UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ______to________
Commission file number
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Non-accelerated filer ☐ | |||
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of August 1, 2020, the Registrant had outstanding
1
QCR HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page | |||||
Part I |
| FINANCIAL INFORMATION | |||
Item 1 |
| Consolidated Financial Statements (Unaudited) | |||
Consolidated Balance Sheets | 4 | ||||
Consolidated Statements of Income | 5 | ||||
6 | |||||
7 | |||||
8 | |||||
Consolidated Statements of Cash Flows | 9 | ||||
11 | |||||
11 | |||||
13 | |||||
17 | |||||
28 | |||||
29 | |||||
30 | |||||
32 | |||||
33 | |||||
35 | |||||
Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||
36 | |||||
36 | |||||
36 | |||||
40 | |||||
42 | |||||
43 | |||||
43 | |||||
47 | |||||
51 | |||||
51 | |||||
52 |
2
52 | |||||
52 | |||||
52 | |||||
53 | |||||
54 | |||||
57 | |||||
59 | |||||
60 | |||||
60 | |||||
61 | |||||
63 | |||||
64 | |||||
65 | |||||
66 | |||||
67 | |||||
68 | |||||
69 | |||||
| 71 | ||||
73 | |||||
| 74 | ||||
74 | |||||
74 | |||||
78 | |||||
78 | |||||
78 | |||||
78 | |||||
79 | |||||
80 |
Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.
3
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of June 30, 2020 and December 31, 2019
| June 30, |
| December 31, | |||
2020 | 2019 | |||||
(dollars in thousands) | ||||||
Assets | ||||||
Cash and due from banks | $ | | $ | | ||
Federal funds sold |
| |
| | ||
Interest-bearing deposits at financial institutions |
| |
| | ||
Securities held to maturity, at amortized cost |
| |
| | ||
Securities available for sale, at fair value |
| |
| | ||
Total securities | |
| | |||
Loans receivable held for sale |
| |
| | ||
Loans/leases receivable held for investment |
| |
| | ||
Gross loans/leases receivable |
| |
| | ||
Less allowance for estimated losses on loans/leases |
| ( |
| ( | ||
Net loans/leases receivable |
| |
| | ||
|
|
|
| |||
Bank-owned life insurance |
| |
| | ||
Premises and equipment, net |
| |
| | ||
Restricted investment securities |
| |
| | ||
Other real estate owned, net |
| |
| | ||
Goodwill |
| |
| | ||
Intangibles |
| |
| | ||
Derivatives | | | ||||
Assets held for sale | | | ||||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
|
|
|
| |||
Liabilities and Stockholders' Equity |
|
|
|
| ||
Liabilities: |
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|
|
| ||
Deposits: |
|
|
|
| ||
Noninterest-bearing | $ | | $ | | ||
Interest-bearing |
| |
| | ||
Total deposits |
| |
| | ||
|
|
|
| |||
Short-term borrowings |
| |
| | ||
Federal Home Loan Bank advances |
| |
| | ||
Subordinated notes | | | ||||
Junior subordinated debentures |
| |
| | ||
Derivatives | | | ||||
Liabilities held for sale | | | ||||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
|
|
|
| |||
|
|
|
| |||
Stockholders' Equity: |
|
|
|
| ||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive income (loss): |
|
| ||||
Securities available for sale |
| |
| | ||
Derivatives | ( | ( | ||||
Total stockholders' equity |
| |
| | ||
Total liabilities and stockholders' equity | $ | | $ | |
See Notes to Consolidated Financial Statements (Unaudited)
4
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, 2020 and 2019
|
| 2020 |
| 2019 | |||
(dollars in thousands, except share data) | |||||||
Interest and dividend income: | |||||||
Loans/leases, including fees | $ | | $ | | |||
Securities: | |||||||
Taxable |
| |
| | |||
Nontaxable |
| |
| | |||
Interest-bearing deposits at financial institutions |
| |
| | |||
Restricted investment securities |
| |
| | |||
Federal funds sold |
| |
| | |||
Total interest and dividend income |
| |
| | |||
Interest expense: | |||||||
Deposits |
| |
| | |||
Short-term borrowings |
| |
| | |||
Federal Home Loan Bank advances |
| |
| | |||
Other borrowings |
| — |
| | |||
Subordinated notes | | | |||||
Junior subordinated debentures |
| |
| | |||
Total interest expense |
| |
| | |||
Net interest income |
| |
| | |||
Provision for loan/lease losses |
| |
| | |||
Net interest income after provision for loan/lease losses |
| |
| | |||
Noninterest income: | |||||||
Trust department fees |
| |
| | |||
Investment advisory and management fees |
| |
| | |||
Deposit service fees |
| |
| | |||
Gains on sales of residential real estate loans, net |
| |
| | |||
Gains on sales of government guaranteed portions of loans, net |
| — |
| | |||
Swap fee income |
| |
| | |||
Securities gains (losses), net |
| |
| ( | |||
Earnings on bank-owned life insurance |
| |
| | |||
Debit card fees |
| |
| | |||
Correspondent banking fees |
| |
| | |||
Other |
| |
| | |||
Total noninterest income |
| |
| | |||
Noninterest expense: | |||||||
Salaries and employee benefits |
| |
| | |||
Occupancy and equipment expense |
| |
| | |||
Professional and data processing fees |
| |
| | |||
Post-acquisition compensation, transition and integration costs |
| |
| | |||
Disposition costs | ( | — | |||||
FDIC insurance, other insurance and regulatory fees |
| |
| | |||
Loan/lease expense |
| |
| | |||
Net cost of (income from) and gains/losses on operations of other real estate |
| ( |
| | |||
Advertising and marketing |
| |
| | |||
Bank service charges |
| |
| | |||
Losses on liability extinguishment |
| |
| — | |||
Correspondent banking expense |
| |
| | |||
Intangibles amortization |
| |
| | |||
Other |
| |
| | |||
Total noninterest expense |
| |
| | |||
Net income before income taxes |
| |
| | |||
Federal and state income tax expense |
| |
| | |||
Net income | $ | | $ | | |||
Basic earnings per common share | $ | | $ | | |||
Diluted earnings per common share | $ | | $ | | |||
Weighted average common shares outstanding |
| |
| | |||
Weighted average common and common equivalent shares outstanding |
| |
| | |||
Cash dividends declared per common share | $ | | $ | | |||
See Notes to Consolidated Financial Statements (Unaudited)
5
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30, 2020 and 2019
|
| 2020 |
| 2019 |
| ||
(dollars in thousands, except share data) | |||||||
Interest and dividend income: | |||||||
Loans/leases, including fees | $ | | $ | | |||
Securities: | |||||||
Taxable |
| |
| | |||
Nontaxable |
| |
| | |||
Interest-bearing deposits at financial institutions |
| |
| | |||
Restricted investment securities |
| |
| | |||
Federal funds sold |
| |
| | |||
Total interest and dividend income |
| |
| | |||
Interest expense: | |||||||
Deposits |
| |
| | |||
Short-term borrowings |
| |
| | |||
Federal Home Loan Bank advances |
| |
| | |||
Other borrowings |
| — |
| | |||
Subordinated notes | | | |||||
Junior subordinated debentures |
| |
| | |||
Total interest expense |
| |
| | |||
Net interest income |
| |
| | |||
Provision for loan/lease losses |
| |
| | |||
Net interest income after provision for loan/lease losses |
| |
| | |||
Noninterest income: | |||||||
Trust department fees |
| |
| | |||
Investment advisory and management fees |
| |
| | |||
Deposit service fees |
| |
| | |||
Gains on sales of residential real estate loans, net |
| |
| | |||
Gains on sales of government guaranteed portions of loans, net |
| — |
| | |||
Swap fee income |
| |
| | |||
Securities gains (losses), net |
| |
| ( | |||
Earnings on bank-owned life insurance |
| |
| | |||
Debit card fees |
| |
| | |||
Correspondent banking fees |
| |
| | |||
Other |
| |
| | |||
Total noninterest income |
| |
| | |||
Noninterest expenses: | |||||||
Salaries and employee benefits |
| |
| | |||
Occupancy and equipment expense |
| |
| | |||
Professional and data processing fees |
| |
| | |||
Post-acquisition compensation, transition and integration costs |
| |
| | |||
Disposition costs |
| |
| — | |||
FDIC insurance, other insurance and regulatory fees |
| |
| | |||
Loan/lease expense |
| |
| | |||
Net cost of (income from) and gains/losses on operations of other real estate |
| ( |
| | |||
Advertising and marketing |
| |
| | |||
Bank service charges |
| |
| | |||
Losses on liability extinguishment |
| |
| — | |||
Correspondent banking expense | | | |||||
Intangibles amortization | | | |||||
Goodwill impairment | | — | |||||
Other |
| |
| | |||
Total noninterest expenses |
| |
| | |||
Net income before income taxes |
| |
| | |||
Federal and state income tax expense |
| |
| | |||
Net income | $ | | $ | | |||
Basic earnings per common share | $ | $ | | ||||
Diluted earnings per common share | $ | $ | | ||||
Weighted average common shares outstanding |
| |
| | |||
Weighted average common and common equivalent shares outstanding |
| |
| | |||
Cash dividends declared per common share | $ | | $ | |
See Notes to Consolidated Financial Statements (Unaudited
6
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three and Six Months Ended June 30, 2020 and 2019
Three Months Ended June 30, |
| ||||||
| 2020 |
| 2019 | ||||
(dollars in thousands) | |||||||
Net income | $ | | $ | | |||
Other comprehensive income (loss): | |||||||
Unrealized gains on securities available for sale: | |||||||
Unrealized holding gains arising during the period before tax | |
| | ||||
Less reclassification adjustment for gains (losses) included in net income before tax | | ( | |||||
| |
| | ||||
Unrealized losses on derivatives: | |||||||
Unrealized holding losses arising during the period before tax |
| ( |
| ( | |||
Less reclassification adjustment for caplet amortization before tax | ( |
| ( | ||||
| ( |
| ( | ||||
Other comprehensive income, before tax |
| |
| | |||
Tax expense |
| |
| | |||
Other comprehensive income, net of tax |
| |
| | |||
Comprehensive income | $ | | $ | |
Six Months Ended June 30, | |||||||
| 2020 |
| 2019 | ||||
(dollars in thousands) | |||||||
Net income | $ | | $ | | |||
Other comprehensive income (loss): | |||||||
Unrealized gains on securities available for sale: | |||||||
Unrealized holding gains arising during the period before tax |
| |
| | |||
Less reclassification adjustment for gains (losses) included in net income before tax | | ( | |||||
| |
| | ||||
Unrealized losses on derivatives: | |||||||
Unrealized holding losses arising during the period before tax |
| ( |
| ( | |||
Less reclassification adjustment for ineffectiveness and caplet amortization before tax |
| ( |
| ( | |||
| ( |
| ( | ||||
Other comprehensive income (loss), before tax |
| |
| | |||
Tax expense |
| |
| | |||
Other comprehensive income (loss), net of tax |
| ( |
| | |||
Comprehensive income | $ | | $ | | |||
See Notes to Consolidated Financial Statements (Unaudited)
7
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three and Six Months Ended June 30, 2020 and 2019
Accumulated | |||||||||||||||
Additional | Other | ||||||||||||||
Common | Paid-In | Retained | Comprehensive | ||||||||||||
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | ||||||
(dollars in thousands) | |||||||||||||||
Balance December 31, 2019 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss, net of tax |
| — |
| — |
| — |
| ( |
| ( | |||||
Common cash dividends declared, $ |
| — |
| — |
| ( |
| — |
| ( | |||||
Repurchase and cancellation of | |||||||||||||||
as a result of a share repurchase program | ( | ( | ( | — | ( | ||||||||||
