holding company under the BHCA. The Company provides bank and bank-related services through its banking subsidiaries, QCBT, CRBT, CSB and SFCB. The Company also engages in direct financing lease contracts through its wholly-owned equity investment by QCBT in m2, headquartered in Brookfield, Wisconsin. The Company also engages in wealth management services through its banking subsidiaries.
On August 12, 2020, the Company sold the Company’s wholly-owned subsidiaries, the Bates Companies, which were originally acquired on October 1, 2018. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFCB, headquartered in Springfield, Missouri. The financial results of the Bates Companies and RB&T prior to their respective sales are included in this report. The financial results of acquired/merged entities for the periods since acquisition/merger are included in this report. See Note 2 to the Consolidated Financial Statements for additional information.
QCBT is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. CRBT is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities including Cedar Falls and Waterloo, Iowa. CSB is a commercial bank that serves Des Moines, Iowa, and adjacent communities. SFCB is a commercial bank that serves Springfield, Missouri.
QCBT, CRBT, and CSB are chartered and regulated under the laws of the state of Iowa. SFCB is chartered and regulated under the laws of the state of Missouri. All four subsidiary banks are insured and subject to regulation by the FDIC. All four subsidiary banks are members of and regulated by the Federal Reserve System.
The remaining direct subsidiaries of the Company consist of six non-consolidated subsidiaries formed for the issuance of trust preferred securities. See Note 13 for a listing of these subsidiaries and additional information.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, OTTI of securities, impairment of goodwill, the fair value of financial instruments, and the fair value of assets acquired/liabilities assumed in a business combination.
Principles of consolidation: The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries, except those six subsidiaries formed for the issuance of trust preferred securities which do not meet the criteria for consolidation. See Note 13 for a detailed listing of these subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Presentation of cash flows: For purposes of reporting cash flows, cash and due from banks include cash on hand and noninterest bearing amounts due from banks. Cash flows from federal funds sold, interest bearing deposits at financial institutions, loans/leases, deposits, short-term borrowings and overnight and short-term FHLB advances are treated as net increases or decreases.
Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. There was no reserve requirement as of December 31, 2020. The reserve requirement was approximately $38,060,000 as of December 31, 2019.
Investment securities: Investment securities HTM are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered AFS as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities AFS are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in AOCI. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
All debt securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary.
In estimating OTTI losses on debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions, and (4) the lack of intent of the Company to sell the security prior to recovery and whether it is not more-likely-than-not that it will be required to sell the security prior to recovery.
If the Company lacks the intent to sell the debt security, and it is not more-likely-than-not the entity will be required to sell the security before recovery of its amortized cost basis, the Company will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company discloses the allowance for loan losses (also known as the allowance) by portfolio segment, and credit quality information, impaired financing receivables, nonaccrual status, and TDRs by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its allowance for loan losses. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 4.
The Company’s portfolio segments are as follows:
● C&I
● CRE
● Residential real estate
● Installment and other consumer
Direct financing leases are considered a segment within the overall loan/lease portfolio.
The Company’s classes of loans receivable are as follows:
● C&I
● Owner-occupied CRE
● Commercial construction, land development, and other land loans that re not owner-occupied CRE
● Other non-owner-occupied CRE
● Residential real estate
● Installment and other consumer
Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio. The
accounting policies for direct financing leases are disclosed below.
Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 31 days or greater.
For all classes of loans receivable, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist:
● It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan;
● When full repayment of principal and interest is not expected;
● When the loan is graded “doubtful”;
● When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future; or
● When foreclosure action is initiated.
When a loan is placed on nonaccrual status, income recognition is ceased. Previously recorded but uncollected amounts of interest on nonaccrual loans are reversed at the time the loan is placed on nonaccrual status. Generally, cash collected on nonaccrual loans is applied to principal. Should full collection of principal be expected, cash collected on nonaccrual loans can be recognized as interest income.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
For all classes of loans receivable, nonaccrual loans may be restored to accrual status provided the following criteria are met:
● The loan is current, and all principal and interest amounts contractually due have been made;
● All principal and interest amounts contractually due, including past due payments, are reasonably assured of repayment within a reasonable period; and
● There is a period of minimum repayment performance, as follows, by the borrower in accordance with contractual terms:
o
Six months of repayment performance for contractual monthly payments, or
o
One year of repayment performance for contractual quarterly or semi-annual payments.
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.
Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than-temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.
The Company defers and amortizes fees and certain incremental direct costs over the contractual term of the lease as an adjustment to the yield. In periods prior to and including December 31, 2018, these initial direct leasing costs approximated 5.5% of the leased asset’s cost. With the adoption of ASU 2016-02 on January 1, 2019, a portion of these costs were expensed instead of deferred. Initial direct leasing costs were 3.2% and 3.9% of the leased asset’s cost in 2020 and 2019, respectively. The unamortized direct costs are recorded as a reduction of unearned lease income.
TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The following criteria, related to granting a concession, together or separately, create a TDR:
● A modification of terms of a debt such as one or a combination of:
o
The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.
o
The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
o
The reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
o
The reduction of accrued interest.
● A transfer from the borrower/lessee to the Company of receivables from third parties, real estate, other assets, or an equity position in the borrower to fully or partially satisfy a loan.
● The issuance or other granting of an equity position to the Company to fully or partially satisfy a debt unless the equity position is granted pursuant to existing terms for converting the debt into an equity position.
Allowance: For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Loan/lease losses, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
For all portfolio segments, the allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans/leases in light of historical experience, the nature and volume of the loan/lease portfolio, adverse situations that may affect the borrower’s/lessee’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” and carrying aggregate exposure in excess of $250 thousand. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A discussion of the risk characteristics and the allowance by each portfolio segment follows:
For C&I loans, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:
● Ability and stability of current management of the borrower;
● Stable earnings with positive financial trends;
● Sufficient cash flow to support debt repayment;
● Earnings projections based on reasonable assumptions;
● Financial strength of the industry and business; and
● Value and marketability of collateral.
Collateral for C&I loans generally includes accounts receivable, inventory, equipment and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years with average terms ranging from three to five years. For low-income housing tax credit permanent loans, the maximum term is generally up to 20 years. For lines of credit, the maximum term is generally 365 days.
In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits established by regulatory authorities.
The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.
In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied loans. Owner-occupied loans are generally considered to have less risk. As of December 31, 2020 and 2019, approximately 26% and 26%, respectively, of the CRE loan portfolio was owner-occupied.
The Company’s lending policy incorporates regulatory guidelines which stipulate that non-owner occupied CRE lending in excess of 300% of total risk-based capital, and construction, land development, and other land loans in excess of 100% of total risk-based capital warrant the use of heightened risk management practices. As of December 31, 2020 and 2019, QCBT and CRBT were in compliance with these limits. Although CSB’s and SFCB’s loan portfolio have historically been real estate dominated and the real estate portfolio levels at each bank exceed these policy limits, a Credit Risk Committee has been established to routinely monitor their real estate loan portfolios. CSB’s real estate levels, while still elevated at December 31, 2020, have declined since December 31, 2019.
In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above and below. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the Company’s lending policy and, if there are exceptions, they are clearly noted as such and specifically identified in loan/lease approval documents.
For C&I and CRE loans, the allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
For C&I loans and all classes of CRE loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The general component consists of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-off experience derived from the Company’s internal risk rating process. See below for a detailed description of the Company’s internal risk rating scale. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
For C&I and CRE loans, the Company utilizes the following internal risk rating scale:
1. Highest Quality (Pass) - loans of the highest quality with no credit risk, including those fully secured by subsidiary bank certificates of deposit and U.S. government securities.
2. Superior Quality (Pass) - loans with very strong credit quality. Borrowers have exceptionally strong earnings, liquidity, capital, cash flow coverage, and management ability. Includes loans secured by high quality marketable securities, certificates of deposit from other institutions, and cash value of life insurance. Also includes loans supported by U.S. government, state, or municipal guarantees.
3. Satisfactory Quality (Pass) - loans with satisfactory credit quality. Established borrowers with satisfactory financial condition, including credit quality, earnings, liquidity, capital and cash flow coverage. Management is capable and experienced. Collateral coverage and guarantor support, if applicable, are more than adequate. Includes loans secured by personal assets and business assets, including equipment, accounts receivable, inventory, and real estate.
4. Fair Quality (Pass) - loans with moderate but still acceptable credit quality. The primary repayment source remains adequate; however, management’s ability to maintain consistent profitability is unproven or uncertain. Borrowers exhibit acceptable leverage and liquidity. May include new businesses with inexperienced management or unproven performance records in relation to peer, or borrowers operating in highly cyclical or declining industries.
5. Early Warning (Pass) - loans where the borrowers have generally performed as agreed, however unfavorable financial trends exist or are anticipated. Earnings may be erratic, with marginal cash flow or declining sales. Borrowers reflect leveraged financial condition and/or marginal liquidity. Management may be new and a track record of performance has yet to be developed. Financial information may be incomplete, and reliance on secondary repayment sources may be increasing.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
6. Special Mention - loans where the borrowers exhibit credit weaknesses or unfavorable financial trends requiring close monitoring. Weaknesses and adverse trends are more pronounced than Early Warning loans, and if left uncorrected, may jeopardize repayment according to the contractual terms. Currently, no loss of principal or interest is expected. Borrowers in this category have deteriorated to the point that it would be difficult to refinance with another lender. Special Mention should be assigned to borrowers in turnaround situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.
7. Substandard - loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if applicable. These loans have a well-defined weakness or weaknesses which jeopardize repayment according to the contractual terms. There is distinct loss potential if the weaknesses are not corrected. Includes loans with insufficient cash flow coverage which are collateral dependent, other real estate owned, and repossessed assets.
8. Doubtful - loans which have all the weaknesses inherent in a Substandard loan, with the added characteristic that existing weaknesses make full principal collection, on the basis of current facts, conditions and values, highly doubtful. The possibility of loss is extremely high, but because of pending factors, recognition of a loss is deferred until a more exact status can be determined. All doubtful loans will be placed on non-accrual, with all payments, including principal and interest, applied to principal reduction
The Company has certain loans risk-rated 7 (substandard), which are not classified as impaired based on the facts of the credit. For these non-impaired and risk-rated 7 loans, the Company does not follow the same allowance methodology as it does for all other non-impaired, collectively evaluated loans. Rather, the Company performs a more detailed analysis including evaluation of the cash flow and collateral valuations. Based upon this evaluation, an estimate of the probable loss in this portfolio is collectively evaluated under ASC 450-20. These non-impaired risk-rated 7 loans exist primarily in the C&I and CRE segments.
For term C&I and CRE loans greater than $1,000,000, a loan review is required within 15 months of the most recent credit review. The review is completed in enough detail to, at a minimum, validate the risk rating. Additionally, the review shall include an analysis of debt service requirements, covenant compliance, if applicable, and collateral adequacy. The frequency of the review is generally accelerated for loans with poor risk ratings.
The Company’s Loan Quality area performs a documentation review of a sampling of C&I and CRE loans, the primary purpose of which is to ensure the credit is properly documented and closed in accordance with approval authorities and conditions. A review is also performed by the Company’s Internal Audit Department of a sampling of C&I and CRE loans for proper documentation, according to an approved schedule. Validation of the risk rating is also part of Internal Audit’s review (performed by Internal Loan Review). Additionally, over the past several years, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.
The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.
For direct financing leases, the allowance consists of specific and general components.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The specific component relates to leases that are classified as impaired, as defined for commercial loans above. For those leases that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired lease is lower than the carrying value of that lease.
The general component consists of quantitative and qualitative factors and covers nonimpaired leases. The quantitative factors are based on historical charge-off experience for the entire lease portfolio. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss data.
Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.
The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.
For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans, and/or installment or other consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
TDRs are considered impaired loans/leases and are subject to the same allowance methodology as described above for impaired loans/leases by portfolio segment. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.
Credit related financial instruments: In the ordinary course of business, the Company has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. In addition, for transfers of a portion of financial assets (for example, participations of loan receivables), the transfer must meet the definition of a “participating interest” in order to account for the transfer as a sale. Following are the characteristics of a “participating interest”:
● Pro-rata ownership in an entire financial asset.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
● From the date of the transfer, all cash flows received from entire financial assets are divided proportionately among the participating interest holders in an amount equal to their share of ownership.
● The rights of each participating interest holder have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder.
● No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.
BOLI: BOLI is carried at cash surrender value with increases/decreases reflected as income/expense in the statement of income.
Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets.
Restricted investment securities: Restricted investment securities represent FHLB and FRB common stock. The stock is carried at cost. These equity securities are “restricted” in that they can only be sold back to the respective institution or another member institution at par. Therefore, they are less liquid than other tradable equity securities. The Company views its investment in restricted stock as a long-term investment. Accordingly, when evaluating for impairment, the value is determined based on the ultimate recovery of the par value, rather than recognizing temporary declines in value. There have been no other-than-temporary write-downs recorded on these securities.
OREO: Real estate acquired through, or in lieu of, loan foreclosures, is held for sale and initially recorded at fair value less costs to sell, establishing a new cost basis. Any writedown to fair value taken at the time of foreclosure is charged to the allowance. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Subsequent write-downs to fair value are charged to earnings.
Repossessed assets: Equipment or other non-real estate property acquired through, or in lieu of foreclosure, is held for sale and initially recorded at fair value less costs to sell. Repossessed assets are included in other assets on the consolidated balance sheets.
Goodwill: The Company has recorded goodwill from various business combinations. The goodwill is not being amortized, but is evaluated at least annually for impairment. The Company’s most recent analysis was performed internally as of November 30, 2020 and it was determined no goodwill impairment existed.
In 2019 and prior years, the goodwill evaluation was performed as of September 30th. In 2019, that September 30th evaluation was then reassessed at November 30th to facilitate a change in the annual impairment testing date going forward. An impairment charge is recognized when the calculated fair value of the reporting unit, including goodwill,
is less than its carrying amount. The Company engaged an external specialist to assess the goodwill at the reporting unit level for the Banks in 2019. As of November 30, 2019, the Company performed an internal assessment of the goodwill for the Bates Companies reporting unit. As a result of this internal assessment, the Company determined an impairment charge of $3 million was required for the Bates Companies reporting unit. See further discussion in Note 6. Based upon internal assessments, there was no impairment recognized during 2018.
Core deposit intangible: The Company has recorded a core deposit intangible from historical acquisitions including CNB, CSB and Guaranty Bank, and from its merger with Springfield Bancshares. The core deposit intangible was the portion of the acquisition purchase price which represented the value assigned to the existing deposit base at acquisition. See Notes 2 and 6 to the Consolidated Financial Statements for additional information. The core deposit intangibles have a finite life and are amortized over the estimated useful life of the deposits (estimated to be ten years).
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Customer list intangible: The Company has recorded a customer list intangible from the Bates Companies acquisition. The customer list intangible was the portion of the acquisition purchase price which represented the value assigned to the existing customer base at acquisition. See Notes 2 and 6 to the Consolidated Financial Statements for addition information. The customer list intangible had a finite life and was to be amortized over the estimated useful life (estimated to be fifteen years). With the sale of the Bates Companies in August 2020, the remaining balance of the customer list intangible was written off.
Assets and liabilities held for sale: Assets and liabilities held for sale are carried at the lower of cost or estimated market value in the aggregate. See Note 2 for further information.
Swap transactions: The Company offers a loan swap program to certain commercial loan customers. Through this program, the Company originates a variable rate loan with the customer. The Company and the swap customer will then enter into a fixed interest rate swap. Separately, an identical offsetting swap is entered into by the Company with a counterparty. These “back-to-back” swap arrangements are intended to offset each other and allow the Company to book a variable rate loan, while providing the customer with a contract for fixed interest payments. In these arrangements, the Company’s net cash flow is equal to the interest income received from the variable rate loan originated with the customer. These customer swaps are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities. Additionally, the Company receives an upfront fee from the counterparty, dependent upon the pricing, that is recognized upon receipt from the counterparty.
Derivatives and hedging activities: The Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates.
Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying index (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying index.
The derivative financial instruments currently used by the Company to manage its exposure to interest rate risk include: (1) interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market (although this type of derivative is negligible); (2) interest rate caps to manage the interest rate risk of certain variable rate deposits and short-term fixed rate liabilities; and (3) interest rate swaps on variable rate trust preferred securities.
