EDGAR 10-K Filing

Company CIK: 906465
Filing Year: 2022
Filename: 906465_10-K_2022_0001558370-22-003441.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 November 9, 2021, the Company announced the signing of a definitive agreement whereby the Company will acquire Guaranty Federal Bancshares, Inc. (GFED) and merge Guaranty Bank, the banking subsidiary of GFED into SFCB. The combined bank will operate under the Guaranty Bank name in all Springfield and southwest Missouri markets. As of December 31, 2021, GFED had $1.2 billion in assets, $815 million in loans and $1.0 billion in deposits.
Under the terms of the merger agreement, stockholders of GFED will have the right to receive for each share of GFED common stock owned, at the election of each stockholder, and subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock, with total consideration to consist of approximately 80% stock and 20% cash. Based upon the $59.99 closing price of the Company’s common stock as of November 5, 2021, the transaction is valued at approximately $151.6 million. The transaction is subject to regulatory approvals, approval by GFED’s stockholders and certain customary closing conditions. The transaction is expected to close late in the first quarter or early in the second quarter of 2022.
On August 12, 2020, the Company sold the Bates Companies, headquartered in Rockford, Illinois. From October 1, 2018, through the date of the disposition, the Company provided wealth management services to the Rockford community through the Bates Companies.
On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly owned subsidiary, RB&T. Prior to this time, the Company provided full service banking services to the Rockford community through RB&T.
See Note 2 to the Consolidated Financial Statements for further discussion on mergers, acquisitions and sales.
The Company engages in direct financing lease contracts and equipment financing agreements through m2, a wholly 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 $2.14 billion and $2.15 billion as of December 31, 2021 and 2020, respectively.
CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September of 2001. Acquired branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.” CRBT provides full-service commercial and consumer banking and trust
and asset management services to Cedar Rapids, Marion and Waterloo/Cedar Falls, Iowa and adjacent communities through its eight facilities. The headquarters for CRBT is located in downtown Cedar Rapids with three other branches located in Cedar Rapids, one branch in Marion, two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $2.03 billion and $1.96 billion as of December 31, 2021 and 2020, respectively.
CSB is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. CSB was acquired by the Company in 2016. CSB provides full-service commercial and consumer banking to Des Moines, Iowa and adjacent communities through its headquarters located in Ankeny, Iowa and its eight other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $1.17 billion and $1.0 billion as of December 31, 2021 and 2020, 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 $882.88 million and $779.96 million as of December 31, 2021 and 2020, respectively.
Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of lending and leasing machinery and equipment to C&I businesses under direct financing lease contracts and equipment financing agreements.
Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2021 and 2020:
Amount Outstanding
Amount Outstanding
Interest
Interest
as of
as of
Rate as of
Rate as of
Name
Date Issued
December 31, 2021
December 31, 2020
Interest Rate
December 31, 2021
December 31, 2020
(dollars in thousands)
QCR Holdings Statutory Trust II
February 2004
$
10,310
$
10,310
2.85% over 3-month LIBOR
3.07
%
3.10
%
QCR Holdings Statutory Trust III
February 2004
8,248
8,248
2.85% over 3-month LIBOR
3.07
%
3.10
%
QCR Holdings Statutory Trust V
February 2006
10,310
10,310
1.55% over 3-month LIBOR
1.67
%
1.79
%
Community National Statutory Trust II
September 2004
3,093
3,093
2.17% over 3-month LIBOR
2.38
%
2.41
%
Community National Statutory Trust III
March 2007
3,609
3,609
1.75% over 3-month LIBOR
1.95
%
1.97
%
Guaranty Bankshares Statutory Trust I
May 2005
4,640
4,640
1.75% over 3-month LIBOR
1.95
%
1.97
%
$
40,210
$
40,210
Weighted Average Rate
2.43
%
2.48
%
Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust.
Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities, as described more fully in this Form 10-K, including in Appendix A “Supervision and Regulation.” Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, swap fee income/capital markets revenue, gains on the sale of residential real estate and government guaranteed loans, earnings from BOLI and other noninterest income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.
The Company and its subsidiaries collectively employed 726 and 714 FTEs at December 31, 2021 and 2020, respectively. The increase in FTEs during 2021 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 $35.9 million, $42.7 million, and $19.9 million, respectively, as of December 31, 2021. In accordance with Missouri regulation, the legal lending limit to one borrower for SFCB, calculated as 15% of aggregate capital, totaled $15.3 million as of December 31, 2021.
The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.
The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. The Company implements a tiered approach, based on the risk rating of the borrower. Under the most recent in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:
High Quality
Medium Quality
Low Quality
(Risk Ratings 1-3)
(Risk Rating 4)
(Risk Ratings 5-8)
(dollars in thousands)
QCBT
$
20,500
$
17,000
$
12,000
CRBT
$
20,000
$
17,000
$
11,500
CSB
$
11,000
$
9,500
$
6,500
SFCB
$
10,000
$
8,000
$
6,000
QCRH Consolidated
$
30,000
$
24,000
$
15,000
The QCRH Consolidated amount represents the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.
In addition, m2’s in-house lending limit is $2.5 million to a single lending/leasing entity or group of related entities, subject to certain exceptions.
As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks. To complement the in-house loan review, an independent third-party performs external loan reviews. Historically, management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.
The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.
Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the subsidiary banks as of December 31, 2021 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, 2021, QCBT’s bank stock loans totaled 32% of risk-based capital.
*** Policy limits are compared to average loan balances rather than the current balance for monitoring purposes.
The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2021 and 2020. Residential real estate loans held for sale are included in residential real estate loans below. Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven. Class of receivable and segment detail post-ASU 2016-03 do not break out CRE loans separately.
Consolidated
QCBT
CRBT
CSB
SFCB
Total
$
%
$
%
$
%
$
%
$
%
(dollars in thousands)
As of December 31, 2021
C & I - Revolving Lines of Credit
$
69,179
%
$
92,757
%
$
56,072
%
$
30,475
%
$
248,483
%
C & I - Other
602,451
%
437,200
%
194,357
%
112,594
%
1,346,602
%
CRE - Owner Occupied
114,927
%
145,895
%
75,322
%
85,557
%
421,701
%
CRE - Non Owner Occupied
171,444
%
202,051
%
122,690
%
150,315
%
646,500
%
Construction & Land Development
291,000
%
240,790
%
243,126
%
143,655
%
918,571
%
Multi-Family
153,977
%
228,083
%
100,186
%
118,166
%
600,412
%
Direct financing leases
45,191
%
-
-
%
-
-
%
-
-
%
45,191
%
1-4 Family
177,227
%
73,821
%
64,767
%
61,546
%
377,361
%
Consumer
24,837
%
17,211
%
10,432
%
22,831
%
75,311
%
$
1,650,233
%
$
1,437,808
%
$
866,952
%
$
725,139
%
%
$
4,680,132
%
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
%
Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established with guidance from the subsidiary banks’ senior management and asset/liability management committees, includes consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to “Item 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 banks receive a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. The banks enter an interest rate swap with the commercial borrower and an equal and offsetting interest rate swap with a larger financial institution counterparty. The Company has increased its focus on this business which has led to significantly increased noninterest income, stronger overall loan growth, and improved management of its interest rate risk. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from year to year. Future levels of swap fee income can be somewhat dependent upon prevailing interest rates and other market activity.
C&I Lending
As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The subsidiary banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the SBA and USDA. Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.
Loan approval is generally based on the following factors:
● Ability and stability of current management of the borrower;
● Stable earnings with positive financial trends;
● Sufficient cash flow to support debt repayment;
● Earnings projections based on reasonable assumptions;
● Financial strength of the industry and business; and
● Value and marketability of collateral.
For C&I loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the Consolidated Financial Statements for additional information, including the internal risk rating scale.
As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain C&I loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:
● Minimum debt service coverage ratio;
● 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 and equipment. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each collateral type are listed below.
Approved Collateral Type
Maximum Advance %
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.
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, 2021 and 2020:
Amount
Amount
(dollars in thousands)
Lessors of Residential Buildings and Dwellings
$
387,818
$
346,177
Administration of Urban Planning and Rural Development
120,416
138,514
Bank Holding Companies
65,080
80,383
Lessors of Nonresidential Buildings
28,821
16,408
Industrial Machinery and Equipment Merchant Wholesalers
28,123
14,533
These loan categories are defined by industry-standard NAICS codes - refer to NAICS.com for a description of each category.
CRE Lending
The subsidiary banks also make CRE loans. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some
situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the Company’s lending policy for the major categories of CRE loans:
Maximum
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
24 months
Residential Construction Loans to Builders****
Lesser of 90% of project cost, or 80% of "as-completed" appraised value
15 months
LIHTC construction Loans
80%
3 years
LIHTC permanent Loans
80%
ears
* 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 that are subject to a DSCR covenant. For loans greater than $500 thousand, the subsidiary banks sensitize this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.
** These maximum rates are consistent with, or in some situations, more conservative than those established by regulatory authorities.
*** Some real estate transactions may offer a swap option whereby the maximum term is 20 years.
**** Generally, the maximum term is 12 months but can be 15 months with credit risk committee monthly review.
The Company’s lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.
In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied CRE loans. Owner-occupied CRE loans are generally considered to have less risk. As of December 31, 2021 and 2020, approximately 16% and 24%, respectively, of the CRE loan portfolio was owner-occupied.
In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied CRE lending exceeds 300% of total risk-based capital and outstanding balances have increased 50% or more during the prior 36 months or construction, land development and other land loans exceed 100% of total risk-based capital.
In addition, the banks have established policy limits around non-owner occupied CRE and total construction, land development and other land loans.
Non-owner CRE Loans/TRBC
Total Construction, Land Development and Other Land Loans/TRBC
QCBT
300%
100%
CRBT
400%
100%
CSB
400%
150%
SFC
450%
100%
Although CSB’s loan portfolio has historically been real estate dominated and its total construction, land development and other land loans levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate loan portfolio.
Following is a listing of the significant industries within the Company’s CRE loan portfolio as of December 31, 2021 and 2020:
Amount
%
Amount
%
(dollars in thousands)
Lessors of Residential Buildings
$
1,316,851
%
$
786,066
%
Lessors of Nonresidential Buildings
557,859
%
567,759
%
Hotels
73,639
%
72,718
%
New Housing For-Sale Builders
61,028
%
46,764
%
Lessors of Other Real Estate Property
60,605
%
45,619
%
Other Activities Related to Real Estate
42,507
%
41,197
%
Other *
568,784
%
547,506
%
Total CRE Loans
$
2,681,273
%
$
2,107,629
%
* “Other” consists of all other industries. None of these had concentrations greater than $40.9 million, or 1.5%, of total CRE loans as of December 31, 2021.
Following is a breakdown of non owner-occupied income-producing CRE by property type as of December 31, 2021 and 2020:
Amount
%
Amount
%
(dollars in thousands)
Multi-family
$
1,231,937
%
$
599,774
%
Office
175,890
%
174,578
%
Retail
147,327
%
156,589
%
Industrial/warehouse
104,035
%
82,568
%
Hotel/motel
77,758
%
77,165
%
Other
373,872
%
480,292
%
Total income-producing CRE
$
2,110,819
%
$
1,570,966
%
Included in Multi-family is $445.6 million of LIHTC permanent loans which are permanent financing for low-income housing tax credit real estate projects. These loans have a maximum term of 20 years. Considering the longer duration, the subsidiary banks often enter into a back-to-back interest rate swap to provide the borrower a long-term fixed interest rate while the subsidiary banks receive a variable interest rate and an upfront nonrefundable fee dependent on market pricing. In addition, the financing structure of the LIHTC permanent loans includes tax credit equity investment that strengthens the overall credit profile. Including the value of the real estate and the LIHTCs, the loan-to-values of the LIHTC permanent loans are typically in the range of 25% to 65%. Lastly, the Company has policy limits on maximum exposure amounts to single developers.
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, 2021 and 2020:
Amount
%
Amount
%
(dollars in thousands)
Multi-family
$
627,101
%
$
281,986
%
Industrial/warehouse
28,191
%
10,884
%
Office
23,714
%
17,126
%
Retail
11,798
%
8,665
%
Hotel/motel
6,804
%
5,715
%
Other
113,786
%
170,153
%
Total non-residential construction loans
$
811,394
%
$
494,529
%
Included in Multi-family is $587.2 million of LIHTC construction loans which provide financing for the construction of both new LIHTC real estate projects and the rehabilitation of existing LIHTC real estate projects. Many of these will convert to LIHTC permanent loans upon completion of construction.
Additionally, the Company had approximately $78.0 million and $48.8 million of residential construction loans outstanding as of December 31, 2021 and 2020, respectively. Of this amount, approximately 52% was considered speculative, while 48% was pre-sold at December 31, 2021, and approximately 54% was considered speculative, while 46% was pre-sold at December 31, 2020.
Direct Financing Leasing
m2 leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.
The following private and public sector business assets are generally acceptable to consider for lease funding:
● 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
$
249,892
$
281,662
$
183,491
Sales of residential real estate loans
$
201,638
$
234,512
$
141,195
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 for primary residences and 80% for second/vacation homes. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 10 years.
In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.
Human Capital Resources. As of December 31, 2021, the Company employed 693 full-time employees and 63 part-time employees across all locations. The employees are not represented by a collective bargaining unit. The Company is a relationship driven company and its ability to attract and retain exceptional employees is key to its success.
The Company encourages and supports the growth and development of its employees and, wherever possible, seeks to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs and external training opportunities. Educational reimbursement is available to employees enrolled in degree or certification programs and for seminars, conferences, and other training events employees attend in connection with their job duties.
As part of its compensation philosophy, the Company believes that it must offer and maintain market competitive total rewards programs for its employees in order to attract and retain exceptional talent. In addition to competitive base wages, additional programs include annual bonus opportunities, an employee stock purchase plan, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, sabbaticals, flexible work schedules, an employee assistance program, and various wellness programs.
The Company is committed to fostering and preserving a culture of diversity, equity, and inclusion, and believes its differences, of every kind, make the company and its communities better. During recent years, the Company focused on several initiatives to promote diversity, equity, and inclusion across its organization. A few specific actions included hiring a Diversity Officer, rolling out a diversity survey for the second year to gather feedback from all employees, and several diversity and inclusion sessions and workshops across our different entities.
The safety, health and wellness of the Company’s employees is a top priority. The COVID-19 pandemic continues to present a unique challenge with regard to maintaining employee safety while continuing successful operations. The Company offers remote working alternatives and enforces safety measures for all employees working in locations across the Company. All employees are encouraged to get vaccinated and are asked not to come in to the office to work when they are experiencing symptoms of COVID-19 or other communicable illnesses. The Company provided frequent communication using a variety of methods to ensure that all employees were kept informed regarding the ongoing pandemic.
The Company strives to maintain a culture in which employees feel valued and, to that end, regularly solicits feedback from employees to understand their views about their work environment and the Company’s culture. The results from employee engagement surveys are used to implement programs and processes designed to enhance engagement and improve the employee experience. In 2021, 88% of employees participated in the annual employee engagement survey, exceeding the Company goal of 80%, and the Company received a strong employee engagement score of 81%, above the national benchmark of 74%.
The regions in which the subsidiary banks operate primarily - the Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield, Missouri - generally have strong labor markets, with unemployment rates of 3.7% and 3.3% in Iowa and Missouri, respectively.
ESG Commitment. The Company is built on relationships and integrity. We adhere to those principles in all areas of our business and in our communities and believe that meaningful environmental, social and governance programs will drive shareholder value and make us a better company. With numerous programs and activities aligned with the ESG framework, we continue to develop and enhance our long-term plan for the future. We are advancing standard reporting processes and gathering benchmarking data to generate meaningful ESG goals for our company.
Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines, Iowa and Springfield, Missouri markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, FinTech companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to traditional banking services. The Company also competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.
Appendices. The commercial banking business is a highly regulated business. See Appendix A “Supervision and Regulation” for a discussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.
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:
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. In addition, the size of nonrefundable swap fees earned in connection with our LIHTC permanent loans may fluctuate depending on the interest rate environment. We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at "Quantitative 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 and reduced the interest it pays on excess reserves. The prolong reduction in interest rates is likely to continue to have an adverse effect our net interest income and margins and our profitability. There is potential that reduced rates could pose additional risks to the economy primarily through higher inflation and financial-stability concerns driven by low borrowing costs. There is also a possibility that labor markets could tighten causing inflationary pressures to build faster than the expected gradual pace. Persistently low interest rates could lead consumers and firms to take on riskier financial investments in search of better returns, increasing asset prices to unsustainable levels. The potential rise in asset prices to unsustainable levels could pose potential financial-stability risks in the commercial real estate and corporate borrowing sectors. Sustained low interest rate periods were something that preceded the 1990 and 2007 recessions, placing significant pressure on real estate asset prices through reach-for-yield investor behavior.
The Federal Reserve has signaled that it will begin to increase rates, taper its quantitative easing program, and reduce its balance sheet of bonds and other assets in 2022, but will do so with the goal of avoiding abrupt or unpredictable changes in economic or financial conditions so as not to disrupt the financial systems, also known as “shocks;” despite this, the impact of these changes cannot be certain. Vulnerabilities in the financial system can amplify the impact of an initial shock following rate increases, potentially leading to unintended volatility, as well to disruptions in the provision of financial services, such as clearing payments, the provision of liquidity, and the availability of credit. Furthermore, asset liquidation pressures can be amplified by liquidity mismatches and the leverage of certain nonbank financial intermediaries such as hedge funds. The financial downturn in March 2020 also demonstrated that pressures on dealer intermediation can limit the availability of liquidity during times of market stress. Given the interconnectedness of the global financial system, these vulnerabilities could impact the Company’s business operations and financial condition.
Declines in asset values may result in impairment charges and adversely affect the value of our investments, financial performance and capital.
The market value of investments in our securities portfolio has become increasingly volatile in recent years, and as of December 31, 2021, we had gross unrealized losses of $1.3 million, or 0.2% of amortized cost, in our investment portfolio (offset by gross unrealized gains of $58.9 million). The market value of investments may be affected by factors other than the underlying performance of the servicer of the securities or the mortgages underlying the securities, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity in the secondary market for certain investment securities. On a quarterly basis, we formally evaluate investments and other assets for impairment indicators. Reduction in the value, or impairment of our investment securities, can impact our earnings and common stockholders' equity. We maintained a balance of $810.2 million, or 13% of our assets, in investment securities at December 31, 2021. Changes in market interest rates can affect the value of these investment securities, with increasing interest rates generally resulting in a reduction of value. Although the reduction in value from temporary increases in market rates does not affect our income until the security is sold, it does result in an unrealized loss recorded in other comprehensive income that can reduce our common stockholders’ equity. Further, we may have to record provision expense to establish an allowance for credit losses on our carried at fair value debt securities, and we must periodically test our investment securities for other-than-temporary impairment in value. In assessing whether the value of investment securities is impaired, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Based on management's evaluation, it was determined that the gross unrealized losses at December 31, 2021 were primarily a function of the changes in certain market interest rates.
The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Market fluctuations could also adversely affect our stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, or international currency fluctuations, may negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results and the impact of these risk factors on our operating results or financial position.
Secondary mortgage, government guaranteed loan and interest rate swap market conditions could have a material impact on our financial condition and results of operations.
Currently, we sell a portion of the residential real estate and government guaranteed loans we originate. The profitability of these operations depends in large part upon our ability to make loans and to sell them in the secondary market at a gain. Thus, we are dependent upon the existence of an active secondary market and our ability to profitably sell loans into that market.
In addition to being affected by interest rates, the secondary markets are also subject to investor demand for residential mortgages and government guaranteed loans and investor yield requirements for those loans. These conditions may fluctuate or even worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have a material adverse effect on our financial condition and results of operations.
The interest rate swap market is dependent upon market conditions. If interest rates move, interest rate swap transactions may no longer make sense for the Company and/or its customers. Interest rate swaps are generally appropriate for commercial customers with a certain level of expertise and comfort with derivatives, so our success is dependent upon the ability to make loans to these types of commercial customers. Additionally, our ability to execute interest rate swaps is also dependent upon counterparties that are willing to enter into the interest rate swap that is equal and offsetting to the interest rate swap we enter into with the commercial customer. The mix of loans with interest rate swaps are heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate on the interest rate environment.
The COVID-19 pandemic continues to create disruptions that affect our business, financial condition, liquidity, and results of operations.
The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic. The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.
In the past year, the United States economy began to rebound from severe disruptions caused by the onset of the pandemic in March 2020. Economic conditions have begun to normalize with the availability of vaccines and treatments, increasing workforce employment and participation, the lessening of business and education restrictions, and demand for services beginning to return. The financial conditions of households and businesses was bolstered significantly by government stimulus, which contributed to the economic recovery but also brought about growing pains as evidenced by supply chain problems and rising prices. Although current economic conditions are more favorable than the prior year, the outlook for continued growth is characterized by elevated uncertainty with potential for unevenness across markets and sectors. Although household and business credit and liquidity is strong currently, further pandemic-related disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans; declines in assets under management, affecting wealth management revenues; negative impacts on regional economic conditions resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations, and deposit availability; and impacts on the implementation of our growth strategy. While the recovery this past year has been strong, the pace of growth in the United States and globally could decline as a result of rising inflation, the pervasiveness of supply chain challenges across industries, and the persistence of the virus in variant forms.
Overall, we believe that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
Continued elevated levels of inflation could adversely impact our business and results of operations.
The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 7.0% in 2021. Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse. For example, if interest rates were to rise in response to, or as a result of, elevated levels of inflation, the value of our securities portfolio would be negatively impacted. In addition, while we generally expect any inflation-related increases in our interest expense to be offset by increases in our interest revenue, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations. Continued elevated levels of inflation could also cause increased volatility and uncertainty in the business environment, which could adversely affect loan demand and our clients’ ability to repay indebtedness. It is also possible that governmental responses to the current inflation environment could adversely affect our business, such as changes to monetary and fiscal policy that are too strict, or the imposition or threatened imposition of price controls. The duration and severity of the current inflationary period cannot be estimated with precision.
Labor shortages and failure to attract and retain qualified employees could negatively impact our business, results of operations and financial condition.
A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, decreased labor force size and participation rates as a result of the COVID-19 pandemic, expanded unemployment benefits offered in response to the ongoing COVID-19 pandemic, and other government actions. Although we have not experienced any material labor shortage to date, we have recently observed an overall tightening and increasingly competitive local labor market. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
In addition, if we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability have unintended negative effects, our business could be adversely affected. An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, caused by COVID-19 or as a result of general macroeconomic factors, could have a material adverse impact on our operations, results of operations, liquidity or cash flows.
Regulatory and Legal Risks
We may be materially and adversely affected by the highly regulated environment in which we operate.
The Company and its bank subsidiaries are subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors' funds, FDIC funds, customers and the banking system as a whole, rather than stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.
As a bank holding company, we are subject to regulation and supervision primarily by the Federal Reserve. QCBT, CRBT and CSB, as Iowa-chartered state member banks, are subject to regulation and supervision primarily by both the Iowa Superintendent and the Federal Reserve. SFCB, as a Missouri-chartered commercial bank, is subject to regulation by both the Missouri Division of Finance and the Federal Reserve. We and our banks undergo periodic examinations by these regulators, who have extensive discretion and authority to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. The primary federal and state banking laws and regulations that affect us are described in Appendix A “Supervision and Regulation” to this report. These laws, regulations, rules, standards, policies and interpretations are constantly evolving and may change significantly over time.
U.S. financial institutions are also subject to numerous monitoring, recordkeeping, and reporting requirements designed to detect and prevent illegal activities such as money laundering and terrorist financing. These requirements are imposed primarily through the Bank Secrecy Act which was most recently amended by the USA Patriot Act. We have instituted policies and procedures to protect us and our employees, to the extent reasonably possible, from being used to facilitate money laundering, terrorist financing and other financial crimes. There can be no guarantee, however, that these policies and procedures are effective.