Issuance of | |||||||||||||||
stock purchased under the Employee Stock Purchase Plan |
| |
| |
| — |
| — |
| | |||||
Issuance of |
|
|
|
|
| ||||||||||
stock options exercised | | | — | — | | ||||||||||
Stock-based compensation expense |
| — |
| |
| — |
| — |
| | |||||
Restricted stock awards and restricted stock units- |
|
| |||||||||||||
of common stock , net of restricted stock units | |||||||||||||||
withheld for payment for taxes | | ( | — | — | | ||||||||||
Exchange of | |||||||||||||||
with payroll taxes for restricted stock and in connection | |||||||||||||||
with stock options exercised |
| ( |
| ( |
| — |
| — |
| ( | |||||
Balance, March 31, 2020 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| |
| | |||||
Common cash dividends declared, $ |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of | |||||||||||||||
stock purchased under the Employee Stock Purchase Plan |
| |
| |
| — |
| — |
| | |||||
Issuance of | |||||||||||||||
stock options exercised |
| |
| |
| — |
| — |
| | |||||
Stock-based compensation expense |
| — |
| |
| — |
| — |
| | |||||
Exchange of | |||||||||||||||
with payroll taxes for restricted stock vested and in | |||||||||||||||
connection with stock options exercised |
| — |
| ( |
| — |
| — |
| ( | |||||
Balance, June 30, 2020 | $ | | $ | | $ | | $ | ( | $ | |
Accumulated | |||||||||||||||
Additional | Other | ||||||||||||||
Common | Paid-In | Retained | Comprehensive | ||||||||||||
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Total | ||||||
(dollars in thousands) | |||||||||||||||
Balance December 31, 2018 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| |
| | |||||
Common cash dividends declared, $ |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of | |||||||||||||||
stock purchased under the Employee Stock Purchase Plan |
| |
| |
| — |
| — |
| | |||||
Issuance of | |||||||||||||||
stock options exercised |
| |
| |
| — |
| — |
| | |||||
Stock-based compensation expense |
| — |
| |
| — |
| — |
| | |||||
Restricted stock awards and restricted stock units - | |||||||||||||||
shares of common stock, net of restricted stock units | |||||||||||||||
withheld for payment of taxes |
| |
| ( |
| — |
| — | ( | ||||||
Exchange of | |||||||||||||||
with payroll taxes for restricted stock vested and in | |||||||||||||||
connection with stock options exercised |
| ( |
| ( |
| — |
| — |
| ( | |||||
Balance, March 31, 2019 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| |
| | |||||
Common cash dividends declared, $ |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of | |||||||||||||||
stock purchased under the Employee Stock Purchase Plan |
| |
| |
| — |
| — |
| | |||||
Issuance of | |||||||||||||||
stock options exercised |
| |
| |
| — |
| — |
| | |||||
Stock-based compensation expense |
| — |
| |
| — |
| — |
| | |||||
Restricted stock awards and restricted stock units- |
|
|
|
|
| ||||||||||
shares of common stock, net of restricted stock units | |||||||||||||||
withheld for payment of taxes | | ( | — | — | — | ||||||||||
Exchange of | |||||||||||||||
with payroll taxes for restricted stock vested and in | |||||||||||||||
connection with stock options exercised |
| ( |
| ( |
| — |
| — |
| ( | |||||
Balance, June 30, 2019 | $ | | $ | | $ | | $ | ( | $ | | |||||
See Notes to Consolidated Financial Statements (Unaudited)
8
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 2020 and 2019
|
| 2020 |
| 2019 | |||
(dollars in thousands) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
| |||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| |||
Depreciation |
| |
| | |||
Provision for loan/lease losses |
| |
| | |||
Stock-based compensation expense |
| |
| | |||
Deferred compensation expense accrued |
| |
| | |||
Losses (gains) on other real estate owned, net |
| ( |
| | |||
Amortization of premiums on securities, net |
| |
| | |||
Caplet amortization | | — | |||||
Securities (gains) losses, net |
| ( |
| | |||
Loans originated for sale |
| ( |
| ( | |||
Proceeds on sales of loans |
| |
| | |||
Gains on sales of residential real estate loans |
| ( |
| ( | |||
Gains on sales of government guaranteed portions of loans |
| — |
| ( | |||
Loss on liability extinguishment, net | | — | |||||
Gains on sales of premises and equipment | ( | ( | |||||
Amortization of intangibles |
| |
| | |||
Accretion of acquisition fair value adjustments, net |
| ( |
| ( | |||
Increase in cash value of bank-owned life insurance |
| ( |
| ( | |||
Goodwill impairment | | — | |||||
Decrease (increase) in other assets |
| ( |
| | |||
Decrease in other liabilities | ( | ( | |||||
Net cash provided by operating activities | $ | | $ | | |||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
| |||
Net decrease in federal funds sold |
| |
| | |||
Net decrease (increase) in interest-bearing deposits at financial institutions |
| |
| ( | |||
Proceeds from sales of other real estate owned |
| |
| | |||
Activity in securities portfolio: |
|
| |||||
Purchases |
| ( |
| ( | |||
Calls, maturities and redemptions |
| |
| | |||
Paydowns |
| |
| | |||
Sales |
| |
| | |||
Activity in restricted investment securities: |
|
|
|
| |||
Purchases |
| ( |
| ( | |||
Redemptions |
| |
| | |||
Net increase in loans/leases originated and held for investment |
| ( |
| ( | |||
Purchase of premises and equipment |
| ( |
| ( | |||
Proceeds from sales of premises and equipment | | | |||||
Net cash (used in) investing activities | $ | ( | $ | ( | |||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
| |||
Net increase in deposit accounts |
| |
| | |||
Net increase (decrease) in short-term borrowings |
| |
| ( | |||
Activity in Federal Home Loan Bank advances: |
|
|
|
| |||
Term advances |
| |
| | |||
Calls and maturities |
| ( |
| ( | |||
Net change in short-term and overnight advances |
| ( |
| ( | |||
Activity in other borrowings: |
|
|
|
| |||
Calls, maturities and scheduled principal payments |
| — |
| ( | |||
Prepayments |
| — |
| ( | |||
Paydown of revolving line of credit |
| — |
| ( | |||
Prepayments on brokered and public time deposits | | — | |||||
Proceeds from subordinated notes | — | | |||||
Payment of cash dividends on common stock |
| ( |
| ( | |||
Proceeds from issuance of common stock, net | | | |||||
Repurchase and cancellation of shares | ( | — | |||||
Net cash provided by financing activities | $ | | $ | | |||
Net increase in cash and due from banks |
| |
| | |||
Cash and due from banks, beginning |
| |
| | |||
Cash and due from banks, ending | $ | | $ | |
9
QCR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - continued
Six Months Ended June 30, 2020 and 2019
Supplemental disclosure of cash flow information, cash payments (receipts) for: |
|
|
|
| |||
Interest | $ | | $ | | |||
Income/franchise taxes |
| ( |
| ( | |||
|
|
| |||||
Supplemental schedule of noncash investing activities: |
|
|
| ||||
Change in accumulated other comprehensive income, unrealized gains on securities available for sale and derivative instruments, net |
| ( |
| | |||
Exchange of shares of common stock in connection with payroll taxes for restricted stock and in connection with stock options exercised |
| ( |
| ( | |||
Transfers of loans to other real estate owned |
| — |
| | |||
Due to broker for purchases of securities | | — | |||||
Due from broker for sales of securities | | — | |||||
Increase (decrease) in the fair value of back-to-back interest rate swap assets and liabilities |
| |
| | |||
Dividends payable |
| |
| | |||
See Notes to Consolidated Financial Statements (Unaudited)
10
Part I
Item 1
QCR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2019, included in the Company's Annual Report on Form 10-K filed with the SEC on March 13, 2020. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.
The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended June 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020, or for any other period.
The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.
Allowance: Allowance for estimated losses on loans/leases | Guaranty: Guaranty Bancshares, Ltd. |
AOCI: Accumulated other comprehensive income (loss) | Guaranty Bank: Guaranty Bank and Trust Company |
AFS: Available for sale | HTM: Held to maturity |
ASC: Accounting Standards Codification | LRP: Loan Relief Program |
ASU: Accounting Standards Update | m2: m2 Lease Funds, LLC |
Bates Companies: Bates Financial Advisors, Inc., Bates | MSELF: Main Street Expanded Loan Facility |
Financial Services, Inc., Bates Securities, Inc. and | MSNLF: Main Street New Loan Facility |
Bates Financial Group, Inc. | 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 | OREO: Other real estate owned |
Security Act | OTTI: Other-than-temporary impairment |
CDI: Core deposit intangible | PCI: Purchased credit impaired |
CECL: Current Expected Credit Losses | PPP: Paycheck Protection Program |
Community National: Community National Bancorporation | Provision: Provision for loan/lease losses |
COVID-19: Coronavirus Disease 2019 | QCBT: Quad City Bank & Trust Company |
CRBT: Cedar Rapids Bank & Trust Company | RB&T: Rockford Bank & Trust Company |
CRE: Commercial real estate | ROAA: Return on Average Assets |
CSB: Community State Bank | SBA: U.S. Small Business Administration |
C&I: Commercial and industrial | SEC: Securities and Exchange Commission |
EPS: Earnings per share | SFC Bank: Springfield First Community Bank |
Exchange Act: Securities Exchange Act of 1934, as | Springfield Bancshares: Springfield Bancshares, Inc. |
amended | TA: Tangible assets |
FASB: Financial Accounting Standards Board | TCE: Tangible common equity |
FDIC: Federal Deposit Insurance Corporation | TDRs: Troubled debt restructurings |
FHLB: Federal Home Loan Bank | TEY: Tax equivalent yield |
FRB: Federal Reserve Bank of Chicago | The Company: QCR Holdings, Inc. |
GAAP: Generally Accepted Accounting Principles | USDA: U.S. Department of Agriculture |
11
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 RB&T prior to its sale are included in this report. See Note 2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for additional information about the sale.
Risks and Uncertainties: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was enacted to, among other things, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The Company currently expects that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability and willingness to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, are also expected to impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. As a result,
12
the Company anticipates that its financial condition, capital levels, asset quality and results of operations will be adversely affected, as described in further detail on this report.
Due to the economic impact that COVID-19 has had on the Company, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event during the first quarter of 2020, therefore an interim impairment test over goodwill was performed as of March 31, 2020. When such an assessment is performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. 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 quarter of 2020 therefore no impairment test over goodwill was needed.