Interest rate caps and interest rate swaps are valued by a third party monthly and corroborated by the transaction counterparty. The Company uses the hypothetical derivative method to assess and measure effectiveness in accordance with ASC 815, Derivative and Hedging.
Preferred stock: The Company currently has 250,000 shares of preferred stock authorized, but none outstanding as of December 31, 2020 and 2019. Should the Company have preferred stock outstanding in the future, dividends declared on those shares would be deducted from net income to arrive at net income available to common stockholders. Net income available to common stockholders would then be used in the earnings per share computation.
Stock-based compensation plans: The Company accounts for stock-based compensation with measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation over the requisite service period for awards expected to vest.
As discussed in Note 16, during the years ended December 31, 2020, 2019, and 2018, the Company recognized stock-based compensation expense for the grant-date fair value of stock based awards that are expected to vest over the requisite service period of $2.2 million, $2.5 million and $1.4 million, respectively. As required, management made
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with the following assumptions for the indicated periods:
Dividend yield
0.60% to 0.81%
0.67%
0.45% to 0.48%
Expected volatility
25.49% to 25.70%
28.28%
29.51% to 29.59%
Risk-free interest rate
0.79% to 1.31%
2.90%
2.60% to 2.94%
Expected life of option grants
6.25 years
6.25 years
6 years
Weighted-average grant date fair value
$
10.07
$
11.29
$
14.68
The Company also uses the Black-Scholes option pricing model to estimate the fair value of stock purchase grants with the following assumptions for the indicated periods:
Dividend yield
0.55% to 0.81%
0.69% to 0.75%
0.37% to 0.51%
Expected volatility
24.59% to 36.38%
20.15% to 21.06%
20.90% to 21.40%
Risk-free interest rate
0.15% to 1.65%
2.02 % to 2.46%
1.59% to 2.22%
Expected life of purchase grants
3 to 6 months
3 to 6 months
3 to 6 months
Weighted-average grant date fair value
$
6.03
$
4.81
$
6.63
The fair value is amortized on a straight-line basis over the vesting periods of the grants and will be adjusted for subsequent changes in estimated forfeitures. The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy. Expected volatility is based on historical volatility of the Company’s common stock price. The risk-free interest rate for periods within the contractual life of the option or purchase is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the option and purchase grants is derived using the “simplified” method and represents the period of time that options and purchases are expected to be outstanding. Historical data is used to estimate forfeitures used in the model. Two separate groups of employees (employees subject to broad based grants, and executive employees and directors) are used.
As of December 31, 2020, there was $399 thousand of unrecognized compensation cost related to stock options granted, which is expected to be recognized over a weighted average period of 1.59 years.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 329,736 options that were in-the-money at December 31, 2020. The aggregate intrinsic value at December 31, 2020 was $7.3 million on options outstanding and $7.3 million on options exercisable. During the years ended December 31, 2020, 2019 and 2018, the aggregate intrinsic value of options exercised under the Company’s stock-based compensation was $270 thousand, $303 thousand, and $365 thousand, respectively, and determined as of the date of the option exercise.
Restricted stock awards granted may not be sold or otherwise transferred until the service periods have lapsed. During the vesting periods, participants have voting rights and receive dividends. Upon termination of employment, common shares upon which the service periods have not lapsed must be returned to the Company.
All restricted share awards are classified as equity awards. The grant-date fair value of equity-classified restricted stock awards is amortized as compensation expense on a straight-line basis over the period restrictions lapse.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
As of December 31, 2020, there was $2.8 million of unrecognized compensation cost related to nonvested restricted stock awards expected to be recognized over a period of 1.9 years.
Income taxes: The Company files its tax return on a consolidated basis with its subsidiaries. The entities follow the direct reimbursement method of accounting for income taxes under which income taxes or credits which result from the inclusion of the subsidiaries in the consolidated tax return are paid to or received from the parent company.
Deferred income taxes are provided under the liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.
Trust assets: Trust assets held by the subsidiary banks in a fiduciary, agency, or custodial capacity for their customers, other than cash on deposit at the subsidiary banks, are not included in the accompanying Consolidated Financial Statements since such items are not assets of the subsidiary banks.
Earnings per share: See Note 18 for a complete description and calculation of basic and diluted earnings per share.
Revenue Recognition:
Trust department and Investment advisory and management fees: This is a contract between the Company and its customers for fiduciary and/or investment administration services on trust and brokerage accounts. Trust services and brokerage fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust account is serviced. Such contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.
Deposit service fees: The deposit contract obligates the Company to serve as a custodian of the customer's deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services related to the deposit account. Deposit account related fees, including analysis charges, overdraft/nonsufficient fund charges, service charges, debit card usage fees, overdraft fees and wire transfer fees are within the scope of the guidance; however, revenue recognition practices did not change under the guidance, as deposit agreements are considered day-to-day contracts. Income for deposit accounts is recognized over the
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.
Correspondent banking fees: A contract between the Company and its correspondent banks for corresponding banking services. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. Correspondent banking fee income is tied to transaction activity and revenue is recognized monthly as earned for services provided.
Reclassifications: Certain amounts in the prior year’s Consolidated Financial Statements have been reclassified, with no effect on net income or stockholders’ equity, to conform with the current period presentation.
Recent accounting developments: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. Under the standard, assets measured at amortized cost (including loans, leases and AFS securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model that is currently being utilized, the standard will require the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including items periods within those fiscal years.
On March 27, 2020, the CARES Act, a stimulus package designed in response to the economic disruption created by COVID-19, was signed into law. The CARES Act includes provisions that, if elected, temporarily delay the required implementation date of ASU 2016-13. Section 4014 of the CARES Act stipulates that no insured depository institution, bank holding company, or affiliate will be required to comply with ASU 2016-13, beginning on the date of the enactment, March 27, 2020 until the earlier of the two following dates: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020. The Company elected to defer its implementation of ASU 2016-13 as allowed by the CARES Act.
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. Based upon guidance from regulators it was determined the Company could also adopt on January 1, 2021, and the Company intends to do so. The Company has developed a CECL allowance model which calculates allowances over the life of the loan and is largely driven by portfolio characteristics, risk-grading, economic outlook, and other key methodology assumptions. Those assumptions are based upon the existing probability of default and loss given default framework. The Company will utilize economic and other forecasts over a reasonable and supportable forecast period and then fully revert back to average historical losses. The Company’s credit administration team will periodically refine the model as needed and is running parallel calculations. The Company anticipates increases in the allowance for credit losses on longer dated portfolios and decreases in the shorter dated portfolios. The Company estimates an increase in the allowance for estimated losses on loans/losses in the range of $1 million to $3 million upon adoption of CECL at January 1, 2021.
Risks and Uncertainties: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant,
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
arts/entertainment/recreation and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, are also expected to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. The Company believes that losses have been incurred that are not yet known and anticipates that its asset quality and results of operations will be adversely affected in the future, as described in further detail on this report.
Note 2. Sales/Mergers/Acquisitions
Sale of the Bates Companies
On August 12, 2020, the Company sold all the issued and outstanding capital stock of the Bates Companies. The aggregate consideration paid to the Company was a $500 thousand note receivable, less imputed interest of $52 thousand, plus cancellation of all future amounts otherwise to become payable to the purchaser by the Company under an earn-out agreement entered into between the same parties in 2018 with a non-discounted value of approximately $880 thousand at the sale date.
Assets and liabilities of the Bates Companies sold are summarized as follows as of the date of closing:
As of
August 12, 2020
(dollars in thousands)
ASSETS
Cash and due from banks
$
Premises and equipment, net
Other assets
2,259
Total assets sold
$
2,627
LIABILITIES
Other liabilities
$
Total liabilities sold
$
Net assets sold
$
1,681
Cash consideration
$
Forgiveness of earn-out consideration
Note receivable consideration
Loss on sale of subsidiary
$
Disposition costs in 2020 related to the sale totaled $227 thousand and were comprised primarily of legal, accounting and personnel costs.
Sale of Assets and Liabilities of Rockford Bank & Trust
On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T, to IB&T, a wholly-owned subsidiary of Heartland Financial USA, Inc., for a cash payment. The cash payment amount was determined substantially by the following formula: (i) the “Purchase Price Premium”, plus (ii) the aggregate net book value of the acquired assets,
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
minus (iii) the aggregate book value of the assumed liabilities. The Purchase Price Premium was equal to: (a) 8% of RB&T’s tangible assets, multiplied by (b) 0.345. The Purchase Price Premium totaled $12.5 million and the total payment by IB&T to the Company at closing was $46.6 million.
Assets and liabilities of RB&T sold are summarized as follows as of the date of closing:
As of
11/30/2019
(dollars in thousands)
ASSETS
Cash and due from banks
$
3,973
Interest-bearing deposits at financial institutions
55,291
Securities held to maturity, at amortized cost
3,243
Securities available for sale, at fair value
21,874
Loans/leases receivable held for investment, net
357,931
Premises and equipment, net
5,612
Restricted investment securities
Other real estate owned, net
2,134
Other assets
3,228
Total assets acquired
$
453,961
LIABILITIES
Noninterest-bearing deposits
$
69,802
Interest-bearing deposits
331,486
Short-term borrowings
1,158
FHLB advances
15,000
Other liabilities
2,241
Total liabilities assumed
$
419,687
Net assets sold
$
34,274
Cash consideration received
$
46,560
Gain on sale of assets and liabilities
$
12,286
The Company retained certain assets, mainly comprised of BOLI, and certain liabilities, mainly comprised of deferred compensation and income tax accruals. These assets and liabilities totaling $12.0 million and $5.0 million, respectively, as of December 31, 2019, were liquidated in 2020 and are included within assets and liabilities held for sale on the consolidated balance sheets.
Disposition costs in 2019 related to the sale totaled $3.3 million and were comprised primarily of legal and accounting costs, costs in connection with the disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of RB&T.
General - Mergers/Acquisitions
The narrative in this subsection applies to all mergers and acquisitions detailed throughout this footnote.
Loans acquired in a business combination are recorded and initially measured at their estimated fair value as of the acquisition date. Credit discounts are included in the determination of fair value. A third party valuation consultant assisted with the determination of fair value.
Purchased loans are segregated into two categories: PCI loans and non-PCI (performing) loans. PCI loans are accounted for in accordance with ASC 310-30, as they display significant credit deterioration since origination and it is probable, as of the acquisition date, that the Company will be unable to collect all contractually required payments from the borrower. Performing loans are accounted for in accordance with ASC 310-20, as these loans do not have evidence of significant credit deterioration since origination and it is probable that the contractually required payments will be received from the borrower.
For PCI loans, the difference between the contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable discount. Further, any excess cash flows expected at acquisition
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the expected remaining life of the loan. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. The present value of any decreases in expected cash flows after the purchase date is recognized by recording an allowance for loan and lease losses and provision for loan losses.
For performing loans, the difference between the estimated fair value of the loans and the principal balance outstanding is accreted over the remaining life of the loans.
Acquisition of the Bates Companies
On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois. The acquisition added approximately $704 million of assets under management at acquisition. In the acquisition, the Company acquired 100% of the Bates Companies’ outstanding common stock for aggregate consideration of $3.0 million cash and up to $3.0 million of the Company’s common stock. Of the total cash consideration, $1.5 million in cash was paid at closing funded through operating cash. The additional $1.5 million was recorded as a promissory note to be repaid in five equal, annual installments of $300,000 each on the first through fifth anniversaries of the closing date. Interest was to be paid at a rate of 2.18% per annum, based on the applicable federal rate as of the closing date. This $1.5 million promissory note is included in Other Liabilities on the Consolidated Balance Sheet. Additionally, in a private placement exempt from registration with the SEC, the Company issued 23,501 shares of Company stock in December 2018. Assuming all future performance based targets were to be met, total stock consideration could have reached $3.0 million, which would result in the Company issuing approximately 47,003 additional common shares based on the 10-day volume weighted average of the closing stock price of the Company ending five days prior to closing. The contingent consideration for the additional common shares, totaling $2.0 million, as of December 31, 2018, is included in Other Liabilities on the Consolidated Balance Sheet. Required performance targets were met during 2019 and the Company issued 9,400 shares of common stock in December 2019 as described above.
During 2018, the Company incurred $394 thousand of expenses related to the acquisition, comprised primarily of legal and accounting costs.
The Company recorded a customer list intangible totaling $1.6 million, which is the portion of the acquisition purchase price that represents the value assigned to the existing customer base. The customer list intangible has a finite life and is amortized over the estimated useful life of the customer base. The Company recorded goodwill totaling $3.7 million, which is the excess of the consideration paid over the fair value of the net assets acquired. This goodwill is not deductible for tax purposes. See Note 6 to the Consolidated Financial Statements for additional information.
The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects. The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
Unaudited pro forma combined operating results for the year ended December 31, 2018, giving effect to the Bates Companies acquisition as if it had occurred as of January 1, 2017, are as follows:
For the Year Ended
December 31, 2018
(dollars in thousands, except per share data)
Net interest income
$
142,368
Noninterest income
$
44,455
Net income
$
44,032
Earnings per common share:
Basic
$
2.98
Diluted
$
2.92
The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the merger occurred on January 1, 2017 or of future results of operations of the consolidated entities.
Springfield Bancshares, Inc.
On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFCB, headquartered in Springfield, Missouri. The Company acquired 100% of Springfield Bancshares common stock in the merger. SFCB is a Missouri-chartered bank that operates one location in the Springfield, Missouri market. As a result of the transaction, SFCB became an independent charter of the Company.
The merger with Springfield Bancshares allowed the Company to enter the Springfield, Missouri market which is consistent with the Company’s strategic plan to selectively acquire other high-performing financial institutions in vibrant mid-sized metropolitan markets with a high concentration of commercial clients. Financial metrics related to the transaction were favorable, as measured by EPS and ROAA accretion.
Stockholders of Springfield Bancshares received 0.3060 shares of the Company’s common stock and $1.50 in cash in exchange for each common share of Springfield Bancshares held. On June 29, 2018, the last trading date before the closing, the Company’s common stock closed at $47.45, resulting in stock consideration valued at $80.6 million and total consideration paid by the Company of $89.0 million. To help fund the cash portion of the purchase price, on June 29, 2018, the Company borrowed $4.1 million on its existing $10.0 million revolving line of credit. The Company also borrowed $4.9 million on this same revolving line of credit to fund the repayment of certain debt assumed in the merger shortly after closing. This note is included within Other Borrowings on the Consolidated Balance Sheets. The remaining cash consideration paid to the shareholders of Springfield Bancshares came from operating cash.
The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805. The Company recognized the full fair value of the assets acquired and liabilities assumed at the merger date, net of applicable income tax effects. The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill. This goodwill is not deductible for tax purposes. During the fourth quarter of 2018, various measurement period adjustments were made. The result of these adjustments was an increase to goodwill of $447 thousand.
The fair values of the assets acquired and liabilities assumed, after measurement period adjustments to date, including the consideration paid and resulting goodwill is as follows.
As of
July 1, 2018
(dollars in thousands)
ASSETS
Cash and due from banks
$
4,586
Interest-bearing deposits at financial institutions
62,924
Securities
4,845
Loans/leases receivable, net
477,337
Bank-owned life insurance
7,092
Premises and equipment
6,092
Restricted investment securities
3,654
Intangibles
8,209
Other assets
1,471
Total assets acquired
$
576,210
LIABILITIES
Deposits
$
439,579
Short-term borrowings
1,143
FHLB advances
74,539
Other borrowings
9,544
Other liabilities
8,409
Total liabilities assumed
$
533,214
Net assets acquired
$
42,996
CONSIDERATION PAID:
Cash
$
8,334
Common stock
80,637
Total consideration paid
$
88,971
Goodwill
$
45,975
The following table presents the purchased loans as of the merger date:
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Contractually required principal payments
$
7,553
$
479,440
$
486,993
Nonaccretable discount
(1,563)
-
(1,563)
Principal cash flows expected to be collected
$
5,990
$
479,440
$
485,430
Accretable discount
(293)
(7,800)
(8,093)
Fair Value of acquired loans
$
5,697
$
471,640
$
477,337
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
Changes in accretable yield for the loans acquired are as follows:
Year ended December 31, 2020
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Balance at the beginning of the period
$
(51)
$
(3,524)
$
(3,575)
Reclassification of nonaccretable discount to accretable
(512)
-
(512)
Accretion recognized
2,048
2,611
Balance at the end of the period
$
-
$
(1,476)
$
(1,476)
For the year ended December 31, 2019
PCI
Performing
Loans
Loans
Total
Balance at the beginning of the period
$
(659)
$
(5,849)
$
(6,508)
Reclassification of nonaccretable discount to accretable
(159)
-
(159)
Accretion recognized
2,325
3,092
Balance at the end of the period
$
(51)
$
(3,524)
$
(3,575)
For the year ended December 31, 2018
PCI
Performing
Loans
Loans
Total
Balance at the beginning of the period
$
-
$
-
$
-
Discount added at acquisition
(293)
(7,800)
(8,093)
Reclassification of nonaccretable discount to accretable
(892)
-
(892)
Accretion recognized
1,951
2,477
Balance at the end of the period
$
(659)
$
(5,849)
$
(6,508)
During 2020, there was no nonaccretable discount that was recognized due to the repayment of PCI loans. However, $512 thousand of nonaccretable discount was reclassified to accretable due to significant improvement on specific credits subsequent to the merger date and all of this amount was accreted to income in 2020.