Failure to comply with applicable laws, regulations or policies could result in sanctions by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on us. Although we have policies and procedures designed to mitigate the risk of any such violations, there can be no assurance that such violations will not occur.
Future legislation, regulation, and government policy could affect the banking industry as a whole, including our business and results of operations, in ways that are difficult to predict. In addition, our results of operations also could be adversely affected by changes in the way in which existing statutes and regulations are interpreted or applied by courts and government agencies.
We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
The Company and each of its banking subsidiaries are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations, which have recently increased due to the effectiveness of the Basel III regulatory capital reforms. We intend to grow our business organically and to explore opportunities to grow our business by taking advantage of attractive acquisition opportunities, and such growth plans may require us to raise additional capital to ensure that we have adequate levels of capital to support such growth on top of our current operations. Our ability to raise additional capital, when and if needed or desired, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market conditions, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. Our failure to meet these capital and other regulatory requirements could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common and preferred stock and to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.
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 and other states may have an impact on the Company's operations and risk profile.
The Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana. Starting January 1, 2020, however, the Illinois Cannabis Regulation and Tax Act began permitting adults to legally purchase marijuana for recreational use from licensed dispensaries. It is the Banks' current policy to avoid knowingly providing banking products or services to entities or individuals that: (i) directly or indirectly manufacture, distribute, or dispense marijuana or hemp products, or those with a significant financial interest in such entities; or (ii) derive a significant percentage of revenue from providing products or services to, or other involvement with, such entities. The Banks are taking reasonable measures, including appropriate new account screening and customer due diligence measures, to ensure that existing and potential customers do not engage in any such activities. Nonetheless, the shift in Illinois law legalizing cannabis use has increased the number of direct and indirect cannabis-related businesses in Illinois, and therefore has increased the likelihood that the Banks could interact with such businesses, as well as their owners and employees. Such interactions could create additional legal, regulatory, strategic, and reputational risk to the Banks and the Company.
Credit and Lending Risks
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.
The majority of our subsidiary banks' loan portfolios are invested in C&I and CRE loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area's largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to C&I and CRE loans, our subsidiary banks are also active in residential mortgage and consumer lending. Our borrowers may experience financial difficulties,
and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.
C&I loans make up a large portion of our loan/lease portfolio.
C&I loans were $1.6 billion, or approximately 34% of our total loan/lease portfolio, as of December 31, 2021. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee or cosigner on commercial loans. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may lose value over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, a prolonged recovery period could harm or continue to harm the businesses of our C&I customers and reduce the value of the collateral securing these loans.
Our loan/lease portfolio has a significant concentration of CRE loans, which involve risks specific to real estate values.
CRE lending comprises a significant portion of our lending business. Specifically, CRE loans were $2.7 billion, or approximately 57% of our total loan/lease portfolio, as of December 31, 2021. Of this amount, $421.7 million, or approximately 16%, was owner-occupied. The market value of real estate securing our CRE loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
Included in our CRE lending portfolio are our LIHTC construction and permanent loans, which have the same inherent risks as our other non-owner occupied CRE loans. However, the LIHTC construction and permanent loans, and related nonrefundable swap fee income, rely on federal LIHTCs to help finance the overall real estate projects and are dependent on the continued availability of such LIHTC programs. Changes to the LIHTC programs, including changes to the level of tax credits provided by the federal government on low income housing, may have an adverse effect on our business, results of operations and financial condition.
Capital and Liquidity Risks
Liquidity risks could affect operations and jeopardize our business, results of operations and financial condition.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of securities and/or loans and other sources could have a substantial negative effect on our liquidity. Our primary sources of funds consist of cash from operations, deposits, investment maturities, repayments, and calls, and loan/lease repayments. Additional liquidity is provided by federal funds purchased from the FRB or other correspondent banks, FHLB advances, wholesale and customer repurchase agreements, brokered deposits, and the ability to borrow at the FRB's Discount Window. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
During periods of economic turmoil, the financial services industry and the credit markets generally may be materially and adversely affected by significant declines in asset values and depressed levels of liquidity. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to 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, 2021, our subsidiary banks had deposits, borrowings and other liabilities in the aggregate of approximately $5.5 billion.
Our allowance may prove to be insufficient to absorb losses in our loan/lease portfolio.
We establish our allowance for credit 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, 2021, our allowance as a percentage of total gross loans/leases was 1.68%, and as a percentage of total NPLs was 2,852.21%.
In addition, we had net charge-offs as a percentage of gross average loans/leases of 0.00% for the year ended December 31, 2021. Because of the concentration of C&I and CRE loans in our 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, 2021 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, financial institutions and non-bank financial services providers.
The banking and financial services businesses in our markets are highly competitive. Our competitors include large regional banks, local community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, Fintech companies, money market mutual funds, credit unions, online lenders and other non-bank financial services providers. Many of these competitors are not subject to the same regulatory restrictions as we are. Many of our unregulated competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.
Technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods. For example, the wide acceptance of Internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly without the direct assistance of banks.
Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan/lease rates and deposit rates or loan/lease terms that are more favorable to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted. If increased competition causes us to 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 has resulted 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 "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. The new CECL standard became effective for us on January 1, 2021. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. CECL also requires that an allowance for credit losses be established for any unfunded loan commitments that are not cancelable. The measurement of expected credit losses is to be based on information from past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, including anticipated losses resulting from deteriorating economic conditions as a result of events such as the COVID-19 pandemic. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model previously required under GAAP, which delayed recognition until it is probable a loss has been incurred. Accordingly, the adoption of the CECL model materially affected how we determine our allowance for credit losses and could require us to significantly increase our allowance in future periods. Moreover, the CECL model may create more volatility in the level of the allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. See Note 1 “Nature of Business and Significant Accounting Policies” of the notes to the consolidated financial statements for additional information on the impact of the adoption of this standard.
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.
Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP and general reporting practices within the financial services industry, 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. End dates for LIBOR have now been set, and U.S. Regulators have issued guidance as of October 2021 that urges market participants to address their existing LIBOR exposures and transition to robust and sustainable alternative rates. The Alternative Reference Rate Committee has proposed that the SOFR is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR but has also advised participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use.
Contracts linked to LIBOR are vast in number and value, are intertwined with numerous financial products and services, and have diverse parties. Although the Company has actively worked to plan for the transition away from LIBOR, the transition is both complex and challenging and the downstream effect of unwinding or transitioning such contracts could cause instability and negatively impact financial markets and individual institutions. If the Company’s selected alternative rate is based on small transaction volume, it could be susceptible to volatility and disruption during times of market stress. Furthermore, if the Company fails to properly address legacy contracts by adding robust fallback positions, it will be exposed to interest rate risks and potential loss of yields. Finally, if the Company or other market participants fail to properly plan to implement alternative rates other than LIBOR it could have an adverse effect on the Company and the financial system as a whole.
The Company's information systems may experience an interruption or breach in security and cyber-attacks, all of which could have a material adverse effect on the Company's business.
The Company relies heavily on internal and outsourced technologies, communications, and information systems to conduct its business. Additionally, in the normal course of business, the Company collects, processes and retains sensitive and confidential information regarding our customers. As the Company's reliance on technology has increased, so have the potential risks of a technology-related operation interruption (such as disruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems) or the occurrence of a cyber-attacks (such as unauthorized access to the Company's systems). These risks have increased for all financial institutions as new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others have also increased. In addition, cyber attackers have taken advantage of the pandemic to create campaigns to leverage individuals fears and uncertainties as well as capitalize on the increased number of transactions occurring on digital channels. Industry trends in ransomware, phishing, and other intrusion methods have increased significantly and will continue to pose increased risk while the Company’s operations remain partially remote.
In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions, retailers and government agencies, particularly denial of service attacks that are designed to disrupt key business or government services, such as customer-facing web sites. The Company is not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. It is also possible that a cyber incident, such as a security breach, may remain undetected for a period of time, further exposing the Company to technology-related risks.
The Company also faces risks related to cyber-attacks and other security breaches in connection with credit card, debit card and other payment related transactions that typically involve the transmission of sensitive information regarding the Company's customers through various third parties, including merchant acquiring banks, payment processors, payment card networks and its processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that the Company does not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact the Company through no fault of its own, and in some cases it may have exposure and suffer losses for breaches or attacks relating to them. Further cyber-attacks or other breaches in the future, whether affecting the Company or others, could intensify consumer concern and regulatory focus and result in increased costs, all of which could have a material adverse effect on the Company's business. To the extent we are involved in any future cyber-attacks or other breaches, the Company's reputation could be affected, which could also have a material adverse effect on the Company's business, financial condition or results of operations.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, as well as that of our customers engaging in internet banking activities, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. Any interruption in, or breach of security of, our computer systems and network infrastructure, or that of our internet banking customers, could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. The Company may also need to spend additional resources to enhance protective and detective measures or to conduct investigations to remediate any vulnerabilities that arise.
We are subject to certain operational risks, including, but not limited to, customer or employee misconduct or fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or 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. Recent changes in labor market conditions have contributed to heightened levels of employee attrition and increased competition for talent, which has in turn driven wage rates higher and may contribute to an increase in operating expenses. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling us to better serve our customers, the effective use of technology increases efficiency and the potential for cost reduction. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
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, 2021, we had $152.0 million of total indebtedness outstanding at the holding company level. In the future, it is possible that we may not generate sufficient revenues to service or repay our debt, and have sufficient funds left over to achieve or sustain profitability in our operations, meet our working capital and capital expenditure needs, and to pay dividends to our common stockholders. Moreover, the degree to which we are leveraged could have important consequences for our stockholders, including:
● limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
● 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 18, 2022, there were 15,641,927 shares of common stock outstanding held by 656 holders of record. Additionally, there are an estimated 3,700 beneficial holders whose stock was held in the street name by brokerage houses and other nominees as of that date.
Dividends on Common Stock. The Company is heavily dependent on dividend payments from its subsidiary banks to provide cash flow for the operations of the holding company and dividend payments on the Company’s common stock. Under applicable state laws, the banks are restricted as to the maximum amount of dividends that they may pay on their common stock. Applicable Iowa and Missouri laws provide that state-chartered banks in those states may not pay dividends in excess of their undivided profits.
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. See Appendix A “Supervision and Regulation” for additional information regarding regulatory restrictions on the payment of dividends.
The Company also has certain contractual restrictions on its ability to pay dividends. The Company has issued debt securities in public offerings and in private placements. Under the terms of the securities, the Company may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances existed through the date of filing of this Annual Report on Form 10-K. 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. 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 2021.
Total number of shares
Maximum number
purchased as part of
of shares that may yet
Total number of
Average price
publicly announced
be purchased under
Period
shares purchased
paid per share
plans or programs
the plans or programs
January 1-31, 2021
-
-
100,932
699,068
February 1-28, 2021
-
-
100,932
699,068
March 1-31, 2021
-
-
100,932
699,068
April 1-30, 2021
-
-
100,932
699,068
May 1-31, 2021
12,000
47.45
112,932
687,068
June 1-30, 2021
88,000
48.04
200,932
599,068
July 1-31, 2021
84,000
47.21
284,932
515,068
August 1-31, 2021
84,904
49.32
369,836
430,164
September 1-30, 2021
24,249
49.82
394,085
405,915
October 1-31, 2021
-
-
394,085
405,915
November 1-30, 2021
-
-
394,085
405,915
December 1-31, 2021
-
-
394,085
405,915
There were 100,932 shares of common stock purchased by the Company during the year ended December 31, 2020. There were no purchases of common stock by the Company during the year ended December 31, 2019.
Stockholder Return Performance Graph. The following graph indicates, for the period commencing December 31, 2016 and ending December 31, 2021, a comparison of cumulative total returns for the Company, the Nasdaq Composite Index, and the SNL Bank Nasdaq Index prepared by S&P Global, Charlottesville, Virginia. The graph was prepared at the Company’s request by S&P Global. The information assumes that $100 was invested at the closing price on December 31, 2016 in the common stock of the Company and in each index, and that all dividends were reinvested.
Index
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
QCR Holdings, Inc.
100.00
99.40
74.88
103.01
93.71
133.19
Nasdaq Composite Index
100.00
129.64
125.96
172.18
249.51
304.85
SNL Bank Nasdaq Index
100.00
118.59
97.58
132.84
119.14
164.80

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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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 2021 and 2020 items and annual comparison between our fiscal 2021 performance compared to our fiscal 2020 performance. A detailed review of our fiscal 2020 performance compared to our fiscal 2019 performance can be found in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion should be read in conjunction with 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-eight years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries. As of December 31, 2021, the Company had $6.1 billion in consolidated assets, including $4.7 billion in total loans/leases, and $4.9 billion in deposits. The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report. Further information related to acquired/merged entities has been presented in the Annual Reports previously filed with the SEC corresponding to the year of each acquisition/merger.
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has not had a materially adverse impact on the Company’s financial condition and results of operations as of and for the year ended December 31, 2021, but continues 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.
Effects on the Company’s Business
The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic. The direct or indirect impact on employees, customers, counterparties, and service providers, as well as other market participants, is likely to continue through 2022 as the world attempts to gain control over the virus and emerging variants. The impact that the virus continues to have on global markets, the economy, business restrictions, and employment is ongoing as a projected return to pre-pandemic operating conditions is unknown.
The Company currently expects that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill and the fair value of financial instruments. A more detailed discussion of these critical accounting policies and estimates can be found in Note 1 to the Consolidated Financial Statements.
Based on its consideration of accounting policies and estimates that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies and estimates:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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.
As of November 30, 2021 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.
ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures and HTM securities to be calculated using a current expected credit loss methodology.
The Company’s allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable - to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. If a loan is determined to no longer share similar risk characteristics with other assets in the segmented pool, it is evaluated on an individual basis.
The Company believes that as a result of the COVID-19 pandemic, losses have been incurred that are not yet known and this could have an adverse effect in the future on the Company’s ACL in the future. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes individually analyzed loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the ACL.
The Company also estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance for OBS exposures is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases.
Although management believes the level of the ACL as of December 31, 2021 was adequate to absorb losses inherent in the loan/lease portfolio and OBS exposures, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, LIBOR yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3.
FAIR VALUE OF SECURITIES
The fair value of securities is determined monthly and the securities are stated at fair value. For available for sale securities, unrealized gains and losses are reported as a component of stockholders’ equity, net of the related tax effect. For both available for sale and held to maturity debt securities, any portion of a decline in value associated with credit loss is recognized in income with the remaining noncredit related component being recognized in other comprehensive income.
EXECUTIVE OVERVIEW
The Company reported net income of $98.9 million for the year ended December 31, 2021, and diluted EPS of $6.20. For the same period in 2020 the Company reported net income of $60.6 million and diluted EPS of $3.80.
The year ended December 31, 2021 was highlighted by several significant items:
● Record annual net income of $98.9 million, or $6.20 per diluted share;
● Reported NIM at 3.30%;
● Noninterest income of $100.4 million for the year;
● Core deposit growth of 7.2% for the year*;
● Loan and lease growth of 16.9% for the year, excluding PPP loans (non-GAAP);
● ACL to total loans/leases of 1.69%, excluding PPP loans (non-GAAP); and
● Nonperforming assets to total assets improved by 80% for the full year and now represent only 0.05% of total assets at December 31, 2021.
* Core deposits are total deposits less brokered deposits
Following is a table that represents the various net income measurements for the years ended December 31, 2021 and 2020.
Year Ended December 31,
(dollars in thousands, except per share data)
Net income
$
98,905
$
60,582
Diluted earnings per common share
$
6.20
$
3.80
Weighted average common and common equivalent shares outstanding
15,944,708
15,952,637
The Company reported adjusted net income (non-GAAP) of $100.0 million, with adjusted diluted EPS of $6.27. See section titled “GAAP to Non-GAAP Reconciliations” for additional information. Adjusted net income for the year excludes a number of non-recurring items, after-tax, most significantly:
● $135 thousand of mark to market gains on unhedged derivatives;
● $493 thousand of acquisition costs; and
● $734 thousand of separation agreement expense.
Following is a table that represents the major income and expense categories.
Year Ended December 31,
(dollars are in thousands)
Net interest income
$
178,233
$
166,950
Provision for credit losses
3,486
55,704
Noninterest income
100,422
113,798
Noninterest expense
153,702
151,755
Federal and state income tax expense
22,562
12,707
Net income
$
98,905
$
60,582
The following are some noteworthy developments in the Company’s financial results:
● Net interest income grew $11.3 million, or 6.8%, in 2021 compared to the prior year. The increase in 2021 was primarily due to strong loan/lease growth funded by core deposit growth while maintaining modest excess liquidity. The Company had success moving cost of funds lower which helped to drive NIM expansion of 4% compared to the fourth quarter of 2020.
● Provision expense decreased $52.2 million when comparing 2021 to 2020. The decrease in 2021 was primarily due to continued strong credit quality, a reduction in NPLs and improving economic conditions. Additionally, the provision amounts for prior years were calculated under different accounting standards due to the adoption of CECL on January 1, 2021. See the “Provision for Credit Losses” section of this report for additional details.
● Noninterest income decreased $13.4 million, or 11.8%, when compared to the prior year. The decrease in 2021 was primarily attributable to lower swap fee income/capital market revenue.
● Noninterest expense increased $1.9 million, or 1.3%, in 2021 compared to the prior year, primarily due to an increase in salaries and benefits expense, a write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets and increase in advertising and marketing expense. In addition, there was a $1.1 million increase in net income from and gain/losses on operations of other real estate due to the sale of one large OREO property at a gain.
STRATEGIC FINANCIAL METRICS
The Company has established strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect business developments. While the Company is determined to work prudently to achieve these goals, there is no assurance that they will be met. Moreover, the Company’s ability to achieve these goals will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of this Annual Report on Form 10-K. The Company’s strategic financial metrics are as follows:
● Generate organic loan and lease growth of 9% per year, funded by core deposits;
● Grow fee-based income by at least 6% per year; and
● Limit our annual operating expense growth to 5% per year.
The following table shows the evaluation of the Company’s strategic financial metrics:
For the Year Ending
Strategic Financial Metric*
Key Metric
Target
December 31, 2021
December 31, 2020
Loan and lease growth organically **
Loans and leases growth
> 9% annually
16.9
%
7.8
%
Fee income growth
Fee income growth
> 6% annually
(10.1)
%
67.8
%
Improve operational efficiencies and hold noninterest expense growth
Noninterest expense growth
< 5% annually
4.0
%
1.5
%
* The calculations provided exclude non-core noninterest income and noninterest expense.
** Loans and leases growth excludes PPP loans.
It should be noted that these initiatives are long-term targets.
STRATEGIC DEVELOPMENTS
The Company took the following actions in 2021 to support our corporate strategy and further the strategic financial metrics shown above:
● The Company grew loans and leases organically in 2021 by 16.9%, excluding PPP loans (non-GAAP), driven by both our specialty finance group and our traditional lending and leasing business.
● Correspondent banking continues to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states it currently serves - Iowa, Wisconsin, Missouri and Illinois. The Company acts as the correspondent bank for 187 downstream banks with total average noninterest bearing deposits of $349.0 million and total average interest bearing deposits of $305.3 million for 2021. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.
● The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrower and the Company. Future levels of swap fees are somewhat dependent upon prevailing interest rates. Swap fee income/capital markets revenue totaled $61.0 million in 2021 as compared to $74.8 million in 2020. Swap fee income relative to the increase in notional amount of the non-hedging interest rate swap contracts was 11.5% in 2021 and 10.6% in 2020.
● In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $1.0 billion in 2021. There were 321 new relationships added in 2021 totaling $450.2 million of new assets under management. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust
department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.
● Noninterest expense in 2021 totaled $153.7 million as compared to $151.8 million in 2020. Salaries and employee benefits expense increased 5% in 2021. This increase was primarily related to increased performance-based incentive compensation driven by strong financial results. Advertising and marketing expenses increased 31% primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020. In addition, there were $624 thousand of acquisition costs in 2021 related to the pending acquisition of GFED as discussed in the Company’s financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K. Net cost of (income from) and gains/losses on operations of other real estate totaled $1.4 million for 2021 due primarily to the sale of one commercial OREO property at a gain. There were no losses on liability extinguishment in 2021 as compared to $3.9 million in 2020 from the prepayment of certain FHLB advances. Other noninterest expense increased 44% in 2021 due primarily to the write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets.
GAAP TO NON-GAAP RECONCILIATIONS
The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio”, “ACL to total loans and leases excluding PPP loans” and “loan growth excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
● TCE/TA ratio (non-GAAP) is reconciled to stockholders’ equity and total assets;
● Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;
● NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM;
● Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and
● ACL to total loans and leases excluding PPP loans and loan growth excluding PPP loans (all non-GAAP measures) are reconciled to ACL and total loans and leases.
The TCE/TA non-GAAP ratio has been a focus for our investors and management believes that this ratio may assist investors in analyzing the Company’s capital position without regard to the effects of intangible assets.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company’s management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
NIM (TEY) is a financial measure that the Company’s management utilizes to take into account the tax benefit associated with certain loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate a great deal, making comparisons difficult.
The efficiency ratio is a ratio that management utilizes to compare the Company to peers. It is standard in the banking industry and widely utilized by investors.
ACL to total loans and leases, excluding PPP loans, and loan growth, excluding PPP loans, are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the years ended December 31, 2021 and 2020 were materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ACL. By excluding the PPP loans, the investor is provided a better comparison to prior years for analysis.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have
limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
As of
GAAP TO NON-GAAP
December 31,
December 31,
RECONCILIATIONS
(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)
$
677,010
$
593,793
Less: Intangible assets
83,415
85,447
TCE (non-GAAP)
$
593,595
$
508,346
Total assets (GAAP)
$
6,096,132
$
5,705,043
Less: Intangible assets
83,415
85,447
TA (non-GAAP)
$
6,012,717
$
5,619,596
TCE/TA ratio (non-GAAP)
9.87
%
9.05
%
For the Year Ended
December 31,
December 31,
ADJUSTED NET INCOME
Net income (GAAP)
$
98,905
$
60,582
Less non-core items (post-tax) (*):
Income:
Securities gains (losses), net
$
(69)
$
1,962
Mark to market gains on unhedged derivatives, net
-
Gain on sale of loan
-
Loss on syndicated loan
-
(210)
Total non-core income (non-GAAP)
$
$
1,752
Expense:
Losses on liability extinguishment
$
-
$
3,087
Goodwill impairment
-
Disposition costs
Acquisition costs
-
Post-acquisition compensation, transition and integration costs
-
Separation agreement
-
Loss on sale of subsidiary
-
Total non-core expense (non-GAAP)
$
1,237
$
4,411
Adjusted net income (non-GAAP)
$
100,048
$
63,241
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)
$
100,048
$
63,241
Weighted average common shares outstanding
15,708,744
15,771,650
Weighted average common and common equivalent shares outstanding
15,944,708
15,952,637
Adjusted EPS (non-GAAP):
Basic
$
6.37
$
4.01
Diluted
$
6.27
$
3.96
ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)
$
100,048
$
63,241
Average Assets
$
5,890,042
$
5,604,074
Adjusted ROAA (non-GAAP)
1.70
%
1.13
%
ADJUSTED NIM (TEY)*
Net interest income (GAAP)
$
178,233
$
166,950
Plus: Tax equivalent adjustment
10,211
8,216
Net interest income - tax equivalent (non-GAAP)
$
188,444
$
175,166
Less: Acquisition accounting net accretion
1,340
3,271
Adjusted net interest income
$
187,104
$
171,895
Average earning assets
$
5,398,868
$
5,085,659
NIM (GAAP)
3.30
%
3.28
%
NIM (TEY) (non-GAAP)
3.49
%
3.44
%
Adjusted NIM (TEY) (non-GAAP)
3.47
%
3.38
%
EFFICIENCY RATIO
Noninterest expense (GAAP)
$
153,702
$
151,755
Net interest income (GAAP)
$
178,233
$
166,950
Noninterest income (GAAP)
100,422
113,798
Total income
$
278,655
$
280,748
Efficiency ratio (noninterest expense/total income) (non-GAAP)
55.16
%
54.05
%
ACL TO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS
ACL, loans and leases
$
78,721
$
84,376
Total loans and leases
4,680,132
4,251,129
Less: PPP loans
28,181
273,146
Total loans and leases, excluding PPP loans
$
4,651,951
$
3,977,983
ACL to total loans and leases, excluding PPP loans
1.69
%
2.12
%
LOAN GROWTH, EXCLUDING PPP LOANS
Total loans and leases
$
4,680,132
$
4,251,129
Less: PPP loans
28,181
273,146
Total loans and leases, excluding PPP loans
$
4,651,951
$
3,977,983
Loan growth, excluding PPP loans
16.94
%
7.80
%
* Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of goodwill impairment which is not deductible for tax and gain on sale of subsidiary which has an estimated effective tax rate of 30.5%.