NOTE 2– INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of June 30, 2020 and December 31, 2019 are summarized as follows:
Gross | Gross | |||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||
|
| Cost |
| Gains |
| (Losses) |
| Value | ||||
(dollars in thousands) | ||||||||||||
June 30, 2020: |
|
|
|
|
|
|
|
| ||||
Securities HTM: |
|
|
|
|
|
|
|
| ||||
Municipal securities | $ | | $ | | $ | ( | $ | | ||||
Other securities |
| |
| — |
| — |
| | ||||
$ | | $ | | $ | ( | $ | | |||||
|
|
|
|
|
|
|
| |||||
Securities AFS: |
|
|
|
|
|
|
|
| ||||
U.S. govt. sponsored agency securities | $ | | $ | | $ | — | $ | | ||||
Residential mortgage-backed and related securities |
| |
| |
| ( |
| | ||||
Municipal securities |
| |
| |
| ( |
| | ||||
Asset-backed securities | | | ( | | ||||||||
Other securities |
| |
| |
| ( |
| | ||||
$ | | $ | | $ | ( | $ | |
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
| Cost |
| Gains |
| (Losses) | Value | ||||||
(dollars in thousands) | ||||||||||||
December 31, 2019: |
|
|
|
|
|
|
|
| ||||
Securities HTM: |
|
|
|
|
|
|
|
| ||||
Municipal securities | $ | | $ | | $ | ( | $ | | ||||
Other securities |
| |
| — |
| — |
| | ||||
$ | | $ | | $ | ( | $ | | |||||
|
|
|
|
|
|
|
| |||||
Securities AFS: |
|
|
|
|
|
|
|
| ||||
U.S. govt. sponsored agency securities | $ | | $ | | $ | ( | $ | | ||||
Residential mortgage-backed and related securities |
| |
| |
| ( |
| | ||||
Municipal securities |
| |
| |
| ( |
| | ||||
Asset-backed securities | | — | ( | | ||||||||
Other securities |
| |
| |
| ( |
| | ||||
$ | | $ | | $ | ( | $ | |
The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.
13
The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.
Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2020 and December 31, 2019, are summarized as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
(dollars in thousands) | ||||||||||||||||||
June 30, 2020: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities HTM: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Other securities |
| |
| — |
| — |
| — |
| |
| — | ||||||
$ | | $ | ( | $ | — | $ | — | $ | | $ | ( | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Securities AFS: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. govt. sponsored agency securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||
Residential mortgage-backed and related securities |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Municipal securities |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Asset-backed securities | | ( | — | — | | ( | ||||||||||||
Other securities |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
$ | | $ | ( | $ | — | $ | — | $ | | $ | ( |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
| Value |
| Losses |
| Value |
| Losses |
| Value |
| Losses | |||||||
(dollars in thousands) | ||||||||||||||||||
December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities HTM: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Other securities |
| |
| — |
| — |
| — |
| |
| — | ||||||
$ | | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||||
Securities AFS: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. govt. sponsored agency securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Residential mortgage-backed and related securities |
| |
| ( |
| |
| ( |
| |
| ( | ||||||
Municipal securities |
| — |
| — |
| |
| ( |
| |
| ( | ||||||
Asset-backed securities | | ( | — | — | | ( | ||||||||||||
Other securities |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
$ | | $ | ( | $ | | $ | ( | $ | | $ | ( |
At June 30, 2020, the investment portfolio included
The Company did not recognize OTTI on any investment securities for the three or six months ended June 30, 2020 and 2019.
14
All sales of securities for the three and six months ended June 30, 2020 and June 30, 2019 were securities identified as AFS.
| Three and Six Months Ended |
|
| ||||||||
June 30, 2020 | June 30, 2019 | ||||||||||
(dollars in thousands) | |||||||||||
Proceeds from sales of securities | $ | | $ | | |||||||
Gross gains from sales of securities |
| |
| — | |||||||
Gross losses from sales of securities |
| ( |
| ( |
The amortized cost and fair value of securities as of June 30, 2020 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.
|
| Amortized Cost |
| Fair Value | ||
(dollars in thousands) | ||||||
Securities HTM: |
|
|
|
| ||
Due in one year or less | $ | | $ | | ||
Due after one year through five years |
| |
| | ||
Due after five years |
| |
| | ||
$ | | $ | | |||
Securities AFS: |
|
|
|
| ||
Due in one year or less | $ | | $ | | ||
Due after one year through five years |
| |
| | ||
Due after five years |
| |
| | ||
| | |||||
Residential mortgage-backed and related securities | | | ||||
Asset-backed securities |
| |
| | ||
$ | | $ | |
Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, at the discretion of the issuer, to terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:
|
| Amortized Cost |
| Fair Value | ||
(dollars in thousands) | ||||||
Securities HTM: |
|
|
|
| ||
Municipal securities | $ | | $ | | ||
|
|
|
| |||
Securities AFS: |
|
|
|
| ||
Municipal securities | | | ||||
Other securities |
| |
| | ||
$ | | $ | |
As of June 30, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by
15
As of December 31, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by
Both general obligation and revenue bonds are diversified across many issuers. As of June 30, 2020 the Company did not hold any revenue bonds of one single issuer of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. As of December 31, 2019, the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the 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 loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.
The Company's municipal securities are owned by each of the
As of June 30, 2020, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.
16
NOTE 3 – LOANS/LEASES RECEIVABLE
The composition of the loan/lease portfolio as of June 30, 2020 and December 31, 2019 is presented as follows:
| 2020 | 2019 | ||||
(dollars in thousands) | ||||||
C&I loans* | $ | | $ | | ||
CRE loans |
|
|
|
| ||
Owner-occupied CRE |
| |
| | ||
Commercial construction, land development, and other land |
| |
| | ||
Other non owner-occupied CRE |
| |
| | ||
| |
| | |||
Direct financing leases ** |
| |
| | ||
Residential real estate loans *** |
| |
| | ||
Installment and other consumer loans |
| |
| | ||
| |
| | |||
Plus deferred loan/lease origination costs, net of fees |
| |
| | ||
| |
| | |||
Less allowance |
| ( |
| ( | ||
$ | | $ | | |||
** Direct financing leases: |
|
|
|
| ||
Net minimum lease payments to be received | $ | | $ | | ||
Estimated unguaranteed residual values of leased assets |
| |
| | ||
Unearned lease/residual income |
| ( |
| ( | ||
| |
| | |||
Plus deferred lease origination costs, net of fees |
| |
| | ||
| |
| | |||
Less allowance |
| ( |
| ( | ||
$ | | $ | |
* Includes equipment financing agreements outstanding at m2, totaling $
** Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The large majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.
*** Includes residential real estate loans held for sale totaling $
17
Changes in accretable yield for acquired loans were as follows:
Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||||||||||||
| PCI |
| Performing |
| PCI |
| Performing |
| |||||||||||
Loans | Loans | Total |
| Loans |
| Loans |
| Total | |||||||||||
(dollars in thousands) | |||||||||||||||||||
Balance at the beginning of the period | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
Reclassification of nonaccretable discount to accretable | — | — | — | ( | — | ( | |||||||||||||
Accretion recognized |
| |
| |
| |
| |
| |
| | |||||||
Balance at the end of the period | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( |
Three months ended June 30, 2019 | Six months ended June 30, 2019 | ||||||||||||||||||
| PCI |
| Performing |
| PCI |
| Performing |
| |||||||||||
Loans | Loans | Total |
| Loans |
| Loans |
| Total | |||||||||||
(dollars in thousands) | |||||||||||||||||||
Balance at the beginning of the period | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||
Reclassification of nonaccretable discount to accretable | ( | — | ( | ( | — | ( | |||||||||||||
Accretion recognized |
| |
| |
| |
| |
| |
| | |||||||
Balance at the end of the period | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( |
The aging of the loan/lease portfolio by classes of loans/leases as of June 30, 2020 and December 31, 2019 is presented as follows:
As of June 30, 2020 |
| ||||||||||||||||||
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 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
CRE |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Owner-Occupied CRE |
| |
| — |
| |
| — |
| |
| | |||||||
Commercial Construction, Land Development, and Other Land |
| |
| |
| — |
| — |
| — |
| | |||||||
Other Non Owner-Occupied CRE |
| |
| |
| — |
| — |
| |
| | |||||||
Direct Financing Leases |
| |
| |
| |
| — |
| |
| | |||||||
Residential Real Estate |
| |
| — |
| |
| — |
| |
| | |||||||
Installment and Other Consumer |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
As a percentage of total loan/lease portfolio |
| | % |
| | % |
| | % |
| — | % |
| | % |
| | % |
As of December 31, 2019 |
| ||||||||||||||||||
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 | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
CRE |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Owner-Occupied CRE |
| |
| |
| |
| — |
| |
| | |||||||
Commercial Construction, Land Development, and Other Land |
| |
| |
| — |
| — |
| — |
| | |||||||
Other Non Owner-Occupied CRE |
| |
| |
| — |
| — |
| |
| | |||||||
Direct Financing Leases |
| |
| |
| |
| — |
| |
| | |||||||
Residential Real Estate |
| |
| |
| |
| — |
| |
| | |||||||
Installment and Other Consumer |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
As a percentage of total loan/lease portfolio |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % |
18
NPLs by classes of loans/leases as of June 30, 2020 and December 31, 2019 are presented as follows:
As of June 30, 2020 | |||||||||||||||
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 | $ | | $ | | $ | | $ | |
| | % | ||||
CRE |
|
|
|
|
|
|
| ||||||||
Owner-Occupied CRE |
| — |
| |
| — |
| |
| | % | ||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| — |
| - | % | ||||
Other Non Owner-Occupied CRE |
| — |
| |
| — |
| |
| | % | ||||
Direct Financing Leases |
| — |
| |
| |
| |
| | % | ||||
Residential Real Estate |
| — |
| |
| — |
| |
| | % | ||||
Installment and Other Consumer |
| |
| |
| — |
| |
| | % | ||||
$ | | $ | | $ | | $ | |
| | % |
** Nonaccrual loans/leases included $
As of December 31, 2019 |
| ||||||||||||||
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 | $ | — | $ | | $ | | $ | |
| | % | ||||
CRE |
|
|
|
|
|
|
|
|
|
| |||||
Owner-Occupied CRE |
| — |
| |
| — |
| |
| | % | ||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| — |
| - | % | ||||
Other Non Owner-Occupied CRE |
| — |
| |
| — |
| |
| | % | ||||
Direct Financing Leases |
| — |
| |
| |
| |
| | % | ||||
Residential Real Estate |
| — |
| |
| — |
| |
| | % | ||||
Installment and Other Consumer |
| |
| |
| — |
| |
| | % | ||||
$ | | $ | | $ | | $ | |
| | % |
** Nonaccrual loans/leases included $
19
Changes in the allowance by portfolio segment for the three and six months ended June 30, 2020 and 2019, respectively, are presented as follows:
Three Months Ended June 30, 2020 | ||||||||||||||||||
Direct Financing | Residential Real | Installment and | ||||||||||||||||
| C&I |
| CRE |
| Leases |
| Estate |
| Other Consumer |
| Total | |||||||
| (dollars in thousands) | |||||||||||||||||
Balance, beginning | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provisions charged to expense |
| |
| |
| |
| |
| |
| | ||||||
Loans/leases charged off |
| ( |
| ( |
| ( |
| — |
| ( |
| ( | ||||||
Recoveries on loans/leases previously charged off |
| |
| — |
| |
| — |
| |
| | ||||||
Balance, ending | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Three Months Ended June 30, 2019 | ||||||||||||||||||
Direct Financing | Residential Real | Installment and | ||||||||||||||||
| C&I |
| CRE |
| Leases |
| Estate |
| Other Consumer |
| Total | |||||||
(dollars in thousands) | ||||||||||||||||||
Balance, beginning | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provisions (credits) charged to expense |
| |
| |
| |
| |
| ( |
| | ||||||
Loans/leases charged off |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Recoveries on loans/leases previously charged off |
| |
| |
| |
| |
| |
| | ||||||
Balance, ending | $ | | $ | | $ | | $ | | $ | | $ | |
Six Months Ended June 30, 2020 | |||||||||||||||||||
|
|
| Direct Financing |
| Residential Real |
| Installment and |
| |||||||||||
C&I | CRE | Leases | Estate | Other Consumer | Total | ||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
Balance, beginning | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Provisions charged to expense |
| |
| |
| |
| |
| |
| | |||||||
Loans/leases charged off |
| ( |
| ( |
| ( |
| — |
| ( |
| ( | |||||||
Recoveries on loans/leases previously charged off |
| |
| |
| |
| |
| |
| | |||||||
Balance, ending | $ | | $ | | $ | | $ | | $ | | $ | |
Six Months Ended June 30, 2019 | ||||||||||||||||||
Direct Financing | Residential Real | Installment and | ||||||||||||||||
| C&I |
| CRE |
| Leases |
| Estate |
| Other Consumer |
| Total | |||||||
(dollars in thousands) | ||||||||||||||||||
Balance, beginning | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Provisions (credits) charged to expense |
| |
| |
| |
| |
| |
| | ||||||
Loans/leases charged off |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Recoveries on loans/leases previously charged off |
| |
| |
| |
| |
| |
| | ||||||
Balance, ending | $ | | $ | | $ | | $ | | $ | | $ | |
20
The allowance by impairment evaluation and by portfolio segment as of June 30, 2020 and December 31, 2019 is presented as follows:
As of June 30, 2020 |
| ||||||||||||||||||
Direct Financing | Residential Real | Installment and |
| ||||||||||||||||
| C&I |
| CRE |
| Leases |
| Estate |
| Other Consumer |
| Total |
| |||||||
(dollars in thousands) | |||||||||||||||||||
Allowance for impaired loans/leases | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Allowance for nonimpaired loans/leases |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Impaired loans/leases | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Nonimpaired loans/leases |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance as a percentage of impaired loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
Allowance as a percentage of nonimpaired loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
Total allowance as a percentage of total loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
|
As of December 31, 2019 |
| ||||||||||||||||||
Direct Financing | Residential Real | Installment and |
| ||||||||||||||||
| C&I |
| CRE |
| Leases |
| Estate |
| Other Consumer |
| Total |
| |||||||
| (dollars in thousands) | ||||||||||||||||||
Allowance for impaired loans/leases | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Allowance for nonimpaired loans/leases |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Impaired loans/leases | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Nonimpaired loans/leases |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance as a percentage of impaired loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
Allowance as a percentage of nonimpaired loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
Total allowance as a percentage of total loans/leases |
| | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
|
Information for impaired loans/leases 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.