During 2019, there was no nonaccretable discount that was recognized due to the repayment of PCI loans. However, $159 thousand of nonaccretable discount was reclassified to accretable due to significant improvement on one specific credit subsequent to the merger date. Of this amount, $153 thousand was accreted to income in 2019, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.
During 2018, there was no nonaccretable discount that was recognized due to the repayment of PCI loans. However, $892 thousand of nonaccretable discount was reclassified to accretable during the third quarter of 2018 due to significant improvement on one specific credit subsequent to the merger date. Of this amount, $396 thousand was accreted to income in 2018, while the remainder will be accreted over the next 8 months, which is the remaining contractual life of the loan.
Premises and equipment acquired with a fair value of $6.1 million includes one branch location. The fair value was determined with the assistance of a third party appraiser. The buildings and building write-ups will be recognized in depreciation expense over 39 years.
The Company recorded a core deposit intangible totaling $8.2 million which is the portion of the merger purchase price which represents the value assigned to the existing deposit base. The core deposit intangible has a finite life and
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years). See Note 6 to the Consolidated Financial Statements for additional information.
FHLB advances and other borrowings assumed with a fair value of $84.1 million included $40.0 million in overnight FHLB advances, $34.5 million of FHLB term advances, $4.7 million in subordinated debentures and a $4.8 million bank stock loan. The $4.8 million bank stock loan was paid off immediately after the merger date on July 2, 2018, at its book value. See Note 10 and 11 to the Consolidated Financial Statements for additional information.
During 2018, the Company incurred $1.4 million of expenses related to the merger comprised primarily of legal, accounting, and investment banking costs. These costs are presented on their own line within the consolidated statements of income. SFCB results are included in the consolidated statements of income effective on the merger date. For the period July 1, 2018 to December 31, 2018, SFCB reported revenues of $15.2 million and net income of $4.8 million, which included $391 thousand of after tax post-acquisition, compensation, transition and integration costs.
Unaudited pro forma combined operating results for the year ended December 31, 2018, giving effect to the merger with Springfield Bancshares as if it had occurred as of January 1, 2017, are as follows:
For the Year Ended
December 31, 2018
(dollars in thousands, except per share data)
Net interest income
$
153,229
Noninterest income
$
42,538
Net income
$
49,542
Earnings per common share:
Basic
$
3.17
Diluted
$
3.11
The pro forma results do not purport to be indicative of the results of operations that actually would have resulted had the merger occurred on January 1, 2017 or of future results of operations of the consolidated entities.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 2020 and 2019 are summarized as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
(Losses)
Value
(dollars in thousands)
December 31, 2020:
Securities HTM:
Municipal securities
$
475,115
$
45,360
$
(248)
$
520,227
Other securities
1,050
-
-
1,050
$
476,165
$
45,360
$
(248)
$
521,277
Securities AFS:
U.S. govt. sponsored agency securities
$
14,936
$
$
(47)
$
15,336
Residential mortgage-backed and related securities
127,670
5,510
(338)
132,842
Municipal securities
147,241
5,215
(48)
152,408
Asset-backed securities
39,663
1,111
(91)
40,683
Other securities
20,550
-
20,697
$
350,060
$
12,430
$
(524)
$
361,966
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
(Losses)
Value
(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities
$
399,596
$
26,042
$
(143)
$
425,495
Other securities
1,050
-
-
1,050
$
400,646
$
26,042
$
(143)
$
426,545
Securities AFS:
U.S. govt. sponsored agency securities
$
19,872
$
$
(77)
$
20,078
Residential mortgage-backed and related securities
118,724
2,045
(182)
120,587
Municipal securities
46,659
1,602
(4)
48,257
Asset-backed securities
16,958
-
(71)
16,887
Other securities
4,749
(1)
4,886
$
206,962
$
4,068
$
(335)
$
210,695
The Company’s HTM municipal securities consist largely of private issues of municipal debt. The municipalities are located primarily within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.
The Company’s residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in commercial mortgage-backed securities or pooled trust preferred securities.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2020 and 2019, are summarized as follows:
Less than 12 Months
12 Months or More
Total
Gross
Gross
Gross
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(dollars in thousands)
December 31, 2020:
Securities HTM:
Municipal securities
$
8,407
$
(248)
$
-
$
-
$
8,407
$
(248)
Securities AFS:
U.S. govt. sponsored agency securities
$
3,199
$
(47)
$
-
$
-
$
3,199
$
(47)
Residential mortgage-backed and related securities
37,549
(338)
-
-
37,549
(338)
Municipal securities
10,110
(48)
-
-
10,110
(48)
Asset-backed securities
6,884
(52)
9,945
(39)
16,829
(91)
$
57,742
$
(485)
$
9,945
$
(39)
$
67,687
$
(524)
Less than 12 Months
12 Months or More
Total
Gross
Gross
Gross
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities
$
$
(1)
$
10,047
$
(142)
$
10,556
$
(143)
Securities AFS:
U.S. govt. sponsored agency securities
$
1,431
$
(21)
$
2,117
$
(56)
$
3,548
$
(77)
Residential mortgage-backed and related securities
2,263
(17)
17,862
(165)
20,125
(182)
Municipal securities
-
-
(4)
(4)
Asset-backed securities
16,886
(71)
-
-
16,886
(71)
Other securities
(1)
-
-
(1)
$
20,829
$
(110)
$
20,703
$
(225)
$
41,532
$
(335)
At December 31, 2020, the investment portfolio included 668 securities. Of this number, 41 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.1% of the total aggregate amortized cost. Of these 41 securities, five securities had an unrealized loss for 12 months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. The Company did not recognize OTTI on any investment securities for the years ended December 31, 2020, 2019 or 2018.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
All sales of securities for the years ended December 31, 2020, 2019 and 2018, respectively, were from securities identified as AFS. Information on proceeds received, as well as the gains and losses from the sale of those securities are as follows:
(dollars in thousands)
Proceeds from sales of securities
$
38,562
$
30,055
$
1,938
Gross gains from sales of securities
2,553
-
Gross losses from sales of securities
(69)
(206)
-
The amortized cost and fair value of securities as of December 31, 2020, by contractual maturity are shown below. Expected maturities of mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following summary.
Amortized Cost
Fair Value
(dollars in thousands)
Securities HTM:
Due in one year or less
$
3,417
$
3,443
Due after one year through five years
34,396
35,103
Due after five years
438,352
482,731
$
476,165
$
521,277
Securities AFS:
Due in one year or less
$
2,369
$
2,373
Due after one year through five years
13,970
14,328
Due after five years
166,388
171,740
182,727
188,441
Residential mortgage-backed and related securities
127,670
132,842
Asset-backed securities
39,663
40,683
$
350,060
$
361,966
Portions of the U.S. government sponsored agencies and municipal securities contain call options, at the discretion of the issuer, to terminate the security at predetermined dates prior to the stated maturity, summarized as follows:
Amortized Cost
Fair Value
(dollars in thousands)
Securities HTM:
Municipal securities
$
227,773
$
236,134
Securities AFS:
Municipal securities
138,688
143,536
Other securities
6,500
6,647
$
145,188
$
150,183
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
As of December 31, 2020 and 2019, investment securities with a carrying value of $212.8 million and $113.4 million, respectively, were pledged on public deposits, FHLB advances, customer repurchase agreements, derivative liabilities, Goldman Sachs cash management program and for other purposes as required or permitted by law.
As of December 31, 2020, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2019, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 93 issuers with fair values totaling $77.2 million and revenue bonds issued by 154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $396.6 million. The Company held investments in general obligation bonds in 22 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 17 states, including seven states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2020 and 2019, the Company held revenue bonds of two issuers and one single issuer, respectively, located in Ohio, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company’s portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).
The Company’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually and as of December 31, 2020, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of total risk-based capital.
As of December 31, 2020, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable
The composition of the loan/lease portfolio as of December 31, 2020 and 2019 is presented as follows:
(dollars in thousands)
C&I loans*
$
1,726,723
$
1,507,825
CRE loans
Owner-occupied CRE
496,471
443,989
Commercial construction, land development, and other land
541,455
378,797
Other non owner-occupied CRE
1,069,703
913,610
2,107,629
1,736,396
Direct financing leases **
66,016
87,869
Residential real estate loans ***
252,121
239,904
Installment and other consumer loans
91,302
109,352
4,243,791
3,681,346
Plus deferred loan/lease origination costs, net of fees
7,338
8,859
4,251,129
3,690,205
Less allowance
(84,376)
(36,001)
$
4,166,753
$
3,654,204
** Direct financing leases:
Net minimum lease payments to be received
$
72,940
$
97,025
Estimated unguaranteed residual values of leased assets
Unearned lease/residual income
(7,163)
(9,703)
66,016
87,869
Plus deferred lease origination costs, net of fees
1,072
1,892
67,088
89,761
Less allowance
(1,764)
(1,464)
$
65,324
$
88,297
* Includes equipment financing agreements outstanding at m2, totaling $171.5 million and $142.0 million as of December 31, 2020 and 2019, 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 and 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 large majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.
At December 31, 2020, the Company had three leases remaining with residual values totaling $239 thousand that were not protected with a lease end options rider. At December 31, 2019, the Company had six leases remaining with residual values totaling approximately $547 thousand that were not protected with a lease end options rider. Management has performed specific evaluations of these unguaranteed residual values and determined that the valuations are appropriate. There were no losses related to unguaranteed residual values during the years ended December 31, 2020, 2019, and 2018.
***Includes residential real estate loans held for sale totaling $3.8 million and $3.7 million as of December 31, 2020 and 2019, respectively.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Changes in accretable yield for the loans acquired in the mergers and acquisitions are as follows:
For the year ended December 31, 2020
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Balance at the beginning of the period
$
(57)
$
(6,378)
$
(6,435)
Reclassification of nonaccretable discount to accretable
(530)
-
(530)
Reclassification of nonaccretable discount to allowance
-
Accretion recognized
2,886
3,473
Balance at the end of the period
$
-
$
(3,139)
$
(3,139)
For the year ended December 31, 2019
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Balance at the beginning of the period
$
(667)
$
(10,127)
$
(10,794)
Reclassification of nonaccretable discount to accretable
(275)
-
(275)
Accretion recognized
3,749
4,634
Balance at the end of the period
$
(57)
$
(6,378)
$
(6,435)
For the year ended December 31, 2018
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Balance at the beginning of the period
$
(191)
$
(6,280)
$
(6,471)
Discount added at acquisition
(293)
(7,800)
(8,093)
Reclassification of nonaccretable discount to accretable
(892)
(470)
(1,362)
Accretion recognized
4,423
5,132
Balance at the end of the period
$
(667)
$
(10,127)
$
(10,794)
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
The aging of the loan/lease portfolio by classes of loans/leases as of December 31, 2020 and 2019 is presented as follows:
Accruing Past
30-59 Days
60-89 Days
Due 90 Days or
Nonaccrual
Classes of Loans/Leases
Current
Past Due
Past Due
More
Loans/Leases
Total
(dollars in thousands)
C&I
$
1,720,058
$
1,535
$
$
-
$
4,807
$
1,726,723
CRE
Owner-Occupied CRE
496,459
-
-
-
496,471
Commercial Construction, Land Development, and Other Land
541,455
-
-
-
-
541,455
Other Non Owner-Occupied CRE
1,062,215
-
-
-
7,488
1,069,703
Direct Financing Leases
64,918
-
66,016
Residential Real Estate
249,364
1,512
-
1,022
252,121
Installment and Other Consumer
91,047
91,302
$
4,225,516
$
3,591
$
$
$
13,940
$
4,243,791
As a percentage of total loan/lease portfolio
99.57
%
0.08
%
0.02
%
0.00
%
0.33
%
100.00
%
Accruing Past
30-59 Days
60-89 Days
Due 90 Days or
Nonaccrual
Classes of Loans/Leases
Current
Past Due
Past Due
More
Loans/Leases
Total
(dollars in thousands)
C&I
$
1,499,891
$
6,126
$
$
-
$
1,236
$
1,507,825
CRE
Owner-Occupied CRE
443,707
-
443,989
Commercial Construction, Land Development, and Other Land
375,940
2,857
-
-
-
378,797
Other Non Owner-Occupied CRE
909,684
-
-
3,853
913,610
Direct Financing Leases
85,636
-
1,517
87,869
Residential Real Estate
235,845
2,939
-
239,904
Installment and Other Consumer
108,750
109,352
$
3,659,453
$
12,638
$
1,320
$
$
7,902
$
3,681,346
As a percentage of total loan/lease portfolio
99.41
%
0.34
%
0.04
%
0.00
%
0.21
%
100.00
%
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
NPLs by classes of loans/leases as of December 31, 2020 and 2019 is presented as follows:
Accruing Past
Due 90 Days or
Nonaccrual
Percentage of
Classes of Loans/Leases
More
Loans/Leases *
Accruing TDRs
Total NPLs
Total NPLs
(dollars in thousands)
C&I
$
-
$
4,807
$
$
5,413
36.87
%
CRE
Owner-Occupied CRE
-
-
0.08
%
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
%
Other Non Owner-Occupied CRE
-
7,488
-
7,488
50.99
%
Direct Financing Leases
-
3.68
%
Residential Real Estate
-
1,022
-
1,022
6.96
%
Installment and Other Consumer
-
1.42
%
$
$
13,940
$
$
14,684
100.00
%
* At December 31, 2020, nonaccrual loans/leases included $984 thousand of TDRs, including $836 thousand in CRE loans, $100 thousand in direct financing leases, and $48 thousand in installment loans.
Accruing Past
Due 90 Days or
Nonaccrual
Percentage of
Classes of Loans/Leases
More
Loans/Leases *
Accruing TDRs
Total NPLs
Total NPLs
(dollars in thousands)
C&I
$
-
$
1,236
$
$
1,882
21.12
%
CRE
Owner-Occupied CRE
-
-
0.38
%
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
%
Other Non Owner-Occupied CRE
-
3,853
-
3,853
43.22
%
Direct Financing Leases
-
1,517
1,850
20.75
%
Residential Real Estate
-
-
7.92
%
Installment and Other Consumer
-
6.61
%
$
$
7,902
$
$
8,914
100.00
%
* At December 31, 2019, accruing past due 90 days or more included $747 thousand of TDRs, including $98 thousand in C&I loans and $269
thousand in CRE loans, $294 thousand in direct financing leases, $31 thousand in residential real estate loans and $55 thousand in
installment loans.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Changes in the allowance by portfolio segment for the years ended December 31, 2020, 2019, and 2018 are presented as follows:
Year Ended December 31, 2020
Direct Financing
Residential Real
C&I
CRE
Leases
Estate
Consumer
Total
(dollars in thousands)
Balance, beginning
$
16,072
$
15,379
$
1,464
$
1,948
$
1,138
$
36,001
Provisions charged to expense
22,899
28,671
2,148
1,755
55,704
Loans/leases charged off
(4,199)
(2,071)
(1,993)
-
(120)
(8,383)
Recoveries on loans/leases previously charged off
1,054
Balance, ending
$
35,421
$
42,161
$
1,764
$
3,732
$
1,298
$
84,376
Year Ended December 31, 2019
Direct Financing
Residential Real
Installment and
C&I
CRE
Leases
Estate
Other Consumer
Total
(dollars in thousands)
Balance, beginning
$
16,420
$
17,719
$
1,792
$
2,557
$
1,359
$
39,847
Reclassification of allowance related to held for sale assets
(2,814)
(2,392)
-
(628)
(288)
(6,122)
Provisions (credits) charged to expense*
3,666
1,566
1,129
6,638
Loans/leases charged off
(1,476)
(1,722)
(1,647)
(191)
(98)
(5,134)
Recoveries on loans/leases previously charged off
Balance, ending
$
16,072
$
15,379
$
1,464
$
1,948
$
1,138
$
36,001
*Excludes provision related to loans included in assets held for sale during the year of $428 thousand for the year ending December 31, 2019.