NET INTEREST INCOME AND MARGIN (TAX EQUIVALENT BASIS)
Net interest income, on a tax equivalent basis (non-GAAP), increased 8% to $188.4 million for the year ended December 31, 2021, as compared to the prior year. Excluding the tax equivalent adjustments, net interest income increased 7% for the year ended December 31, 2021 compared to the prior year. Net interest income improved due to several factors:
● Strong organic loan and deposit growth;
● Significant growth and forgiveness of PPP loans in 2021 and 2020;
● Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and
● Reduction in cost of funds.
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
GAAP
For the Year Ended
December 31,
Average Yield on Interest-Earning Assets
3.97
%
Average Cost of Interest-Bearing Liabilities
0.63
%
Net Interest Spread
3.34
%
NIM (TEY) (Non-GAAP)
3.28
%
NIM Excluding Acquisition Accounting Net Accretion
3.27
%
Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans. In evaluating net interest income and NIM, it's important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons. A comparison of acquisition accounting net accretion included in NIM is as follows:
For the Year Ended
December 31,
December 31,
(dollars in thousands)
Acquisition Accounting Net Accretion in NIM
$
1,340
$
3,271
The Company's management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet management strategies which included better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate increases and finding additional ways to manage cost of funds through derivatives.
The Company’s average balances, interest income/expense, and rates earned/paid on major balance sheet categories are presented in the following table:
Year Ended December 31,
Interest
Average
Interest
Average
Interest
Average
Average
Earned
Yield or
Average
Earned
Yield or
Average
Earned
Yield or
Balance
or Paid
Cost
Balance
or Paid
Cost
Balance
or Paid
Cost
(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold
$
1,964
$
0.10
%
$
2,398
$
0.79
%
$
8,898
$
2.29
%
Interest-bearing deposits at financial institutions
116,421
0.15
315,616
0.21
179,635
3,910
2.18
Investment securities (1)
804,636
29,504
3.66
715,808
26,773
3.74
635,650
24,151
3.80
Restricted investment securities
19,386
4.83
20,270
1,031
5.00
21,559
1,174
5.45
Gross loans/leases receivable (1) (2) (3)
4,456,461
179,738
4.03
4,031,567
178,097
4.42
3,857,547
193,365
5.01
Total interest earning assets
$
5,398,868
210,367
3.90
$
5,085,659
206,589
4.06
$
4,703,289
222,803
4.74
Noninterest-earning assets:
Cash and due from banks
$
60,298
$
80,208
$
81,645
Premises and equipment
75,015
73,063
78,189
Less allowance
(81,633)
(55,275)
(40,953)
Other
420,809
420,419
280,810
Total assets
$
5,873,357
$
5,604,074
$
5,102,980
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
$
3,058,917
8,621
0.28
%
$
2,797,669
11,980
0.43
%
$
2,443,989
29,898
1.22
%
Time deposits
448,191
4,679
1.04
690,222
11,289
1.64
966,745
20,977
2.17
Short-term borrowings
6,281
0.08
22,625
0.37
16,837
2.16
FHLB advances
23,389
0.30
74,167
1,087
1.44
108,536
2,895
2.67
Other borrowings
-
-
-
-
-
-
13,563
3.77
Subordinated notes
115,398
6,272
5.44
83,404
4,697
5.63
60,883
3,564
5.85
Junior subordinated debentures
38,067
2,276
5.90
37,913
2,286
5.93
37,751
2,308
6.11
Total interest-bearing liabilities
$
3,690,243
21,923
0.59
$
3,706,000
31,423
0.85
$
3,648,304
60,517
1.66
Noninterest-bearing demand deposits
$
1,269,467
$
1,052,375
$
817,473
Other noninterest-bearing liabilities
276,457
279,459
129,794
Total liabilities
$
5,236,167
$
5,037,834
$
4,595,571
Stockholders' equity
637,190
566,240
507,409
Total liabilities and stockholders' equity
$
5,873,357
$
5,604,074
$
5,102,980
Net interest income
$
188,444
$
175,166
$
162,286
Net interest spread
3.31
%
3.21
%
3.08
%
Net interest margin
3.30
%
3.28
%
3.31
%
Net interest margin (TEY)(Non-GAAP)
3.49
%
3.44
%
3.45
%
Adjusted net interest margin (TEY)(Non-GAAP)
3.47
%
3.38
%
3.36
%
Ratio of average interest-earning assets to average interest-bearing liabilities
146.30
%
137.23
%
128.92
%
(1) Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
(2) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.
The Company’s components of change in net interest income are presented in the following table:
For the years ended December 31, 2021 and 2020
Inc./(Dec.)
Components
Inc./(Dec.)
Components
from
of Change (1)
from
of Change (1)
Prior Year
Rate
Volume
Prior Year
Rate
Volume
2021 vs. 2020
2020 vs. 2019
(dollars in thousands)
(dollars in thousands)
INTEREST INCOME
Federal funds sold
$
(17)
$
(14)
$
(3)
$
(184)
$
(88)
$
(96)
Interest-bearing deposits at financial institutions
(496)
(154)
(342)
(3,241)
(4,985)
1,744
Investment securities (2)
2,731
(576)
3,307
2,622
(382)
3,004
Restricted investment securities
(81)
(35)
(46)
(143)
(83)
(60)
Gross loans/leases receivable (2) (3)
1,641
(16,368)
18,009
(15,268)
(23,679)
8,411
Total change in interest income
$
3,778
$
(17,147)
$
20,925
$
(16,214)
$
(29,217)
$
13,003
INTEREST EXPENSE
Interest-bearing deposits
$
(3,359)
$
(4,422)
$
1,063
$
(17,918)
$
(21,725)
$
3,807
Time deposits
(6,610)
(3,375)
(3,235)
(9,688)
(4,462)
(5,226)
Short-term borrowings
(79)
(41)
(38)
(279)
(372)
Federal Home Loan Bank advances
(1,017)
(546)
(471)
(1,808)
(1,071)
(737)
Other borrowings
-
-
-
(512)
(256)
(256)
Subordinated notes
1,575
-
1,575
1,133
-
1,133
Junior subordinated debentures
(10)
-
(10)
(22)
-
(22)
Total change in interest expense
$
(9,500)
$
(8,384)
$
(1,116)
$
(29,094)
$
(27,886)
$
(1,208)
Total change in net interest income
$
13,278
$
(8,763)
$
22,041
$
12,880
$
(1,331)
$
14,211
(1) The column "Inc/(Dec) from Prior Year" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.
(2) Interest earned and yields on nontaxable investment securities and loans are determined on a tax equivalent basis using a 21% tax rate.
(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.
The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income. Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.
The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2021 and 2020
INTEREST INCOME
For 2021, interest income increased $1.8 million, or 1%, primarily due to an increase in the volume of average securities and average loans/leases partially offset by a decline in yields on average loans/leases and average securities. In total, the Company’s average interest-earning assets increased $313.2 million, or 6%, year-over-year. Average loans/leases grew 11%, while average securities increased 12%.
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 2021 to 2020, interest expense decreased $9.5 million, or 30%, year-over-year. 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 higher cost brokered deposits and FHLB advances. In the second half of 2020 and the full year of 2021, the Company’s cost of funds declined in conjunction with the declining rate environment. The
Company’s cost of funds was 0.59% for the year ending December 31, 2021, which was down from 0.85% for the year ending December 31, 2020.
The Company’s management intends to continue to shift the mix of funding from wholesale funds to core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company’s franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
PROVISION FOR CREDIT LOSSES
The ACL is established through provision for credit losses expense to provide an estimated ACL. The following table shows the components for the provision for credit losses for the years ended December 31, 2021 and 2020.
Year Ended
December 31,
December 31,
(dollars in thousands)
Provision for credit losses - loans and leases (1)
$
5,702
$
55,704
Provision for credit losses - off-balance sheet exposures (2)
(2,231)
N/A
Provision for credit losses - held to maturity securities (3)
N/A
Total provision for credit losses
$
3,486
$
55,704
(1) 2021 and years forward are evaluated using ASU 2016-13 and years prior to 2021 were calculated under an incurred loss model.
(2) Prior to adoption of ASU 2016-13 on January 1, 2021, there were no requirements to record provision for off-balance sheet exposures.
(3) Prior to the adoption of ASU 2016-13 on January 1, 2021, there was no requirement to record provision for credit losses for held to maturity securities.
The Company’s total provision for credit losses was $3.5 million for 2021, a decrease of $52.2 million from 2020. The adoption of ASU 2016-13 now requires an allowance on HTM debt securities and OBS exposures, specifically unfunded commitments. For the year ended December 31, 2021, the provision related to OBS was negative due to the decrease in the balance of those OBS exposures with an increase in line of credit usage. The decrease in provision on loans and leases was substantially driven by decreased qualitative allocations in response to improving economic conditions related to the effects of COVID-19.
The ACL for loans and leases is established based on a number of factors, including the Company’s historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economies and the risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies and Critical Accounting Estimates” section.
The Company had an ACL on loans/leases of 1.68% of total gross loans/leases at December 31, 2021, compared to 1.98% of total gross loans/leases at December 31, 2020. Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $1.5 million and $3.1 million at December 31, 2021 and 2020, respectively.
The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19:
As of December 31,
% of Total Gross
Amount
Loans and Leases
(dollars in thousands)
Hotels
$
76,628
1.64
%
Arts, Entertainment and Recreation
21,918
0.47
Restaurants (full service and limited service only)
21,162
0.45
$
119,708
2.56
%
Additional discussion of the Company’s allowance can be found in the “Financial Condition” section of this report.
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the years ended December 31, 2021 and 2020.
Year Ended
December 31,
December 31,
$ Change
% Change
(dollars in thousands)
Trust department fees
$
11,206
$
9,207
$
1,999
21.7
%
Investment advisory and management fees
4,080
5,318
(1,238)
(23.3)
Deposit service fees
6,132
6,041
1.5
Gains on sales of residential real estate loans, net
4,397
4,680
(283)
(6.0)
Gains on sales of government guaranteed portions of loans, net
1.3
Swap fee income/capital markets revenue
60,992
74,821
(13,829)
(18.5)
Securities gains (losses), net
(88)
2,484
(2,572)
(103.5)
Earnings on bank-owned life insurance
1,838
1,904
(66)
(3.5)
Debit card fees
4,216
3,402
23.9
Correspondent banking fees
1,114
23.4
Other
6,308
4,814
1,494
31.0
Total noninterest income
$
100,422
$
113,798
$
(13,376)
(11.8)
%
In recent years, the Company has been successful in expanding its wealth management customer base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management increased by $1.0 billion in 2021. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully managed trusts. Trust department fees increased 22% in 2021 as compared to 2020. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuation.
Investment advisory and management fees decreased 23% in 2021 as compared to 2020. 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 sale of the Bates Companies in August 2020 negatively impacted the fee income from this line of business compared to 2020. Excluding the impact of the Bates Companies sale, investment advisory and management fees increased 22% when comparing 2021 to 2020.
Deposit service fees increased 2% in 2021 as compared to 2020. The increase was primarily due to higher transactional volume with improving current economic conditions and new accounts. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, decreased 6% in 2021 as compared to 2020. The decrease was primarily due to decreased residential real estate purchases impacted by availability and the refinancing of residential real estate loans as volumes peaked in 2020 when rates declined.
The Company’s gains on the sale of government-guaranteed portions of loans for 2021 increased 1% as compared to 2020. 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.
The Company has grown its interest rate swap program significantly over the past several years. The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans. Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience. The LIHTC industry is strong and growing with an increased need for affordable housing. The interest rate swaps allow the commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $61.0 million in 2021 as compared to $74.8 million in 2020. Swap fee income relative to the increase in notional amount of the
non-hedging interest rate swap contracts was 11.5% in 2021 and 10.6% in 2020. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans. The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans. Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.
Securities losses, net of gains totaled $88 thousand in 2021 as compared to $2.5 million in securities gains, net of losses in 2020. In 2020, management sold select overvalued securities and utilized the gains to offset the cost of prepaying certain high-cost wholesale funds.
Earnings on BOLI decreased 4% in 2021. There were no purchases of BOLI in 2021 or 2020. Yields on BOLI (based on a simple average and excluding the impact of the federal income tax exemption) were 2.94% for 2021 and 2.87% for 2020. Notably, a small portion of the Company’s BOLI is variable rate whereby the returns are determined by the performance of the equity market. Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.
Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 24% in 2021. These fees improved alongside improving economic conditions and more normalized spending patterns. These fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 23% in 2021. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of noninterest bearing deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves 187 banks in Iowa, Illinois, Missouri and Wisconsin.
Other noninterest income increased 31% in 2021 primarily due to equity investment income and gains on disposal of leased assets.
NONINTEREST EXPENSES
The following tables set forth the various categories of noninterest expenses for the years ended December 31, 2021 and 2020.
Year Ended
December 31,
December 31,
$ Change
% Change
(dollars in thousands)
Salaries and employee benefits
$
100,907
$
96,268
$
4,639
4.8
%
Occupancy and equipment expense
15,918
16,504
(586)
(3.6)
Professional and data processing fees
14,579
14,644
(65)
(0.4)
Acquisition costs
-
100.0
Post-acquisition compensation, transition and integration costs
-
(214)
(100.0)
Disposition costs
(677)
(98.1)
FDIC insurance, other insurance and regulatory fees
4,475
4,164
7.5
Loan/lease expense
1,671
1,435
16.4
Net (income from) and gains/losses on operations of other real estate
(1,420)
(307)
(1,113)
362.5
Advertising and marketing
4,254
3,260
30.5
Bank service charges
2,173
2,016
7.8
Loss on liability extinguishment
-
3,907
(3,907)
(100.0)
Correspondent banking expense
(39)
(4.7)
Intangibles amortization
2,032
2,149
(117)
(5.4)
Goodwill impairment
-
(500)
(100.0)
Loss on sale of subsidiary
-
(158)
(100.0)
Other
7,677
5,315
2,362
44.4
Total noninterest expense
$
153,702
$
151,755
$
1,947
1.3
%
Management places strong emphasis on overall cost containment and is committed to improving the Company’s general efficiency. One-time charges relating to acquisitions and separation agreement expenses impacted expense in 2021. In
2020, one-time charges relating to losses on liability extinguishment, dispositions and goodwill impairments impacted expenses.
Salaries and employee benefits, which is the largest component of noninterest expense, increased 5% in 2021 as compared to 2020. This increase was primarily related to increased incentive compensation driven by record financial results, and higher salary costs due to a higher number of FTEs.
Occupancy and equipment expense decreased 4% in 2021 as compared to 2020. This decrease was due to reduced service contract costs.
Professional and data processing fees remained flat in 2021 as compared to 2020. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs. Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.
Acquisition costs totaled $624 thousand in 2021. These costs were comprised of primarily legal, accounting and investment banking costs related to the pending acquisition described in Note 24 to the Consolidated Financial Statements.
There were no post-acquisition compensation, transition and integration costs in 2021. Post-acquisition compensation, transition and integration costs totaled $214 thousand for 2020. These costs were comprised primarily of personnel costs, IT integration, and conversion costs related to the previous mergers/acquisitions as described in Note 2 to the Consolidated Financial Statements.
Disposition costs totaled $13 thousand for 2021 as compared to $690 thousand for 2020. The costs were comprised primarily of legal, accounting, disposal of fixed assets and prepaids, personnel costs and IT deconversion costs related to the sale of the Bates Companies. See Note 2 to the Consolidated Financial Statements for further discussion.
FDIC insurance, other insurance and regulatory fee expense increased 8% in 2021. The increase in expense was due to an increase in the asset size of the Company in 2021 as well as FDIC insurance assessment credits applied in 2020.
Loan/lease expense increased 16% in 2021 as compared to 2020. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from operations totaled $1.4 million for 2021 as compared to net income of operations of $307 thousand for 2020. The higher amount in 2021 is due primarily to the gain on sale of one commercial OREO property.
Advertising and marketing expense increased 31% in 2021 as compared to 2020. The increase in expense was primarily due to the return to more normal operations during 2021 after improvements in the general environment due to COVID-19 as compared to 2020.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT’s correspondent banking customer portfolio, increased 8% in 2021 as compared to 2020. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses is expected to also increase.
There were no losses on liability extinguishment in 2021. Losses on liability extinguishment were $3.9 million in 2020. These losses relate to the prepayment of certain FHLB advances.
Correspondent banking expense decreased 5% in 2021 as compared to 2020. These are direct costs incurred to provide services to QCBT’s correspondent banking customer portfolio, including safekeeping and cash management services. In 2021, the Company made a strategic decision to discontinue maintenance of a cash vault to supply correspondents and correspondents were successfully moved to ordering cash directly through the Federal Reserve Bank. This resulted in a cost savings for the Company.
Intangible amortization expense decreased 5% in 2021 as compared to 2020. These expenses naturally decrease unless there is an addition to intangible assets.
There was no goodwill impairment expense in 2021. Goodwill impairment expense totaled $500 thousand in 2020 related to the Bates Companies. See Note 6 to the Consolidated Financial Statements for further discussion.
There was no loss on sale of a subsidiary in 2021. Loss on sale of a subsidiary totaled $158 thousand in 2020 due to the sale of the Bates Companies. See Note 2 to the Consolidated Financial Statements for further discussion. There was no loss on sale of a subsidiary in 2021.
Other noninterest expense increased 44% in 2021 as compared to 2020. The increase was due primarily to the write-off of certain fixed assets which resulted in a $1.4 million loss on disposal of fixed assets and $993 of credit card processing expenses.
INCOME TAX EXPENSE
The provision for income taxes was $22.6 million for 2021, or an effective tax rate of 18.6%, compared to $12.7 million for 2020, or an effective tax rate of 17.3%. Refer to the reconciliation of the expected income tax rate to the effective tax rate that is included in Note 14 to the Consolidated Financial Statements for additional details.
FINANCIAL CONDITION AS OF DECEMBER 31, 2021 AND 2020
OVERVIEW
Following is a table that represents the major categories of the Company’s balance sheet.
As of December 31,
(dollars in thousands)
Amount
%
Amount
%
Cash, federal funds sold, and interest-bearing deposits
$
125,152
%
$
157,005
%
Securities
810,215
%
838,131
%
Net loans/leases
4,601,411
%
4,166,753
%
Derivatives
222,220
%
222,757
%
Other assets
337,134
%
320,397
%
Total assets
$
6,096,132
%
$
5,705,043
%
Total deposits
$
4,922,772
%
$
4,599,137
%
Total borrowings
170,805
%
177,114
%
Derivatives
225,135
%
229,270
%
Other liabilities
100,410
%
105,729
%
Total stockholders' equity
677,010
%
593,793
%
Total liabilities and stockholders' equity
$
6,096,132
%
$
5,705,043
%
In 2021, total assets increased $391.1 million, or 7%. The Company’s securities portfolio decreased $27.9 million, or 3%, during 2021. The Company’s loan/lease portfolio increased $434.7 million, or 10%, during 2021. The increase in the loan/lease portfolio was due to traditional commercial lending and SFG. Excluding PPP loans (non-GAAP), the Company’s loan/lease portfolio grew organically $674.0 million, or 16.9%, during 2021, which was funded by deposit growth and excess cash. Deposits grew $323.6 million, or 7%, during 2021. Borrowings decreased $6.3 million, or 4%, during 2021.
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 and are generated by our specialty finance group.
Following is a breakdown of the Company’s securities portfolio by type, the percentage of net unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration as of December 31, 2021 and 2020.
Amount
%
Amount
%
(dollars in thousands)
U.S. treasuries and govt. sponsored agency securities
$
23,328
%
$
15,336
%
Municipal securities
639,601
%
627,523
%
Residential mortgage-backed and related securities
94,323
%
132,842
%
Asset-backed securities
27,124
%
40,683
%
Other securities
25,839
%
21,747
%
$
810,215
%
$
838,131
%
Securities as a % of Total Assets
13.29
%
14.69
%
Net Unrealized Gains as a % of Amortized Cost
7.17
%
6.90
%
Duration (in years)
8.2
7.0
Yield on investment securities (tax equivalent)
3.66
%
3.74
%
At January 1, 2021, the Company adopted ASU 2016-13, which requires an ACL related to HTM securities. Additionally, ASU 2016-13 replaced the legacy GAAP OTTI model with a credit loss model. The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant Accounting Policies” to the consolidated financial statement for a discussion of the impact of the adoption of ASU 2016-13.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.
The following is a breakdown of the weighted-average yield for each range of maturities by category of debt securities that are not held at fair value:
Weighted
Amortized
Average
Cost*
Yield
(dollars in thousands)
Municipal securities:
Within 1 year
$
2,622
2.08
%
After 1 but within 5 years
22,746
3.34
%
After 5 but within 10 years
48,402
3.43
%
After 10 years
397,763
3.87
%
Total
$
471,533
3.79
%
Other securities:
Within 1 year
$
2.92
%
After 1 but within 5 years
4.39
%
Total
$
1,050
3.62
%
Total HTM Securities
$
472,583
* Amortized cost above excludes ACL of $198 thousand.
The weighted-average yield is calculated by dividing the total interest for each security per maturity range by the total amortized cost within that maturity range. Yields are not computed on a tax equivalent basis.
There have been no major changes within the tax exempt portfolio.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company’s investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 16.9% in 2021 over 2020. The mix of loan/lease types within the Company’s loan/lease portfolio is presented in the following tables. Adoption of ASU 2016-13 resulted in a change in loans and lease segments and those segments for prior to 2021 are shown in a separate table.
As of
December 31, 2021
Amount
%
(dollars in thousands)
C&I - revolving
$
248,483
%
C&I - other *
1,346,602
%
CRE - owner occupied
421,701
%
CRE - non-owner occupied
646,500
%
Construction and land development
918,571
%
Multi-family
600,412
%
Direct financing leases
45,191
%
1-4 family real estate
377,361
%
Consumer
75,311
%
Total loans/leases
$
4,680,132
%
Less allowance
(78,721)
Net loans/leases
$
4,601,411
Amount
%
(dollars in thousands)
C&I loans*
$
1,726,723
%
CRE loans
2,107,629
%
Direct financing leases
66,016
%
Residential real estate loans
252,121
%
Installment and other consumer loans
91,302
%
Total loans/leases
$
4,243,791
%
Plus deferred loan/lease origination costs, net of fees
7,338
Less allowance
(84,376)
Net loans/leases
$
4,166,753
*Includes PPP loans totaling $28.2 million and $273.1 million at December 31, 2021 and 2020, respectively.