21
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the six months ended June 30, 2020 are presented as follows:
Six Months Ended June 30, 2020 | ||||||||||||||||||
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 | $ | | $ | | $ | — | $ | | $ | | $ | | ||||||
CRE |
|
|
|
|
|
|
|
|
|
|
| |||||||
Owner-Occupied CRE |
| |
| |
| — |
| |
| — |
| — | ||||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Other Non Owner-Occupied CRE |
| |
| |
| — |
| |
| |
| | ||||||
Direct Financing Leases |
| |
| |
| — |
| |
| |
| | ||||||
Residential Real Estate |
| |
| |
| — |
| |
| — |
| — | ||||||
Installment and Other Consumer |
| |
| |
| — |
| |
| — |
| — | ||||||
$ | | $ | | $ | — | $ | | $ | | $ | | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
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 |
| |
| |
| |
| |
| — |
| — | ||||||
Direct Financing Leases |
| |
| |
| |
| |
| — |
| — | ||||||
Residential Real Estate |
| |
| |
| |
| |
| — |
| — | ||||||
Installment and Other Consumer |
| |
| |
| |
| |
| — |
| — | ||||||
$ | | $ | | $ | | $ | | $ | — | $ | — | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total Impaired Loans/Leases: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
C&I | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
CRE |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner-Occupied CRE |
| |
| |
| — |
| |
| — |
| — | ||||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Other Non Owner-Occupied CRE |
| |
| |
| |
| |
| |
| | ||||||
Direct Financing Leases |
| |
| |
| |
| |
| |
| | ||||||
Residential Real Estate |
| |
| |
| |
| |
| — |
| — | ||||||
Installment and Other Consumer |
| |
| |
| |
| |
| — |
| — | ||||||
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
22
Loans/leases, by classes of financing receivable, considered to be impaired as of and for the three months ended June 30, 2020 and 2019 are presented as follows:
Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | |||||||||||||||||
| Interest Income | Interest Income | ||||||||||||||||
Average | Recognized for | Average | Recognized for | |||||||||||||||
Recorded | Interest Income | Cash Payments | Recorded | Interest Income | Cash Payments | |||||||||||||
Classes of Loans/Leases | Investment |
| Recognized |
| Received | Investment |
| Recognized |
| Received | ||||||||
| (dollars in thousands) | |||||||||||||||||
Impaired Loans/Leases with No Specific Allowance Recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||||
C&I | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
CRE |
|
|
|
|
|
|
|
|
| |||||||||
Owner-Occupied CRE |
| |
| — |
| — |
| |
| |
| | ||||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| |
| |
| | ||||||
Other Non Owner-Occupied CRE |
| |
| |
| |
| |
| |
| | ||||||
Direct Financing Leases |
| |
| |
| |
| |
| |
| | ||||||
Residential Real Estate |
| |
| — |
| — |
| |
| — |
| — | ||||||
Installment and Other Consumer |
| |
| — |
| — |
| |
| |
| | ||||||
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
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 |
| |
| — |
| — |
| |
| — |
| — | ||||||
Direct Financing Leases |
| |
| — |
| — |
| |
| — |
| — | ||||||
Residential Real Estate |
| |
| — |
| — |
| |
| |
| | ||||||
Installment and Other Consumer |
| |
| — |
| — |
| |
| — |
| — | ||||||
$ | | $ | — | $ | — | $ | | $ | | $ | | |||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total Impaired Loans/Leases: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
C&I | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
CRE |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Owner-Occupied CRE |
| |
| — |
| — |
| |
| |
| | ||||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — |
| |
| |
| | ||||||
Other Non Owner-Occupied CRE |
| |
| |
| |
| |
| |
| | ||||||
Direct Financing Leases |
| |
| |
| |
| |
| |
| | ||||||
Residential Real Estate |
| |
| — |
| — |
| |
| |
| | ||||||
Installment and Other Consumer |
| |
| — |
| — |
| |
| |
| | ||||||
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
23
Loans/leases, by classes of financing receivable, considered to be impaired as of December 31, 2019 are presented as
follows:
Unpaid | ||||||||||
Recorded | Principal | Related | ||||||||
Classes of Loans/Leases |
| Investment |
| Balance |
| Allowance | ||||
| (dollars in thousands) | |||||||||
Impaired Loans/Leases with No Specific Allowance Recorded: |
|
|
|
|
|
| ||||
C&I | $ | | $ | | $ | — | ||||
CRE |
|
|
|
|
|
| ||||
Owner-Occupied CRE |
| |
| |
| — | ||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — | ||||
Other Non Owner-Occupied CRE |
| |
| |
| — | ||||
Direct Financing Leases |
| |
| |
| — | ||||
Residential Real Estate |
| |
| |
| — | ||||
Installment and Other Consumer |
| |
| |
| — | ||||
$ | | $ | | $ | — | |||||
|
|
|
|
|
| |||||
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 |
| |
| |
| | ||||
Direct Financing Leases |
| |
| |
| | ||||
Residential Real Estate |
| |
| |
| | ||||
Installment and Other Consumer |
| |
| |
| | ||||
$ | | $ | | $ | | |||||
|
|
|
|
|
| |||||
Total Impaired Loans/Leases: |
|
|
|
|
| |||||
C&I | $ | | $ | | $ | | ||||
CRE |
|
|
| |||||||
Owner-Occupied CRE |
| |
| |
| — | ||||
Commercial Construction, Land Development, and Other Land |
| — |
| — |
| — | ||||
Other Non Owner-Occupied CRE |
| |
| |
| | ||||
Direct Financing Leases |
| |
| |
| | ||||
Residential Real Estate |
| |
| |
| | ||||
Installment and Other Consumer |
| |
| |
| | ||||
$ | | $ | | $ | |
Impaired loans/leases for which no allowance has been provided have adequate collateral, based on management’s current estimates.
For C&I and CRE loans, the Company’s credit quality indicator consists of internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.
For certain C&I loans (equipment financing agreements), direct financing leases, residential real estate loans, and installment and other consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system.
24
For each class of financing receivable, the following presents the recorded investment by credit quality indicator as of June 30, 2020 and December 31, 2019:
As of June 30, 2020 |
| ||||||||||||||||||
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) | $ | | $ | | $ | | $ | | $ | |
| | % | ||||||
Special Mention (Rating 6) |
| |
| |
| |
| |
| |
| | % | ||||||
Substandard (Rating 7) |
| |
| |
| — |
| |
| |
| | % | ||||||
Doubtful (Rating 8) |
| — |
| — |
| — |
| — |
| — |
| — | % | ||||||
$ | | $ | | $ | | $ | | $ | |
| | % |
As of June 30, 2020 |
| |||||||||||||||||
Direct Financing | Residential Real | Installment and | As a % of |
| ||||||||||||||
Delinquency Status * |
| C&I |
| Leases |
| Estate |
| Other Consumer |
| Total |
| Total |
| |||||
| (dollars in thousands) | |||||||||||||||||
Performing | $ | | $ | | $ | | $ | | $ | |
| | % | |||||
Nonperforming |
| |
| |
| |
| |
| |
| | % | |||||
$ | | $ | | $ | | $ | | $ | |
| | % |
As of December 31, 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) | $ | | $ | | $ | | $ | | $ | |
| | % | |||||
Special Mention (Rating 6) |
| |
| |
| |
| |
| |
| | % | |||||
Substandard (Rating 7) |
| |
| |
| |
| |
| |
| | % | |||||
Doubtful (Rating 8) |
| — |
| — |
| — |
| — |
| — |
| | % | |||||
$ | | $ | | $ | | $ | | $ | |
| | % |
As of December 31, 2019 |
| |||||||||||||||||
Direct Financing | Residential Real | Installment and | As a % of |
| ||||||||||||||
Delinquency Status * |
| C&I |
| Leases |
| Estate |
| Other Consumer |
| Total |
| Total |
| |||||
| (dollars in thousands) | |||||||||||||||||
Performing | $ | | $ | | $ | | $ | | $ | |
| | % | |||||
Nonperforming |
| |
| |
| |
| |
| |
| | % | |||||
$ | | $ | | $ | | $ | | $ | |
| | % |
* 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.
25
As of June 30, 2020 and December 31, 2019, TDRs totaled $
For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and six months ended June 30, 2020 and 2019. The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of the restructuring.