Year Ended December 31, 2018
Direct Financing
Residential Real
Installment and
C&I
CRE
Leases
Estate
Other Consumer
Total
(dollars in thousands)
Balance, beginning
$
14,323
$
13,963
$
2,382
$
2,466
$
1,222
$
34,356
Provisions charged to expense
7,161
4,094
1,068
12,658
Loans/leases charged off
(5,359)
(387)
(2,002)
(127)
(44)
(7,919)
Recoveries on loans/leases previously charged off
Balance, ending
$
16,420
$
17,719
$
1,792
$
2,557
$
1,359
$
39,847
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
The allowance by impairment evaluation and by portfolio segment as of December 31, 2020 and 2019 is presented as follows:
Direct Financing
Residential Real
Installment and
C&I
CRE
Leases
Estate
Other Consumer
Total
(dollars in thousands)
Allowance for impaired loans/leases
$
$
1,938
$
-
$
$
$
2,680
Allowance for nonimpaired loans/leases
34,771
40,223
1,764
3,712
1,226
81,696
$
35,421
$
42,161
$
1,764
$
3,732
$
1,298
$
84,376
Impaired loans/leases
$
5,381
$
7,487
$
$
$
$
14,628
Nonimpaired loans/leases
1,721,342
2,100,142
65,438
251,144
91,097
4,229,163
$
1,726,723
$
2,107,629
$
66,016
$
252,121
$
91,302
$
4,243,791
Allowance as a percentage of impaired loans/leases
12.08
%
25.88
%
-
%
2.05
%
35.12
%
18.32
%
Allowance as a percentage of nonimpaired loans/leases
2.02
%
1.92
%
2.70
%
1.48
%
1.35
%
1.93
%
Total allowance as a percentage of total loans/leases
2.05
%
2.00
%
2.67
%
1.48
%
1.42
%
1.99
%
Direct Financing
Residential Real
Installment and
C&I
CRE
Leases
Estate
Other Consumer
Total
(dollars in thousands)
Allowance for impaired loans/leases
$
$
$
$
$
$
Allowance for nonimpaired loans/leases
15,902
15,254
1,194
1,933
1,058
35,341
$
16,072
$
15,379
$
1,464
$
1,948
$
1,138
$
36,001
Impaired loans/leases
$
1,846
$
3,585
$
2,025
$
$
$
8,661
Nonimpaired loans/leases
1,505,979
1,732,811
85,844
239,255
108,796
3,672,685
$
1,507,825
$
1,736,396
$
87,869
$
239,904
$
109,352
$
3,681,346
Allowance as a percentage of impaired loans/leases
9.21
%
3.49
%
13.33
%
2.31
%
14.39
%
7.62
%
Allowance as a percentage of nonimpaired loans/leases
1.06
%
0.88
%
1.39
%
0.81
%
0.97
%
0.96
%
Total allowance as a percentage of total loans/leases
1.07
%
0.89
%
1.67
%
0.81
%
1.04
%
0.98
%
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the years ended December 31, 2020, 2019, and 2018 are presented below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.
Interest Income
Average
Recognized for
Recorded
Unpaid Principal
Related
Recorded
Interest Income
Cash Payments
Classes of Loans/Leases
Investment
Balance
Allowance
Investment
Recognized
Received
(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I
$
1,361
$
1,441
$
-
$
1,002
$
$
CRE
Owner-Occupied CRE
-
-
-
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
1,133
1,933
-
Direct Financing Leases
-
Residential Real Estate
-
-
-
Installment and Other Consumer
-
-
-
$
3,924
$
4,804
$
-
$
2,576
$
$
Impaired Loans/Leases with Specific Allowance Recorded:
C&I
$
4,020
$
4,020
$
$
1,555
$
-
$
-
CRE
Owner-Occupied CRE
-
-
-
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
6,354
6,354
1,938
5,726
-
-
Direct Financing Leases
-
-
-
-
-
-
Residential Real Estate
-
-
Installment and Other Consumer
-
-
$
10,704
$
10,704
$
2,680
$
7,578
$
-
$
-
Total Impaired Loans/Leases:
C&I
$
5,381
$
5,461
$
$
2,557
$
$
CRE
Owner-Occupied CRE
-
-
-
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
7,487
8,287
1,938
6,220
Direct Financing Leases
-
Residential Real Estate
-
-
Installment and Other Consumer
-
-
$
14,628
$
15,508
$
2,680
$
10,154
$
$
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Interest Income
Average
Recognized for
Recorded
Unpaid Principal
Related
Recorded
Interest Income
Cash Payments
Classes of Loans/Leases
Investment
Balance
Allowance
Investment
Recognized
Received
(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I
$
1,607
$
1,647
$
-
$
$
$
CRE
Owner-Occupied CRE
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
-
Direct Financing Leases
1,642
1,642
-
1,322
Residential Real Estate
-
-
-
Installment and Other Consumer
-
-
-
$
4,912
$
5,115
$
-
$
4,009
$
$
Impaired Loans/Leases with Specific Allowance Recorded:
C&I
$
$
$
$
$
-
$
-
CRE
Owner-Occupied CRE
-
-
-
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
2,867
2,867
1,958
-
-
Direct Financing Leases
Residential Real Estate
-
-
Installment and Other Consumer
-
-
$
3,749
$
3,749
$
$
2,412
$
$
Total Impaired Loans/Leases:
C&I
$
1,846
$
1,886
$
$
1,094
$
$
CRE
Owner-Occupied CRE
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
-
-
-
Other Non Owner-Occupied CRE
3,551
3,553
2,696
Direct Financing Leases
2,025
2,025
1,518
Residential Real Estate
-
-
Installment and Other Consumer
-
-
$
8,661
$
8,864
$
$
6,421
$
$
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Interest Income
Average
Recognized for
Recorded
Unpaid Principal
Related
Recorded
Interest Income
Cash Payments
Classes of Loans/Leases
Investment
Balance
Allowance
Investment
Recognized
Received
(dollars in thousands)
Impaired Loans/Leases with No Specific Allowance Recorded:
C&I
$
1,846
$
4,540
$
-
$
2,346
$
$
CRE
Owner-Occupied CRE
-
-
-
Commercial Construction, Land Development, and Other Land
-
-
-
Other Non Owner-Occupied CRE
1,804
1,804
-
-
-
Direct Financing Leases
1,929
1,929
-
2,193
Residential Real Estate
1,058
-
Installment and Other Consumer
-
-
-
$
7,938
$
10,706
$
-
$
6,208
$
$
Impaired Loans/Leases with Specific Allowance Recorded:
C&I
$
2,653
$
2,653
$
$
1,118
$
$
CRE
Owner-Occupied CRE
-
-
Commercial Construction, Land Development, and Other Land
-
-
Other Non Owner-Occupied CRE
7,577
7,577
2,052
3,055
Direct Financing Leases
-
-
Residential Real Estate
1,126
1,126
Installment and Other Consumer
-
-
$
12,265
$
12,621
$
3,659
$
5,460
$
$
Total Impaired Loans/Leases:
C&I
$
4,499
$
7,193
$
$
3,464
$
$
CRE
Owner-Occupied CRE
-
-
Commercial Construction, Land Development, and Other Land
-
-
Other Non Owner-Occupied CRE
9,381
9,381
2,052
3,595
Direct Financing Leases
2,249
2,249
2,466
Residential Real Estate
2,110
2,184
1,276
Installment and Other Consumer
-
-
$
20,203
$
23,327
$
3,659
$
11,668
$
$
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.
For C&I and CRE loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. See Note 1 for further discussion on the Company’s risk ratings.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
For C&I equipment financing loans, direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.
For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of December 31, 2020 and 2019:
CRE
Non-Owner Occupied
Commercial
Construction,
Internally Assigned
Land
Risk Rating
Owner-Occupied
Development,
As a % of
C&I
CRE
and Other Land
Other CRE
Total
Total
(dollars in thousands)
Pass (Ratings 1 through 5)
$
1,506,578
$
488,478
$
530,297
$
999,931
$
3,525,284
%
Special Mention (Rating 6)
23,929
3,087
43,785
71,481
1.95
Substandard (Rating 7)
24,710
4,906
10,478
25,987
66,081
1.80
Doubtful (Rating 8)
-
-
-
-
-
-
Total
$
1,555,217
$
496,471
$
541,455
$
1,069,703
$
3,662,846
100.00
%
Direct Financing
Residential Real
Installment and
As a % of
Delinquency Status *
C&I
Leases
Estate
Other Consumer
Total
Total
(dollars in thousands)
Performing
$
170,712
$
65,475
$
251,099
$
91,094
$
578,380
99.56
%
Nonperforming
1,022
2,565
0.44
$
171,506
$
66,016
$
252,121
$
91,302
$
580,945
100.00
%
CRE
Non-Owner Occupied
Commercial
Construction,
Land
Owner-Occupied
Development,
As a % of
Internally Assigned Risk Rating
C&I
CRE
and Other Land
Other CRE
Total
Total
(dollars in thousands)
Pass (Ratings 1 through 5)
$
1,334,446
$
439,418
$
378,572
$
896,206
$
3,048,642
98.28
%
Special Mention (Rating 6)
12,962
3,044
3,905
19,952
0.64
%
Substandard (Rating 7)
18,439
1,527
13,499
33,649
1.08
%
Doubtful (Rating 8)
-
-
-
-
-
-
%
$
1,365,847
$
443,989
$
378,797
$
913,610
$
3,102,243
100.00
%
Direct Financing
Residential Real
Installment and
As a % of
Delinquency Status *
C&I
Leases
Estate
Other Consumer
Total
Total
(dollars in thousands)
Performing
$
140,992
$
86,019
$
239,198
$
108,763
$
574,972
99.29
%
Nonperforming
1,850
4,131
0.71
%
$
141,978
$
87,869
$
239,904
$
109,352
$
579,103
100.00
%
* Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing troubled debt restructurings.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
TDRs totaled $1.7 million as of December 31, 2020 and 2019, respectively.
For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the years ended December 31, 2020 and 2019. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of restructuring. The specific allowance is as of December 31, 2020 and 2019, respectively. The following excludes any TDRs that were restructured and paid off or charged off in the same year.
Pre-
Post-
Modification
Modification
Number of
Recorded
Recorded
Specific
Classes of Loans/Leases
Loans / Leases
Investment
Investment
Allowance
(dollars in thousands)
CONCESSION - Significant Payment Delay
C&I
$
$
$
-
Direct Financing Leases
-
$
$
$
-
CONCESSION - Extension of Maturity
CRE Other
$
$
$
-
TOTAL
$
1,022
$
1,022
$
-
Pre-
Post-
Modification
Modification
Number of
Recorded
Recorded
Specific
Classes of Loans/Leases
Loans / Leases
Investment
Investment
Allowance
(dollars in thousands)
CONCESSION - Significant Payment Delay
C & I
$
$
$
-
Direct Financing Leases
$
$
$
CONCESSION - Forgiveness of Principal
C & I
$
$
$
-
CONCESSION - Extension of Maturity
Installment and Other Consumer
$
$
$
TOTAL
$
1,143
$
1,093
$
Of the TDRs reported above, two with a post-modification recorded investment totaling $880 thousand were on nonaccrual as of December 31, 2020 and three with a post-modification recorded investment totaling $121 thousand were on nonaccrual as of December 31, 2019.
For the year ended December 31, 2020, the Company had one TDR totaling $44 thousand that redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. For the year ended December 31, 2019, the Company had two TDRs totaling $66 thousand that redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status.
Not included in the table above, the Company had five TDRs that were restructured and charged off in 2020, totaling $266 thousand. There was one TDR that was both restructured and charged off in 2019, totaling $52 thousand.
On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. The regulators have clarified that this guidance may continue to be applied in 2021.
In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be (1) related to COVID-19, (2) executed on a loan that was not more than 30 days past due as of December 31, 2019 and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the termination of the presidentially-declared emergency or (B) December 31, 2020. If a modification does not meet the criteria of the CARES act, a deferral can still be excluded from TDR treatment as long as the modifications meet the banking regulatory criteria discussed in the preceding paragraph.
The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of December 31, 2020, there were 126 bank modifications of loans to commercial and consumer clients totaling $21 million and 71 m2 modifications of loans and leases totaling $7 million for a combined 197 modifications totaling $28 million, representing 0.66% of the total loan and lease portfolio that were on deferral as of such date.
On December 27, 2020, former President Trump signed the Consolidated Appropriations Act, which extended the Loan Relief Program to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
Loans are made in the normal course of business to directors, executive officers, and their related interests. All such loans, in the opinion of management, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lenders and did not involve more than the normal risk of collectability or present other unfavorable features. An analysis of the changes in the aggregate committed amount of loans to insiders greater than or equal to $60,000 during the years ended December 31, 2020, 2019, and 2018, is as follows:
(dollars in thousands)
Balance, beginning
$
112,830
$
125,496
$
66,442
Net increase (decrease) due to change in related parties
(1,601)
(12,161)
41,797
Advances
43,238
98,708
43,453
Repayments
(54,106)
(99,213)
(26,196)
Balance, ending
$
100,361
$
112,830
$
125,496
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
The Company’s loan portfolio includes a geographic concentration in the Midwest. Additionally, the loan portfolio includes a concentration of loans in certain industries as of December 31, 2020 and 2019 as follows:
Percentage of
Percentage of
Total
Total
Industry Name
Balance
Loans/Leases
Balance
Loans/Leases
(dollars in thousands)
Lessors of Residential Buildings
$
1,134,178
%
$
745,770
%
Lessors of Non-Residential Buildings
591,398
%
574,058
%
Administration of Urban Planning & Community & Rural Development
138,514
%
133,157
%
Concentrations within the leasing portfolio are monitored by equipment type - none of which represent a concentration within the total loans/leases portfolio. Within the leasing portfolio, diversification is spread among construction, manufacturing and the service industries. Geographically, the lease portfolio is diversified across all 50 states. No individual state represents a concentration within the total loan/lease portfolio.
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December 31, 2020 and 2019:
(dollars in thousands)
Land
$
13,403
$
13,632
Buildings (useful lives 15 to 50 years)
67,844
66,070
Furniture and equipment (useful lives 3 to 10 years)
42,667
40,228
Premises and equipment
123,914
119,930
Less accumulated depreciation
51,221
46,071
Premises and equipment, net
$
72,693
$
73,859
As a lessee, the Company has entered into operating leases for certain branch locations. Total lease expenses were $662 thousand and $732 thousand for the year ended December 31, 2020 and 2019, respectively.
At December 31, 2020 and 2019, the Company’s ROU assets (included in other assets on the consolidated balance sheets) and operating lease liabilities (included in other liabilities on the consolidated balance sheets) were both $1.7 million and $1.9 million, respectively. No new ROU assets were capitalized during the year ended December 31, 2020 or 2019.
At December 31, 2020, the contractual maturities of operating lease liabilities were as follows:
Amount
Year ending December 31:
(dollars in thousands)
Thereafter
$
1,779
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Premises and Equipment (continued)
As a lessor, the Company leases certain types of commercial vehicles and industrial equipment to its customers. The Company recognized lease-related revenue, primarily interest income from direct financing leases of $5.1 million and $6.1 million for the year ended December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, the Company’s net investment in direct financing leases was $65.3 million and $88.3 million, respectively.