The Company experienced strong loan growth in 2021. The growth was broad-based with some stronger growth in multi-family and construction related to our increased focus on LIHTC lending.
Historically, the Company structures most residential real estate loans to conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell the loans on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans and recognizing noninterest income from the gain on sale. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans in the table above. Historically, the subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years, and then retain these loans in their portfolios. The Company holds a limited amount of 15-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, 2021 and 2020. Maturities are based on contractual dates.
As of December 31, 2021
Maturities After One Year
Due in one
Due after one
Due after 5
Due after
Predetermined
Adjustable
year or less
through 5 years
through 15 years
15 years
interest rates
interest rates
(dollars in thousands)
C&I - revolving
$
198,861
$
44,927
$
4,695
$
-
$
10,852
$
38,770
C&I - other
320,932
591,103
222,408
212,159
725,568
300,102
CRE - owner occupied
39,959
188,408
163,862
29,472
228,247
153,495
CRE - non-owner occupied
97,300
347,215
156,558
45,427
342,349
206,851
Construction and land development
144,624
159,408
45,608
568,931
161,195
612,752
Multi-family
27,483
67,407
134,919
370,603
67,055
505,874
Direct financing leases
2,514
42,253
-
42,677
-
1-4 family real estate
21,190
92,443
113,049
150,679
316,356
39,815
Consumer
8,968
32,787
32,654
17,860
48,483
$
861,831
$
1,565,951
$
874,177
$
1,378,173
$
1,912,159
$
1,906,142
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
See Note 4 to the Consolidated Financial Statements for additional information on the Company’s loan/lease portfolio.
ALLOWANCE FOR CREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES
On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which replaces the incurred loss methodology with the CECL methodology. Additionally, CECL required an ACL for OBS exposures to be calculated using a current expected credit loss methodology.
The adequacy of the 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 ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality” as described in Note 1 to the Consolidated Financial Statements and carrying aggregate exposure in excess of $250 thousand. The adequacy of the allowance is monitored by the credit administration staff and reported to management and the Board of Directors.
Changes in the ACL for loans/leases for the years ended December 31, 2021, 2020 and 2019 are presented as follows:
Year Ended
December 31, 2021
December 31, 2020
December 31, 2019
(dollars in thousands)
Balance, beginning
$
84,376
$
36,001
$
39,847
Impact of adopting ASU 2016-13
(8,102)
-
-
Reclassification of allowance related to held for sale loans
-
-
(6,122)
Provision
5,702
55,704
6,638
Charge-offs
(4,538)
(8,383)
(5,134)
Recoveries
1,283
1,054
Balance, ending
$
78,721
$
84,376
$
36,001
Net charge-offs by segment and their percentage of average loans and leases are as follows:
Year ended December 31,
Amount
% of Average Loans
Amount
% of Average Loans
(dollars in thousands)
Average amount of loans/leases outstanding, before allowance
$
4,456,461
$
4,031,567
Net charge-offs:
C&I
$
-
0.00
%
$
(3,550)
0.09
%
C&I - Revolving
-
0.00
-
0.00
C&I - Other
(1,697)
0.04
-
0.00
CRE
-
0.00
(1,889)
0.05
CRE owner occupied
0.00
-
0.00
CRE non-owner occupied
(1,791)
0.04
-
0.00
Construction and land development
-
0.00
-
0.00
Multi-family
(150)
0.00
-
0.00
Direct financing leases
-
0.00
(1,848)
0.05
Residential real estate
-
0.00
0.00
1-4 family real estate
0.00
-
0.00
Consumer
(0.01)
(71)
0.00
Total net charge-offs
$
(3,255)
$
(7,329)
Changes in the ACL for OBS exposures for the year ended December 31, 2021:
Year Ended
December 31, 2021
(dollars in thousands)
Balance, beginning (1)
$
-
Impact of adopting ASU 2016-13
9,117
Provisions credited to expense
(2,231)
Balance, ending
$
6,886
(1) Prior to the adoption of ASU 2016-13, the Company did not calculate an ACL for OBS exposures, and therefore prior periods have not been shown in this table.
The ACL for OBS exposures totaled $9.1 million at the adoption of CECL on January 1, 2021. Prior to January 1, 2021, the allowance for OBS exposures was not required. The Company recorded negative $2.2 million of provision for credit losses related to OBS exposures, specifically unfunded commitments, in 2021 primarily due to increased line of credit usage resulting in lower exposure. At December 31, 2021, the allowance for OBS exposures was $6.9 million.
The following is a table that reports the criticized and classified loan totals as of December 31, 2021 and 2020.
As of December 31,
Internally Assigned Risk Rating *
(dollars in thousands)
Special Mention (Rating 6)
$
62,510
$
71,481
Substandard (Rating 7)
53,296
66,081
Doubtful (Rating 8)
-
-
$
115,806
$
137,562
Criticized Loans **
$
115,806
$
137,562
Classified Loans ***
$
53,296
$
66,081
Criticized Loans as a % of Total Loans/Leases
2.47
%
3.24
%
Classified Loans as a % of Total Loans/Leases
1.14
%
1.55
%
* Amounts above exclude the government guaranteed portion, if any. The Company assigns internal risk ratings of Pass (Rating 2) for the government
guaranteed portion.
** Criticized loans are defined as C&I and CRE loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as C&I and CRE loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans decreased 16% and classified loans decreased 20% in 2021 as compared to 2020. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.
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, 2021 and 2020.
As of December 31,
ACL on loans/leases / Gross loans/leases
1.68
%
1.98
%
ACL on loans/leases / NPLs
2,825.21
%
574.61
%
The following table presents the allowance by type and the percentage of loan/lease type to total loans/leases.
As of December 31,
Amount
%
(dollars in thousands)
C&I - revolving
3,907
%
C&I - other
25,982
%
CRE - owner occupied
8,501
%
CRE - non-owner occupied
8,549
%
Construction and land development
16,972
%
Multi-family
9,339
%
1-4 family real estate
4,541
%
Consumer
%
$
78,721
%
* Included within the C&I - Other segment is an ACL on leases of $1.5 million. Leases represent 1% of to total loans/leases.
As of December 31,
Amount
%
(dollars in thousands)
C&I loans
35,421
%
CRE loans
42,161
%
Direct financing leases
1,764
%
Residential real estate loans
3,732
%
Installment and other consumer loans
1,298
%
$
84,376
%
% Represents the percentage of the certain type of loan/lease to total loans/leases
Although management believes that the ACL for loans/leases at December 31, 2021 is at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and may require additional increases in the provision for credit losses. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and 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 ACL.
NONPERFORMING ASSETS
The table below presents the amounts of NPAs and related ratios.
As of December 31,
(dollars in thousands)
Nonaccrual loans/leases (1) (2)
$
2,759
$
13,940
Accruing loans/leases past due 90 days or more
Total NPLs
2,760
13,943
OREO
-
Other repossessed assets
-
Total NPAs
$
2,760
$
14,098
NPLs to total loans/leases
0.06
%
0.33
%
NPAs to total loans/leases plus repossessed property
0.06
%
0.33
%
NPAs to total assets
0.05
%
0.25
%
Nonccrual loans/leases to total loans/leases
0.06
%
0.33
%
ACL to nonaccrual loans
2853.24
%
605.28
%
(1) Includes government guaranteed portions of loans, if applicable.
(2) Includes TDRs of $65 thousand, $984 thousand and $747 thousand at December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
The majority of the Company’s NPAs consists of nonaccrual loans/leases. For nonaccrual loans/leases, management thoroughly reviewed these loans/leases and provided specific allowances as appropriate.
OREO is carried at the lower of carrying amount or fair value less costs to sell.
The policy of the Company is to place a loan/lease on nonaccrual status if: (a) payment in full of interest or principal is not expected; or (b) principal or interest has been in default for a period of 90 days or more unless the obligation is both in the process of collection and well secured. A loan/lease is well secured if it is secured by collateral with sufficient market value to repay principal and all accrued interest. A debt is in the process of collection if collection of the debt is proceeding in due course either through legal action, including judgment enforcement procedures, or in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to current status.
In 2021, the Company’s NPAs decreased $11.3 million, or 80% as compared to $14.1 million in 2020. The decrease in NPAs in 2021 was primarily due to several isolated relationships that paid off in 2021 as well as one loan that was charged off to OREO and subsequently sold.
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, the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. The Company believes that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. The Company implemented its LRP offerings to extend qualifying customers’ payments for 90 days. As of December 31, 2021 there were no Bank modifications of loans to commercial and consumer clients and six m2 modifications of loans and leases totaling $2.4 million representing 0.05% of the total loan and lease portfolio currently on deferral. The Company intends to allow qualifying commercial and consumer clients to defer payments under the new guidance.
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 clarified that this guidance could continue to be applied through December 31, 2021.
DEPOSITS
Deposits grew $323.6 million, or 7.0%, during 2021, primarily due to an increase in both non-interest bearing and interest bearing deposits. The table below presents the composition of the Company’s deposit portfolio.
As of December 31,
Amount
%
Amount
%
(dollars in thousands)
Noninterest bearing demand deposits
$
1,268,788
%
$
1,145,378
%
Interest bearing demand deposits
3,232,633
%
2,987,469
%
Time deposits
421,348
%
460,659
%
Brokered deposits
-
%
5,631
-
%
$
4,922,772
%
$
4,599,137
%
The Company has been successful in growing its noninterest-bearing deposit portfolio over the past several years, growing average balances 21% in 2021. 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.
The Company’s correspondent bank deposits have grown significantly over the past two years. The correspondent bank deposit portfolio consists of the following:
● Noninterest-bearing deposits which represent the correspondent banks’ operating cash used for processing transactions with the Federal Reserve,
● Money market deposits which represent some excess liquidity, and
● The correspondent banks’ EBA at the FRB.
The Company has modified the structure and interest rates paid for those correspondent bank deposits on the balance sheet which are the noninterest bearing deposits and the money market deposits. This has led to more of the correspondent bank portfolio’s excess liquidity to shift to the EBAs at the FRB which is managed by the Company, but is off the Company’s balance sheet. On average, over the past two years, the correspondent banks’ EBA ranges from $1.3 billion to $1.5 billion which is approximately $1 billion more than pre-pandemic levels.
The Company had total uninsured deposits of $1.9 billion and $1.8 billion as of December 31, 2021 and 2020 respectively. The table below represents the time deposits in FDIC uninsured accounts by maturity:
As of December 31,
As of December 31,
(dollars in thousands)
U.S. Time Deposits in Amounts in Excess of FDIC insurance limit:
One to three months
$
61,278
$
88,295
Three to six months
45,451
35,977
Six to twelve months
81,290
76,478
Over twelve months
37,038
46,939
$
225,058
$
247,690
There were no other time deposits otherwise uninsured. The Company had no deposits by foreign depositors in domestic offices as of December 31, 2021 and 2020.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committee. See discussion regarding policy limits on bank stock loans in the Lending/Leasing section under Item 1 - Business in Part I of this Annual Report on Form 10-K.
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)
Federal funds purchased
3,800
5,430
$
3,800
$
5,430
The Company’s federal funds purchased fluctuates based on the short-term funding needs of the Company’s subsidiary banks. See Note 9 to the Consolidated Financial Statements for additional information on the Company’s short-term borrowings.
FHLB ADVANCES AND OTHER BORROWINGS
As a result of their membership in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short-term or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of rising interest rates or when these advances provide a less costly source of funds than customer deposits. There was no change in FHLB advances from 2020 to 2021.
As of December 31,
(dollars in thousands)
FHLB Advances
$
15,000
$
15,000
Weighted Average Interest Rate at Year-End
0.31
%
0.29
%
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
The Company had subordinated notes totaling $113.9 million and $118.7 million as of December 31, 2021 and 2020, respectively. The Company prepaid $5.0 million in subordinated debt in 2021 with no gain/loss.
See Note 12 to the Consolidated Financial Statements for additional information regarding the subordinated notes.
STOCKHOLDERS’ EQUITY
The table below presents the composition of the Company’s stockholders’ equity.
As of December 31,
(dollars in thousands)
Common stock
$
15,613
$
15,806
Additional paid in capital
273,768
275,807
Retained earnings
386,077
300,804
AOCI
1,552
1,376
Total stockholders' equity
$
677,010
$
593,793
TCE / TA ratio (non-GAAP)
9.87
%
9.05
%
* TCE/TA ratio is a non-GAAP measure. Refer to the GAAP to Non-GAAP Reconciliations section of this report for more information.
As of December 31, 2021 and 2020, no preferred stock was outstanding.
The following table presents the rollforward of stockholders’ equity for the years ended December 31, 2021 and 2020, respectively.
For the Year Ended December 31,
(dollars in thousands)
Beginning balance
$
593,793
$
535,351
Impact of adoption of ASU 2016-13
(937)
-
Net income
98,905
60,582
Other comprehensive income, net of tax
2,474
Repurchase and cancellation of shares of common stock as a result of a share repurchase program
(14,168)
(3,779)
Common cash dividends declared
(3,781)
(3,779)
Other *
3,022
2,944
Ending balance
$
677,010
$
593,793
* 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. To date, the Company has purchased 394,085 shares under the program and all shares purchased have been retired.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers’ credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks, cash and due from banks and federal funds sold, which averaged $178.7 million and $398.2 million during 2021 and 2020, respectively. The Company’s on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.
The Federal Reserve Bank has provided a lending facility that will allow the Company, if desired, to obtain funding specifically for loans that the Company makes under the PPP, which will allow the Company to retain existing sources of liquidity for traditional operations. The Company has been able to access other available funding sources to address liquidity needs during the COVID-19 pandemic.
The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured 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, 2021, the subsidiary banks had 31 lines of credit totaling $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, all of the $517.7 million was available.
At December 31, 2020, the subsidiary banks had 28 lines of credit totaling $743.1 million, of which $287.1 million was secured and $456.0 million was unsecured. At December 31, 2020, all of the $743.1 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, 2022. At December 31, 2021, the full $25.0 million was available. See Note 11 to the Consolidated Financial Statements for additional information.
Investing activities used cash of $411.8 million during 2021 compared to $704.5 million during 2020. Proceeds from calls, maturities, pay downs, and sales of securities were $195.7 million for 2021 compared to $138.9 million for 2020. Purchases of securities used cash of $173.2 million for 2021 compared to $356.1 million for 2020. The net increase in loans/leases used cash of $433.5 million for 2021 compared to $564.7 million for 2020.
Financing activities provided cash of $299.7 million for 2021 compared to $577.4 million for 2020. Net increases in deposits totaled $323.6 million for 2021 as compared to $716.9 million for 2020. Net short-term borrowings decreased $1.6 million for 2021 and decreased $8.0 million for 2020. In 2021 the Company used $5.0 million to prepay select subordinated notes. In 2020 the Company used $55.3 million to prepay select FHLB advances and $29.2 million to prepay brokered and public time deposits. Short-term FHLB advances decreased $94.3 million in 2020.
Total cash provided by operating activities was $88.2 million for 2021 compared to $112.2 million for 2020.
Throughout its history, the Company has secured additional capital through various resources, including common and preferred stock and the issuance of trust preferred securities and subordinated notes.
As of December 31, 2021 and 2020, the subsidiary banks remained “well-capitalized” in accordance with regulatory capital requirements administered by the federal banking authorities. See Note 17 to the Consolidated Financial Statements for detail of the capital amounts and ratios for the Company and its subsidiary banks.
COMMITMENTS, CONTINGENCIES, CONTRACTUAL OBLIGATIONS, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the subsidiary banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying Consolidated Financial Statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit, and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the banks upon extension of credit, is based upon management’s credit evaluation of the 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, 2021 and 2020, no amounts had been recorded as liabilities for the banks’ potential obligations under these guarantees.
As of December 31, 2021 and 2020, commitments to extend credit aggregated $1.2 billion and $1.4 billion, respectively. As of December 31, 2021 and 2020, standby letters of credit aggregated $21.7 million and $24.8 million, respectively. Management does not expect that all of these commitments will be funded.
Additional information regarding commitments, contingencies, and off-balance sheet arrangements is described in Note 19 to the Consolidated Financial Statements.
The Company has various financial obligations, including contractual obligations and commitments, which may require future cash payments. The significant fixed and determinable contractual obligations to third parties are deposits without a stated maturity, certificates of deposit, short-term borrowings, subordinated notes, and junior subordinated debentures and totaled $5.1 billion as of December 31, 2021.
The Company’s operating contract obligations represent short and long-term contractual payments for data processing equipment and services, software, and other equipment and professional services and totaled $49.8 million as of December 31, 2021.
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.
● The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), acts of war or threats thereof and other adverse events that could cause economic deterioration or instability in credit markets, and the response of the 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 acquisitions and the possibility that transaction costs may be greater than anticipated.
● The loss of key executives and employees.
● Changes in consumer spending.
● The costs, effects and outcomes of existing or future litigation.
● Unexpected outcomes of existing or new litigation involving the Company.
● The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.
● 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 its 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, 2021 and 2020 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)
%
(0.1)
%
-
%
200 basis point upward shift
(10.0)
%
3.1
%
2.5
%
300 basis point upward shock
(30.0)
%
11.6
%
10.3
%
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at December 31, 2021 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 (PCAOB ID: 49)
Financial Statements
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
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: Parent Company Only Financial Statements
●
Note 21: Fair Value
●
Note 22: Business Segment Information
●
Note 23: Pending Acquisition
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, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2021, and the related notes to the consolidated financial
statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company's internal control over financial reporting as of
December 31, 2021, 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 11, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control
over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses on financial instruments in 2021 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Credit Losses).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
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 credit losses on loans and leases
As described in Notes 1 and 4 to the consolidated financial statements, the allowance for credit losses on loans and leases (allowance) totaled $78.7 million at December 31, 2021. On January 1, 2021, the
Company adopted ASU 2016-13, which changes the impairment model from an incurred loss model to an expected loss model. Under the expected loss model, the allowance is measured on a collective (pool)
basis when similar risk characteristics exist (general reserve). Loans that do not share similar risk characteristics are evaluated on an individual basis at the balance sheet date (specific reserve). At
December 31, 2021 the general reserve on loans and leases collectively evaluated for impairment totaled $76.2 million and the specific reserve on loans and leases individually evaluated totaled $2.5 million.
The measurement of the general reserve is based on relevant past events, including historical
experience, current conditions and reasonable and supportable forecasts that affect collectability. The Company’s reserve on collectively evaluated loans and leases includes a quantitative allowance based
upon estimates of losses over the life of the loans and leases that is calculated using an existing
probability of default and loss given default framework, as well as a qualitative component for factors not reflected in the historical loss experience. The qualitative component is determined based on an
assessment of internal and external influences on credit quality at the present time (qualitative factors), as well as a projection of the impact in the future (future factors). Qualitative factors of significant influence include the general economic environment in the Company’s markets, both locally and nationally, as well
as the impact of economic conditions on certain industries, the impact of the COVID-19 pandemic, and
credit quality indicators. The Company’s future factors represent an estimate of forecasted economic conditions. The calculation also contemplates that the Company may not have sufficient information to
make reasonable and supportable forecasts for the entire life of the loans and leases, which would result
in a reversion to historical credit loss information. The evaluation of these qualitative factors and future
factors requires that management make significant judgments, which may significantly impact the
estimated allowance.
We identified the implementation of ASU 2016-13 and both the qualitative and future factors, applied to
the general reserve of the allowance as critical audit matters because auditing management’s
implementation of the new standard as well as auditing management’s determination of the qualitative
and future factors required significant auditor judgement as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
Our audit procedures related to the implementation of ASU 2016-13 included the following, among others:
● We obtained an understanding of the relevant controls related to implementation of the new
accounting guidance and tested such controls for design and operating effectiveness, including management’s review and approval of the methodology and assumptions in its model.
● We evaluated the reasonableness of managements assumptions and methodology as well as model selection and validation over the implementation of ASU 2016-13.
● We tested the completeness and accuracy of the data used in the initial calculations by management by agreeing the data to internal or external sources.
Our audit procedures related to the Company’s qualitative factors and future factors in the general
reserve included the following, among others:
● We obtained an understanding of the relevant controls related to the qualitative and future factors of
the general reserve and tested such controls for design and operating effectiveness, including
controls relating to management’s review and approval of the qualitative and future factors and the underlying data used in determining those factors.
● We tested management’s process and evaluated the reasonableness of their judgments and assumptions to develop the qualitative and future factors, which included:
o Testing the accuracy and relevancy of the data inputs used by management as a basis for the adjustments for qualitative and future factors by comparing to internal and external source data.
o Evaluating the magnitude and directional consistency of the adjustments for such.
o Evaluating whether management’s conclusions were consistent with Company provided internal data and external, independently sourced data and agreeing the impact to the allowance calculation.
/s/ RSM US LLP
We have served as the Company's auditor since 1993.
Davenport, Iowa
March 11, 2022
QCR Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
December 31,
December 31,
(dollars in thousands)
Assets
Cash and due from banks
$
37,490
$
61,329
Federal funds sold
12,370
9,080
Interest-bearing deposits at financial institutions
75,292
86,596
Securities held to maturity, at amortized cost, net of allowance for credit losses
472,385
476,165
Securities available for sale, at fair value
337,830
361,966
Total securities
810,215
838,131
Loans receivable held for sale
3,828
3,758
Loans/leases receivable held for investment
4,676,304
4,247,371
Gross loans/leases receivable
4,680,132
4,251,129
Less allowance for credit losses
(78,721)
(84,376)
Net loans/leases receivable
4,601,411
4,166,753
Bank-owned life insurance
62,424
60,586
Premises and equipment, net
78,530
72,693
Restricted investment securities
19,353
18,103
Other real estate owned, net
-
Goodwill
74,066
74,066
Intangibles
9,349
11,381
Derivatives
222,220
222,757
Other assets
93,412
83,548
Total assets
$
6,096,132
$
5,705,043
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
$
1,268,788
$
1,145,378
Interest-bearing
3,653,984
3,453,759
Total deposits
4,922,772
4,599,137
Short-term borrowings
3,800
5,430
Federal Home Loan Bank advances
15,000
15,000
Subordinated notes
113,850
118,691
Junior subordinated debentures
38,155
37,993
Derivatives
225,135
229,270
Other liabilities
100,410
105,729
Total liabilities
5,419,122
5,111,250
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 December 2021 and December 2020 - no shares issued or outstanding
-
-
Common stock, $1 par value; shares authorized 20,000,000 December 2021 - 15,613,460 shares issued and outstanding December 2020 - 15,805,711 shares issued and outstanding
15,613
15,806
Additional paid-in capital
273,768
275,807
Retained earnings
386,077
300,804
Accumulated other comprehensive income (loss):
Securities available for sale
5,925
9,008
Derivatives
(4,373)
(7,632)
Total stockholders' equity
677,010
593,793
Total liabilities and stockholders' equity
$
6,096,132
$
5,705,043
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2021, 2020, and 2019
(dollars in thousands)
Interest and dividend income:
Loans/leases, including fees
$
173,940
$
173,967
$
190,324
Securities:
Taxable
8,923
7,787
6,607
Nontaxable
16,167
14,900
13,858
Interest-bearing deposits at financial institutions
3,910
Restricted investment securities
1,031
1,174
Federal funds sold
Total interest and dividend income
200,155
198,373
216,076
Interest expense:
Deposits
13,300
23,269
50,875
Short-term borrowings
Federal Home Loan Bank advances
1,087
2,894
Other borrowings
-
-
Subordinated notes
6,272
4,697
3,564
Junior subordinated debentures
2,275
2,286
2,308
Total interest expense
21,922
31,423
60,517
Net interest income
178,233
166,950
155,559
Provision for credit losses
3,486
55,704
7,066
Net interest income after provision for credit losses
174,747
111,246
148,493
Noninterest income:
Trust department fees
11,206
9,207
9,559
Investment advisory and management fees
4,080
5,318
6,995
Deposit service fees
6,132
6,041
6,812
Gains on sales of residential real estate loans, net
4,397
4,680
2,571
Gains on sales of government guaranteed portions of loans, net
Swap fee income/capital markets revenue
60,992
74,821
28,295
Securities gains (losses), net
(88)
2,484
(30)
Earnings on bank-owned life insurance
1,838
1,904
1,973
Debit card fees
4,216
3,402
3,357
Correspondent banking fees
1,114
Gain on sale of assets and liabilities of subsidiary
-
-
12,286
Other
6,308
4,814
5,429
Total noninterest income
100,422
113,798
78,768
Noninterest expense:
Salaries and employee benefits
100,907
96,268
92,063
Occupancy and equipment expense
15,918
16,504
15,106
Professional and data processing fees
14,579
14,644
13,381
Acquisition costs
-
-
Post-acquisition compensation, transition and integration costs
-
3,582
Disposition costs
3,325
FDIC insurance, other insurance and regulatory fees
4,475
4,164
2,955
Loan/lease expense
1,671
1,435
1,097
Net income from and gains/losses on operations of other real estate
(1,420)
(307)
3,789
Advertising and marketing
4,254
3,260
4,548
Bank service charges
2,173
2,016
2,009
Losses on liability extinguishment
-
3,907
Correspondent banking expense
Intangibles amortization
2,032
2,149
2,266
Goodwill impairment
-
3,000
Loss on sale of subsidiary
-
-
Other
7,677
5,315
6,841
Total noninterest expense
153,702
151,755
155,234
Net income before income taxes
121,467
73,289
72,027
Federal and state income tax expense
22,562
12,707
14,619
Net income
$
98,905
$
60,582
$
57,408
Basic earnings per common share
$
6.30
$
3.84
$
3.65
Diluted earnings per common share
$
6.20
$
3.80
$
3.60
Weighted average common shares outstanding
15,708,744
15,771,650
15,730,016
Weighted average common and common equivalent shares outstanding
15,944,708
15,952,637
15,967,775
Cash dividends declared per common share
$
0.24
$
0.24
$
0.24
See Notes to Consolidated Financial Statements.