For the three months ended June 30, 2020 | For the three months ended June 30, 2019 | |||||||||||||||||||||
|
| Pre- |
| Post- |
|
|
| Pre- |
| Post- |
| |||||||||||
Modification | Modification | Modification | Modification | |||||||||||||||||||
Number of | Recorded | Recorded | Specific | Number of | Recorded | Recorded | Specific | |||||||||||||||
Classes of Loans/Leases | Loans / Leases | Investment | Investment | Allowance | Loans / Leases | Investment | Investment | Allowance | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
CONCESSION - Significant Payment Delay |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
C&I | — | $ | — | $ | — | $ | — | | $ | | $ | | $ | — | ||||||||
Direct Financing Leases |
| | | | — | — | — | — | — | |||||||||||||
| | $ | | $ | | $ | — | | $ | | $ | | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
CONCESSION - Forgiveness of Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
C&I |
| — | $ | — | $ | — | $ | — | | $ | | $ | | $ | — | |||||||
— | $ | — | $ | — | $ | — | | $ | | $ | | $ | — | |||||||||
TOTAL |
| | $ | | $ | | $ | — | | $ | | $ | | $ | — | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2020 | For the six months ended June 30, 2019 | |||||||||||||||||||||
|
| Pre- |
| Post- |
|
|
| Pre- |
| Post- |
| |||||||||||
Modification | Modification | Modification | Modification | |||||||||||||||||||
Number of | Recorded | Recorded | Specific | Number of | Recorded | Recorded | Specific | |||||||||||||||
Classes of Loans/Leases | Loans / Leases | Investment | Investment | Allowance | Loans / Leases | Investment | Investment | Allowance | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
CONCESSION - Significant Payment Delay |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
C & I | | $ | | $ | | $ | — | | $ | | $ | | $ | — | ||||||||
Direct Financing Leases |
| | | | — | | | | | |||||||||||||
| | $ | | $ | | $ | — | | $ | | $ | | $ | | ||||||||
CONCESSION - Forgiveness of Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
C & I |
| — | $ | — | $ | — | $ | — | | | | — | ||||||||||
TOTAL |
| |
| $ | | $ | | $ | — | | $ | | $ | | $ | | ||||||
Of the loans restructured during the six months ended June 30, 2020,
For the three months ended June 30, 2020,
For the three and six months ended June 30, 2019,
26
Not included in the table above, the Company had
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.
In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, existing loan could not be more than 30 days past due as of December 31, 2019 and modification executed between March 1, 2020 and earlier of 60 days after the termination of the National Emergency or December 31, 2020. 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 FASB criteria discussed in the preceding paragraph.
The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. As of June 30, 2020, the program has provided
27
NOTE 4 – DERIVATIVES AND HEDGING ACTIVITIES
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 in December 2019 to hedge against the risk of rising interest rates on liabilities. The liabilities consist of $
Balance Sheet | Fair Value as of | ||||||||||||||||||||
Hedged Item | Effective Date | Maturity Date | Location | Notional Amount | Strike Rate | June 30, 2020 | December 31, 2019 | ||||||||||||||
(dollars in thousands) | |||||||||||||||||||||
Deposits | 1/1/2020 | 1/1/2023 | Other Assets | $ | % | $ | | $ | | ||||||||||||
Deposits | 1/1/2020 | 1/1/2023 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2023 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2023 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2024 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2024 | Other Assets | | | ||||||||||||||||
Deposits | 2/1/2020 | 2/1/2024 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2024 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2025 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2025 | Other Assets | | | ||||||||||||||||
Deposits | 3/1/2020 | 3/1/2025 | Other Assets | | | ||||||||||||||||
Deposits | 1/1/2020 | 1/1/2025 | Other Assets | | | ||||||||||||||||
$ | $ | | $ | | |||||||||||||||||
The Company has entered into interest rate swaps to hedge against the risk of rising rates on its rolling fixed rate short-term FHLB advances or brokered CDs and its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815. The details of the interest rate swaps are as follows:
Balance Sheet | Fair Value as of | |||||||||||||||||||||
Hedged Item | Effective Date | Maturity Date | Location | Notional Amount | Receive Rate | Pay Rate | June 30, 2020 | December 31, 2019 | ||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||
CRBT - FHLB Advances or Brokered CDs |
| 3/16/2020 | 3/16/2023 | Derivatives - Liabilities |
| $ | | % |
| % | $ | ( | $ | - | ||||||||
SFCB - FHLB Advances or Brokered CDs |
| 3/16/2020 | 3/16/2023 | Derivatives - Liabilities |
| | % |
| % | ( | - | |||||||||||
QCR Holdings Statutory Trust II |
| 9/30/2018 | 9/30/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
QCR Holdings Statutory Trust III |
| 9/30/2018 | 9/30/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
QCR Holdings Statutory Trust V |
| 7/7/2018 | 7/7/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
Community National Statutory Trust II |
| 9/20/2018 | 9/20/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
Community National Statutory Trust III |
| 9/15//2018 | 9/15/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
Guaranty Bankshares Statutory Trust I |
| 9/15/2018 | 9/15/2028 | Derivatives - Liabilities |
| | % |
| % | ( | ( | |||||||||||
|
|
| $ | | % |
| % | $ | ( | $ | ( | |||||||||||
Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.
The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third party financial institution. Additionally, the Company receives an upfront 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
28
underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.
Interest rate swaps that are not designated as hedging instruments are summarized as follows:
June 30, 2020 | December 31, 2019 | ||||||||||||
Notional Amount | Estimated Fair Value | Notional Amount | Estimated Fair Value | ||||||||||
(dollars in thousands) | |||||||||||||
Non-Hedging Interest Rate Derivatives Assets: | |||||||||||||
Interest rate swap contracts | $ | | $ | | $ | $ | |||||||
Non-Hedging Interest Rate Derivatives Liabilities: | |||||||||||||
Interest rate swap contracts | $ | | $ | | $ | $ |
Swap fee income totaled $
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:
|
| June 30, 2020 | December 31, 2019 | |||
(dollars in thousands) | ||||||
Cash | $ | | $ | | ||
U.S govt. sponsored agency securities | | | ||||
Municipal securities | | | ||||
Residential mortgage-backed and related securities |
| |
| | ||
$ | | $ | | |||
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. Additionally, the Company enters into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits. The ISDA master agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
NOTE 5 - EARNINGS PER SHARE
The following information was used in the computation of EPS on a basic and diluted basis:
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2020 |
| 2019 |
| 2020 |
| 2019 | |||||||
(dollars in thousands, except share data) | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Basic EPS | $ | | $ | | $ | | $ | | |||||
Diluted EPS | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding |
| |
| |
| |
| | |||||
Weighted average common shares issuable upon exercise of stock options | |||||||||||||
and under the employee stock purchase plan |
| |
| |
| |
| | |||||
Weighted average common and common equivalent shares outstanding |
| |
| |
| |
| | |||||
29
NOTE 6 – FAIR VALUE
Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
● | 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 and liabilities measured at fair value on a recurring basis comprise the following at June 30, 2020 and December 31, 2019:
Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices | Significant | ||||||||||
| in Active | Other | Significant | |||||||||
| Markets for | Observable | Unobservable | |||||||||
| Identical Assets | Inputs | Inputs | |||||||||
|
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
(dollars in thousands) | ||||||||||||
June 30, 2020: |
|
|
|
|
|
|
|
| ||||
Securities AFS: |
|
|
|
|
|
|
|
| ||||
U.S. govt. sponsored agency securities | $ | | $ | — | $ | | $ | — | ||||
Residential mortgage-backed and related securities |
| |
| — |
| |
| — | ||||
Municipal securities |
| |
| — |
| |
| — | ||||
Asset-backed securities | | — | | — | ||||||||
Other securities |
| |
| — |
| |
| — | ||||
Derivatives |
| |
| — |
| |
| — | ||||
Total assets measured at fair value | $ | | $ | — | $ | | $ | — | ||||
|
|
|
|
|
|
|
| |||||
Derivatives | $ | | $ | — | $ | | $ | — | ||||
Total liabilities measured at fair value | $ | | $ | — | $ | | $ | — | ||||
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
| |||||
December 31, 2019: |
|
|
|
|
|
|
|
| ||||
Securities AFS: |
|
|
|
|
|
|
|
| ||||
U.S. govt. sponsored agency securities | $ | | $ | — | $ | | $ | — | ||||
Residential mortgage-backed and related securities |
| |
| — |
| |
| — | ||||
Municipal securities |
| |
| — |
| |
| — | ||||
Asset-backed securities | | — | | — | ||||||||
Other securities |
| |
| — |
| |
| — | ||||
Derivatives |
| |
| — |
| |
| — | ||||
Total assets measured at fair value | $ | | $ | — | $ | | $ | — | ||||
|
|
|
|
|
|
|
| |||||
Derivatives | $ | | $ | — | $ | | $ | — | ||||
Total liabilities measured at fair value | $ | | $ | — | $ | | $ | — |
The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).
Interest rate caps are used for the purpose of hedging interest rate risk. The interest rate caps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).
30
Interest rate swaps are used for the purpose of hedging interest rate risk on FHLB advances, brokered deposits and junior subordinated debt. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Interest rate swaps are also executed for select commercial customers. The interest rate swaps are further described in Note 4 to the Consolidated Financial Statements. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs).
Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2020 and December 31, 2019:
| Fair Value Measurements at Reporting Date Using | |||||||||||
Quoted Prices | Significant | |||||||||||
in Active | Other | Significant | ||||||||||
Markets for | Observable | Unobservable | ||||||||||
Identical Assets | Inputs | Inputs | ||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(dollars in thousands) | ||||||||||||
June 30, 2020: |
|
|
|
|
|
|
|
| ||||
Impaired loans/leases | $ | | $ | — | $ | — | $ | | ||||
OREO |
| |
| — |
| — |
| | ||||
$ | | $ | — | $ | — | $ | | |||||
December 31, 2019: |
|
|
|
|
|
|
|
| ||||
Impaired loans/leases | $ | | $ | — | $ | — | $ | | ||||
OREO |
| |
| — |
| — |
| | ||||
$ | | $ | — | $ | — | $ | | |||||
Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.
OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property.
31
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 |
| |||||||||||||||
June 30, | December 31, |
| |||||||||||||||
|
| 2020 |
| 2019 |
| Valuation Technique |
| Unobservable Input |
| Range | |||||||
(dollars in thousands) | |||||||||||||||||
Impaired loans/leases | $ | | $ | |
|
|
| ( | % | to |
| ( | % | ||||
OREO |
| |
| |
|
|
| % | to |
| ( | % |
For the impaired loans/leases and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.
There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three and six months ended June 30, 2020 and 2019.
The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
Fair Value | As of June 30, 2020 | As of December 31, 2019 | ||||||||||||
Hierarchy | Carrying | Estimated | Carrying | Estimated | ||||||||||
| Level |
| Value |
| Fair Value |
| Value |
| Fair Value | |||||
(dollars in thousands) | ||||||||||||||
Cash and due from banks |
| Level 1 | $ | | $ | | $ | | $ | | ||||
Federal funds sold |
| Level 2 |
| |
| |
| |
| | ||||
Interest-bearing deposits at financial institutions |
| Level 2 |
| |
| |
| |
| | ||||
Investment securities: |
|
|
|
|
|
| ||||||||
HTM |
| Level 2 |
| |
| |
| |
| | ||||
AFS |
| * |
| |
| |
| |
| | ||||
Loans/leases receivable, net |
| Level 3 |
| |
| |
| |
| | ||||
Loans/leases receivable, net |
| Level 2 |
| |
| |
| |
| | ||||
Derivatives |
| Level 2 |
| |
| |
| |
| | ||||
Deposits: |
|
|
|
|
|
| ||||||||
Nonmaturity deposits |
| Level 2 |
| |
| |
| |
| | ||||
Time deposits |
| Level 2 |
| |
| |
| |
| | ||||
Short-term borrowings |
| Level 2 |
| |
| |
| |
| | ||||
FHLB advances |
| Level 2 |
| |
| |
| |
| | ||||
Subordinated notes | Level 2 | | | | | |||||||||
Junior subordinated debentures |
| Level 2 |
| |
| |
| |
| | ||||
Derivatives |
| Level 2 |
| |
| |
| |
| |
*See previous table in Note 2.