As of December 31, 2020, the contractual maturities of sales-type and direct financing lease receivables were as follows:
Amount
Year ending December 31:
(dollars in thousands)
3,879
14,983
21,059
17,248
14,780
Thereafter
Total lease payments receivable
$
72,940
Unguaranteed residual values
Unearned lease/residual income
(7,163)
$
66,016
Plus deferred origination costs, net of fees
1,072
$
67,088
Less allowance
(1,764)
Total lease payments receivable
$
65,324
The The
Note 6. Goodwill and Intangibles
The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2020, 2019 and 2018:
(dollars in thousands)
Balance at the beginning of period
$
74,748
$
77,832
$
28,334
Merger with Springfield Bancshares
-
-
45,975
Acquisition of Bates Companies
-
-
3,766
Acquisition of Guaranty Bank - measurement period adjustment
-
-
(243)
Acquisition of Bates Companies - measurement period adjustment
-
(84)
-
Sale of Bates Companies
(182)
-
-
Goodwill impairment - Bates Companies
(500)
(3,000)
-
Balance at the end of period
$
74,066
$
74,748
$
77,832
The following table presents the goodwill by reportable segment:
December 31, 2020
December 31, 2019
December 31, 2018
(dollars in thousands)
Commercial banking:
QCBT
$
3,223
$
3,223
$
3,223
CRBT
14,980
14,980
14,980
CSB
9,888
9,888
9,888
SFCB
45,975
45,975
45,975
Other, Parent Company Only
-
3,766
$
74,066
$
74,748
$
77,832
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Goodwill and Intangibles (continued)
At November 30, 2020 the Company’s management performed an annual internal assessment at the reporting unit level and determined no goodwill impairment existed.
Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event during the first quarter of 2020, and therefore an interim impairment test over goodwill was performed as of March 31, 2020. Based upon the results of the interim goodwill assessment during the first quarter of 2020, the Company concluded that an impairment did not exist on the bank reporting units as of the time of the assessment. There was no occurrence of a triggering event during the second or third quarter of 2020 and therefore no impairment test over goodwill was needed.
During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies reporting unit. This was the result of the announcement of a sale of the Bates Companies, as discussed in Note 2.
As of November 30, 2019, the Company’s management performed an internal assessment of the goodwill for the Bates Companies reporting unit. With the Bates Companies located in Rockford, Illinois, the Company had intended to achieve synergies and cross-selling opportunities that significantly enhanced the value of the Bates Companies. With the sale of the assets and liabilities of RB&T, which was the Company’s bank subsidiary located
in Rockford, Illinois, the Company’s valuation analysis determined the value had declined and the goodwill was impaired. Specifically, the Company determined a goodwill impairment charge of $3 million was required for the Bates Companies. The Company used a combination of methods to determine the value and related goodwill impairment charge. The methods included prices of comparable businesses as well as recent discussions with existing wealth management providers in the surrounding Rockford market.
The following table presents the changes in core deposit intangibles (included in Intangibles on the consolidated balance sheets) during the years ended December 31, 2020, 2019 and 2018:
(dollars in thousands)
Balance at the beginning of the period
$
13,466
$
15,595
$
9,079
Merger with Springfield Bancshares
-
-
8,208
Amortization expense
(2,085)
(2,129)
(1,692)
Balance at the end of the period
$
11,381
$
13,466
$
15,595
Gross carrying amount
$
19,255
$
19,255
$
19,255
Accumulated amortization
(7,874)
(5,789)
(3,660)
Net book value
$
11,381
$
13,466
$
15,595
The following table presents the core deposit intangibles by reportable segment:
December 31, 2020
December 31, 2019
December 31, 2018
(dollars in thousands)
Commercial Banking:
CRBT
$
2,189
$
2,684
$
3,186
CSB
3,305
3,980
4,675
SFCB
5,887
6,802
7,734
$
11,381
$
13,466
$
15,595
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Goodwill and Intangibles (continued)
The following table presents the estimated amortization of the core deposit intangibles:
Amount
Years ending December 31,
(dollars in thousands)
$
2,032
1,971
1,776
1,623
1,535
Thereafter
2,444
$
11,381
The following table presents the changes in customer list intangible (included in Intangibles on the Consolidated Balance Sheets) during the years ended December 31, 2020 and 2019:
(dollars in thousands)
Balance at the beginning of period
$
1,504
$
1,855
Acquisition of Bates Companies - measurement period adjustment
-
(214)
Sale of Bates Companies
(1,440)
-
Amortization
(64)
(137)
Balance at the end of period
-
1,504
The customer list intangible relates to the Parent Company Only (“All Other”) reportable segment.
Note 7. Derivatives and Hedging Activities
Derivatives are summarized as follows as of December 31, 2020 and 2019:
(dollars in thousands)
Assets:
Interest rate caps - hedged
$
$
3,148
Interest rate caps
-
Interest rate swaps
222,431
84,679
$
222,757
$
87,827
Liabilities:
Interest rate swaps - hedged
$
(6,839)
$
(3,758)
Interest rate swaps
(222,431)
(84,679)
$
(229,270)
$
(88,437)
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Derivatives and Hedging Activities (continued)
The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.
The Company entered into interest rate caps to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps summarized below. 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
December 31, 2020
December 31, 2019
(dollars in thousands)
Deposits
1/1/2020
1/1/2023
Other Assets
$
25,000
1.75
%
$
$
Deposits
1/1/2020
1/1/2023
Other Assets
50,000
1.57
Deposits
1/1/2020
1/1/2023
Other Assets
25,000
1.80
Deposits
1/1/2020
1/1/2024
Other Assets
25,000
1.75
Deposits
1/1/2020
1/1/2024
Other Assets
50,000
1.57
Deposits
1/1/2020
1/1/2024
Other Assets
25,000
1.80
Deposits
1/1/2020
1/1/2025
Other Assets
25,000
1.75
Deposits
1/1/2020
1/1/2025
Other Assets
50,000
1.57
Deposits
1/1/2020
1/1/2025
Other Assets
25,000
1.80
$
300,000
$
$
2,518
In December 2020, the Company redesignated three of its interest rate caps, which had been purchased in 2019 for $800 thousand. The caps, which were designated as cash flow hedges at the time of purchase, are now designated as unhedged. A loss of $649 thousand was recognized due to the change in designation as the underlying hedged item no longer exists. For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. There was no change in value recognized into current earnings for 2020 as the change in designation was effective December 31, 2020. The details of the unhedged interest rate caps are as follows:
Balance Sheet
Fair Value as of
Effective Date
Maturity Date
Location
Notional Amount
Strike Rate
December 31, 2020
December 31, 2019
(dollars in thousands)
1/1/2020
1/1/2023
Other Assets
$
25,000
1.90
%
$
$
2/1/2020
2/1/2024
Other Assets
25,000
1.90
3/1/2020
3/1/2025
Other Assets
25,000
1.90
$
75,000
$
$
The Company 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:
Balance Sheet
Fair Value as of
Hedged Item
Effective Date
Maturity Date
Location
Notional Amount
Receive Rate
Pay Rate
December 31, 2020
December 31, 2019
(dollars in thousands)
QCR Holdings Statutory Trust II
9/30/2018
9/30/2028
Derivatives - Liabilities
10,000
3.10
%
5.85
%
(1,767)
(971)
QCR Holdings Statutory Trust III
9/30/2018
9/30/2028
Derivatives - Liabilities
8,000
3.10
%
5.85
%
(1,414)
(777)
QCR Holdings Statutory Trust V
7/7/2018
7/7/2028
Derivatives - Liabilities
10,000
1.79
%
4.54
%
(1,721)
(944)
Community National Statutory Trust II
9/20/2018
9/20/2028
Derivatives - Liabilities
3,000
2.41
%
5.17
%
(529)
(291)
Community National Statutory Trust III
9/15//2018
9/15/2028
Derivatives - Liabilities
3,500
1.97
%
4.75
%
(616)
(339)
Guaranty Bankshares Statutory Trust I
9/15/2018
9/15/2028
Derivatives - Liabilities
4,500
1.97
%
4.75
%
(792)
(436)
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
$
39,000
2.48
%
5.24
%
$
(6,839)
$
(3,758)
Note 7. Derivatives and Hedging Activities (continued)
In the first quarter of 2020, the Company entered into $40 million of interest rate swaps which were then terminated in the fourth quarter of 2020, resulting in a loss of $808 thousand.
Changes in the fair values of derivative financial instruments accounted for as cash flow hedges to the extent they are included in the assessment of effectiveness, are recorded as a component of AOCI. The following is a summary of how AOCI was impacted during the reporting periods:
Year Ended
December 31, 2020
December 31, 2019
(dollars in thousands)
Unrealized loss at beginning of period, net of tax
$
(3,915)
$
(1,276)
Amount reclassified from accumulated other comprehensive income to noninterest expense related to unhedging caplet
-
Amount reclassified from accumulated other comprehensive income to noninterest expense related to swap termination
-
Amount reclassified from accumulated other comprehensive income to interest expense related to caplet amortization
Amount of loss recognized in other comprehensive income, net of tax
(5,406)
(3,061)
Unrealized loss at end of period, net of tax
$
(7,632)
$
(3,915)
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 offsetting interest rate swap with a third party financial institution. Additionally, the Company receives an upfront fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value 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:
December 31, 2020
December 31, 2019
Notional Amount
Estimated Fair Value
Notional Amount
Estimated Fair Value
(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts
$
1,539,602
$
222,431
$
787,221
$
84,679
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts
$
1,539,602
$
222,431
$
787,221
$
84,679
Swap fee income totaled $74.8 million, $28.3 million and $10.8 million for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:
December 31, 2020
December 31, 2019
(dollars in thousands)
Cash
$
45,719
$
-
U.S govt. sponsored agency securities
3,628
3,541
Municipal securities
85,937
22,924
Residential mortgage-backed and related securities
89,646
72,090
$
224,930
$
98,555
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
of outstanding swaps. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the
Note 7. Derivatives and Hedging Activities (continued)
base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. For the large majority of the Company’s swapped loan portfolio, the loan-to-value including the potential swap exposure is below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
Note 8. Deposits
The aggregate amount of certificates of deposit, each with a minimum denomination of $250,000, was $169.1 million and $293.4 million as of December 31, 2020 and 2019, respectively.
As of December 31, 2020, the scheduled maturities of certificates of deposit were as follows:
Amount
Year ending December 31:
(dollars in thousands)
$
228,257
61,450
13,648
12,684
7,795
Thereafter
136,825
$
460,659
The Company has public entity interest-bearing demand deposits and certificates of deposit that are collateralized by investment securities with carrying values as follows:
(dollars in thousands)
U.S. govt. sponsored agency securities
$
3,668
$
6,135
Residential mortgage-backed and related securities
4,772
3,782
$
8,440
$
9,917
The Company had a $110.5 million PUD LOC with the FHLB of Des Moines for the purpose of providing additional collateral on public deposits as of December 31, 2020. As of December 31, 2019, the Company had a $47.4 million PUD LOC with the FHLB of Des Moines. There were no amounts outstanding under these letters of credit as of December 31, 2020 or 2019.
The Company prepaid brokered and public time deposits totaling $29.2 million in 2020 resulting in a loss of $576 thousand. There were no prepayments of brokered certificates of deposits in 2019.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Short-Term Borrowings
Short-term borrowings as of December 31, 2020 and 2019 are summarized as follows:
(dollars in thousands)
Overnight repurchase agreements with customers
$
-
$
2,193
Federal funds purchased
5,430
11,230
$
5,430
$
13,423
As of December 31, 2020, the Company is no longer offering overnight repurchase agreements with customers.
The Company’s overnight repurchase agreements with customers were collateralized by investment securities with carrying values as follows:
(dollars in thousands)
U.S. govt. sponsored agency securities
$
-
$
1,964
Residential mortgage-backed and related securities
1,456
Total securities pledged to overnight customer repurchase agreements
3,420
Less: overcollateralized position
1,227
$
-
$
2,193
Inherent in the overnight repurchase agreements is a risk that the fair value of the collateral pledged on the agreements could decline below the amount obligated under our customer repurchase agreements. The Company considers this risk minimal. The Company monitors balances daily to ensure that collateral is sufficient to meet obligations. Additionally, the Company maintains an overcollateralized position that is sufficient to cover any interest rate movements.
The securities underlying the agreements as of December 31, 2019 were under the Company’s control in safekeeping at third-party financial institutions.
Information concerning overnight repurchase agreements with customers is summarized as follows for the years ended December 31, 2020 and 2019:
(dollars in thousands)
Average daily balance
$
1,495
$
4,231
Average daily interest rate
0.40
%
0.73
%
Maximum month-end balance
$
2,377
$
4,177
Weighted average rate as of December 31
-
%
1.00
%
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Short-Term Borrowings (continued)
Information concerning federal funds purchased is summarized as follows for the years ended December 31, 2020 and 2019:
(dollars in thousands)
Average daily balance
$
19,573
$
12,594
Average daily interest rate
0.36
%
2.56
%
Maximum month-end balance
$
30,430
$
17,010
Weighted average rate as of December 31
0.06
%
1.50
%
Note 10. FHLB Advances
The subsidiary banks are members of the FHLB of Des Moines. Maturity and interest rate information on advances from the FHLB as of December 31, 2020 and 2019 is as follows:
December 31, 2020
December 31, 2019
Weighted
Weighted
Average
Average
Interest Rate
Interest Rate
Amount Due
at Year-End
Amount Due
at Year-End
(dollars in thousands)
Maturity:
Year ending December 31:
$
-
-
%
$
110,900
1.73
%
15,000
0.29
5,000
1.55
-
-
23,400
1.73
-
-
20,000
1.84
-
-
-
-
Total FHLB advances
$
15,000
0.29
%
$
159,300
1.74
%
The Company prepaid $55.3 million of FHLB advances in 2020 and $30.3 million in 2019 with excess funds generated by strong deposit growth. The loss on the prepayment of the FHLB advances totaled $1.9 million and $386 thousand for the year ended December 31, 2020 and 2019, respectively.
Advances are collateralized by loans of $1.1 billion as of December 31, 2020 and 2019, in aggregate. On pledged loans, the FHLB applies varying collateral maintenance levels from 125% to 333% based on the loan type. Advances are also collateralized by securities of $590 thousand and $1.4 million as of December 31, 2020 and 2019, respectively, in aggregate. The Company continues to pledge loans under blanket liens to provide off balance sheet liquidity.
As of December 31, 2020 and included within the 2021 maturity grouping above are $15.0 million of short-term advances from the FHLB. These advances have maturities ranging from 1 day to 1 month. Short-term and overnight advances totaled $109.3 million as of December 31, 2019 and had maturities ranging from 1 day to 1 month.
As of December 31, 2020 and 2019, the subsidiary banks held $6.6 million and $11.7 million, respectively, of FHLB stock, which is included in restricted investment securities on the consolidated balance sheet.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11. Other Borrowings and Unused Lines of Credit
The Company prepaid two wholesale structured repurchase agreements in the second quarter of 2019 using excess funds generated by strong deposit growth. The first wholesale structured repurchase agreement totaled $5.0 million and had an original maturity date of March 13, 2020 with a rate of 2.58%. The second wholesale structured
repurchase agreement totaled $20.0 million and had an original maturity of June 13, 2020 with a rate of 2.46%. The loss on the prepayment of the wholesale structured repurchase agreements totaled $50 thousand. In addition, wholesale repurchase agreements totaling $10.0 million matured in the second quarter of 2019. The wholesale structured repurchase agreements were utilized as an alternative funding source to FHLB advances and customer deposits.
The Company had two term notes totaling $23.3 million at December 31, 2018 with original maturity dates of December 31, 2021. Interest on the term notes were calculated at the effective LIBOR rate plus 3.00% per annum (5.52% at December 31, 2018). The collateral on both borrowings was 100% of the outstanding capital stock of the Company’s bank subsidiaries. In February 2019, immediately following the subordinated note issuance, the Company repaid the term notes.
In the second quarter of 2020, the Company renewed its revolving line of credit. At renewal, the line amount was increased from $20.0 million to $25.0 million for which there is no outstanding balance as of December 31, 2020. Interest on the revolving line of credit is calculated at the effective Prime Rate plus 2.25% per annum (5.50% at December 31, 2020). The collateral on the revolving line of credit is 100% of the outstanding capital stock of the Company’s bank subsidiaries.