QCR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020, and 2019
(dollars in thousands)
Net income
$
98,905
$
60,582
$
57,408
Other comprehensive income:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period before tax
(4,158)
10,657
8,761
Less reclassification adjustment for gains (losses) included in net income before tax
(88)
2,484
(30)
(4,070)
8,173
8,791
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax
3,427
(6,854)
(3,806)
Less reclassification adjustment for unhedging caplet
-
(649)
-
Less reclassification adjustment for swap termination
-
(792)
-
Less reclassification adjustment for caplet amortization before tax
(697)
(551)
-
4,124
(4,862)
(3,806)
Unrealized gains on assets held for sale:
Unrealized holding gains arising during the period before tax on securities held for sale
-
-
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, before tax
3,311
5,879
Tax expense (benefit)
(122)
1,433
Other comprehensive income, net of tax
2,474
4,446
Comprehensive income
$
99,081
$
63,056
$
61,854
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2021, 2020, and 2019
Accumulated
Additional
Other
Common
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
(Loss) Income
Total
(dollars in thousands)
Balance December 31, 2018
$
15,718
$
270,761
$
192,203
$
(5,544)
$
473,138
Net income
-
-
57,408
-
57,408
Other comprehensive income, net of tax
-
-
-
4,446
4,446
Issuance of 9,400 shares of common stock as a result of the acquisition of the Bates Companies
-
-
Impact of adoption of ASU 2016-13
-
-
-
-
-
Common cash dividends declared, $0.24 per share
-
-
(3,775)
-
(3,775)
Stock-based compensation expense
-
2,469
-
-
2,469
Issuance of common stock under employee benefit plans
1,165
-
-
1,266
Balance, December 31, 2019
$
15,828
$
274,785
$
245,836
$
(1,098)
$
535,351
Net income
-
-
60,582
-
60,582
Other comprehensive income, net of tax
-
-
-
2,474
2,474
Common cash dividends declared, $0.24 per share
-
-
(3,779)
-
(3,779)
Repurchase and cancellation of 100,932 shares of common stock
as a result of a share repurchase program
(101)
(1,843)
(1,835)
-
(3,779)
Stock-based compensation expense
-
2,150
-
-
2,150
Issuance of common stock under employee benefit plans
-
-
Balance, December 31, 2020
$
15,806
$
275,807
$
300,804
$
1,376
$
593,793
Impact of adoption of ASU 2016-13
-
-
(937)
-
(937)
Net income
-
-
98,905
-
98,905
Other comprehensive income, net of tax
-
-
-
Repurchase and cancellation of 293,153 shares of common stock
as a result of a share repurchase program
(293)
(4,961)
(8,914)
-
(14,168)
Common cash dividends declared, $0.24 per share
-
-
(3,781)
-
(3,781)
Stock-based compensation expense
-
2,352
-
-
2,352
Issuance of common stock under employee benefit plans
-
-
Balance, December 31, 2021
$
15,613
$
273,768
$
386,077
$
1,552
$
677,010
See Notes to Consolidated Financial Statements.
QCR Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020, and 2019
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
98,905
$
60,582
$
57,408
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
5,359
5,333
5,225
Provision for credit losses
3,486
55,704
7,066
Deferred income taxes
15,272
(14,530)
6,364
Stock-based compensation expense
2,352
2,150
2,469
Deferred compensation expense accrued
4,580
3,821
2,773
(Gains) losses on other real estate owned, net
(1,754)
(317)
3,361
Amortization of premiums on securities, net
1,933
1,561
Caplet amortization
-
Mark to market gains on unhedged derivatives, net
(170)
-
-
Securities (gains) losses, net
(2,484)
Loans originated for sale
(204,449)
(236,734)
(151,692)
Proceeds on sales of loans
209,003
241,553
152,633
Gains on sales of residential real estate loans
(4,397)
(4,680)
(2,571)
Gains on sales of government guaranteed portions of loans
(227)
(224)
(748)
Loss on liability extinguishment, net
-
3,907
Losses (gains) on sales and disposals of premises and equipment
1,059
(19)
Amortization of intangibles
2,032
2,149
2,266
Accretion of acquisition fair value adjustments, net
(1,340)
(3,271)
(4,344)
Increase in cash value of bank-owned life insurance
(1,838)
(1,904)
(1,973)
Loss (gain) on sale of subsidiary/certain assets and liabilities of subsidiary
-
(12,286)
Goodwill impairment
-
3,000
Increase in other assets
(47,006)
(9,445)
(19,152)
Increase in other liabilities
4,633
8,408
23,915
Net cash provided by operating activities
88,218
112,177
76,494
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in federal funds sold
(3,290)
16,598
Net decrease (increase) in interest-bearing deposits at financial institutions
11,304
61,295
(69,984)
Proceeds from sales of other real estate owned
4,742
4,477
Activity in securities portfolio:
Purchases
(173,204)
(356,127)
(71,963)
Calls, maturities and redemptions
106,442
53,007
25,193
Paydowns
65,410
47,313
50,830
Sales
23,874
38,562
30,055
Activity in restricted investment securities:
Purchases
(1,280)
(4,600)
(5,859)
Redemptions
9,749
7,621
Proceeds from the liquidation of bank-owned life insurance
-
10,999
-
Net increase in loans/leases originated and held for investment
(433,544)
(564,748)
(320,368)
Purchase of premises and equipment
(13,981)
(4,268)
(12,429)
Proceeds from sales of premises and equipment
1,726
2,562
Purchase of derivatives
-
-
(4,347)
Payment for termination of derivative
-
(808)
-
Net cash (transferred out) transferred in sale of subsidiary
-
(154)
42,587
Net cash used in investing activities
(411,771)
(704,482)
(308,664)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts
323,635
716,898
335,580
Net decrease in short-term borrowings
(1,630)
(7,993)
(14,193)
Activity in Federal Home Loan Bank advances:
Term advances
-
125,000
25,000
Calls and maturities
-
(121,600)
(35,000)
Net change in short-term and overnight advances
-
(94,300)
(52,465)
Prepayments
-
(55,274)
(30,323)
Activity in other borrowings:
Calls, maturities and scheduled principal payments
-
-
(11,937)
Prepayments
-
-
(46,313)
Paydown of revolving line of credit
-
-
(9,000)
Prepayments on brokered and public time deposits
-
(29,153)
-
Prepayments of subordinated notes
(5,000)
-
-
Proceeds from subordinated notes
50,000
63,393
Payment of cash dividends on common stock
(3,793)
(3,779)
(3,767)
Proceeds from issuance of common stock, net
1,360
1,926
Repurchase and cancellation of shares
(14,168)
(3,779)
-
Net cash provided by financing activities
299,714
577,380
222,901
Net decrease in cash and due from banks
(23,839)
(14,925)
(9,269)
Cash and due from banks, beginning
61,329
76,254
85,523
Cash and due from banks, ending
$
37,490
$
61,329
$
76,254
QCR Holdings, Inc. and Subsidiaries - Continued
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020, and 2019
Supplemental disclosure of cash flow information, cash payments for:
Interest
$
23,373
$
32,178
$
59,292
Income/franchise taxes
48,988
24,567
2,719
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net
2,474
4,446
Change in retained earnings from adoption of ASU 2016-13
(937)
-
-
Transfers of loans to other real estate owned
2,962
1,086
Due to broker for purchases of securities
1,000
-
-
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities
(1,376)
137,752
62,483
Dividends payable
Consideration received on sale of the Bates Companies
-
1,523
-
Supplemental disclosure of cash flow information for sale of subsidiary/certain assets and certain liabilities of subsidiary:
Cash proceeds**
$
-
$
$
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
**Net cash paid 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
able of Contents
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.
ACL: Allowance for credit losses
AFS: Available for sale
HTM: Held to maturity
Allowance: Allowance for credit losses
Iowa Superintendent: Iowa Superintendent of Banking
AOCI: Accumulated other comprehensive income (loss)
LCR: Liquidity Coverage Ratio
ARRC: Alternative Reference Rate Committee
LIBOR: London Inter-Bank Offered Rate
ASC: Accounting Standards Codification
LIHTC: Low-income housing tax credit
ASC 805: Business Combination Standard
LRP: Loan Relief Program
ASU: Accounting Standards Update
m2: m2 Equipment Finance, LLC
Bates Companies: Bates Financial Advisors, Inc., Bates
MD&A: Management’s Discussion & Analysis
Financial Services, Inc., Bates Securities, Inc. and Bates
Missouri Division of Finance: Missouri Department of
Financial Group, Inc.
Commerce and Insurance
BHCA: Bank Holding Company Act of 1956
NIM: Net interest margin
BOLI: Bank-owned life insurance
NPA: Nonperforming asset
Caps: Interest rate cap derivatives
NPL: Nonperforming loan
CARES Act: Coronavirus Aid, Relief and Economy Security
Act
CECL: Current Expected Credit Losses
CFPB: Bureau of Consumer Financial Protection
NSFR: Net Stable Funding Ratio
OBS: Off-balance sheet
OREO: Other real estate owned
OTTI: Other-than-temporary impairment
CNB: Community National Bank
PCAOB: Public Company Accounting Oversight Board
Community National: Community National Bancorporation
COVID-19: Coronavirus Disease 2019
CRA: Community Reinvestment Act
PCD: Purchased credit deteriorated loan
PCI: Purchased credit impaired
PPP: Paycheck Protection Program
CRBT: Cedar Rapids Bank & Trust Company
Provision: Provision for credit losses
CRE: Commercial real estate
PUD LOC: Public Unit Deposit Letter of Credit
CRE Guidance: Interagency Concentrations in Commercial
QCBT: Quad City Bank & Trust Company
Real Estate Lending, Sound Risk Management Practices
RB&T: Rockford Bank & Trust Company
guidance
ROAA: Return on Average Assets
CSB: Community State Bank
ROACE: Return on Average Common Equity
C&I: Commercial and industrial
ROAE: Return on Average Equity
Dodd-Frank Act: Dodd-Frank Wall Street Reform and
ROU: Right of use
Consumer Protection Act
SBA: U.S. Small Business Administration
DGCL: Delaware General Corporation Law
SEC: Securities and Exchange Commission
DIF: Deposit Insurance Fund
SERPs: Supplemental Executive Retirement Plans
EBA: Excess Balance Account
SFCB: Springfield First Community Bank
EPS: Earnings per share
SFG: Specialty Finance Group
ESG: Environmental, Social and Governance
SOFR: Secured Overnight Financing Rate
Exchange Act: Securities Exchange Act of 1934, as amended
Springfield Bancshares: Springfield Bancshares, Inc.
FASB: Financial Accounting Standards Board
TA: Tangible assets
FDIC: Federal Deposit Insurance Corporation
TCE: Tangible common equity
Federal Reserve: Board of Governors of the Federal Reserve
TDRs: Troubled debt restructurings
System
TEY: Tax equivalent yield
FHLB: Federal Home Loan Bank
The Company: QCR Holdings, Inc.
FRB: Federal Reserve Bank of Chicago
TRBC: Total risk-based capital
FTEs: Full-time equivalents
Treasury: U.S. Department of the Treasury
GAAP: Generally Accepted Accounting Principles
USA Patriot Act: Uniting and Strengthening America by
GFED: Guaranty Federal Bancshares
Providing Appropriate Tools Required to Intercept
Goldman Sachs: Goldman Sachs and Company
and Obstruct Terrorism Act of 2001
Guaranty: Guaranty Bankshares, Ltd.
USDA: U.S. Department of Agriculture
Guaranty Bank: Guaranty Bank and Trust Company
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. The financial results of the Bates Companies and RB&T prior to their respective sales are included in this report. See Note 2 to the Consolidated Financial Statements for additional information.
QCBT is a commercial bank that serves the Iowa and Illinois Quad Cities and adjacent communities. CRBT is a commercial bank that serves Cedar Rapids, Iowa, and adjacent communities including Cedar Falls and Waterloo, Iowa. CSB is a commercial bank that serves Des Moines, Iowa, and adjacent communities. 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 a consolidated subsidiary formed during 2021 for the risk management of insurance and six non-consolidated subsidiaries formed for the issuance of trust preferred securities. See Note 13 to the Consolidated Financial Statements for a listing of these subsidiaries and additional information.
Significant accounting policies:
Accounting estimates: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill, fair value of financial instruments, and the fair value of securities.
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. All material intercompany accounts and transactions have been eliminated in consolidation.
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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Cash and due from banks: The subsidiary banks are required by federal banking regulations to maintain certain cash and due from bank reserves. There was no reserve requirement as of December 31, 2021 and 2020.
Investment securities: Investment securities HTM are those debt securities that the Company has the ability and intent to hold until maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. Such securities are carried at cost, net of ACL, adjusted for amortization of premiums and accretion of discounts. If the ability or intent to hold to maturity is not present for certain specified securities, such securities are considered AFS as the Company intends to hold them for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other factors. Securities AFS are carried at fair value. Unrealized gains or losses, net of taxes, are reported as increases or decreases in AOCI. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.
All debt securities are evaluated to determine whether declines in fair value below their amortized cost require an allowance. See further discussion in the Allowance section following.
Loans receivable, held for sale: Residential real estate loans which are originated and intended for resale in the secondary market in the foreseeable future are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows.
Loans receivable, held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are reported at amortized cost, net of the ACL. Amortized cost is the amount of unpaid principal adjusted for charge-offs, any discounts or premiums, and any deferred fees and/or costs on originated loans. Accrued interest receivable totaled $15 million at December 31, 2021 and was reported in other assets on the consolidated balance sheet. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans are classified as investing activities in the statement of cash flows.
The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company discloses the ACL (also known as the allowance) by portfolio segment, and credit quality information, nonaccrual status, and past due status by class of financing receivable. A portfolio segment is the level at which the Company develops and documents a systematic methodology to determine its ACL. A class of financing receivable is a further disaggregation of a portfolio segment based on risk characteristics and the Company’s method for monitoring and assessing credit risk. See the following information and Note 4 to the Consolidated Financial Statements.
The Company’s portfolio segments are as follows:
● C&I - revolving
● C&I - other
● CRE - owner occupied
● CRE - non-owner occupied
● Construction and land development
● Multi-family
● 1-4 family real estate
● Consumer
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The Company’s classes of loans receivable are as follows:
● C&I - revolving
● C&I - other
● CRE - owner occupied
● CRE - non-owner occupied
● Construction and land development
● Multi-family
● Direct financing leases
● 1-4 family real estate
● Consumer
Direct financing leases are considered a class of financing receivable within the overall loan/lease portfolio and are included in the C&I - other loan segments for ACL. The accounting policies for direct financing leases are disclosed below.
Generally, for all classes of loans receivable, loans are considered past due when contractual payments are delinquent for 30 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.
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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Direct finance leases receivable, held for investment: The Company leases machinery and equipment to customers under leases that qualify as direct financing leases for financial reporting and as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values (approximately 3% to 25% of the cost of the related equipment), are recorded as lease receivables when the lease is signed and the lease property delivered to the customer. The excess of the minimum lease payments and residual values over the cost of the equipment is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease on a basis that results in an approximate level rate of return on the unrecovered lease investment.
Lease income is recognized on the interest method. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipment’s fair value at lease termination, the Company relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends.
The Company’s estimates are reviewed continuously to ensure reasonableness; however, the amounts the Company will ultimately realize could differ from the estimated amounts. If the review results in a lower estimate than had been previously established, a determination is made as to whether the decline in estimated residual value is other-than-temporary. If the decline in estimated unguaranteed residual value is judged to be other-than-temporary, the accounting for the transaction is revised using the changed estimate. The resulting reduction in the investment is recognized as a loss in the period in which the estimate is changed. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and nonaccrual for direct financing leases are materially consistent with those described above for all classes of loan receivables.
TDRs: TDRs exist when the Company, for economic or legal reasons related to the borrower’s/lessee’s financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower/lessee and the Company) to the borrower/lessee that it would not otherwise consider. The Company attempts to maximize its recovery of the balances of the loans/leases through these various concessionary restructurings.
The following criteria, related to granting a concession, together or separately, create a TDR:
● A modification of terms of a debt such as one or a combination of:
o
The reduction of the stated interest rate to a rate lower than the current market rate for new debt with similar risk.
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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Allowance:
Allowance for Credit Losses on Loans and Leases
The ACL on loans/leases is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the eight portfolio segments at which the allowance will be measured. For all portfolio segments, the allowance is established as losses are estimated to have occurred through a provision that is charged to earnings. Credit losses on loans and leases, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan/lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions that are expected to exist through the contractual lives of the financial assets and that are reasonable and supportable - to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company will immediately and fully revert back to average historical losses when it can no longer develop reasonable and supportable forecasts.
A discussion of the risk characteristics and the allowance by each portfolio segment follows:
For C&I loans, the Company focuses on small and mid-sized businesses with primary operations as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The Company provides a wide range of C&I loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Approval is generally based on the following factors:
● Ability and stability of current management of the borrower;
● 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 and equipment. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash.
The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years with average terms ranging from three to five years. For lines of credit, the maximum term is generally 365 days.
In addition, the Company often takes personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.
CRE is segmented into the following categories generally based on source of repayment: Owner occupied CRE, non-owner occupied CRE and multi-family. CRE loans are also embedded in the following segments: construction and land development and 1-4 family real estate. The Company is an active lender of LIHTC project loans which includes both the construction and permanent loan. CRE loans are subject to underwriting standards and processes similar
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for CRE loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (CRE loans on improved property, raw land, land development, and commercial construction). These limits are the same limits, or in some situations, more conservative than those established by regulatory authorities.
Multi-family loans are typically repaid from rental income. LIHTC permanent loans are included in multi-family loans and the maximum term is generally up to 20 years.
The Company’s lending policy also includes guidelines for real estate appraisals, including minimum appraisal standards based on certain transactions. In addition, the Company often takes personal guarantees to help assure repayment.
Construction loans include any loans to finance the construction of any new residential property, CRE property, low-income housing project or major rehabilitation or expansion of existing commercial structures. Construction lending carries a higher degree of risk because of the difficulty of protecting the bank against various factors. The following components are evaluated when underwriting these types of loans:
● Borrowers/contractors experience and ability is analyzed with the type and size of project being considered.
● Financial ability to cover cost overruns.
● Reliability and thoroughness of cost projections and reasonable assurance that significant provisions are made for contingencies for soft costs especially interest and operating deficits.
● Reliability of the estimate of time to complete the project.
The land development portfolio also includes other land loans such as raw land. The raw land component involves considerable risk to the bank and is reserved for the bank’s most credit worthy borrowers. Land development loans are typically only made to experienced local developers with successful track records.
For all loans the allowance consists of pooled and individually analyzed components. Pooled loan allowances consist of quantitative and qualitative factors and cover loan classes that share similar risk characteristics with other assets in the segmented pool.
Quantitative Factors:
The quantitative factors are based on the probability of default and loss given default derived from historical net charge-off experience, repayment activity and default, remaining life, and current economic conditions as well as economic outlook.
Qualitative Factors:
The Company’s allowance methodology also has a qualitative component, the purpose of which is to take into consideration changes in current conditions that are not reflected in the quantitative analysis performed in determining its base credit loss rates.
The Company utilizes the following qualitative factors:
● National and local economy
● Loan volume and trend
● Loan quality
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
● Loan policies and procedures
● Management and staff experience
● Concentrations
● Collateral
● Loan review system
● Regulatory environment and oversight
The Company also provides for unique circumstances with qualitative adjustments as needed. The Company has been providing a separate qualitative allocation for the COVID-19 pandemic since the second quarter of 2020. The qualitative adjustments are based on the current conditions and applied as a percentage adjustment in addition to the calculated historical loss rates. The adjustment amount can be either positive or negative. These adjustments reflect the extent to which the Company expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated.
Economic forecasting:
The Company uses reasonable and supportable forecasts over the contractual term of the financial assets for each entity. This measurement is based upon relevant past events, historical experience and current conditions to determine the forecasted data which requires significant judgement. When management no longer has sufficient information to make a reasonable and supportable forecast, the data will then immediately revert back to the average historical performance for each entity. These forecasted adjustments are added to the qualitative adjustments and applied as a percentage adjustment in addition to the historical loss rates.
It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as, but not limited to, economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not be an effective indicator of the quality of the Company’s forecasting process, including the length of the forecast period.
Loans are determined to no longer share similar risk characteristics with other assets in the segmented pool when their scheduled payments of principal and interest according to the contractual terms of the loan agreement, have a greater probability of uncollectability based on current information and events. Such events include past due status of 90 days
or more, non-accrual status or classification of a substandard or doubtful risk rating.
Factors considered by management in determining risk rating and non-accrual status include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered low quality. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Allowances for these low quality loans with outstanding principal balances greater than $250,000 are measured on a case-by-case basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Low quality loans with principal balances equal to or less than $250,000 are placed into a unique pool and have the overall effective loss rate for that period applied to this low quality pool. However, should an asset within the low quality pool no longer have the same risk characteristic of the unique pool, it will be removed and individually analyzed as described above.
Some loans that are determined to no longer share risk characteristics with other assets in the segmented pool, may be deemed collateral dependent. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. When
it is determined that foreclosure is probable, the collateral’s fair value is used to estimate the financial assets expected credit losses for the current reporting period. This fair value is then reduced by the present value of estimated costs to sell. If it is determined that the asset is collateral-dependent but foreclosure is not probable, an institution can elect
to apply the practical expedient to use the collateral’s fair value to estimate the asset’s expected credit loss. The Company is choosing to utilize the practical expedient. When using the practical expedient on a collateral dependent
loan where repayment is reliant upon the sale of the collateral, the fair value of that collateral will be adjusted for estimated costs to sell. However, if the repayment is dependent on the operations of the company, the fair market value less estimated cost to sell cannot be used. Thus, the net present value of the cash-flow will be utilized.