NOTE 7 – 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.
32
The Company's primary segment, Commercial Banking, is geographically divided by markets into the secondary segments comprised of the
The Company's Wealth Management segment represents the trust, asset management, investment management and advisory services offered at the Company's subsidiary banks and the Bates Companies in aggregate. This segment generates income primarily from fees charged based on assets under administration for corporate and personal trusts, custodial services, and investments managed.
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. The financial results for RB&T prior to the sale of the majority of its assets and liabilities at November 30, 2019 are also included in the Company’s All Other Segment as are the assets held for sale at June 30, 2020.
Selected financial information on the Company's business segments is presented as follows as of and for the three and six months ended June 30, 2020 and 2019.
Commercial Banking | Wealth | Intercompany | Consolidated | ||||||||||||||||||||
QCBT |
| CRBT |
| CSB |
| SFC Bank |
| Management |
| All other |
| Eliminations |
| Total | |||||||||
(dollars in thousands) | |||||||||||||||||||||||
Three Months Ended June 30, 2020 |
|
| |||||||||||||||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Net interest income |
| |
| |
| |
| |
| — |
| ( |
| |
| | |||||||
Provision for loan/lease losses |
| |
| |
| |
| |
| — |
| — |
| — |
| | |||||||
Net income (loss) from continuing operations |
| |
| |
| |
| |
| |
| |
| ( |
| | |||||||
Goodwill |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Intangibles |
| — |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Total assets |
| |
| |
| |
| |
| — |
| |
| ( |
| | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Three Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Net interest income |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Provision for loan/lease losses |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Net income (loss) from continuing operations |
| |
| |
| |
| |
| |
| |
| ( |
| | |||||||
Goodwill |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Intangibles |
| — |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Total assets |
| |
| |
| |
| |
| — |
| |
| ( |
| | |||||||
Six Months Ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Net interest income |
| |
| |
| |
| |
| — |
| ( |
| |
| | |||||||
Provision for loan/lease losses |
| |
| |
| |
| |
| — |
| — |
| — |
| | |||||||
Net income (loss) |
| |
| |
| |
| |
| |
| |
| ( |
| | |||||||
Goodwill |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Intangibles |
| — |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Total assets |
| |
| |
| |
| |
| — |
| |
| ( |
| | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Six Months Ended June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total revenue | $ | | $ | | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Net interest income |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Provision for loan/lease losses |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Net income (loss) from continuing operations |
| |
| |
| |
| |
| |
| |
| ( |
| | |||||||
Goodwill |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Intangibles |
| — |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Total assets |
| |
| |
| |
| |
| — |
| |
| ( |
| |
NOTE 8 – REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification
33
are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation. Management believes, as of June 30, 2020 and December 31, 2019, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.
Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks' actual capital amounts and ratios as of June 30, 2020 and December 31, 2019 are presented in the following table (dollars in thousands). As of June 30, 2020 and December 31, 2019, each of the subsidiary banks met the requirements to be “well capitalized”.
For Capital | To Be Well |
| |||||||||||||||||||
Adequacy Purposes | Capitalized Under |
| |||||||||||||||||||
For Capital | With Capital | Prompt Corrective |
| ||||||||||||||||||
Actual | Adequacy Purposes | Conservation Buffer | Action Provisions |
| |||||||||||||||||
| Amount |
| Ratio |
| Amount | Ratio |
| Amount | Ratio |
| Amount | Ratio | |||||||||
As of June 30, 2020: | |||||||||||||||||||||
Company: | |||||||||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Quad City Bank & Trust: |
|
|
|
|
|
|
|
| |||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Cedar Rapids Bank & Trust: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Community State Bank: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Springfield First Community Bank: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | |
For Capital | To Be Well |
| |||||||||||||||||||
Adequacy Purposes | Capitalized Under |
| |||||||||||||||||||
For Capital | With Capital | Prompt Corrective |
| ||||||||||||||||||
Actual | Adequacy Purposes | Conservation Buffer | Action Provisions |
| |||||||||||||||||
| Amount |
| Ratio |
| Amount | Ratio |
| Amount | Ratio |
| Amount | Ratio |
| ||||||||
As of December 31, 2019: | |||||||||||||||||||||
Company: | |||||||||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Tier 1 leverage |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Common equity Tier 1 |
| |
| |
| | > | |
| | > | |
| | > | | |||||
Quad City Bank & Trust: |
|
|
|
|
|
|
|
| |||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| | |
| | > | |
| | > | |
| | > | | ||||||
Tier 1 leverage |
| | |
| | > | |
| | > | |
| | > | | ||||||
Common equity Tier 1 |
| | |
| | > | |
| | > | |
| | > | | ||||||
Cedar Rapids Bank & Trust: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| | |
| | > | |
| | > | |
| | > | | ||||||
Tier 1 leverage |
| | |
| | > | |
| | > | |
| | > | | ||||||
Common equity Tier 1 |
| | |
| | > | |
| | > | |
| | > | | ||||||
Community State Bank: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| | |
| | > | |
| | > | |
| | > | | ||||||
Tier 1 leverage |
| | |
| | > | |
| | > | |
| | > | | ||||||
Common equity Tier 1 |
| | |
| | > | |
| | > | |
| | > | | ||||||
Springfield First Community Bank: |
|
|
|
|
|
|
| ||||||||||||||
Total risk-based capital | $ | | | % | $ | | > | | % | $ | | > | | % | $ | | > | | % | ||
Tier 1 risk-based capital |
| | |
| | > | |
| | > | |
| | > | | ||||||
Tier 1 leverage |
| | |
| | > | |
| | > | |
| | > | | ||||||
Common equity Tier 1 |
| | |
| | > | |
| | > | |
| | > | |
34
NOTE 9 – PENDING SALE
On April 2, 2020, the Company entered into a stock purchase agreement to sell all the issued and outstanding capital stock of the Bates Companies. The aggregate consideration to be paid to the Company shall be an amount equal to $
This transaction received regulatory approval and the closing date is scheduled for August 10, 2020.
Goodwill impairment related to the execution of the agreement to sell the Bates Companies was $
35
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three and six months ending June 30, 2020. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. The page locations and specific sections and notes that are referred to in this discussion are presented in the table of contents.
Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.
GENERAL
QCR Holdings, Inc. is a financial holding company and the parent company of QCBT, CRBT, CSB and SFC Bank. QCBT, CRBT and CSB are Iowa-chartered commercial banks and SFC Bank is a Missouri-chartered commercial bank. All four charters are members of the Federal Reserve system with depository accounts insured to the maximum amount permitted by the FDIC.
● | QCBT commenced operations in 1994 and provides full-service commercial and consumer banking, and trust and asset management services to the Quad City area and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and Moline, Illinois. QCBT also provides leasing services through its wholly-owned subsidiary, m2, located in Brookfield, Wisconsin. In addition, QCBT owns 100% of Quad City Investment Advisors, LLC, which is an investment management and advisory company. |
● | CRBT commenced operations in 2001 and provides full-service commercial and consumer banking, and trust and asset management services to Cedar Rapids, Iowa and adjacent communities through its five offices located in Cedar Rapids and Marion, Iowa. Cedar Falls and Waterloo, Iowa and adjacent communities are served through three additional CRBT offices (one in Cedar Falls and two in Waterloo). |
● | CSB was acquired by the Company in 2016 and provides full-service commercial and consumer banking services to the Des Moines, Iowa area and adjacent communities through its 10 offices, including its main office located on North Ankeny Boulevard in Ankeny, Iowa. |
● | SFC Bank became a subsidiary of the Company in 2018 and provides full-service commercial and consumer banking services to the Springfield, Missouri area through its main office located on Glenstone Avenue in Springfield, Missouri. |
IMPACT OF COVID-19
The progression of the COVID-19 pandemic in the United States has had an adverse impact on the Company’s financial condition and results of operations as of and for the three and six months ended June 30, 2020, and could 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 Illinois, Missouri and Iowa. Each of these three states has recently taken different steps to reopen since COVID-19 thrust the country into lockdown starting in March 2020. In Illinois, Governor J.B Pritzker has moved the state into Phase 4 of Restore Illinois which allows
36
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
businesses to open with Illinois Department of Public Health approved safety guidance and requires certain businesses to open at reduced capacity. This went into effect on June 26, 2020. In Missouri, Governor Mike Parson announced the full opening of the state, effective June 16, 2020. In Iowa, Governor Kim Reynolds lifted all capacity limits on businesses effective June 10, 2020. Despite these measures, the reopening of each jurisdiction is subject to change, delay and setbacks based on ongoing regional monitoring of the pandemic. However, currently all of the subsidiary banks’ branches are open during normal business hours with the exception of four branch locations that are currently limiting lobby access to appointment only.
Each state has experienced rapidly increasing unemployment levels as a result of the curtailment of business activities, rising from an average of 4.6% in Illinois in March 2020 to an average of 15.2% in May 2020, according to the Illinois Department of Employment Security. The unemployment rate in Illinois improved slightly in June 2020 to an average of 14.6%. Unemployment rose from an average of 4.5% in Missouri in March 2020 to 10.1% in May 2020, according to the Missouri Department of Labor and Industrial Relations. The unemployment rate in Missouri improved in June 2020 to an average of 7.9%. In Iowa, unemployment rose from an average of 3.7% in March 2020 to 10.0% in May 2020, according to the Iowa Workforce Development. The unemployment rate in Iowa improved in June 2020 to an average of 7.9%.
Policy and Regulatory Developments
Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
● | The Federal Reserve decreased the range for the Federal Funds Target Rate by 0.50% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%. |
● | On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic stimulus package, which provided for cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act, which authorized an additional $310 billion of PPP loans. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to limitations and eligibility criteria. The original timeframe for PPP lending expired on June 30, 2020, but Congress acted on June 30, 2020 to provide a 5-week PPP extension for lending to allow small businesses additional time to apply for the remaining PPP funds allocated by Congress in connection with the CARES Act. The subsidiary banks are participating as lenders in the PPP. |
● | In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To be eligible, the modification must be related to COVID-19, existing loan could not be more than 30 days past due as of December 31, 2019 and modification executed between March 1, 2020 and earlier of 60 days after the termination of the National Emergency or December 31, 2020. 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 FASB criteria discussed in Note 3 of the Consolidated Financial Statements. |
● | On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs, and the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the Consolidated Financial Statements for additional discussion on TDRs. |
37
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
● | On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: the MSNLF and the MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve has provided additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to such a facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. As of June 30, 2020, the Company is only participating in the PPP and not the Main Street Business Lending Program. |
Effects on the Company’s Business
The Company currently expects that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on its business. In particular, the Company anticipates that a significant portion of the subsidiary banks’ borrowers in the hotel, restaurant, entertainment and retail industries will continue to endure significant economic distress, and could adversely affect their ability to repay existing indebtedness, and could adversely impact the value of collateral pledged to the banks. These developments, together with economic conditions generally, may impact the Company’s commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, the Company’s equipment leasing business and loan portfolio, the Company’s consumer loan business and loan portfolio, and the value of certain collateral securing the Company’s loans. In addition, the Company’s loan and lease growth could slow exclusive of the PPP loans, while deposit growth could accelerate as businesses and consumers navigate the impact. As a result, the Company anticipates that its financial condition, capital levels, asset quality and results of operations could be adversely affected, as described in further detail below.