Unused lines of credit of the subsidiary banks as of December 31, 2020 and 2019 are summarized as follows:
(dollars in thousands)
Secured
$
287,076
$
45,342
Unsecured
456,000
335,300
$
743,076
$
380,642
The Company pledges select C&I, CRE and PPP loans to the Federal Reserve Bank of Chicago for borrowing as part of the Borrower-In-Custody program.
Note 12. Subordinated Notes
Subordinated notes as of December 31, 2020 and 2019 are summarized as follows:
Amount Outstanding
Interest Rate
Amount Outstanding
Interest Rate
as of December 31, 2020
as of December 31, 2020
as of December 31, 2019
as of December 31, 2019
Maturity Date
(dollars in thousands)
Subordinated debenture dated 9/14/20
$
50,000
5.125
%
$
-
-
%
9/15/2030
Subordinated debenture dated 2/1/19
65,000
5.375
%
65,000
5.375
%
2/15/2029
Subordinated debenture dated 4/30/16*
2,000
4.00
%
2,000
4.00
%
4/30/2026
Subordinated debenture dated 9/15/16*
3,000
4.00
%
3,000
4.00
%
9/15/2026
Debt issuance costs
(1,309)
(1,606)
Total Subordinated Debentures
$
118,691
$
68,394
*Assumed in acquisition of SFCB
On September 14, 2020, the Company completed a private offering of $50.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 15, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, bear interest at a fixed rate of 5.125% per year, from and including September 14, 2020 to, but excluding, September 15, 2025 or earlier redemption date. From and including September 15, 2025 to,
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Subordinated Notes (continued)
but excluding, the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then current three-month term SOFR plus 500 basis points. Interest on the subordinated notes is payable quarterly, commencing on December 15, 2020. The subordinated notes are redeemable by the Company at its option, in whole or in part, on any interest payment date on or after September 15, 2025. The subordinated notes are redeemable by the Company in whole but not in part, under certain limited circumstances set forth in the subordinated notes. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.
On February 12, 2019, the Company completed an underwritten public offering of $65.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on February 15, 2029. Net proceeds, after deducting the underwriting discount and estimated expenses, were $63.4 million. The subordinated notes, which qualify as Tier 2 capital for the Company, bear interest at a fixed rate of 5.375% per year from and after February 12, 2019 to, but excluding, February 15, 2024 or earlier redemption date. From and after February 15, 2024 to, but excluding, the maturity date or earlier redemption date, the interest will reset quarterly to the then current three-month LIBOR plus 282 basis points. Interest on the subordinated notes is payable semi-annually, commencing on August 15, 2019 during the five year fixed term and thereafter quarterly, commencing on February 15, 2024. The subordinated notes are redeemable by the Company at its option, in whole or in part, on any interest payment date on or after February 15, 2024. The subordinated notes are redeemable by the Company in whole but not in part, under certain limited circumstances set forth in the subordinated notes. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the subordinated notes being redeemed, together with any accrued and unpaid interest on the subordinated notes being redeemed to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks. Unamortized debt issuance costs related to the subordinated notes totaled $1.3 million and $1.6 million at December 31, 2020 and 2019, respectively. The Company used a portion of the net proceeds from the offering to repay term notes totaling $21.3 million and the outstanding balance of $9.0 million on its revolving line of credit.
As part of the merger with Springfield Bancshares, the Company assumed two subordinated debentures with a fair value of $4.8 million. The interest rate on the subordinated debentures is fixed for the first five years of the term and then converts to floating for the remaining term, at the prime rate floating daily. The debentures may be called after a minimum of five years following issuance and at the prior approval of the appropriate regulatory agencies. These subordinated debentures are unsecured.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Junior Subordinated Debentures
Junior subordinated debentures are summarized as of December 31, 2020 and 2019 as follows:
(dollars in thousands)
Note Payable to QCR Holdings Capital Trust II
$
10,310
$
10,310
Note Payable to QCR Holdings Capital Trust III
8,248
8,248
Note Payable to QCR Holdings Capital Trust V
10,310
10,310
Note Payable to Community National Trust II*
3,093
3,093
Note Payable to Community National Trust III*
3,609
3,609
Note Payable to Guaranty Bankshares Statutory Trust I**
4,640
4,640
Market Value Discount per ASC 805***
(2,217)
(2,372)
$
37,993
$
37,838
* As part of the acquisition of Community National, the Company assumed two junior subordinated debentures with fair value of $4.2 million.
** As part of the acquisition of Guaranty Bank, the Company assumed one junior subordinated debenture with a fair value of $3.9 million.
*** Market value discount includes discount on junior subordinated debt acquired in 2013 as part of the purchase of Community National and junior subordinated debt acquired in 2017 as part of the purchase of Guaranty Bank.
A schedule of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including the amounts outstanding as of December 31, 2020 and 2019, is as follows:
Amount
Amount
Outstanding
Outstanding
December 31,
December 31,
Interest Rate as of
Interest Rate as of
Name
Date Issued
Interest Rate
December 31, 2020
December 31, 2019
(dollars in thousands)
QCR Holdings Statutory Trust II*
February 2004
$
10,310
$
10,310
2.85% over 3-month LIBOR
3.10
%
4.79
%
QCR Holdings Statutory Trust III
February 2004
8,248
8,248
2.85% over 3-month LIBOR
3.10
%
4.79
%
QCR Holdings Statutory Trust V
February 2006
10,310
10,310
1.55% over 3-month LIBOR
1.79
%
3.54
%
Community National Statutory Trust II
September 2004
3,093
3,093
2.17% over 3-month LIBOR
2.41
%
4.08
%
Community National Statutory Trust III
March 2007
3,609
3,609
1.75% over 3-month LIBOR
1.97
%
3.64
%
Guaranty Bankshares Statutory Trust I
May 2005
4,640
4,640
1.75% over 3-month LIBOR
1.97
%
3.64
%
$
40,210
$
40,210
Weighted Average Rate
2.48
%
4.18
%
* Original amount issued for QCR Holdings Statutory Trust II was $12,372,000.
Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but all are currently callable at par at any time. Interest rate reset dates vary by Trust.
The Company uses interest rate swaps for the purpose of hedging interest rate risk on the variable rate junior subordinated debt. See Note 7 to the Consolidated Financial Statements for the details of these instruments.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Federal and State Income Taxes
Federal and state income tax expense was comprised of the following components for the years ended December 31, 2020, 2019, and 2018:
(dollars in thousands)
Current
$
27,237
$
8,255
$
2,723
Deferred
(14,530)
6,364
6,292
$
12,707
$
14,619
$
9,015
A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income was as follows for the years ended December 31, 2020, 2019, and 2018:
Year Ended December 31,
% of
% of
% of
Pretax
Pretax
Pretax
Amount
Income
Amount
Income
Amount
Income
(dollars in thousands)
Computed "expected" tax expense
$
15,391
21.0
%
$
15,126
21.0
%
$
10,948
21.0
%
Tax exempt income, net
(5,943)
(8.1)
(4,470)
(6.2)
(3,958)
(7.6)
Bank-owned life insurance
(308)
(0.4)
(360)
(0.5)
(343)
(0.6)
State income taxes, net of federal benefit, current year
3,622
4.9
3,668
5.1
2,681
5.2
Change in unrecognized tax benefits
0.7
(93)
(0.1)
(45)
(0.1)
Goodwill impairment
0.1
0.9
-
-
Intended liquidation of bank-owned life insurance
-
-
1.1
-
-
Tax credits
(456)
(0.6)
(705)
(1.0)
(154)
(0.3)
Acquisition costs
-
-
-
-
0.4
Excess tax benefit on stock options exercised and restricted stock awards vested
(242)
(0.3)
(287)
(0.4)
(425)
(0.8)
Other
(215)
(0.3)
0.4
0.1
Federal and state income tax expense
$
12,707
17.3
%
$
14,619
20.3
%
$
9,015
17.3
%
Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2020 and 2019:
(dollars in thousands)
Balance, beginning
$
1,254
$
1,249
Impact of tax positions taken during current year
Gross increase (decrease) related to tax positions of prior years
Reduction as a result of a lapse of the applicable statute of limitations
(187)
(414)
Balance, ending
$
1,893
$
1,254
Included in the unrecognized tax benefits liability at December 31, 2020 are potential benefits of approximately $1.4 million that, if recognized, would affect the effective tax rate.
The liability for unrecognized tax benefits includes accrued interest for tax positions, which either do not meet the more-likely-than-not recognition threshold or where the tax benefit is measured at an amount less than the tax benefit
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Federal and State Income Taxes (continued)
claimed or expected to be claimed on an income tax return. At December 31, 2020 and 2019, accrued interest on uncertain tax positions was approximately $277 thousand and $232 thousand, respectively. Estimated interest related to the underpayment of income taxes is classified as a component of “income tax expense” in the statements of income.
The Company’s federal income tax returns are open and subject to examination from the 2017 tax return year and later. Various state franchise and income tax returns are generally open from the 2016 and later tax return years based on individual state statutes of limitations.
The net deferred tax liabilities consisted of the following as of December 31, 2020 and 2019:
(dollars in thousands)
Deferred tax assets:
Historic tax credits
$
$
Net unrealized losses on securities available for sale and derivative instruments
-
Compensation
10,288
8,433
Loan/lease losses
20,016
11,332
Net operating loss carryforwards, federal and state
Other
31,071
21,303
Deferred tax liabilities:
Net unrealized gains on securities available for sale and derivative instruments
-
Premises and equipment
5,737
4,616
Equipment financing leases
13,373
16,252
Acquisition fair value adjustments
3,351
3,963
Intended liquidation of bank-owned life insurance
-
Gain on sale of assets and liabilities of subsidiary
-
Investment accretion
Deferred loan origination fees, net
Other
24,477
28,039
Net deferred tax liabilities
$
6,594
$
(6,736)
At December 31, 2020, the Company had $3.0 million of federal tax net operating loss carryforwards which are set to expire in varying amounts between 2029 and 2033. At December 31, 2020, the Company had $2.1 million of state tax net operating loss carryforwards which are set to expire in varying amounts between 2023 and 2028. All of the federal tax net operating loss carryforwards and the state tax net operating loss carryforwards were acquired from Community National and CNB.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Federal and State Income Taxes (continued)
The change in deferred income taxes was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2020, 2019, and 2018:
(dollars in thousands)
Provision for income taxes
$
(14,530)
$
6,364
$
6,292
Net deferred tax asset resulting from market value adjustments of acquisitions
-
(381)
(52)
Net deferred tax assets resulting from sale of other subsidiary
-
-
Net deferred tax liabilities resulting from sale of bank subsidiary
-
(1,644)
-
Statement of stockholders' equity- Other comprehensive income (loss)
1,433
(1,000)
$
(13,330)
$
5,772
$
5,240
Note 15. Employee Benefit Plans
The Company has a profit sharing plan, which includes a provision designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended, to allow for participant contributions. Substantially all employees who are at least 18 years of age are eligible to participate in the plan. The Company matches 100% of the first 3% of employee contributions, and 50% of the next 3% of employee contributions, up to a maximum amount of 4.5% of an employee’s compensation. Additionally, at its discretion, the Company may make additional contributions to the plan, which are allocated to the accounts of participants in the plan based on relative compensation. There were no discretionary contributions for the years ended December 31, 2020, 2019 and 2018. Company matching contributions for the years ended December 31, 2020, 2019, and 2018 were as follows:
(dollars in thousands)
Matching contribution
$
2,520
$
2,443
$
2,000
The Company has entered into nonqualified supplemental executive retirement plans (SERPs) with certain executive officers. The SERPs allow certain executives to accumulate retirement benefits beyond those provided by the qualified retirement plan. Changes in the liability related to the SERPs, included in other liabilities, are as follows for the years ended December 31, 2020, 2019 and 2018:
(dollars in thousands)
Balance, beginning
$
5,160
$
4,623
$
4,330
Expense accrued
1,193
Cash payments made
(164)
(164)
(164)
Balance, ending
$
6,189
$
5,160
$
4,623
The Company has entered into deferred compensation agreements with certain executive officers. Under the provisions of the agreements, the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution varies by officer and is a maximum of between $10 thousand and $25 thousand annually as set forth in each officer’s participation agreement. Interest on the deferred amounts is earned at prime rate subject to a minimum of 4% and a maximum of 12%, with such limits differing by
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Employee Benefit Plans (continued)
officer. The Company has also entered into deferred compensation agreements with certain other officers. Under the provisions of the agreements, the officers may defer compensation and the Company matches the deferral up to certain maximums. The Company’s matching contribution differs by officer and is a maximum between 4% and 10% of compensation. Interest on the deferred amounts is earned at prime rate plus one percentage point, and has a minimum of 4% and shall not exceed 8%.
Upon retirement, the officer will receive the deferral balance in 180 equal monthly installments. As of December 31, 2020 and 2019, the liability related to the agreements totaled $24.7 million and $19.5 million, respectively.
Changes in the deferred compensation agreements, included in other liabilities, are as follows for the years ended December 31, 2020, 2019, and 2018:
(dollars in thousands)
Balance, beginning
$
19,474
$
15,029
$
12,347
Employee deferrals
3,959
2,474
1,407
Company match and interest
2,628
2,072
1,367
Cash payments made
(1,348)
(101)
(92)
Balance, ending
$
24,713
$
19,474
$
15,029
Note 16. Stock-Based Compensation
The Company’s Board of Directors adopted in February 2010, and the stockholders approved in May 2010, the QCR Holdings, Inc. 2010 Equity Incentive Plan (“2010 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2013, and the stockholders approved in May 2013, the QCR Holdings, Inc. 2013 Equity Incentive Plan (“2013 Equity Incentive Plan”). The Company’s Board of Directors adopted in February 2016, and the stockholders approved in May 2016, the QCR Holdings, Inc. 2016 Equity Incentive Plan (“2016 Equity Incentive Plan”). Up t 350,000, 350,000, and 400,000 shares of common stock, respectively, may be issued to employees and directors of the Company and its subsidiaries pursuant to equity incentive awards granted under these plans.
The 2010 Equity Incentive Plan, the 2013 Equity Incentive Plan, and the 2016 Equity Incentive Plan (collectively, the “Equity Plans”) are administered by the Compensation Committee of the Board of Directors (the “Committee”). As of December 31, 2020, there were 170,833 remaining shares of common stock available for the grant of future awards under the Equity Plans; however, such future awards may be granted only under the 2016 Equity Incentive Plan.
The number and exercise price of options granted under the Equity Plans are determined by the Committee at the time the option is granted. In no event can the exercise price be less than the value of the common stock at the date of the grant for stock options. All options have a 10-year life and will vest and become exercisable from 3-to-7 years after the date of the grant.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Stock-Based Compensation (continued)
Stock-based compensation expense was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2020, 2019, and 2018.
(dollars in thousands)
Stock options
$
$
$
Restricted stock awards
1,619
1,850
Stock purchase plan
$
2,150
$
2,469
$
1,443
Stock options:
A summary of the stock option plans as of December 31, 2020, 2019, and 2018 and changes during the years then ended is presented below:
December 31,
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
Outstanding, beginning
426,913
$
20.14
469,572
$
18.52
513,554
$
17.13
Granted
23,350
39.12
20,200
36.00
16,315
44.02
Exercised
(41,650)
10.67
(59,393)
12.11
(60,127)
13.56
Forfeited
(850)
19.94
(3,466)
31.59
(170)
16.81
Outstanding, ending
407,763
22.24
426,913
20.14
469,572
18.52
Exercisable, ending
354,899
365,084
358,270
Weighted average fair value per option granted
$
10.07
$
11.29
$
14.68
A further summary of options outstanding as of December 31, 2020 is presented below:
Options Outstanding
Weighted
Options Exercisable
Average
Weighted
Weighted
Remaining
Average
Average
Range of
Number
Contractual
Exercise
Number
Exercise
Exercise Prices
Outstanding
Life
Price
Exercisable
Price
$7.99 to $8.93
11,325
0.14
$
8.15
11,325
$
8.15
$9.00 to $9.30
60,328
1.08
9.30
60,328
9.30
$15.50 to $15.65
66,491
2.24
15.64
66,491
15.64
$17.10 to $18.00
113,527
3.56
17.31
113,527
17.31
$21.71 to $22.64
58,115
5.22
22.88
56,115
22.63
$36.00 to $48.50
97,977
7.39
41.45
47,113
42.98
407,763
354,899
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16. Stock-Based Compensation (continued)
Restricted stock awards:
A summary of changes in the Company’s nonvested restricted stock, restricted stock unit and performance stock unit awards as of December 31, 2020, 2019 and 2018 is presented below:
December 31,
Outstanding, beginning
106,826
64,099
46,389
Granted*
34,559
85,961
37,315
Released
(37,296)
(37,624)
(19,605)
Forfeited
(1,600)
(5,610)
-
Outstanding, ending
102,489
106,826
64,099
Weighted average fair value per share granted
$
39.39
$
20.14
$
43.50
* At December 31, 2020, includes 8,913 shares of restricted stock, 25,646 restricted stock units.