For non-homogenous loans, the Company utilizes the following internal risk rating scale:
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.
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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
situations. This rating is intended as a transitional rating, therefore, it is generally not assigned to a borrower for a period of more than one year.
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, OREO, 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
For term C&I and CRE loans equal to or greater than $1,000,000, the subsidiary banks with an asset size of $1.0 billion or less as of the most recent fiscal year-end require a term loan review within 15 months of the most recent credit review. For the subsidiary banks with an asset size of over $1.0 billion as of the most recent fiscal year-end, a term loan review is required within 15 months of the most recent credit review for term C&I and CRE loans of $2.0 million or more. A credit review encompasses any new debt issuances or renewed debt facilities that are part of the borrower’s credit relationship. The term loan/credit 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, the Company has contracted an independent outside third party to review a sampling of C&I and CRE loans. Validation of the risk rating is part of this review as well.
The Company leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed. Direct financing leases are included in the C&I-other segment and allowance is established in the same manner as C&I loans.
Generally, the Company’s residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that mature or adjust in one to five years or fixed rate mortgages that mature in 15 years, and then retain these loans in their portfolios. Servicing rights are not presently retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.
The Company provides many types of installment and other consumer loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
For residential real estate loans, and installment and other consumer loans, these large groups of smaller balance homogenous loans follow the same methodology as commercial loans in terms of evaluation of risk characteristics, other than these may not be risk rated due to homogenous nature.
TDRs follow the same allowance methodology as described above for all loans. Once a loan is classified as a TDR, it will remain a TDR until the loan is paid off, charged off, moved to OREO or restructured into a new note without a concession. TDR status may also be removed if the TDR was restructured in a prior calendar year, is current, accruing interest and shows sustained performance.
Allowance for Credit Losses on Off-Balance Sheet Exposures
The Company estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by the Company. Management uses an estimated average utilization rate to determine the exposure of default. The allowance on OBS exposures is calculated using probability of default and loss given default using the same segmentation and qualitative factors used for loans and leases. The allowance for OBS exposures is recorded in the Other Liabilities section of the consolidated balance sheet. The Company recorded an ACL on OBS exposures upon adoption of ASU 2016-13. See Note 4.
Allowance for Credit Losses on Held to Maturity Debt Securities
The Company measures expected credit losses on held to maturity debt securities on a collective basis based on security type. The estimate of expected credit losses considers historical credit information from external sources. The Company’s held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions. The Company recorded an ACL on HTM debt securities upon adoption of ASU 2016-13. See Note 3.
Allowance for Credit Losses on Available for Sale Debt Securities
Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an available for sale debt security due to credit loss results in recording an ACL to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an ACL, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to the changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issues, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis. The Company did not record an ACL on AFS debt securities upon adoption of ASU 2016-13. See Note 3.
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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
● 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 write down 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.
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 as of November 30, 2021 and it was determined no goodwill impairment existed. See further information in Note 6 to the Consolidated Financial Statements.
Core deposit intangible: The Company has recorded a core deposit intangible from historical acquisitions. 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 10 years).
Customer list intangible: The Company had 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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
(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.
Swap transactions: The Company offers a loan swap program to certain commercial loan customers including C&I, CRE, and multi-family which includes LIHTC permanent loans. 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, non-refundable fee from the counterparty, dependent upon the pricing, that is recognized upon receipt from the counterparty. This upfront, non-refundable fee is recorded as noninterest income and classified as swap fee income/capital markets revenue.
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 and floating rate loans.
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, 2021 and 2020. 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 to the Consolidated Financial Statements, during the years ended December 31, 2021, 2020, and 2019, 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 $2.4 million, $2.2 million and $2.5 million, respectively. As required, management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
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
0.55%
0.60% to 0.81%
0.67%
Expected volatility
23.57%
25.49% to 25.70%
28.28%
Risk-free interest rate
1.62%
0.79% to 1.31%
2.90%
Expected life of option grants
6.25 years
6.25 years
6.25 years
Weighted-average grant date fair value
$
10.85
$
10.07
$
11.29
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
0.49% to 0.61%
0.55% to 0.81%
0.69% to 0.75%
Expected volatility
37.51% to 38.65%
24.59% to 36.38%
20.15% to 21.06%
Risk-free interest rate
0% to 0.06%
0.15% to 1.65%
2.02 % to 2.46%
Expected life of purchase grants
3 to 6 months
3 to 6 months
3 to 6 months
Weighted-average grant date fair value
$
7.67
$
6.03
$
4.81
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, 2021, there was $382 thousand of unrecognized compensation cost related to stock options granted, which is expected to be recognized over a weighted average period of 1.98 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 367,998 options that were in-the-money at December 31, 2021. The aggregate intrinsic value at December 31, 2021 was $11.6 million on options outstanding and $10.8 million on options exercisable. During the years ended December 31, 2021, 2020 and 2019, the aggregate intrinsic value of options exercised under the Company’s stock-based compensation was $419 thousand, $270 thousand, and $303 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.
As of December 31, 2021, there was $2.7 million of unrecognized compensation cost related to nonvested restricted stock awards expected to be recognized over a period of 1.7 years.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
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 to the Consolidated Financial Statements 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 statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
Correspondent banking fees: This is 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 HTM securities) will be presented at the net amount expected to be collected. Rather than the “incurred” model previously utilized, the standard requires the use of a forward-looking approach to recognizing all expected credit losses at the beginning of an asset’s life. For public companies, ASU 2016-13 became effective for fiscal years beginning after December 15, 2019, including 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 CARES Act’s enactment and continuing until the earlier of: (1) the date on which the national emergency related to the COVID-19 outbreak is terminated or (2) December 31, 2020.
On December 27, 2020, the Consolidated Appropriations Act was established, which extended this relief to the earlier of the first day of the Company’s fiscal year after the date of the national emergency terminates or January 1, 2022. Based upon guidance from regulators it was determined the Company could adopt ASU 2016-13 on January 1, 2021, which the Company did on January 1, 2021.
Results for reporting periods beginning after December 31, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP, which includes a change in terminology from “Allowance for estimated losses on loans/leases” to “Allowance for credit losses.” The Company adopted the standard using a modified retrospective approach and recorded an after-tax decrease to retained earnings of $937 thousand as of January 1, 2021 due to the adoption of ASU 2016-13. This transition adjustment included an $8.1 million decrease in the allowance related to loans and leases, established an ACL on held to maturity debt securities of $183 thousand and established an ACL on OBS credit exposures of $9.1 million. The Company did not record an ACL on available for sale securities upon adoption of ASU 2016-13.
The Company elected to not measure an ACL on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. The Company elected not to include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the financial statements and notes included on the following pages of this Form 10-K.
The Company elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital, because the impact on the capital ratios of the Company and its subsidiary banks was not significant.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
The following table illustrated the impact of ASU 2016-13 as of January 1, 2021:
As Reported
Pre-
Impact of
Under
ASU 2016-13
ASU 2016-13
ASU 2016-13
Adoption
Adoption
(dollars in thousands)
Assets:
Allowance for credit losses HTM securities
$
$
-
$
Loans*:
C&I
-
35,421
(35,421)
C&I - revolving
2,982
-
2,982
C&I - other
29,130
-
29,130
CRE
-
42,161
(42,161)
CRE - owner occupied
8,696
-
8,696
CRE - non owner occupied
11,428
-
11,428
Construction & Land Development
11,999
-
11,999
Multi-family
5,836
-
5,836
Direct financing leases
-
1,764
(1,764)
1-4 family real estate
5,042
-
5,042
Residential real estate
-
3,732
(3,732)
Consumer
1,161
1,298
(137)
Allowance for credit losses on loans
76,274
84,376
(8,102)
Liabilities:
Allowance for credit losses on OBS credit exposures
9,117
-
9,117
*Loan segmentation under ASU 2016-13 follows different methodology where that segmentation is collateral driven, causing certain segments to contain commercial and non-commercial borrowers, whereas pre-ASU 2016-13 segments were borrower driven.
Further discussion contained in this report regarding the loan and lease portfolio as well as ACL on HTM securities and OBS exposures is only relevant for the year 2021 and forward. Discussion in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 is still applicable for years prior to 2021.
Pending accounting developments:
In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease arrangements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.
Management has assessed the impacts of ASU 2020-4 and the related opportunities and risks involved in the LIBOR transition. Specifically, management has identified all of the financial instruments with LIBOR exposure which includes certain commercial loans, interest rate swaps, interest rate caps, and certain securities. In all cases, management has determined a plan of transition from LIBOR to a different index. The transition will happen prior to the expiration of published LIBOR rates on June 30, 2023. Management expects the transition to have a minimal impact to the Company’s financial statements.
Risks and uncertainties:
On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies (continued)
19 pandemic. The extent to which COVID-19 will continue to affect business operations, financial condition, credit quality, and results of operations will depend on future developments that cannot be predicted, including the duration and scope of the pandemic.
In the past year, the United States economy began to rebound from severe disruptions caused by the onset of the pandemic in March 2020. Economic conditions have begun to normalize with the availability of vaccines and treatments, increasing workforce employment and participation, the lessening of business and education restrictions, and demand for services beginning to return. The financial conditions of households and businesses was bolstered significantly by government stimulus, which contributed to the economic recovery but also brought about growing pains as evidenced by supply chain problems and rising prices. Although current economic conditions are more favorable than the prior year, the outlook for continued growth is characterized by elevated uncertainty with potential for unevenness across markets and sectors. Although household and business credit and liquidity is strong currently, further pandemic-related disruptions could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans; declines in assets under management, affecting wealth management revenues; negative impacts on regional economic conditions resulting in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations, and deposit availability; and impacts on the implementation of our growth strategy. While the recovery this past year has been strong, the pace of growth in the United States and globally could decline as a result of rising inflation, the pervasiveness of supply chain challenges across industries, and the persistence of the virus in variant forms.
Overall, we believe that the economic impact from COVID-19 will continue for some time and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity, and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, nor are there historical indicators to rely on in terms of how markets will react, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
Note 2. Sales/Mergers/Acquisitions
Sale of the Bates Companies
On August 12, 2020, the Company sold all of 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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 Company
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: (1) the “Purchase Price Premium”, plus (2) the aggregate net book value of the acquired assets, minus (3) 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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2. Sales/Mergers/Acquisitions (continued)
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.
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.
Note 3. Investment Securities
The amortized cost and fair value of investment securities as of December 31, 2021 and 2020 are summarized as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost*
Gains
(Losses)
Value
(dollars in thousands)
December 31, 2021:
Securities HTM:
Municipal securities
$
471,533
$
49,715
$
-
$
521,248
Other securities
1,050
-
(1)
1,049
$
472,583
$
49,715
$
(1)
$
522,297
Securities AFS:
U.S. treasuries and govt. sponsored agency securities
$
23,370
$
$
(296)
$
23,328
Residential mortgage-backed and related securities
92,431
2,672
(780)
94,323
Municipal securities
163,253
5,228
(215)
168,266
Asset-backed securities
26,372
-
27,124
Other securities
24,568
(30)
24,789
$
329,994
$
9,157
$
(1,321)
$
337,830
* HTM securities shown on the balance sheet of $472.4 million represent amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.
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
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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
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.
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, 2021 and 2020, 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, 2021:
Securities HTM:
Other securities
$
1,049
$
(1)
$
-
$
-
$
1,049
$
(1)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities
$
9,802
$
(156)
$
3,035
$
(140)
$
12,837
$
(296)
Residential mortgage-backed and related securities
5,363
(67)
19,406
(713)
24,769
(780)
Municipal securities
13,287
(211)
1,001
(4)
14,288
(215)
Other securities
4,528
(30)
-
-
4,528
(30)
$
32,980
$
(464)
$
23,442
$
(857)
$
56,422
$
(1,321)
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)
At December 31, 2021, the investment portfolio included 622 securities. Of this number, 42 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.17% of the total aggregate amortized cost. Of these 42 securities, 13 securities had an unrealized loss for 12 months or more.
On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses held to maturity securities by major security type for the year ended December 31, 2021.
Year Ended December 31, 2021
Municipal
Other
securities
securities
Total
(dollars in thousands)
Allowance for credit losses:
Beginning balance
$
-
$
-
$
-
Impact of adopting ASU 2016-13
Provision for credit loss expense
(1)
Balance, ending
$
$
-
$
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in this Form 10-K, for a discussion of the impact of the adoption of ASU 2016-13.
All sales of securities for the years ended December 31, 2021, 2020 and 2019, 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
$
23,874
$
38,562
$
30,055
Gross gains from sales of securities
-
2,553
Gross losses from sales of securities
(88)
(69)
(206)
The amortized cost and fair value of securities as of December 31, 2021, by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the 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 table.
Amortized Cost
Fair Value
(dollars in thousands)
Securities HTM:
Due in one year or less
$
2,636
$
2,651
Due after one year through five years
23,246
23,800
Due after five years
446,701
495,846
$
472,583
$
522,297
Securities AFS:
Due in one year or less
$
5,873
$
5,943
Due after one year through five years
5,600
5,764
Due after five years
199,718
204,676
211,191
216,383
Residential mortgage-backed and related securities
92,431
94,323
Asset-backed securities
26,372
27,124
$
329,994
$
337,830
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
$
278,699
$
289,939
Securities AFS:
Municipal securities
158,262
163,070
Other securities
24,568
24,789
$
182,830
$
187,859
As of December 31, 2021 and 2020, investment securities with a carrying value of $246.5 million and $212.8 million, respectively, were pledged on public deposits, FHLB advances, customer repurchase agreements, derivative liabilities, in connection with a Goldman Sachs cash management program and for other purposes as required or permitted by law.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3. Investment Securities (continued)
As of December 31, 2021, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company held investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.
As of December 31, 2020, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company 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.
Both general obligation and revenue bonds are diversified across many issuers. As of December 31, 2021 and 2020, the Company held revenue bonds of two issuers, 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, 2021, all were within policy limitations approved by the charter’s board of directors. Policy limits are calculated as a percentage of total risk-based capital.
As of December 31, 2021, 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, 2021 and 2020 is presented as follows:
December 31, 2021
(dollars in thousands)
C&I:
C&I - revolving
$
248,483
C&I - other *
1,346,602
1,595,085
CRE - owner occupied
421,701
CRE - non-owner occupied
646,500
Construction and land development
918,571
Multi-family
600,412
Direct financing leases**
45,191
1-4 family real estate***
377,361
Consumer
75,311
4,680,132
Allowance for credit losses
(78,721)
$
4,601,411
** Direct financing leases:
Net minimum lease payments to be received
$
49,362
Estimated unguaranteed residual values of leased assets
Unearned lease/residual income
(4,336)
45,191
Plus deferred lease origination costs, net of fees
45,759
Less allowance for credit losses
(1,546)
$
44,213
December 31, 2020
(dollars in thousands)
C&I loans*
$
1,726,723
CRE loans
Owner-occupied CRE
496,471
Commercial construction, land development, and other land
541,455
Other non owner-occupied CRE
1,069,703
2,107,629
Direct financing leases **
66,016
Residential real estate loans ***
252,121
Installment and other consumer loans
91,302
4,243,791
Plus deferred loan/lease origination costs, net of fees
7,338
4,251,129
Less allowance
(84,376)
$
4,166,753
** Direct financing leases:
Net minimum lease payments to be received
$
72,940
Estimated unguaranteed residual values of leased assets
Unearned lease/residual income
(7,163)
66,016
Plus deferred lease origination costs, net of fees
1,072
67,088
Less allowance
(1,764)
$
65,324
* Includes equipment financing agreements outstanding at m2, totaling $225.1 million and $171.5 million as of December 31, 2021 and 2020, respectively and PPP loans totaling $28.2 million and $273.1 million as of December 31, 2021 and December 31, 2020, respectively.
**
Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors 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 majority of leases with residual values contain a lease options rider which requires the lessee to pay the residual
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
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, 2021, the Company had two leases remaining with residual values totaling $165 thousand that were not protected with a lease end options rider. At December 31, 2020, the Company had three leases remaining with residual values totaling approximately $239 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, 2021, 2020, and 2019.
***Includes residential real estate loans held for sale totaling $3.8 million as of December 31, 2021 and 2020.
Changes in accretable yield for the loans acquired in mergers and acquisitions are as follows:
For the year ended December 31, 2021
PCI
Performing
Loans
Loans
Total
(dollars in thousands)
Balance at the beginning of the period
$
-
$
(3,139)
$
(3,139)
Accretion recognized
-
1,606
1,606
Balance at the end of the period
$
-
$
(1,533)
$
(1,533)
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)
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, 2021 and 2020 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:
C&I - revolving
$
248,483
$
-
$
-
$
-
$
-
$
248,483
C&I - other
1,337,034
7,308
1,400
1,346,602
CRE - owner occupied
421,701
-
-
-
-
421,701
CRE - non-owner occupied
646,500
-
-
-
-
646,500
Construction and land development
918,498
-
-
-
918,571
Multi-family
600,412
-
-
-
-
600,412
Direct financing leases
44,174
-
45,191
1-4 family real estate
374,912
1,325
-
377,361
Consumer
75,272
-
-
75,311
$
4,666,986
$
2,202
$
8,184
$
$
2,759
$
4,680,132
As a percentage of total loan/lease portfolio
99.72
%
0.05
%
0.17
%
0.00
%
0.06
%
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
$
1,720,058
$
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
%
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, 2021 and 2020 is presented as follows:
Accruing Past
Nonaccrual
Nonaccrual
Due 90 Days or
Loans/Leases
Loans/Leases
Percentage of
Classes of Loans/Leases
More
with an ACL
without an ACL
Total NPLs
Total NPLs
(dollars in thousands)
C&I:
C&I - revolving
$
-
$
-
$
-
$
-
-
%
C&I - other
1,130
1,401
50.77
CRE - owner occupied
-
-
-
-
-
CRE - non-owner occupied
-
-
-
-
-
Construction and land development
-
-
2.64
Multi-family
-
-
-
-
-
Direct financing leases
-
30.69
1-4 family real estate
-
-
14.78
Consumer
-
-
1.12
$
$
1,757
$
1,002
$
2,760
100.00
%
The Company did not recognize any interest income on nonaccrual loans during the year ended December 31, 2021.
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, accruing past due 90 days or more included $984 thousand of TDRs, including $836 thousand in CRE loans, $100
thousand in direct financing leases, and $48 thousand in installment loans.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Changes in the ACL loans/leases by portfolio segment for the years ended December 31, 2021, 2020, and 2019 are presented as follows:
Year Ended December 31, 2021
CRE
CRE
Construction
Direct
Residential
1-4
C&I -
C&I -
Owner
Non-Owner
and Land
Multi-
Financing
Real
Family
C&I
Revolving
Other*
CRE
Occupied
Occupied
Development
Family
Leases
Estate
Real Estate
Consumer
Total
(dollars in thousands)
Balance, beginning
$
35,421
$
-
$
-
$
42,161
$
-
$
-
$
-
$
-
$
1,764
$
3,732
$
-
$
1,298
$
84,376
Adoption of ASU 2016-13
(35,421)
2,982
29,130
(42,161)
8,696
11,428
11,999
5,836
(1,764)
(3,732)
5,042
(137)
(8,102)
Provision
-
(1,451)
-
(198)
(1,088)
4,973
3,653
-
-
(603)
(509)
5,702
Charge-offs
-
-
(2,287)
-
-
(1,876)
-
(150)
-
-
(179)
(46)
(4,538)
Recoveries
-
-
-
-
-
-
-
1,283
Balance, ending
$
-
$
3,907
$
25,982
$
-
$
8,501
$
8,549
$
16,972
$
9,339
$
-
$
-
$
4,541
$
$
78,721
*Included within the C&I-other column are ACL on leases with a beginning balance of $1.78 million, adoption impact of $685 thousand, negative provision of negative $703 thousand, charge-offs of $458 thousand and recoveries of $258 thousand. ACL on leases was $1.5 million as of December 31, 2021.
Year Ended December 31, 2020
Direct Financing
Residential Real
Installment and
C&I
CRE
Leases
Estate
Other Consumer
Total
(dollars in thousands)
Balance, beginning
$
16,072
$
15,379
$
1,464
$
1,948
$
1,138
$
36,001
Provision
22,899
28,671
2,148
1,755
55,704
Charge-offs
(4,199)
(2,071)
(1,993)
-
(120)
(8,383)
Recoveries
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)
Provision
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.
The composition of the ACL loans/leases by portfolio segment based on evaluation method are as follows:
Amortized Cost of Loans Receivable
Allowance for Credit Losses
Individually
Collectively
Individually
Collectively
Evaluated for
Evaluated for
Evaluated for
Evaluated for
Credit Losses
Credit Losses
Total
Credit Losses
Credit Losses
Total
(dollars in thousands)
C&I :
C&I - revolving
$
2,638
$
245,845
$
248,483
$
$
3,739
$
3,907
C&I - other*
13,456
1,378,337
1,391,793
25,239
25,982
16,094
1,624,182
1,640,276
28,978
29,889
CRE - owner occupied
3,841
417,860
421,701
1,264
7,237
8,501
CRE - non-owner occupied
25,006
621,494
646,500
-
8,549
8,549
Construction and land development
10,436
908,135
918,571
16,961
16,972
Multi-family
-
600,412
600,412
-
9,339
9,339
1-4 family real estate
2,950
374,411
377,361
4,212
4,541
Consumer
74,961
75,311
$
58,677
$
4,621,455
$
4,680,132
$
2,554
$
76,167
$
78,721
*Included within the C&I - other category are leases individually evaluated of $847 thousand with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
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
%
Information for impaired loans/leases prior to adoption of ASU 2016-13 on January 1, 2021, is presented in the tables below. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan/lease. The unpaid principal balance represents the recorded balance outstanding on the loan/lease prior to any partial charge-offs.
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 year ended December 31, 2020 and 2019 are presented as follows:
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
$
$
*Impaired loans/leases prior to adoption of ASU 2016-13 and those individually evaluated under ASU 2016-13 for which no allowance has been provided have adequate collateral, based on management’s current estimates.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
The following table present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses:
Non
Commercial
Owner-Occupied
Owner Occupied
Assets
Real Estate
Real Estate
Securities
Equipment
Other
Total
(dollars in thousands)
C & I:
C&I - revolving
$
2,518
$
-
$
-
$
-
$
$
-
$
2,638
C&I - other*
-
2,471
9,877
13,456
3,201
-
2,471
9,997
16,094
CRE - owner occupied
-
-
3,841
-
-
-
3,841
CRE - non-owner occupied
-
25,006
-
-
-
-
25,006
Construction and land development
-
10,362
-
-
-
10,436
Multi-family
-
-
-
-
-
-
-
1-4 family real estate
-
2,133
-
-
-
2,950
Consumer
-
-
-
$
3,201
$
36,185
$
8,859
$
$
9,998
$
$
58,677
*Included within the C&I - other category are leases individually evaluated of $847 thousand with primary collateral of equipment.
For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family real estate loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.