The Company’s Response
The Company has taken numerous steps in response to the COVID-19 pandemic, including the following:
● | The Company implemented its LRP offering to extend qualifying customers’ payments for 90 days. The program has provided 2,401 modifications of loans and leases totaling $544.0 million to commercial and consumer clients as of June 30, 2020. |
● | As the Company moved to protect the health and safety of its employees and clients, digital collaboration and digital banking applications have become business critical. The Company is using virtual meetings to stay connected with its clients and customers are leveraging the Company’s mobile banking capabilities. The Company’s digital communications tool is a modern enterprise video application, with an easy, reliable and secure cloud platform for video and audio conferencing, chat and web conferencing across mobile, desktop and room systems. It has enabled the Company to continue to collaborate in real-time across the enterprise and to meet face-to-face with our clients while working remotely to adhere to the Center for Disease Control’s |
38
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
physical distancing guidelines. Clients are using the Company’s existing mobile banking and mobile payment capabilities including: on-line banking, remote deposit, on-line retail loan applications and person-to-person payment applications that are available across multiple form factors. These applications have enabled customers to engage with the Company virtually to meet their community banking needs. The Company proactively reached out to customers to make sure that they knew how to use these tools and increased their mobile deposit limits to enable expanded use of remote deposit features. The Company also worked with primary digital banking solution providers to make adjustments to their hosting capabilities to accommodate the unprecedented levels of volume through this digital channel. |
● | The Company began to execute on its Public Emergency Preparedness Plan (“PEP”) mid-February. The PEP was created to coordinate resources in an organized manner to respond to any public emergency that may significantly affect staffing. One of the situations specifically called out in the plan is a health-related event such as a specific threat of influenza, or other disease, creating pandemic conditions. This program is an important part of the Company’s Business Continuity Program, which specifically addresses rapid recovery from an occurrence that would disable any entity for a period exceeding 48 hours. The goal of the plan is to protect employees, customers, facilities, systems, property and operations during any public emergency and maintain normal operations, to the extent possible, consistent with those goals. In the event that normal operations cannot be maintained, the goals will be to maximize the continuity of the essential services to our customers, protect the health and safety of employees and customers, and minimize adverse financial impact to our institutions. Finally, the plan will provide for a return to full operations and services as quickly as possible. The plan was fully implemented during the first two weeks of March and the following strategies were executed: |
o | Emergency Preparedness Response Team critical members were identified to direct the Company’s planning, preparedness, training and response to lead the recovery effort with the COVID-19 pandemic; |
o | increased cash reserves at all charters were established and the charters began monitoring cash outflows; |
o | IT testing began to ensure the Company’s systems were capable of handling traffic generated by employees working from home; |
o | reviewed cross training lists for each department in case of staff shortages; |
o | split specific departments into shifts so not all employees were working together at the same time; and |
o | communication sites were activated in case emergency information needed to be communicated to employees. |
● | The PPP was approved as part of the CARES Act and authorized up to $349 billion in forgivable loans to small businesses to pay their employees and for other operating expenses, during the COVID-19 crisis, and an additional $310 billion of loans were authorized to be made under the PPP in a second phase of funding. The Company has processed 1,655 loans for a total of $358.1 million as of June 30, 2020. The Company is continuing to take PPP applications and is currently processing new loans under newly approved additional funding. PPP loans are included in the C&I category of loans in Note 3 of the Consolidated Financial Statements. |
● | The Company has implemented a number of actions to support a healthy workforce, including: |
39
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
o | adopting alternative work practices such as working in shifts, social distancing in our facilities and adding remote work options for approximately half of our workforce; |
o | discontinued business travel, large events and meetings; and |
o | utilizing online meeting platforms. |
● | On February 28, 2020, the Company’s Board of Directors authorized a share repurchase program, permitting the repurchase of up to 800,000 shares of the Company’s outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if the Company does not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain when the Company will resume the repurchase of shares as part of this program in the future. |
EXECUTIVE OVERVIEW
The Company reported net income of $13.7 million and diluted EPS of $0.86 for the quarter ended June 30, 2020. By comparison, for the quarter ended March 31, 2020, the Company reported net income of $11.2 million and diluted EPS of $0.70. For the quarter ended June 30, 2019, the Company reported net income of $13.5 million, and diluted EPS of $0.85. For the six months ended June 30, 2020, the Company reported net income of $25.0 million, and diluted EPS of $1.56. By comparison, for the six months ended June 30, 2019, the Company reported net income of $26.4 million, and diluted EPS of $1.66.
The second quarter of 2020 was also highlighted by the following results and events:
● | Net income of $13.7 million, or $0.86 per diluted share; |
● | Adjusted net income (non-GAAP) of $14.0 million, or $0.88 per diluted share; |
● | Noninterest income of $28.6 million; |
● | Net interest margin was stable, excluding the impact of excess liquidity; |
● | Pre-Provision/Pre-Tax Adjusted Net Income (non-GAAP) of $36.8 million; |
● | Provision expense of $19.9 million for the quarter, increasing ALLL to Loans by 33 bps to 1.47%; |
● | Nonperforming assets to total assets of 0.24%, improving 8 basis points from the prior quarter; |
● | Annualized core loan and lease growth of 8.4% for the quarter, excluding newly originated SBA PPP loans; |
● | Annualized deposit growth of 17.2% for the quarter; and |
● | PPP loan participation of 1,655 totaling $358.1 million to both new and existing clients. |
40
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Following is a table that represents various income measurements for the Company.
For the three months ended | For the six months ended | |||||||||||||||
June 30, 2020 | March 31, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Net income | $ | 13,739 | $ | 11,228 | $ | 13,504 | $ | 24,967 | $ | 26,422 | ||||||
Diluted earnings per common share | $ | 0.86 | $ | 0.70 | $ | 0.85 | $ | 1.56 | $ | 1.66 | ||||||
Weighted average common and common equivalent shares outstanding |
| 15,895,336 |
| 16,011,456 |
| 15,938,377 |
| 15,956,958 |
| 15,930,659 |
Following is a table that represents the major income and expense categories for the Company:
For the three months ended | For the six months ended | |||||||||||||||
| June 30, 2020 |
| March 31, 2020 |
| June 30, 2019 |
| June 30, 2020 |
| June 30, 2019 |
| ||||||
(dollars in thousands) | ||||||||||||||||
Net interest income | $ | 40,948 | $ | 37,698 | $ | 38,013 | $ | 78,646 | $ | 74,921 | ||||||
Provision expense |
| 19,915 |
| 8,367 |
| 1,941 |
| 28,282 |
| 4,075 | ||||||
Noninterest income |
| 28,626 |
| 15,196 |
| 17,065 |
| 43,822 |
| 29,058 | ||||||
Noninterest expense |
| 33,122 |
| 31,415 |
| 36,560 |
| 64,537 |
| 68,995 | ||||||
Federal and state income tax expense |
| 2,798 |
| 1,884 |
| 3,073 |
| 4,682 |
| 4,487 | ||||||
Net income | $ | 13,739 | $ | 11,228 | $ | 13,504 | $ | 24,967 | $ | 26,422 | ||||||
Following are some noteworthy changes in the Company's financial results:
● | Net interest income in the second quarter of 2020 was up 9% compared to the first quarter of 2020. The increase was primarily due to growth in average interest earning assets of $791.6 million, or 17.7% on a linked quarter basis, of which $404.9 million of the increase was due to excess cash derived from outsized deposit growth. Net interest income increased 8% compared to the second quarter of 2019 and 5% when comparing the first six months of 2020 to the same period of the prior year. The increase was primarily due to loan growth during the first six months of 2020. |
● | Provision expense in the second quarter of 2020 increased $11.5 million compared to the first quarter of 2020. Provision expense increased $18.0 million compared to the second quarter of 2019 and $24.2 million when comparing the first six months of 2020 to the same period in the prior year. The increase was primarily due to increased qualitative allocations in response to deteriorating economic conditions as related to the effects of COVID-19. See the Provision for Loan Lease Losses section of this report for additional details. |
● | Noninterest income in the second quarter of 2020 increased 88% compared to the first quarter of 2020 primarily due to higher swap fee income. Noninterest income increased 68% compared to the second quarter of 2019 and 51% when comparing the first six months of 2020 to the same period in the prior year. This increase was primarily attributable to higher swap fee income in the first six months of 2020. |
● | Noninterest expense increased 5% in the second quarter of 2020 compared to the first quarter of 2020. Salaries and employee benefits were $21.3 million in the second quarter of 2020 as compared to $18.5 million in the first quarter of 2020 primarily due to higher incentive compensation as a result of the higher swap fee income. FDIC and other insurance, and regulatory fees were $908 thousand in the second quarter of 2020 as compared to $683 thousand in the first quarter of 2020 due to FDIC insurance assessment credits included in first quarter 2020 totals. Loss on liability extinguishment was $429 thousand in the second quarter of 2020 as compared to $147 |
41
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
thousand in the first quarter of 2020 due to increased early payoffs of brokered certificate of deposits in the second quarter. Noninterest expense decreased 9% compared to the second quarter of 2019 and decreased 6% when comparing the first six months of 2020 to the same period in the prior year. Salaries and employee benefits were down 9% from prior year primarily due to reduced bonus compensation as a result of the impact of COVID-19 and the sale of RB&T. |
● | Federal and state income tax expense in the second quarter of 2020 increased 49% compared to the first quarter of 2020. Federal and state income tax expense decreased 9% compared to the second quarter of 2019 and increased 4% when comparing the first six months of 2020 to the same period in the prior year. See the “Income Taxes” section of this report for additional details on these increases. |
STRATEGIC FINANCIAL METRICS
The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics will be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The Company's long-term strategic financial metrics are as follows:
● | Organic loan and lease growth of 9% per year, funded by core deposits; |
● | Grow fee-based income by at least 6% per year; and |
● | Limit our annual operating expense growth to 5% per year. |
The following table shows the evaluation of the Company’s strategic financial metrics:
Year to Date | ||||||||
Strategic Financial Metric |
| Key Metric |
| Target | June 30, 2020* | |||
Loans and leases growth organically |
| Loans and leases growth |
| > 9% annually | 5.0 | % | ||
Fee income growth |
| Fee income growth |
| > 6% annually | 31.7 | % | ||
Improve operational efficiencies and hold noninterest expense growth | Noninterest expense growth |
| < 5% annually | (11.6) | % |
* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison. The calculations provided exclude non-core noninterest income and noninterest expense.
** Loans and leases growth excludes PPP loans.
It should be noted that these initiatives are long-term targets. Due to the impact of the COVID-19 pandemic, the Company may not be able to achieve these goals for the full year 2020.