At December 31, 2019, includes 18,634 shares of restricted stock, 49,269 restricted stock units and 18,058 performance share units.
At December 31, 2018, includes 22,660 shares of restricted stock and 14,655 restricted stock units.
The total grant value of restricted stock, restricted stock unit and performance share unit awards that were released during the years ended December 31, 2020, 2019 and 2018 was $1.4 million, $1.3 million and $622 thousand, respectively.
Stock purchase plan:
The Company’s Board of Directors and its stockholders adopted in October 2002 the QCR Holdings, Inc. Employee Stock Purchase Plan (the “Purchase Plan”). On May 2, 2012, the Company’s stockholders approved a complete amendment and restatement of the Purchase Plan. As of January 1, 2020, there were 89,582 shares of common stock available for issuance under the Purchase Plan. For each six-month offering period, the Board of Directors will determine how many of the total number of available shares will be offered. The purchase price is the lesser of 85% or the fair market value at the date of the grant or the investment date. The investment date, as established by the Board of Directors, is the date common stock is purchased after the end of each calendar quarter during an offering period. The maximum dollar amount any one participant can elect to contribute in an offering period is $10 thousand. Additionally, the maximum percentage that any one participant can elect to contribute is 15% of his or her compensation for the years ended December 31, 2020 and 2019. The maximum percentage that any one participant could elect to contribute was 10% of his or her compensation for the year ended December 31, 2018. Information for the stock purchase plan for the years ended December 31, 2020, 2019 and 2018 is presented below:
Shares granted
38,738
29,882
17,305
Shares purchased
37,114
28,775
15,528
Weighted average fair value per share granted
$
6.01
$
4.81
$
6.63
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17. Regulatory Capital Requirements and Restrictions on Dividends
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks’ financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of December 31, 2020 and 2019, 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 December 31, 2020 and 2019 are also presented in the following table (dollars in thousands). As of December 31, 2020 and 2019, the subsidiary banks met the requirements to be “well capitalized”.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
For Capital
With Capital
Prompt Corrective
Actual
Adequacy Purposes
Conservation Buffer
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2020:
Company:
Total risk-based capital
$
721,004
14.95
%
$
385,832
>
8.00
%
$
506,404
>
10.50
%
$
482,290
>
10.00
%
Tier 1 risk-based capital
546,729
11.34
289,374
>
6.00
409,946
>
8.50
385,832
>
8.00
Tier 1 leverage
546,729
9.49
230,345
>
4.00
230,345
>
4.00
287,931
>
5.00
Common equity Tier 1
508,736
10.55
217,030
>
4.50
337,603
>
7.00
313,488
>
6.50
Quad City Bank & Trust:
Total risk-based capital
$
213,608
12.24
%
$
139,581
>
8.00
%
$
183,200
>
10.50
%
$
174,477
>
10.00
%
Tier 1 risk-based capital
191,693
10.99
104,686
>
6.00
148,305
>
8.50
139,581
>
8.00
Tier 1 leverage
191,693
8.48
90,430
>
4.00
90,430
>
4.00
113,038
>
5.00
Common equity Tier 1
191,693
10.99
78,514
>
4.50
122,134
>
7.00
113,410
>
6.50
Cedar Rapids Bank & Trust:
Total risk-based capital
$
217,227
13.14
%
$
132,269
>
8.00
%
$
173,603
>
10.50
%
$
165,336
>
10.00
%
Tier 1 risk-based capital
196,438
11.88
99,202
>
6.00
140,536
>
8.50
132,269
>
8.00
Tier 1 leverage
196,438
10.01
78,535
>
4.00
78,535
>
4.00
98,169
>
5.00
Common equity Tier 1
196,438
11.88
74,401
>
4.50
115,735
>
7.00
107,469
>
6.50
Community State Bank:
Total risk-based capital
$
108,040
12.69
%
$
68,117
>
8.00
%
$
89,404
>
10.50
%
$
85,146
>
10.00
%
Tier 1 risk-based capital
97,350
11.43
51,088
>
6.00
72,374
>
8.50
68,117
>
8.00
Tier 1 leverage
97,350
10.27
37,930
>
4.00
37,930
>
4.00
47,412
>
5.00
Common equity Tier 1
97,350
11.43
38,316
>
4.50
59,602
>
7.00
55,345
>
6.50
Springfield First Community Bank:
Total risk-based capital
$
90,334
14.35
%
$
50,357
>
8.00
%
$
66,094
>
10.50
%
$
62,947
>
10.00
%
Tier 1 risk-based capital
77,668
12.34
37,768
>
6.00
53,505
>
8.50
50,357
>
8.00
Tier 1 leverage
77,668
10.87
28,575
>
4.00
28,575
>
4.00
35,719
>
5.00
Common equity Tier 1
77,668
12.34
28,326
>
4.50
44,063
>
7.00
40,915
>
6.50
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17. Regulatory Capital Requirements and Restrictions on Dividends (continued)
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
For Capital
With Capital
Prompt Corrective
Actual
Adequacy Purposes
Conservation Buffer
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2019:
Company:
Total risk-based capital
$
581,234
13.33
%
$
348,937
>
8.00
%
$
457,980
>
10.50
%
$
436,171
>
10.00
%
Tier 1 risk-based capital
481,702
11.04
261,703
>
6.00
370,746
>
8.50
348,937
>
8.00
Tier 1 leverage
481,702
9.53
202,207
>
4.00
202,207
>
4.00
252,758
>
5.00
Common equity Tier 1
443,864
10.18
196,277
>
4.50
305,320
>
7.00
283,511
>
6.50
Quad City Bank & Trust:
Total risk-based capital
$
183,855
11.83
%
$
124,362
>
8.00
%
$
163,225
>
10.50
%
$
155,452
>
10.00
%
Tier 1 risk-based capital
170,137
10.94
93,271
>
6.00
132,134
>
8.50
124,362
>
8.00
Tier 1 leverage
170,137
9.94
68,479
>
4.00
68,479
>
4.00
85,598
>
5.00
Common equity Tier 1
170,137
10.94
69,953
>
4.50
108,817
>
7.00
101,044
>
6.50
Cedar Rapids Bank & Trust:
Total risk-based capital
$
175,498
11.90
%
$
117,953
>
8.00
%
$
154,813
>
10.50
%
$
147,441
>
10.00
%
Tier 1 risk-based capital
162,127
11.00
88,465
>
6.00
125,325
>
8.50
117,953
>
8.00
Tier 1 leverage
162,127
10.41
62,286
>
4.00
62,286
>
4.00
77,857
>
5.00
Common equity Tier 1
162,127
11.00
66,349
>
4.50
103,209
>
7.00
95,837
>
6.50
Community State Bank:
Total risk-based capital
$
92,095
12.32
%
$
59,813
>
8.00
%
$
78,504
>
10.50
%
$
74,766
>
10.00
%
Tier 1 risk-based capital
85,437
11.43
44,860
>
6.00
63,551
>
8.50
59,813
>
8.00
Tier 1 leverage
85,437
10.39
32,902
>
4.00
32,902
>
4.00
41,128
>
5.00
Common equity Tier 1
85,437
11.43
33,645
>
4.50
52,336
>
7.00
48,598
>
6.50
Springfield First Community Bank:
Total risk-based capital
$
71,074
12.72
%
$
44,704
>
8.00
%
$
58,674
>
10.50
%
$
55,880
>
10.00
%
Tier 1 risk-based capital
63,956
11.45
33,528
>
6.00
47,498
>
8.50
44,704
>
8.00
Tier 1 leverage
63,956
9.70
26,379
>
4.00
26,379
>
4.00
32,974
>
5.00
Common equity Tier 1
63,956
11.45
25,146
>
4.50
39,116
>
7.00
36,322
>
6.50
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding the availability of funds for dividends, however, the Federal Reserve may prohibit the payment of any dividends by the subsidiary banks if the Federal Reserve determines such payment would constitute an unsafe or unsound practice.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued junior subordinated debentures in four private placements and assumed three issues of junior subordinated debentures in connection with the acquisitions. Under the terms of the debentures, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. These circumstances did not exist at December 31, 2020 or 2019.
In September 2020 and in February 2019, the Company completed subordinated notes offerings. See Note 12 of the Consolidated Financial Statements for further information.
On February 18, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain when the Company will resume the repurchase of shares as part of this program in the future.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18. Earnings per Share
The following information was used in the computation of basic and diluted EPS for the years ended December 31, 2020, 2019, and 2018:
(dollars in thousands, except per share data)
Net income
$
60,582
$
57,408
$
43,120
Basic EPS
$
3.84
$
3.65
$
2.92
Diluted EPS
$
3.80
$
3.60
$
2.86
Weighted average common shares outstanding*
15,771,650
15,730,016
14,768,687
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan
180,987
237,759
296,043
Weighted average common and common equivalent shares outstanding**
15,952,637
15,967,775
15,064,730
* The increase in weighted average common shares outstanding from 2018 to 2019 was primarily due to the common stock
issuances that occurred in conjunction with the Springfield Bancshares merger.
** Excludes anti-dilutive shares of 104,636, 80,437 and 91,954 at December 31, 2020, 2019 and 2018, respectively.
Note 19. Commitments and Contingencies
In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based upon management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, marketable securities, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the subsidiary banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary banks hold collateral, as described above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the subsidiary banks would be required to fund the commitments. The maximum potential amount of future payments the subsidiary banks could be required to make is represented by the contractual amount. If the commitment is funded, the subsidiary banks would be entitled to seek recovery from the customer. At December 31, 2020 and 2019, no amounts had been recorded as liabilities for the subsidiary banks’ potential obligations under these guarantees.
As of December 31, 2020 and 2019, commitments to extend credit aggregated $1.7 billion and $1.2 billion, respectively. As of December 31, 2020 and 2019, standby letters of credit aggregated $24.8 million and $23.8 million, respectively. Management does not expect that all of these commitments will be funded.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19. Commitments and Contingencies (continued)
The Company has also executed contracts for the sale of mortgage loans in the secondary market in the amount of $3.8 million and $3.7 million as of December 31, 2020 and 2019, respectively. These amounts are included in loans held for sale at the respective balance sheet dates.
Residential mortgage loans sold to investors in the secondary market are sold with varying recourse provisions. Essentially, all loan sales agreements require the repurchase of a mortgage loan by the seller in situations such as breach of representation, warranty, or covenant, untimely document delivery, false or misleading statements, failure to obtain certain certificates of insurance, unmarketability, etc. Certain loan sales agreements contain repurchase requirements based on payment-related defects that are defined in terms of the number of days/months since the purchase, the sequence number of the payment, and/or the number of days of payment delinquency. Based on the specific terms stated in the agreements of investors purchasing residential mortgage loans from the Company’s subsidiary banks, the Company had $32.4 million and $24.5 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2020 and 2019, respectively. The subsidiary banks did not repurchase any loans from secondary market investors under the terms of loans sales agreements during the years ended December 31, 2020, 2019, and 2018. In the opinion of management, the risk of recourse and the subsequent requirement of loan repurchase to the subsidiary banks is not significant, and accordingly no liabilities have been established related to such.
Aside from cash on-hand and in-vault, the majority of the Company’s cash is maintained at upstream correspondent banks. The total amount of cash on deposit, certificates of deposit, and federal funds sold exceeded federal insured limits by approximately $59.4 million and $34.6 million as of December 31, 2020 and 2019, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the upstream correspondent banks.
In an arrangement with Goldman Sachs, CRBT offers a cash management program for select customers. Based on a predetermined minimum balance, which must be maintained in the account, excess funds are automatically swept daily to an institutional money market fund administered by Goldman Sachs. At December 31, 2020 and 2019, the Company had $103.8 million and $148.3 million, respectively of customer funds invested in this cash management program. In the opinion of management, no material risk of loss exists due to the financial condition of Goldman Sachs. As of December 31, 2020, there were $24.0 million of investment securities pledged on Goldman Sachs and none were pledged as of December 31, 2019.
Note 20. Quarterly Results of Operations (Unaudited)
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year Ended December 31, 2020
March
June
September
December
(dollars in thousands)
Total interest income
$
48,982
$
48,650
$
50,890
$
49,851
Total interest expense
11,276
7,694
6,309
6,144
Net interest income
37,706
40,956
44,581
43,707
Provision for loan/lease losses
8,367
19,915
20,342
7,080
Noninterest income
15,196
28,626
37,959
32,017
Noninterest expense
31,423
33,130
40,838
46,364
Income before taxes
13,112
16,537
21,360
22,280
Federal and state income tax expense
1,884
2,798
4,016
4,009
Net income
$
11,228
$
13,739
$
17,344
$
18,271
EPS:
Basic
$
0.71
$
0.87
$
1.10
$
1.16
Diluted
$
0.70
$
0.86
$
1.09
$
1.14
Year Ended December 31, 2019
March
June
September
December
(dollars in thousands)
Total interest income
$
52,101
$
54,181
$
56,817
$
52,977
Total interest expense
15,193
16,168
16,098
13,058
Net interest income
36,908
38,013
40,719
39,919
Provision for loan/lease losses
2,134
1,941
2,012
Noninterest income
11,992
17,065
19,906
29,805
Noninterest expense
32,435
36,560
39,945
46,294
Income before taxes
14,331
16,577
18,668
22,451
Federal and state income tax expense
1,413
3,073
3,573
6,560
Net income
$
12,918
$
13,504
$
15,095
$
15,891
EPS:
Basic
$
0.82
$
0.86
$
0.96
$
1.01
Diluted
$
0.81
$
0.85
$
0.94
$
0.99
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent company only):
Condensed Balance Sheets
December 31, 2020 and 2019
(dollars in thousands)
Assets
Cash and due from banks
$
88,610
$
59,529
Interest-bearing deposits at financial institutions
7,200
5,601
Investment in bank subsidiaries
655,232
570,698
Investment in nonbank subsidiaries
4,540
13,239
Premises and equipment, net
9,242
9,424
Goodwill
-
Intangibles
-
1,503
Other assets
7,225
15,150
Total assets
$
772,049
$
675,826
Liabilities and Stockholders' Equity
Liabilities:
Subordinated notes
$
113,691
$
63,531
Junior subordinated debentures
37,993
37,838
Other liabilities
26,572
39,106
Total liabilities
178,256
140,475
Stockholders' Equity:
Common stock
15,806
15,828
Additional paid-in capital
275,807
274,785
Retained earnings
300,804
245,836
Accumulated other comprehensive loss
1,376
(1,098)
Total stockholders' equity
593,793
535,351
Total liabilities and stockholders' equity
$
772,049
$
675,826
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. Parent Company Only Financial Statements (continued)
Condensed Statements of Income
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
Total interest income
$
$
$
Equity in net income of bank subsidiaries
79,624
69,966
55,209
Equity in net income of nonbank subsidiaries
(261)
6,797
(436)
Other
(322)
Total income
79,681
77,154
54,539
Interest expense
6,662
5,836
3,637
Salaries and employee benefits
11,825
8,739
6,598
Professional fees
2,558
1,545
1,872
Acquisition costs
-
-
1,654
Post-acquisition compensation, transition and integration costs
3,171
Disposition costs
1,606
-
Goodwill impairment
3,000
-
Other
2,505
2,147
1,026
Total expenses
24,507
26,044
14,952
Income before income tax benefit
55,174
51,110
39,587
Income tax benefit
5,408
6,298
3,533
Net income
$
60,582
$
57,408
$
43,120
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. Parent Company Only Financial Statements (continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2020, 2019, and 2018
(dollars in thousands)
Cash Flows from Operating Activities:
Net income
$
60,582
$
57,408
$
43,120
Adjustments to reconcile net income to net cash provided by operating activities:
Earnings of bank subsidiaries
(79,624)
(69,966)
(55,209)
Earnings (losses) of nonbank subsidiaries
(6,797)
Distributions from bank subsidiaries
-
-
34,500
Distributions from nonbank subsidiaries
45,058
Deferred income taxes
6,909
2,498
1,292
Accretion of acquisition fair value adjustments
Depreciation
Stock-based compensation expense
2,150
2,469
1,443
Loss on sale of subsidiary
-
-
Goodwill impairment
3,000
-
Decrease (increase) in other assets
1,663
(2,472)
Increase (decrease) in other liabilities
(14,966)
7,814
(7,226)
Net cash provided by (used in) operating activities
(21,495)
39,644
19,791
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits at financial institutions
(1,599)
(4,600)
(1,000)
Capital infusion, bank subsidiaries
-
(8,600)
(3,500)
Capital infusion, non-bank subsidiaries
-
(100)
-
Net cash received in dissolution of subsidiary
8,450
-
-
Net cash paid for acquisitions
-
-
(5,183)
Net cash received in sale of subsidiary
-
-
Purchase of premises and equipment
(272)
(2,861)
(2,257)
Net cash provided by (used in) investing activities
6,774
(16,161)
(11,940)
Cash Flows from Financing Activities:
Activity in other borrowings:
Proceeds from other borrowings
-
-
9,000
Paydown on revolving line of credit
-
(9,000)
-
Prepayments
-
(21,313)
-
Calls, maturities and scheduled payments
-
(1,799)
(12,550)
Proceeds from subordinated notes
50,000
63,393
-
Payment of cash dividends on common and preferred stock
(3,779)
(3,767)
(3,300)
Proceeds from issuance of common stock, net
1,360
1,926
1,279
Repurchase and cancellation of shares
(3,779)
-
-
Net cash provided by (used in) financing activities
43,802
29,440
(5,571)
Net increase in cash and due from banks
29,081
52,923
2,280
Cash and due from banks:
Beginning
59,529
6,606
4,326
Ending
$
88,610
$
59,529
$
6,606
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22. Fair Value
Accounting guidance on fair value measurements uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
● Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;
● Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
● Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement
Assets measured at fair value on a recurring basis comprised the following at December 31, 2020 and 2019:
Fair Value Measurements at Reporting Date Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
(dollars in thousands)
December 31, 2020:
Securities AFS:
U.S. govt. sponsored agency securities
$
15,336
$
-
$
15,336
$
-
Residential mortgage-backed and related securities
132,842
-
132,842
-
Municipal securities
152,408
-
152,408
-
Asset-backed securities
40,683
-
40,683
-
Other securities
20,697
-
20,697
-
Derivatives
222,757
-
222,757
-
Total assets measured at fair value
$
584,723
$
-
$
584,723
$
-
Derivatives
$
229,270
$
-
$
229,270
$
-
Total liabilities measured at fair value
$
229,270
$
-
$
229,270
$
-
December 31, 2019:
Securities AFS:
U.S. govt. sponsored agency securities
$
20,078
$
-
$
20,078
$
-
Residential mortgage-backed and related securities
120,587
-
120,587
-
Municipal securities
48,257
-
48,257
-
Asset-backed securities
16,887
-
16,887
-
Other securities
4,886
-
4,886
-
Derivatives
87,827
-
87,827
-
Total assets measured at fair value
$
298,522
$
-
$
298,522
$
-
Derivatives
$
88,437
$
-
$
88,437
$
-
Total liabilities measured at fair value
$
88,437
$
-
$
88,437
$
-
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).