For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Prior to adoption of ASU 2016-13, this included C&I equipment financing agreements, direct financing leases, residential real estate loans, and installment and other consumer loans. Delinquency status is updated daily by the Company’s loan system.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
The following tables show the credit quality indicator of loans by class of receivable and year of origination as of December 31, 2021;
Term Loans
Amortized Cost Basis by Origination Year
Revolving
Loans
Internally Assigned
Amortized
Risk Rating
Prior
Cost Basis
Total
(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)
$
-
$
-
$
-
$
-
$
-
$
-
$
245,212
$
245,212
Special Mention (Rating 6)
-
-
-
-
-
-
Substandard (Rating 7)
-
-
-
-
-
-
2,638
2,638
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total C&I - revolving
$
-
$
-
$
-
$
-
$
-
$
-
$
248,483
$
248,483
C&I - other
Pass (Ratings 1 through 5)
$
391,532
$
362,256
$
133,678
$
82,177
$
83,419
$
53,310
$
-
$
1,106,372
Special Mention (Rating 6)
3,580
-
-
4,640
Substandard (Rating 7)
2,366
7,138
-
10,507
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total C&I - other
$
395,618
$
364,995
$
141,165
$
82,573
$
83,810
$
53,358
$
-
$
1,121,519
CRE - owner occupied
Pass (Ratings 1 through 5)
$
118,014
$
143,045
$
47,660
$
30,523
$
17,038
$
46,185
$
11,477
$
413,942
Special Mention (Rating 6)
-
-
1,846
1,202
-
3,918
Substandard (Rating 7)
-
-
2,080
1,239
-
-
3,841
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total CRE - owner occupied
$
118,651
$
143,045
$
49,740
$
31,995
$
19,406
$
47,387
$
11,477
$
421,701
CRE - non-owner occupied
Pass (Ratings 1 through 5)
$
176,813
$
145,712
$
88,697
$
63,849
$
55,752
$
28,808
$
8,592
$
568,223
Special Mention (Rating 6)
7,295
20,881
1,802
12,230
5,494
5,580
-
53,282
Substandard (Rating 7)
1,105
6,297
15,563
1,087
-
-
24,995
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total CRE - non-owner occupied
$
185,213
$
172,890
$
106,062
$
77,166
$
62,189
$
34,388
$
8,592
$
646,500
Construction and land development
Pass (Ratings 1 through 5)
$
394,045
$
248,360
$
126,941
$
106,790
$
3,012
$
-
$
13,277
$
892,425
Special Mention (Rating 6)
-
-
-
-
-
-
-
-
Substandard (Rating 7)
10,362
-
-
-
-
-
-
10,362
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total Construction and land development
$
404,407
$
248,360
$
126,941
$
106,790
$
3,012
$
-
$
13,277
$
902,787
Multi-family
Pass (Ratings 1 through 5)
$
266,120
$
197,224
$
74,033
$
47,486
$
5,609
$
7,376
$
2,564
$
600,412
Special Mention (Rating 6)
-
-
-
-
-
-
-
-
Substandard (Rating 7)
-
-
-
-
-
-
-
-
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total Multi-family
$
266,120
$
197,224
$
74,033
$
47,486
$
5,609
$
7,376
$
2,564
$
600,412
1-4 family real estate
Pass (Ratings 1 through 5)
$
47,097
$
24,029
$
16,188
$
7,569
$
5,845
$
5,213
$
3,079
$
109,020
Special Mention (Rating 6)
-
-
-
-
-
-
Substandard (Rating 7)
-
-
-
-
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total 1-4 family real estate
$
47,134
$
24,207
$
16,188
$
8,006
$
6,046
$
5,213
$
3,079
$
109,873
Consumer
Pass (Ratings 1 through 5)
$
1,558
$
$
$
$
-
$
$
2,031
$
5,224
Special Mention (Rating 6)
-
-
-
-
-
-
-
-
Substandard (Rating 7)
-
-
-
-
-
-
Doubtful (Rating 8)
-
-
-
-
-
-
-
-
Total Consumer
$
1,558
$
$
$
$
-
$
$
2,031
$
5,361
Total
$
1,418,701
$
1,151,208
$
514,237
$
354,369
$
180,072
$
148,546
$
289,503
$
4,056,636
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
Term Loans
Amortized Cost Basis by Origination Year
Revolving
Loans
Amortized
Delinquency Status *
Prior
Cost Basis
Total
(dollars in thousands)
C&I - other
Performing
$
117,163
$
54,261
$
33,390
$
14,274
$
4,200
$
$
-
$
223,743
Nonperforming
-
1,340
Total C&I - other
$
117,258
$
54,438
$
34,034
$
14,642
$
4,242
$
$
-
$
225,083
Direct financing leases
Performing
$
6,690
$
12,130
$
11,638
$
9,235
$
3,695
$
$
-
$
44,344
Nonperforming
-
-
-
Total Direct financing leases
$
6,690
$
12,862
$
11,638
$
9,287
$
3,713
$
1,001
$
-
$
45,191
Construction and land development
Performing
$
12,857
$
2,080
$
-
$
$
-
$
-
$
$
15,711
Nonperforming
-
-
-
-
-
-
Total Construction and land development
$
12,857
$
2,080
$
-
$
$
$
-
$
$
15,784
1-4 family real estate
Performing
$
104,005
$
78,713
$
19,001
$
10,784
$
10,533
$
43,976
$
$
267,080
Nonperforming
-
-
-
-
-
Total 1-4 family real estate
$
104,005
$
78,713
$
19,001
$
10,890
$
10,533
$
44,278
$
$
267,488
Consumer
Performing
$
4,891
$
4,020
$
2,114
$
1,660
$
$
1,230
$
55,411
$
69,919
Nonperforming
-
-
-
-
Total Consumer
$
4,891
$
4,020
$
2,129
$
1,660
$
$
1,231
$
55,411
$
69,950
Total
$
245,701
$
152,113
$
66,802
$
36,973
$
19,169
$
46,979
$
55,759
$
623,496
*Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual and accruing loans/leases that are greater than or equal to 90 days past due.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
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,
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)
$
1,506,578
$
488,478
$
530,297
$
999,931
$
3,525,284
96.25
%
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)
-
-
-
-
-
-
%
$
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
%
* Prior to adoption of ASU 2016-13: Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual, accruing loans/leases that are greater than or equal to 90 days past due, and accruing TDRs.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
TDRs totaled $494 thousand and $1.7 million as of December 31, 2021 and 2020, 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, 2021 and 2020. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of restructuring.
Pre-
Post-
Modification
Modification
Number of
Recorded
Recorded
Specific
Classes of Loans/Leases
Loans / Leases
Investment
Investment
Allowance
(dollars in thousands)
CONCESSION - Extension of Maturity
1-4 family real estate
$
2,532
$
2,532
$
CONCESSION - Interest Rate Adjusted Below Market
1-4 family real estate
$
$
$
Consumer
$
$
$
TOTAL
$
2,599
$
2,599
$
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
$
-
Of the loans restructured reported above, one with a post-modification recorded investment totaling $54 thousand was on nonaccrual as of December 31, 2021 and two with a post-modification recorded investment totaling $880 thousand were on nonaccrual as of December 31, 2020.
For the year ended December 31, 2021, the Company did not have any TDRs 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, 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.
The Company did not have any TDRs that were restructured and charged off in 2021. There were five TDRs that were both restructured and charged off in 2020, totaling $266 thousand.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
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 clarified that this guidance could continue to be applied through December 31, 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. On December 27, 2020, the Consolidated Appropriations Act was established, which extended the eligibility window for TDR relief to the earlier of (A) 60 days after the termination of the presidentially-declared emergency or (B) January 1, 2022. Accordingly, the Company has ended the LRP.
The Company implemented its LRP during the first quarter of 2020 offering to extend qualifying customers’ payments for 90 days. As of December 31, 2021, there were no bank modifications of loans and six m2 modifications of loans and leases totaling $2.4 million, representing 0.05% of the total loan and lease portfolio that remained on deferral as of such date.
The adoption of ASU 2016-13 on January 1, 2021 required an allowance for OBS exposures, specifically on unfunded commitments. Changes in the ACL for OBS exposures for the year ended December 31, 2021 is presented as follows:
For the Year Ended
December 31, 2021
(dollars in thousands)
Balance, beginning
$
-
Impact of adopting ASU 2016-13
9,117
Provisions credited to expense
(2,231)
Balance, ending
$
6,886
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4. Loans/Leases Receivable (continued)
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, 2021, 2020, and 2019, is as follows:
(dollars in thousands)
Balance, beginning
$
100,361
$
112,830
$
125,496
Net decrease due to change in related parties
(18,832)
(1,601)
(12,161)
Advances
42,817
43,238
98,708
Repayments
(23,448)
(54,106)
(99,213)
Balance, ending
$
100,898
$
100,361
$
112,830
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, 2021 and 2020 as follows:
Percentage of
Percentage of
Total
Total
Industry Name
Balance
Loans/Leases
Balance
Loans/Leases
(dollars in thousands)
Lessors of Residential Buildings*
$
1,706,092
%
$
1,134,178
%
Lessors of Non-Residential Buildings
586,672
%
591,398
%
Administration of Urban Planning & Community & Rural Development
120,416
%
138,514
%
* Includes loans on LIHTC projects
Note 5. Premises and Equipment
The following summarizes the components of premises and equipment as of December 31, 2021 and 2020:
(dollars in thousands)
Land
$
12,513
$
13,403
Buildings (useful lives 15 to 39 years)
70,555
67,844
Furniture and equipment (useful lives 3 to 15 years)
47,822
42,667
Premises and equipment
130,890
123,914
Less accumulated depreciation
52,360
51,221
Premises and equipment, net
$
78,530
$
72,693
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5. Premises and Equipment (continued)
As a lessee, the Company has entered into operating leases for certain branch locations. Total lease expenses were $636 thousand and $662 thousand for the year ended December 31, 2021 and 2020, respectively.
At December 31, 2021 and 2020, 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 $1.3 million and $1.7 million, respectively. No new ROU assets were capitalized during the year ended December 31, 2021 or 2020.
At December 31, 2021, the contractual maturities of operating lease liabilities were as follows:
Amount
Year ending December 31:
(dollars in thousands)
Thereafter
$
1,469
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 $4.0 million and $5.1 million for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company’s net investment in direct financing leases was $44.2 million and $65.3 million, respectively.
As of December 31, 2021, the contractual maturities of sales-type and direct financing lease receivables were as follows:
Amount
Year ending December 31:
(dollars in thousands)
2,590
12,461
14,319
14,508
5,019
Thereafter
Total lease payments receivable
$
49,362
Unguaranteed residual values
Unearned lease/residual income
(4,336)
$
45,191
Plus deferred origination costs, net of fees
$
45,759
Less allowance
(1,546)
Total lease payments receivable
$
44,213
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The
Note 6. Goodwill and Intangibles
The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2021, 2020 and 2019:
(dollars in thousands)
Balance at the beginning of period
$
74,066
$
74,748
$
77,832
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
$
74,066
$
74,748
The following table presents the goodwill by reportable segment:
December 31, 2021
December 31, 2020
December 31, 2019
(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
-
-
$
74,066
$
74,066
$
74,748
At November 30, 2021 and 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 had on the Company during 2020, 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 to the Consolidated Financial Statements.
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 discussions with existing wealth management providers in the surrounding Rockford market.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6. Goodwill and Intangibles (continued)
The following table presents the changes in core deposit intangibles (included in Intangibles on the consolidated balance sheets) during the years ended December 31, 2021, 2020 and 2019:
(dollars in thousands)
Balance at the beginning of the period
$
11,381
$
13,466
$
15,595
Amortization expense
(2,032)
(2,085)
(2,129)
Balance at the end of the period
$
9,349
$
11,381
$
13,466
Gross carrying amount
$
19,255
$
19,255
$
19,255
Accumulated amortization
(9,906)
(7,874)
(5,789)
Net book value
$
9,349
$
11,381
$
13,466
The following table presents the core deposit intangibles by reportable segment:
December 31, 2021
December 31, 2020
December 31, 2019
(dollars in thousands)
Commercial Banking:
CRBT
$
1,702
$
2,189
$
2,684
CSB
2,653
3,305
3,980
SFCB
4,994
5,887
6,802
$
9,349
$
11,381
$
13,466
The following table presents the estimated amortization of the core deposit intangibles:
Amount
Years ending December 31,
(dollars in thousands)
$
1,971
1,776
1,623
1,535
1,284
Thereafter
1,160
$
9,349
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. There was no activity during the year ended December 31, 2021.
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.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Derivatives and Hedging Activities
Derivatives are summarized as follows as of December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
(dollars in thousands)
Assets:
Interest rate caps - hedged
$
$
Interest rate caps
Interest rate swaps
221,055
222,431
$
222,220
$
222,757
Liabilities:
Interest rate swaps - hedged
$
(4,080)
$
(6,839)
Interest rate swaps
(221,055)
(222,431)
$
(225,135)
$
(229,270)
The Company uses interest rate swap and cap instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.
The Company entered into interest rate caps to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815. An initial premium of $3.5 million was paid upfront for the caps executed. The details of the interest rate caps are as follows:
Balance Sheet
Fair Value as of
Hedged Item
Effective Date
Maturity Date
Location
Notional Amount
Strike Rate
December 31, 2021
December 31, 2020
(dollars in thousands)
Deposits
1/1/2020
1/1/2023
Derivatives - Assets
$
25,000
1.75
%
$
$
Deposits
1/1/2020
1/1/2023
Derivatives - Assets
50,000
1.57
Deposits
1/1/2020
1/1/2023
Derivatives - Assets
25,000
1.80
Deposits
1/1/2020
1/1/2024
Derivatives - Assets
25,000
1.75
Deposits
1/1/2020
1/1/2024
Derivatives - Assets
50,000
1.57
Deposits
1/1/2020
1/1/2024
Derivatives - Assets
25,000
1.80
Deposits
1/1/2020
1/1/2025
Derivatives - Assets
25,000
1.75
Deposits
1/1/2020
1/1/2025
Derivatives - Assets
50,000
1.57
Deposits
1/1/2020
1/1/2025
Derivatives - Assets
25,000
1.80
$
300,000
$
$
In December 2020, the Company redesignated three of its interest rate caps, which had been purchased in 2019 for $800 thousand. The caps, which were designated as cash flow hedges at the time of purchase, 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. 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, 2021
December 31, 2020
(dollars in thousands)
1/1/2020
1/1/2023
Derivatives - Assets
$
25,000
1.90
%
$
$
2/1/2020
2/1/2024
Derivatives - Assets
25,000
1.90
3/1/2020
3/1/2025
Derivatives - Assets
25,000
1.90
$
75,000
$
$
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Derivatives and Hedging Activities (continued)
The Company entered into interest rate swaps to hedge against the risk of declining interest rates on floating rate loans. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
Balance Sheet
Fair Value as of
Hedged Item
Effective Date
Maturity Date
Location
Notional Amount
Receive Rate
Pay Rate
December 31, 2021
December 31, 2020
(dollars in thousands)
Loans
7/1/2021
7/1/2031
Derivatives - Liabilities
35,000
1.40
%
2.81
%
(17)
N/A
Loans
7/1/2021
7/1/2031
Derivatives - Liabilities
50,000
1.40
%
2.81
%
(25)
N/A
Loans
7/1/2021
7/1/2031
Derivatives - Liabilities
40,000
1.40
%
2.81
%
(34)
N/A
Loans
7/1/2021
7/1/2031
Derivatives - Liabilities
25,000
1.40
%
2.81
%
(13)
N/A
$
150,000
$
(89)
$
N/A
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, 2021
December 31, 2020
(dollars in thousands)
QCR Holdings Statutory Trust II
9/30/2018
9/30/2028
Derivatives - Liabilities
10,000
3.07
%
5.85
%
(1,035)
(1,767)
QCR Holdings Statutory Trust III
9/30/2018
9/30/2028
Derivatives - Liabilities
8,000
3.07
%
5.85
%
(828)
(1,414)
QCR Holdings Statutory Trust V
7/7/2018
7/7/2028
Derivatives - Liabilities
10,000
1.67
%
4.54
%
(996)
(1,721)
Community National Statutory Trust II
9/20/2018
9/20/2028
Derivatives - Liabilities
3,000
2.38
%
5.17
%
(309)
(529)
Community National Statutory Trust III
9/15//2018
9/15/2028
Derivatives - Liabilities
3,500
1.95
%
4.75
%
(360)
(616)
Guaranty Bankshares Statutory Trust I
9/15/2018
9/15/2028
Derivatives - Liabilities
4,500
1.95
%
4.75
%
(463)
(792)
$
39,000
$
(3,991)
$
(6,839)
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, 2021
December 31, 2020
(dollars in thousands)
Unrealized loss at beginning of period, net of tax
$
(7,632)
$
(3,915)
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 gain (loss) recognized in other comprehensive income, net of tax
2,562
(5,406)
Unrealized loss at end of period, net of tax
$
(4,373)
$
(7,632)
As discussed under “Swap Transactions” in Note 1 to the Consolidated Financial Statements, 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, non-refundable fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty. Because the Company acts as an intermediary for the customer, changes in the fair value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7. Derivatives and Hedging Activities (continued)
Interest rate swaps that are not designated as hedging instruments are summarized as follows:
December 31, 2021
December 31, 2020
Notional Amount
Estimated Fair Value
Notional Amount
Estimated Fair Value
(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts
$
2,024,599
$
221,055
$
1,495,251
$
222,431
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts
$
2,024,599
$
221,055
$
1,495,251
$
222,431
The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the years ended December 31, 2021 and 2020 are as follows:
Year Ended December 31, 2021
Year Ended December 31, 2020
Year Ended December 31, 2019
Interest and
Interest
Interest and
Interest
Interest and
Interest
Dividend Income
Expense
Dividend Income
Expense
Dividend Income
Expense
(dollars in thousands)
Income and expense line items presented in the consolidated statements of income
$
200,155
$
21,922
$
198,373
$
31,423
$
216,076
$
60,517
The effects of cash flow hedging:
Gain (loss) on cash flow hedges:
Interest rate caps on deposits
-
-
-
-
Interest rate swaps on variable rate loans
1,006
-
-
-
-
Interest rate swaps on TRUPS
-
1,114
-
-
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, 2021
December 31, 2020
(dollars in thousands)
Cash
$
21,100
$
45,719
U.S treasuries and govt. sponsored agency securities
3,555
3,628
Municipal securities
65,104
85,937
Residential mortgage-backed and related securities
139,166
89,646
$
228,925
$
224,930
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company 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 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
base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. The majority of the Company’s swapped loan portfolio consists of loans on projects, with loan-to-values including the potential swap exposure well below 65%. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8. Deposits
The aggregate amount of certificates of deposit, each with a minimum denomination of $250,000, was $169.0 million and $175.6 million as of December 31, 2021 and 2020, respectively.
As of December 31, 2021, the scheduled maturities of certificates of deposit were as follows:
Amount
(dollars in thousands)
Year ending December 31:
$
334,214
57,712
16,747
9,802
2,873
Thereafter
-
$
421,348
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
$
3,080
$
3,668
Residential mortgage-backed and related securities
3,270
4,772
$
6,350
$
8,440
The Company had a $129.5 million PUD LOC with the FHLB of Des Moines for the purpose of providing additional collateral on public deposits as of December 31, 2021. As of December 31, 2020, the Company had a $110.5 million PUD LOC with the FHLB of Des Moines. There were no amounts outstanding under these letters of credit as of December 31, 2021 or 2020.
There were no prepayments of brokered certificates of deposits in 2021. The Company prepaid brokered and public time deposits totaling $29.2 million in 2020 resulting in a loss of $576 thousand.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9. Short-Term Borrowings
Short-term borrowings as of December 31, 2021 and 2020 are summarized as follows:
(dollars in thousands)
Federal funds purchased
3,800
5,430
$
3,800
$
5,430
Information concerning federal funds purchased is summarized as follows for the years ended December 31, 2021 and 2020:
(dollars in thousands)
Average daily balance
$
6,280
$
19,573
Average daily interest rate
0.08
%
0.36
%
Maximum month-end balance
$
11,320
$
30,430
Weighted average rate as of December 31
0.08
%
0.06
%
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, 2021 and 2020 is as follows:
December 31, 2021
December 31, 2020
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:
$
-
-
%
$
15,000
0.29
%
15,000
0.31
-
-
Total FHLB advances
$
15,000
0.31
%
$
15,000
0.29
%
The Company prepaid $55.3 million of FHLB advances in 2020 with excess funds generated by strong deposit growth. The loss on the prepayment of the FHLB advances totaled $1.9 million for the year ended December 31, 2020.
Advances are collateralized by loans of $1.3 billion and $1.1 billion as of December 31, 2021 and 2020, respectively, 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 $334 thousand and $590 thousand as of December 31, 2021 and 2020, respectively, in aggregate. The Company continues to pledge loans under blanket liens to provide off balance sheet liquidity.
All advances outstanding as of December 31, 2021 and 2020 are short-term advances from the FHLB. These advances have maturities ranging from 1 day to 1 month.
As of December 31, 2021 and 2020, the subsidiary banks held $7.8 million and $6.6 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
In the second quarter of 2021, the Company renewed its revolving line of credit. At renewal, the line amount remained unchanged at $25.0 million for which there was no outstanding balance as of December 31, 2021. Interest on the revolving line of credit is calculated at the effective Prime Rate plus 2.25% per annum (5.50% at December 31, 2021). 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, 2021 and 2020 are summarized as follows:
(dollars in thousands)
Secured
$
61,657
$
287,076
Unsecured
456,000
456,000
$
517,657
$
743,076
Included in the Secured category above, 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, 2021 and 2020 are summarized as follows:
Amount Outstanding
Interest Rate
Amount Outstanding
Interest Rate
as of December 31, 2021
as of December 31, 2021
as of December 31, 2020
as of December 31, 2020
Maturity Date
(dollars in thousands)
Subordinated debenture dated 9/14/20
$
50,000
5.125
%
$
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
%
4/30/2026
Subordinated debenture dated 9/15/16*
-
-
%
3,000
4.00
%
9/15/2026
Debt issuance costs
(1,150)
(1,309)
Total Subordinated Debentures
$
113,850
$
118,691
*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,
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.
In addition, the Company has $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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12. Subordinated Notes (continued)
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 $1.2 million and $1.3 million at December 31, 2021 and 2020, 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 which were prepaid in full in 2021 with no resulting gain or loss.
Note 13. Junior Subordinated Debentures
Junior subordinated debentures are summarized as of December 31, 2021 and 2020 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***
(2,055)
(2,217)
$
38,155
$
37,993
* As part of the acquisition of Community National in 2013, the Company assumed two junior subordinated debentures with a total fair value of $4.2 million.
** As part of the acquisition of Guaranty Bank in 2017, 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 as described in * and **.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13. Junior Subordinated Debentures (continued)
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, 2021 and 2020, 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, 2021
December 31, 2020
(dollars in thousands)
QCR Holdings Statutory Trust II*
February 2004
$
10,310
$
10,310
2.85% over 3-month LIBOR
3.07
%
3.10
%
QCR Holdings Statutory Trust III
February 2004
8,248
8,248
2.85% over 3-month LIBOR
3.07
%
3.10
%
QCR Holdings Statutory Trust V
February 2006
10,310
10,310
1.55% over 3-month LIBOR
1.67
%
1.79
%
Community National Statutory Trust II
September 2004
3,093
3,093
2.17% over 3-month LIBOR
2.38
%
2.41
%
Community National Statutory Trust III
March 2007
3,609
3,609
1.75% over 3-month LIBOR
1.95
%
1.97
%
Guaranty Bankshares Statutory Trust I
May 2005
4,640
4,640
1.75% over 3-month LIBOR
1.95
%
1.97
%
$
40,210
$
40,210
Weighted Average Rate
2.43
%
2.48
%
* 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, 2021, 2020, and 2019:
(dollars in thousands)
Current
$
7,290
$
27,237
$
8,255
Deferred
15,272
(14,530)
6,364
$
22,562
$
12,707
$
14,619
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, 2021, 2020, and 2019:
Year Ended December 31,
% of
% of
% of
Pretax
Pretax
Pretax
Amount
Income
Amount
Income
Amount
Income
(dollars in thousands)
Computed "expected" tax expense
$
25,508
21.0
%
$
15,391
21.0
%
$
15,126
21.0
%
Tax exempt income, net
(7,537)
(6.2)
(5,943)
(8.1)
(4,470)
(6.2)
Bank-owned life insurance
(386)
(0.3)
(308)
(0.4)
(360)
(0.5)
State income taxes, net of federal benefit, current year
5,089
4.2
3,622
4.9
3,668
5.1
Change in unrecognized tax benefits
0.5
0.7
(93)
(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)
Acquisition costs
0.1
-
-
-
-
Excess tax benefit on stock options exercised and restricted stock awards vested
(436)
(0.4)
(242)
(0.3)
(287)
(0.4)
Re-measurement of deferred tax asset to incorporate newly enacted tax rates
-
-
0.3
-
-
Other
(383)
(0.3)
(215)
(0.3)
0.4
Federal and state income tax expense
$
22,562
18.6
%
$
12,707
17.3
%
$
14,619
20.3
%
Changes in the unrecognized tax benefits included in other liabilities are as follows for the years ended December 31, 2021 and 2020:
(dollars in thousands)
Balance, beginning
$
1,893
$
1,254
Impact of tax positions taken during current year
1,326
Gross increase (decrease) related to tax positions of prior years
(646)
Reduction as a result of a lapse of the applicable statute of limitations
(391)
(187)
Balance, ending
$
2,182
$
1,893
Included in the unrecognized tax benefits liability at December 31, 2021 are potential benefits of approximately $1.7 million that, if recognized, would affect the effective tax rate.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Federal and State Income Taxes (continued)
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 claimed or expected to be claimed on an income tax return. At December 31, 2021 and 2020, accrued interest on uncertain tax positions was approximately $236 thousand and $277 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 2018 tax return year and later. Various state franchise and income tax returns are generally open from the 2017 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, 2021 and 2020:
(dollars in thousands)
Deferred tax assets:
Historic tax credits
$
$
Compensation
11,912
10,288
Loan/lease losses
19,023
20,016
Net operating loss carryforwards, federal and state
1,354
Premises and equipment
-
16,509
Other
32,374
47,580
Deferred tax liabilities:
Net unrealized gains on securities available for sale and derivative instruments
Premises and equipment
6,099
-
Equipment financing leases
6,462
13,373
Acquisition fair value adjustments
3,269
3,351
Investment accretion
Deferred loan origination fees, net
1,403
Other
18,684
18,740
Net deferred tax assets
$
13,690
$
28,840
During the third quarter of 2021, effective January 1, 2020, the Company elected a tax accounting method change for identifying costs for self-constructed assets. The change resulted in an increase in capitalized costs for tax purposes in the amount of $88.0 million as of January 1, 2020, which, in turn, resulted in the recording of a deferred tax asset. A change from one generally accepted accounting principle to another is applied retrospectively, therefore deferred income taxes as of December 31, 2020, shown in the table above, have been adjusted retrospectively to reflect this change. The impact of the change was an increase in the deferred tax asset for premises and equipment in the amount of $22.2 million. The Company has concluded it qualifies for another automatic federal income tax accounting method change for self-constructed assets and intends to elect such, effective January 1, 2021, with the filing of its 2021 income tax return. This resulted in a reversal of the deferred tax asset as of January 1, 2021.
At December 31, 2021, the Company had $4.8 million of federal tax net operating loss carryforwards and $10.9 million of state tax net operating loss carryforwards. $3.0 million of the federal tax net operating loss carryforwards are related to the acquisition of Community National and CNB and these losses are set to expire in varying amounts between 2029 and 2033. $2.1 million of the state tax net operating loss carryforwards are also related to the acquisition of Community National and CNB and are set to expire in varying amounts between 2023 and 2028. An additional
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14. Federal and State Income Taxes (continued)
$1.8 million of federal tax net operating loss carryforwards and an additional $8.8 million of state tax net operating loss carryforwards were generated in 2021. All of these net operating losses generated in 2021 are expected to be utilized in 2022.
The change in deferred income taxes was reflected in the Consolidated Financial Statements as follows for the years ended December 31, 2021, 2020, and 2019:
(dollars in thousands)
Provision for income taxes
$
15,272
$
(14,530)
$
6,364
Net deferred tax asset resulting from market value adjustments of acquisitions
-
-
(381)
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)
(122)
1,433
$
15,150
$
(13,330)
$
5,772
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, 2021, 2020 and 2019. Company matching contributions for the years ended December 31, 2021, 2020, and 2019 were as follows:
(dollars in thousands)
Matching contribution
$
2,446
$
2,520
$
2,443
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, 2021, 2020 and 2019:
(dollars in thousands)
Balance, beginning
$
6,189
$
5,160
$
4,623
Expense accrued
1,532
1,193
Cash payments made
(448)
(164)
(164)
Balance, ending
$
7,273
$
6,189
$
5,160
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
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15. Employee Benefit Plans (continued)
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 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, 2021 and 2020, the liability related to the agreements totaled $32.3 million and $24.7 million, respectively.
Changes in the deferred compensation agreements, included in other liabilities, are as follows for the years ended December 31, 2021, 2020, and 2019:
(dollars in thousands)
Balance, beginning
$
24,713
$
19,474
$
15,029
Employee deferrals
4,900
3,959
2,474
Company match and interest
3,048
2,628
2,072
Cash payments made
(308)
(1,348)
(101)
Balance, ending
$
32,353
$
24,713
$
19,474
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 to 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, 2021, there were 132,375 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, 2021, 2020, and 2019.
(dollars in thousands)
Stock options
$
$
$
Restricted stock awards
1,864
1,619
1,850
Stock purchase plan
$
2,352
$
2,150
$
2,469
Stock options:
A summary of the stock option plans as of December 31, 2021, 2020, and 2019 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
407,763
$
22.24
426,913
$
20.14
469,572
$
18.52
Granted
22,150
43.61
23,350
39.12
20,200
36.00
Exercised
(60,317)
15.76
(41,650)
10.67
(59,393)
12.11
Forfeited
(1,598)
38.50
(850)
19.94
(3,466)
31.59
Outstanding, ending
367,998
24.46
407,763
22.24
426,913
20.14
Exercisable, ending
318,266
354,899
365,084
Weighted average fair value per option granted
$
10.85
$
10.07
$
11.29
A further summary of options outstanding as of December 31, 2021 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
$9.30
29,406
0.08
$
9.30
29,406
$
9.30
$15.50 to $15.65
64,106
1.25
15.64
64,066
15.64
$17.10 to $18.00
110,499
2.57
17.31
110,459
17.31
$22.64 to $29.77
55,216
4.20
22.83
53,716
22.64
$36.00 to $41.95
37,834
7.66
38.25
14,360
37.84
$42.65 to $48.50
70,937
6.59
43.78
46,259
43.84
367,998
318,266
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, 2021, 2020 and 2019 is presented below:
December 31,
Outstanding, beginning
102,489
106,826
64,099
Granted*
38,360
34,559
85,961
Released
(43,691)
(37,296)
(37,624)
Forfeited
(51)
(1,600)
(5,610)
Outstanding, ending
97,107
102,489
106,826
Weighted average fair value per share granted
$
45.18
$
39.39
$
20.14
* At December 31, 2021, includes 12,412 shares of restricted stock, 25,948 restricted stock units.
At December 31, 2020, includes 8,913 shares of restricted stock and 25,646 restricted stock units.
At December 31, 2019, includes 18,634 shares of restricted stock, 49,269 restricted stock units and 18,058 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, 2021, 2020 and 2019 was $1.9 million, $1.4 million and $1.3 million, 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, 2021, there were 61,186 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, 2021, 2020 and 2019. Information for the stock purchase plan for the years ended December 31, 2021, 2020 and 2019 is presented below:
Shares granted
28,396
38,738
29,882
Shares purchased
30,543
37,114
28,775
Weighted average fair value per share granted
$
7.67
$
6.03
$
4.81
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, 2021 and 2020, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.
Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of December 31, 2021 and 2020 are also presented in the following table (dollars in thousands). As of December 31, 2021 and 2020, 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
( dollars in thousands)
As of December 31, 2021:
Company:
Total risk-based capital
$
814,629
14.77
%
$
441,100
>
8.00
%
$
578,944
>
10.50
%
$
551,375
>
10.00
%
Tier 1 risk-based capital
631,649
11.46
330,825
>
6.00
468,669
>
8.50
441,100
>
8.00
Tier 1 leverage
631,649
10.46
241,579
>
4.00
241,579
>
4.00
301,974
>
5.00
Common equity Tier 1
593,494
10.76
248,119
>
4.50
385,962
>
7.00
358,394
>
6.50
Quad City Bank & Trust:
Total risk-based capital
$
247,658
13.29
%
$
149,126
>
8.00
%
$
195,727
>
10.50
%
$
186,407
>
10.00
%
Tier 1 risk-based capital
224,253
12.03
111,844
>
6.00
158,446
>
8.50
149,126
>
8.00
Tier 1 leverage
224,253
10.45
85,873
>
4.00
85,873
>
4.00
107,341
>
5.00
Common equity Tier 1
224,253
12.03
83,883
>
4.50
130,485
>
7.00
121,164
>
6.50
Cedar Rapids Bank & Trust:
Total risk-based capital
$
277,673
14.85
%
$
149,595
>
8.00
%
$
196,343
>
10.50
%
$
186,993
>
10.00
%
Tier 1 risk-based capital
254,279
13.60
112,196
>
6.00
158,944
>
8.50
149,595
>
8.00
Tier 1 leverage
254,279
12.59
80,777
>
4.00
80,777
>
4.00
100,971
>
5.00
Common equity Tier 1
254,279
13.60
84,147
>
4.50
130,895
>
7.00
121,546
>
6.50
Community State Bank:
Total risk-based capital
$
123,365
11.95
%
$
82,601
>
8.00
%
$
108,413
>
10.50
%
$
103,251
>
10.00
%
Tier 1 risk-based capital
110,410
10.69
61,951
>
6.00
87,763
>
8.50
82,601
>
8.00
Tier 1 leverage
110,410
9.67
45,676
>
4.00
45,676
>
4.00
57,095
>
5.00
Common equity Tier 1
110,410
10.69
46,463
>
4.50
72,276
>
7.00
67,113
>
6.50
Springfield First Community Bank:
Total risk-based capital
$
101,067
13.39
%
$
60,369
>
8.00
%
$
79,235
>
10.50
%
$
75,462
>
10.00
%
Tier 1 risk-based capital
91,625
12.14
45,277
>
6.00
64,142
>
8.50
60,369
>
8.00
Tier 1 leverage
91,625
11.08
33,088
>
4.00
33,088
>
4.00
41,360
>
5.00
Common equity Tier 1
91,625
12.14
33,958
>
4.50
52,823
>
7.00
49,050
>
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
( dollars in thousands)
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
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, 2021 or 2020.
In September 2020 and in February 2019, the Company completed subordinated notes offerings. See Note 12 to 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. There were 293,153 and 100,932 shares of common stock purchased by the Company during the year ended December 31, 2021 and 2020, respectively. There are 405,915 shares of common stock remaining for repurchase as of December 31, 2021.
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, 2021, 2020, and 2019:
(dollars in thousands, except per share data)
Net income
$
98,905
$
60,582
$
57,408
Basic EPS
$
6.30
$
3.84
$
3.65
Diluted EPS
$
6.20
$
3.80
$
3.60
Weighted average common shares outstanding
15,708,744
15,771,650
15,730,016
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan
235,964
180,987
237,759
Weighted average common and common equivalent shares outstanding
15,944,708
15,952,637
15,967,775
* Excludes anti-dilutive shares of 0, 104,636 and 80,437 at December 31, 2021, 2020 and 2019, 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, 2021 and 2020, no amounts had been recorded as liabilities for the subsidiary banks’ potential obligations under these guarantees.
As of December 31, 2021 and 2020, commitments to extend credit aggregated $1.2 billion and $1.4 billion, respectively. As of December 31, 2021 and 2020, standby letters of credit aggregated $21.7 million and $24.8 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 as of December 31, 2021 and 2020. 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 $20.8 million and $32.4 million of sold residential mortgage loans with recourse provisions still in effect at December 31, 2021 and 2020, 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, 2021, 2020, and 2019. 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 $48.2 million and $59.4 million as of December 31, 2021 and 2020, 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 customer’s account, excess funds are automatically swept daily to an institutional money market fund administered by Goldman Sachs. At December 31, 2021 and 2020, the Company had $107.0 million and $103.8 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, 2021 and 2020, there were $31.5 million and $24.0 million of investment securities pledged on the Goldman Sachs program, respectively, as a cover to the swap exposure.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Parent Company Only Financial Statements
The following is condensed financial information of QCR Holdings, Inc. (parent company only):
Condensed Balance Sheets
December 31, 2021 and 2020
(dollars in thousands)
Assets
Cash and due from banks
$
41,531
$
88,610
Interest-bearing deposits at financial institutions
5,750
7,200
Investment in bank subsidiaries
769,628
655,232
Investment in nonbank subsidiaries
5,341
4,540
Premises and equipment, net
8,632
9,242
Other assets
7,716
16,268
Total assets
$
838,598
$
781,092
Liabilities and Stockholders' Equity
Liabilities:
Subordinated notes
$
113,850
$
113,691
Junior subordinated debentures
38,155
37,993
Other liabilities
9,583
35,615
Total liabilities
161,588
187,299
Stockholders' Equity:
Common stock
15,613
15,806
Additional paid-in capital
273,768
275,807
Retained earnings
386,077
300,804
Accumulated other comprehensive income
1,552
1,376
Total stockholders' equity
677,010
593,793
Total liabilities and stockholders' equity
$
838,598
$
781,092
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Parent Company Only Financial Statements (continued)
Condensed Statements of Income
Years Ended December 31, 2021, 2020, and 2019
(dollars in thousands)
Total interest income
$
$
$
Equity in net income of bank subsidiaries
117,408
79,624
69,966
Equity in net income (loss) of nonbank subsidiaries
(261)
6,797
Other
Total income
118,720
79,681
77,154
Interest expense
8,482
6,662
5,836
Salaries and employee benefits
12,446
11,825
8,739
Professional fees
1,983
2,558
1,545
Acquisition costs
-
-
Post-acquisition compensation, transition and integration costs
-
3,171
Disposition costs
1,606
Goodwill impairment
-
3,000
Other
2,784
2,505
2,147
Total expenses
26,332
24,507
26,044
Income before income tax benefit
92,388
55,174
51,110
Income tax benefit
6,517
5,408
6,298
Net income
$
98,905
$
60,582
$
57,408
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20. Parent Company Only Financial Statements (continued)
Condensed Statements of Cash Flows
Years Ended December 31, 2021, 2020, and 2019
(dollars in thousands)
Cash Flows from Operating Activities:
Net income
$
98,905
$
60,582
$
57,408
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Earnings of bank subsidiaries
(117,408)
(79,624)
(69,966)
(Earnings) losses of nonbank subsidiaries
(456)
(6,797)
Distributions from nonbank subsidiaries
45,058
Deferred income taxes
(1,093)
6,909
2,498
Accretion of acquisition fair value adjustments
Depreciation
Deferred compensation expense accrued
-
-
Stock-based compensation expense
2,352
2,150
2,469
Loss on sale of subsidiary
-
-
Gain on sale of fixed assets
-
-
Goodwill impairment
-
3,000
Decrease (increase) in other assets
(7,380)
(2,472)
Increase (decrease) in other liabilities
(14,702)
(5,923)
7,814
Net cash provided by (used in) operating activities
(30,832)
(21,495)
39,644
Cash Flows from Investing Activities:
Net increase (decrease) in interest-bearing deposits at financial institutions
1,450
(1,599)
(4,600)
Capital infusion, bank subsidiaries
-
-
(8,600)
Capital infusion, non-bank subsidiaries
(375)
-
(100)
Net cash received in dissolution of subsidiary
-
8,450
-
Net cash received in sale of subsidiary
-
-
Purchase of premises and equipment
(31)
(272)
(2,861)
Net cash provided by (used in) investing activities
1,044
6,774
(16,161)
Cash Flows from Financing Activities:
Activity in other borrowings:
Paydown on revolving line of credit
-
-
(9,000)
Prepayments
-
-
(21,313)
Calls, maturities and scheduled payments
-
-
(1,799)
Proceeds from subordinated notes
-
50,000
63,393
Payment of cash dividends
(3,793)
(3,779)
(3,767)
Proceeds from issuance of common stock, net
1,360
1,926
Repurchase and cancellation of shares
(14,168)
(3,779)
-
Net cash provided by (used in) financing activities
(17,291)
43,802
29,440
Net increase (decrease) in cash and due from banks
(47,079)
29,081
52,923
Cash and due from banks:
Beginning
88,610
59,529
6,606
Ending
$
41,531
$
88,610
$
59,529
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21. 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, 2021 and 2020:
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, 2021:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities
$
23,328
$
-
$
23,328
$
-
Residential mortgage-backed and related securities
94,323
-
94,323
-
Municipal securities
168,266
-
168,266
-
Asset-backed securities
27,124
-
27,124
-
Other securities
24,789
-
24,789
-
Derivatives
222,220
-
222,220
-
Total assets measured at fair value
$
560,050
$
-
$
560,050
$
-
Derivatives
$
225,135
$
-
$
225,135
$
-
Total liabilities measured at fair value
$
225,135
$
-
$
225,135
$
-
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
$
-
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 21. Fair Value (continued)
Interest rate caps are used for the purpose of hedging interest rate risk on deposits. 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 loans and 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 observable 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 observable 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, 2021 and 2020:
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, 2021:
Loans/leases evaluated individually
$
6,618
$
-
$
-
$
6,618
December 31, 2020:
Loans/leases evaluated individually
$
9,926
$
-
$
-
$
9,926
OREO
-
-
$
9,948
$
-
$
-
$
9,948
Loans/leases evaluated individually are valued 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 21. 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)
Loans/leases evaluated individually
$
6,618
$
9,926
Appraisal of collateral
Appraisal adjustments
-10.00
%
to
-30.00
%
OREO
-
Appraisal of collateral
Appraisal adjustments
0.00
%
to
-35.00
%
For loans/leases evaluated individually and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
There have been no changes in valuation techniques used for any assets measured at fair value during the years ended December 31, 2021 or 2020.
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, 2021
As of December 31, 2020
Hierarchy
Carrying
Estimated
Carrying
Estimated
Level
Value
Fair Value
Value
Fair Value
(dollars in thousands)
Cash and due from banks
Level 1
$
37,490
$
37,490
$
61,329
$
61,329
Federal funds sold
Level 2
12,370
12,370
9,080
9,080
Interest-bearing deposits at financial institutions
Level 2
75,292
75,292
86,596
86,596
Investment securities:
HTM
Level 2
472,385
522,297
476,165
521,277
AFS
Level 2
337,830
337,830
361,966
361,966
Loans/leases receivable, net
Level 3
6,128
6,618
9,191
9,926
Loans/leases receivable, net
Level 2
4,595,283
4,478,899
4,157,562
4,112,735
Derivatives
Level 2
222,220
222,220
222,757
222,757
Deposits:
Nonmaturity deposits
Level 2
4,501,424
4,501,424
4,138,478
4,138,478
Time deposits
Level 2
421,348
419,453
460,659
465,681
Short-term borrowings
Level 2
3,800
3,800
5,430
5,430
FHLB advances
Level 2
15,000
15,000
15,000
14,998
Subordinated notes
Level 2
113,850
116,203
118,691
112,406
Junior subordinated debentures
Level 2
38,155
31,072
37,993
30,618
Derivatives
Level 2
225,135
225,135
229,270
229,270
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22. 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 is presented as follows as of and for the years ended December 31, 2021, 2020, and 2019:
Commercial Banking
Intercompany
Consolidated
QCBT
CRBT
CSB
SFCB
All other
Eliminations
Total
(dollars in thousands)
Year Ended December 31, 2021
Total revenue
$
88,689
$
129,080
$
43,945
$
38,342
$
119,451
$
(118,930)
$
300,577
Net interest income
66,232
57,354
35,512
26,351
(8,479)
1,263
178,233
Provision for credit losses
1,519
(697)
2,219
-
-
3,486
Net income (loss)
34,616
55,411
12,802
14,579
99,331
(117,834)
98,905
Goodwill
3,223
14,980
9,888
45,975
-
-
74,066
Intangibles
-
1,702
2,653
4,994
-
-
9,349
Total assets
2,142,344
2,030,279
1,168,606
882,885
845,120
(973,102)
6,096,132
Year 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
2,153,773
1,957,695
1,004,183
779,956
134,407
(324,971)
5,705,043
Year 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
*Includes financial results for RB&T for 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 year 2019 and the period from January 1, 2020 through August 12, 2020, prior to the sale of the companies.
Note 23. Pending Acquisition
On November 9, 2021, the Company announced the signing of a definitive agreement whereby the Company will acquire GFED and merge Guaranty Bank, the banking subsidiary of GFED into SFCB, the Company’s Springfield-based charter. The combined bank will operate under the Guaranty Bank name in all Springfield and southwest Missouri markets. As of December 31, 2021, GFED had $1.2 billion in assets, $815 million in loans and $1.0 billion in deposits.
Under the terms of the merger agreement, stockholders of GFED will have the right to receive for each share of GFED common stock owned, at the election of each stockholder, and subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock, with total consideration to consist of approximately 80% stock and 20% cash. Based upon the $59.99 closing price of the Company’s common stock as of November 5, 2021, the transaction is valued at approximately $151.6 million. The transaction is subject to regulatory approvals, approval by GFED’s stockholders and certain customary closing conditions. The transaction is expected to close late in the first quarter or early in the second quarter of 2022.
QCR Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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

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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, 2021. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective 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, 2021. 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, 2021. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2021.
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, 2021, 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, 2021, 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, 2021, 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, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements of the Company and our report dated March 11, 2022 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 11, 2022
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.

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

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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 2022 Proxy Statement and is incorporated herein by reference.

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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 2022 Proxy Statement and is incorporated herein by reference.

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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 2022 Proxy Statement and is incorporated herein by reference.
The table below sets forth the following information as of December 31, 2021 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
452,586
(2)
$
24.65
193,561
(3)
Equity compensation plans not approved by stockholders
-
-
-
Total
452,586
(2)
$
24.65
193,561
(3)
(1) The weighted average exercise price only relates to outstanding option awards.
(2) Includes 367,998 outstanding option awards and 69,476 outstanding restricted stock units and 10,082 performance share units granted under the Equity Plans.
(3)Includes 132,375 and 61,186 shares available under the QCR Holdings, Inc. 2016 Equity Incentive Plan and QCR Holdings, Inc.
Employee Stock Purchase Plan.

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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 2022 Proxy Statement and is incorporated herein by reference.

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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 2022 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
2.1
Agreement and Plan of Merger, dated as of November 9, 2021, by and between QCR Holdings, Inc. and Guaranty Federal Bancshares, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on November 9, 2021).*
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 31, 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+
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).
10.3+
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).
10.4+
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).
10.5+
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).
10.6+
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).
10.7+
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).
10.8+
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).
10.9+
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).
10.10+
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).
10.11+
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).
10.12+
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)).
10.13+
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)).
10.14+
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)).
10.15+
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).
10.16+
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).
10.17+
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).
10.18+
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).
10.19+
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).
10.20+
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).
10.21+
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).
10.22+
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).
10.23+
Separation Agreement and General Release of Claims, dated January 15, 2021, between QCR Holdings, Inc. and Robert Fulp.
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, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the years ended December 31, 2021, December 31, 2020 and December 31, 2019; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, December 31, 2020, and December 31, 2019; (iv) Consolidated Statements of Changes in Stockholders; Equity for the years ended December 31, 2021, December 31, 2020 and December 31, 2019; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2021, December 31, 2020 and December 31, 2019; 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.
*
QCR Holdings, Inc. has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. QCR Holdings, Inc. will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.