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22. Fair Value (continued)
Interest rate caps are used for the purpose of hedging interest rate risk. See Note 7 to the Consolidated Financial Statements for the details of these instruments. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).
Interest rate swaps are used for the purpose of hedging interest rate risk on junior subordinated debt. See Note 7 to the Consolidated Financial Statements for the details of these instruments. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Interest rate swaps are also executed for select commercial customers. See Note 7 to the Consolidated Financial Statements for the detail of these instruments. The fair values are determined by comparing the contractual rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Assets measured at fair value on a non-recurring basis comprised the following at December 31, 2020 and 2019:
Fair Value Measurements at Reporting Date Using
Quoted Prices
Significant
in Active
Other
Significant
Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Fair Value
Level 1
Level 2
Level 3
(dollars in thousands)
December 31, 2020:
Impaired loans/leases
$
9,926
$
-
$
-
$
9,926
OREO
-
-
$
9,948
$
-
$
-
$
9,948
December 31, 2019:
Impaired loans/leases
$
3,394
$
-
$
-
$
3,394
OREO
4,459
-
-
4,459
$
7,853
$
-
$
-
$
7,853
Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as a Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.
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. Appraised and reported values are discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the property.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22. Fair Value (continued)
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level Fair Value Measurements
Fair Value
Fair Value
December 31,
December 31,
Valuation Technique
Unobservable Input
Range
(dollars in thousands)
Impaired loans/leases
$
9,926
$
3,394
Appraisal of collateral
Appraisal adjustments
-10.00
%
to
-30.00
%
OREO
4,459
Appraisal of collateral
Appraisal adjustments
0.00
%
to
-35.00
%
For impaired loans/leases and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
There have been no changes in valuation techniques used for any assets measured at fair value during the years ended December 31, 2020 or 2019.
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheet, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
Fair Value
As of December 31, 2020
As of December 31, 2019
Hierarchy
Carrying
Estimated
Carrying
Estimated
Level
Value
Fair Value
Value
Fair Value
(dollars in thousands)
Cash and due from banks
Level 1
$
61,329
$
61,329
$
76,254
$
76,254
Federal funds sold
Level 2
9,080
9,080
9,800
9,800
Interest-bearing deposits at financial institutions
Level 2
86,596
86,596
147,891
147,891
Investment securities:
HTM
Level 2
476,165
521,277
400,646
426,545
AFS
Level 2
361,966
361,966
210,695
210,695
Loans/leases receivable, net
Level 3
9,191
9,926
3,143
3,394
Loans/leases receivable, net
Level 2
4,157,562
4,112,735
3,651,061
3,606,520
Derivatives
Level 2
222,757
222,757
87,827
87,827
Deposits:
Nonmaturity deposits
Level 2
4,138,478
4,138,478
3,184,726
3,184,726
Time deposits
Level 2
460,659
465,681
726,325
742,444
Short-term borrowings
Level 2
5,430
5,430
13,423
13,423
FHLB advances
Level 2
15,000
14,998
159,300
159,193
Subordinated notes
Level 2
118,691
122,406
68,394
68,563
Junior subordinated debentures
Level 2
37,993
30,618
37,838
30,477
Derivatives
Level 2
229,270
229,270
88,437
88,437
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 23. Business Segment Information
Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters.
The Company’s Commercial Banking business is geographically divided by markets into the operating segments which are the four subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB and SFCB. Each of these operating segments offer similar products and services, but are managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.
The Company'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, with all intercompany accounts and transactions eliminated, is presented as follows as of and for the years ended December 31, 2020, 2019, and 2018:
Commercial Banking
Intercompany
Consolidated
QCBT
CRBT
CSB
SFCB
All other
Eliminations
Total
(dollars in thousands)
Twelve Months Ended December 31, 2020*
Total revenue
$
92,336
$
125,416
$
50,448
$
42,036
$
2,197
$
(262)
$
312,171
Net interest income
63,366
52,857
31,570
24,759
(6,633)
1,031
166,950
Provision for loan/lease losses
21,612
19,438
9,243
5,411
-
-
55,704
Net income (loss) from continuing operations
21,557
33,890
11,379
12,797
(19,041)
-
60,582
Goodwill
3,223
14,980
9,888
45,975
-
-
74,066
Intangibles
-
2,189
3,305
5,887
-
-
11,381
Total assets
2,149,469
1,952,308
1,000,670
779,956
125,365
(324,971)
5,682,797
Twelve Months Ended December 31, 2019*
Total revenue
$
87,433
$
96,631
$
42,059
$
31,569
$
38,758
$
(1,606)
$
294,844
Net interest income
52,097
44,310
31,370
21,422
6,360
-
155,559
Provision for loan/lease losses
3,433
1,080
1,315
-
7,066
Net income (loss) from continuing operations
21,607
27,716
10,787
8,244
(10,946)
-
57,408
Goodwill
3,223
14,980
9,888
45,975
-
74,748
Intangibles
-
2,684
3,980
6,802
1,504
-
14,970
Total assets
1,682,477
1,572,324
853,833
748,753
116,968
(65,305)
4,909,050
Twelve Months Ended December 31, 2018*
Total revenue
$
77,129
$
73,208
$
36,649
$
15,153
$
23,152
$
(871)
$
224,420
Net interest income
48,682
43,038
28,763
11,835
10,077
-
142,395
Provision for loan/lease losses
3,693
1,833
1,523
4,619
-
12,658
Net income (loss)
20,559
20,680
8,449
4,816
(11,384)
-
43,120
Goodwill
3,223
14,980
9,888
45,975
3,766
-
77,832
Intangibles
-
3,186
4,675
7,734
1,855
-
17,450
Total assets
1,623,369
1,379,222
785,364
632,849
555,293
(26,387)
4,949,710
* Includes financial results for RB&T for the year 2018 and the period from January 1, 2019 through November 30, 2019, prior to the sale of the majority of
its assets and liabilities. Includes financial results for the Bates Companies for the years October 1, 2018 through December 31, 2018 after the purchase of the
companies, the year 2019 and the period from January 1, 2020 through August 12, 2020, prior to the sale of the companies.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e) promulgated under the Exchange Act) as of December 31, 2020. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was: (1) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures; and (2) recorded, processed, summarized and reported as and when required.
Management’s Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting includes controls and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. Management’s assessment is based on the criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and was designed to provide reasonable assurance that the Company maintained effective internal control over financial reporting as of December 31, 2020. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2020.
RSM US LLP, the Company’s independent registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2020, which is included on the following pages of this Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of QCR Holdings, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited QCR Holdings, Inc. and its subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements and our report dated March 12, 2021 expressed an unqualified opinion.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Davenport, Iowa
March 12, 2021
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 like to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
Part III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is set forth under the captions “Proposal 1: Election of Directors,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” in the Company’s 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is set forth under the caption “Security Ownership of Certain Beneficial Owners” in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
The table below sets forth the following information as of December 31, 2020 for (i) all compensation plans previously approved by the Company’s stockholders and (ii) all compensation plans not previously approved by the Company’s stockholders:
(a) The number of securities to be issued upon the exercise of outstanding options, warrants, and rights;
(b) The weighted-average exercise price of such outstanding options, warrants, and rights; and
(c) Other than securities to be issued upon the exercise of such outstanding options, warrants, and rights, the number of securities remaining available for future issuance under the plans.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to be
available for future issuance
issued upon exercise of
Weighted-average exercise price
under equity compensation
outstanding options, warrants,
of outstanding options,
plans (excluding securities
Plan category
and rights
warrants, and rights (1)
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by stockholders
494,191
(2)
$
22.23
260,415
(3)
Equity compensation plans not approved by stockholders
-
-
-
Total
494,191
(2)
$
22.23
260,415
(3)
(1) The weighted average exercise price only relates to outstanding option awards.
(2) Includes 407,763 outstanding option awards and 65,181outstanding restricted stock units and 14,070 performance share units granted under the Equity Plans.
(3)Includes 170,833 and 89,582 shares available under the QCR Holdings, Inc. 2016 Equity Incentive Plan and QCR Holdings, Inc.
Employee Stock Purchase Plan.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is set forth under the captions “Corporate Governance and the Board of Directors” and “Transactions with Management and Directors” in the Company’s 2021 Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is set forth under the caption “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm” in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
These documents are listed in the Index to Consolidated Financial Statements under Item 8.
(a) 2. Financial Statement Schedules
Financial statement schedules are omitted, as they are not required or are not applicable, or the required information is shown in the Consolidated Financial Statements and the accompanying notes thereto.
(a) 3. Exhibits
The following exhibits are either filed as a part of this Annual Report on Form 10-K or are incorporated herein by reference:
Exhibit
Number
Exhibit Description
3.1
Certificate of Incorporation of QCR Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q/A Amendment No. 1 for the period ended September 30, 2011).
3.2
Bylaws of QCR Holdings, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on February 19, 2019).
4.1
Certain instruments defining the rights of holders of long-term debt of the Company, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Securities and Exchange Commission upon request.
4.2
Description of the Company’s Securities (incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 10-K for the period ended December 30, 2019).
10.1
Dividend Reinvestment Plan of QCR Holdings, Inc. (incorporated by reference to Exhibit 99.1 of Company’s Form S-3D, File No. 333-102699 dated January 24, 2003).
10.2
Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht dated August 26, 2005 (incorporated by reference to Exhibit 10.1 of Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.3+
Amended and Restated Executive Deferred Compensation Plan Participation Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 19, 2013 (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.4+
Amended and Restated Executive Deferred Compensation Plan Participation Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 19, 2013 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.5+
Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Cedar Rapids Bank and Trust Company and Larry J. Helling dated December 31, 2008 (incorporated by reference to Exhibit 10.29 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.6+
Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between QCR Holdings, Inc. and Todd A. Gipple dated December 31, 2008 (incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008).
10.7
+
QCR Holdings, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 21, 2012).
10.8
Amendment No. 1 to the Second Amended and Restated Operating Agreement between Quad City Bank and Trust Company and John Engelbrecht, dated August 26, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
10.9
+
QCR Holdings, Inc. 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 20, 2013).
10.10
+
Form of Participation Agreement under the QCR Holdings, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014).
10.11
+
QCR Holdings, Inc. 2016 Equity Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A filed on April 1, 2016).
10.12+
QCR Holdings, Inc., Non-Qualified Supplemental Executive Retirement Plan, as amended and restated December 22, 2016 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 28, 2016).
10.13+
Non-Qualified Supplemental Executive Retirement Plan Joinder Agreement between Quad City Bank and Trust Company and John H. Anderson dated December 22, 2016 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 28, 2016).
10.14+
Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 4.5 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).
10.15+
Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Award Agreement (incorporated by reference to Exhibit 4.6 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).
10.16+
Form of QCR Holdings, Inc. 2016 Equity Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 4.7 of the Company’s Form S-8 filed on October 27, 2016 (File No. 333-214282)).
10.17+
Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Larry Helling (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 19, 2018).
10.18+
Employment Agreement, dated November 19, 2018, between QCR Holdings, Inc. and Todd Gipple (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed November 19, 2018).
10.19+
Employment Agreement, dated January 9, 2019, between QCR Holdings, Inc., Quad City Bank and Trust Company, and John Anderson (incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.20+
Executive Deferred Compensation Plan Participation Agreement, dated December 16, 2016, between Quad City Bank and Trust Company and John Anderson (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.21+
Executive Deferred Compensation Plan Participation Agreement, dated November 24, 2014, between QCR Holdings, Inc. and Dana Nichols (incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.22+
Employment Agreement, dated January 1, 2004, between Cedar Rapid Bank and Trust and Dana Nichols (incorporated by reference to Exhibit 10.45 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.23+
First Amendment to the Employment Agreement, dated December 31, 2008, between Cedar Rapids Bank and Trust Company and Dana Nichols (incorporated by reference to Exhibit 10.40 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.24+
Employment Agreement, dated April 17, 2018, between Springfield First Community Bank and Robert Fulp (incorporated by reference to Exhibit 10.41 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.25+
Executive Deferred Compensation Plan Participation Agreement, dated January 1, 2019, between Springfield First Community Bank and Robert Fulp (incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2019).
10.26+
QCR Holdings, Inc. 2010 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A dated March 22, 2010).
10.27
+
Separation Agreement and General Release of Claims, dated January 15, 2021, between QCR Holdings, Inc. and Robert Fulp (filed herewith).
21.1
Subsidiaries of QCR Holdings, Inc. (filed herewith).
23.1
Consent of Independent Registered Pubic Accounting Firm - RSM US LLP (filed herewith).
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) (filed herewith).
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 (filed herewith).
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 (filed herewith).
Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the years ended December 31, 2020, December 31, 2019 and December 31, 2018; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, December 31, 2019, and December 31, 2018; (iv) Consolidated Statements of Changes in Stockholders; Equity for the years ended December 31, 2020, December 31, 2019 and December 31, 2018; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, December 31, 2019 and December 31, 2018; and (vi) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibit 101).
+
A compensatory arrangement.