42
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
STRATEGIC DEVELOPMENTS
The Company has taken the following actions during the second quarter of 2020 to support its corporate strategy:
● | The Company grew loans and leases organically in the second quarter of 2020 by 8.4% on an annualized basis, excluding PPP loans (non-GAAP), reflecting healthy demand across all markets. |
● | Correspondent banking has continued 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 currently served – Iowa, Illinois, Wisconsin and Missouri. The Company acts as the correspondent bank for 191 downstream banks with average total noninterest bearing deposits of $249.2 million and average total interest bearing deposits of $505.2 million during the first six months of 2020. By comparison, the Company acted as the correspondent bank for 192 downstream banks with average total noninterest bearing deposits of $168.9 million and average total interest bearing deposits of $310.1 million during the first six months of 2019. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans. |
● | As a result of the relatively low interest rate environment including a flat to inverted yield curve, the Company has focused on executing interest rate swaps on select commercial loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent on the pricing. The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Swap fee income totaled $26.7 million for the six months ended June 30, 2020 as compared to $11.1 million for the six months ended June 30, 2019. |
● | Noninterest expense for the first six months of 2020 totaled $64.5 million as compared to $69.0 million in the first six months of 2019. The decrease was primarily due to a decline in salaries and employee benefits as a result of reduced bonus and incentive compensation due to the impact of COVID-19. |
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”, “pre-provision/pre-tax adjusted income”, “NIM (TEY)”, “adjusted NIM”, “pre-provision/pre-tax adjusted ROAA”, “efficiency ratio”, “ALLL to total loans and leases excluding PPP loans” and “loan growth annualized excluding PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:
● | TCE/TA ratio (non-GAAP) is reconciled to stockholders' equity and total assets; |
● | TCE/TA ratio excluding PPP loans (non-GAAP) is reconciled to stockholders’ equity and total assets; |
● | Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income; |
● | Pre-provision/Pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA (all non-GAAP measures) are reconciled to net income; |
● | NIM (TEY) (non-GAAP) and adjusted NIM (non-GAAP) are reconciled to NIM; |
● | Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and |
43
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
● | ALLL to total loans and leases excluding PPP loans and loan growth annualized excluding PPP loans are reconciled to ALLL and total loans and leases. |
The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets. The TCE/TA ratio excluding PPP loans non-GAAP ratio is provided as the Company’s management believes this financial measure is important to investors as total assets for the quarter ended June 30, 2020 was materially higher due to the addition of PPP loans. By excluding the PPP loans, management believes the investor is provided a better comparison to prior periods for analysis.
The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.
The pre-provision/pre-tax adjusted income and pre-provision/pre-tax adjusted ROAA are measurements of the Company’s financial performance excluding provision and income taxes as well as non-recurring income and expense items. The Company’s management believes this financial measure is important to investors as provision for the quarter ended June 30, 2020 was materially higher due to the impact of COVID-19 as well as its impact on income taxes. By excluding the provision and income taxes as well as non-recurring income and expense items, the investor is provided a better comparison to prior periods for analysis.
NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.
The efficiency ratio is a ratio that management utilizes to compare the Company to its peers. It is a standard ratio used to calculate overhead as a percentage of revenue in the banking industry and is widely utilized by investors.
ALLL to total loans and leases, excluding PPP loans and loan growth annualized, excluding PPP loans are ratios that management utilizes to compare the Company to its peers. The Company’s management believes these financial measures are important to investors as total loans and leases for the quarter ended June 30, 2020 was materially higher due to the addition of PPP loans which are guaranteed by the government and therefore do not necessitate an increase in ALLL. By excluding the PPP loans, the investor is provided a better comparison to prior periods for analysis.
44
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
As of | ||||||||||
GAAP TO NON-GAAP |
| June 30, |
| March 31, |
| June 30, |
| |||
RECONCILIATIONS | 2020 | 2020 | 2019 | |||||||
| (dollars in thousands, except per share data) | |||||||||
TCE/TA RATIO |
|
|
|
| ||||||
Stockholders' equity (GAAP) | $ | 556,020 | $ | 539,139 | $ | 504,300 | ||||
Less: Intangible assets |
| 88,120 |
| 88,669 |
| 93,837 | ||||
TCE (non-GAAP) | $ | 467,900 | $ | 450,470 | $ | 410,463 | ||||
Total assets (GAAP) | $ | 5,604,761 | $ | 5,232,075 | $ | 5,194,852 | ||||
Less: Intangible assets |
| 88,120 |
| 88,669 |
| 93,837 | ||||
TA (non-GAAP) | $ | 5,516,641 | $ | 5,143,406 | $ | 5,101,015 | ||||
TCE/TA ratio (non-GAAP) |
| 8.48 | % |
| 8.76 | % |
| 8.05 | % | |
TCE/TA RATIO EXCLUDING PPP LOANS |
|
|
|
| ||||||
Stockholders' equity (GAAP) | $ | 556,020 | $ | 539,139 | $ | 504,300 | ||||
Less: PPP loan interest income (post-tax) | 2,085 | — | — | |||||||
Less: Intangible assets |
| 88,120 |
| 88,669 |
| 93,837 | ||||
TCE (non-GAAP) | $ | 465,815 | $ | 450,470 | $ | 410,463 | ||||
Total assets (GAAP) | $ | 5,604,761 | $ | 5,232,075 | $ | 5,194,852 | ||||
Less: PPP loans | 358,052 | — | — | |||||||
Less: Intangible assets |
| 88,120 |
| 88,669 |
| 93,837 | ||||
TA (non-GAAP) | $ | 5,158,589 | $ | 5,143,406 | $ | 5,101,015 | ||||
TCE/TA ratio excluding PPP loans (non-GAAP) |
| 9.03 | % |
| 8.76 | % |
| 8.05 | % | |
45
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
For the Quarter Ended | For the Six Months Ended |
| |||||||||||||||
June 30, |
| March 31, |
| June 30, | June 30, | June 30, |
| ||||||||||
| 2020 |
| 2020 |
| 2019 |
| 2020 | 2019 |
| ||||||||
(dollars in thousands, except per share data) | |||||||||||||||||
ADJUSTED NET INCOME | |||||||||||||||||
Net income (GAAP) | $ | 13,739 | $ | 11,228 | $ | 13,504 | $ | 24,967 | $ | 26,422 | |||||||
Less non-core items (post-tax) (*): |
|
|
|
|
|
|
|
|
| ||||||||
Income: |
|
|
|
|
|
|
|
|
|
| |||||||
Securities gains (losses), net | $ | 51 | $ | — | $ | (41) | $ | 51 | $ | (41) | |||||||
Total non-core income (non-GAAP) | $ | 51 | $ | — | $ | — | $ | 51 | $ | (41) | |||||||
Expense: |
|
|
|
|
|
|
|
|
|
| |||||||
Losses on debt extinguishment | $ | 339 | $ | 116 | $ | — | $ | 455 | $ | — | |||||||
Goodwill impairment | — | 500 | — | 500 | — | ||||||||||||
Disposition costs | (66) | 408 | — | 343 | — | ||||||||||||
Post-acquisition compensation, transition and integration costs |
| 55 |
| 119 |
| 559 |
| 175 |
| 665 | |||||||
Total non-core expense (non-GAAP) | $ | 329 | $ | 1,143 | $ | 559 | $ | 1,472 | $ | 2,281 | |||||||
Adjusted net income (non-GAAP) | $ | 14,016 | $ | 12,371 | $ | 14,104 | $ | 26,388 | $ | 27,128 | |||||||
PRE-PROVISION/PRE-TAX ADJUSTED INCOME | |||||||||||||||||
Net income (GAAP) | $ | 13,739 | $ | 11,228 | $ | 13,504 | $ | 24,967 | $ | 26,422 | |||||||
Less: Non-core income not tax-effected | 65 | — | (52) | 65 | (52) | ||||||||||||
Plus: Non-core expense not tax-effected | 416 | 1,315 | 708 | 1,731 | 842 | ||||||||||||
Provision expense | 19,915 | 8,367 | 1,941 | 28,282 | 4,075 | ||||||||||||
Federal and state income tax expense | 2,798 | 1,884 | 3,073 | 4,682 | 4,487 | ||||||||||||
Pre-provision/pre-tax adjusted income (non-GAAP) | $ | 36,803 | $ | 22,794 | $ | 19,278 | $ | 59,597 | $ | 35,878 | |||||||
PRE-PROVISION/PRE-TAX ADJUSTED RETURN ON AVERAGE ASSETS (NON-GAAP) | |||||||||||||||||
Pre-provision/pre-tax adjusted income (non-GAAP) | $ | 36,803 | $ | 22,794 | $ | 19,278 | $ | 59,597 | $ | 35,878 | |||||||
Average assets | 5,800,164 | 4,948,311 | 5,077,900 | 5,374,224 | 5,023,201 | ||||||||||||
Pre-provision/pre-tax adjusted return on average assets (non-GAAP) | 2.54 | % | 1.84 | % | 1.52 | % | 2.22 | % | 1.43 | % | |||||||
ADJUSTED EPS |
|
|
|
|
|
|
|
|
|
| |||||||
Adjusted net income (non-GAAP) (from above) | $ | 14,016 | $ | 12,371 | $ | 14,104 | $ | 26,388 | $ | 27,128 | |||||||
Weighted average common shares outstanding |
| 15,747,056 |
| 15,796,796 |
| 15,714,588 |
| 15,771,926 |
| 15,703,967 | |||||||
Weighted average common and common equivalent shares outstanding |
| 15,895,336 |
| 16,011,456 |
| 15,938,377 |
| 15,956,958 |
| 15,930,659 | |||||||
Adjusted EPS (non-GAAP): |
|
|
|
|
|
|
|
|
|
| |||||||
Basic | $ | 0.89 | $ | 0.78 | $ | 0.90 | $ | 1.67 | $ | 1.73 | |||||||
Diluted | $ | 0.88 | $ | 0.77 | $ | 0.88 | $ | 1.65 | $ | 1.70 | |||||||
ADJUSTED ROAA |
|
|
|
|
|
|
|
|
|
| |||||||
Adjusted net income (non-GAAP) (from above) | $ | 14,016 | $ | 12,371 | $ | 14,104 | $ | 26,388 | $ | 27,128 | |||||||
Average Assets | $ | 5,800,164 | $ | 4,948,311 | $ | 5,077,900 | $ | 5,374,224 | $ | 5,023,201 | |||||||
Adjusted ROAA (annualized) (non-GAAP) |
| 0.97 | % |
| 1.00 | % |
| 1.11 | % |
| 0.98 | % |
| 1.08 | % | ||
ADJUSTED NIM (TEY)* |
|
|
|
| |||||||||||||
Net interest income (GAAP) | $ | 40,948 | $ | 37,698 | $ | 38,013 | $ | 78,646 | $ | 74,921 | |||||||
Plus: Tax equivalent adjustment |
| 1,728 |
| 1,790 |
| 1,808 |
| 3,517 |
| 3,509 | |||||||
Net interest income - tax equivalent (non-GAAP) | $ | 42,676 | $ | 39,488 | $ | 39,821 | $ | 82,163 | $ | 78,430 | |||||||
Less: Acquisition accounting net accretion | 736 | 625 | 1,076 | 1,361 | 2,145 | ||||||||||||
Adjusted net interest income | 41,940 | 38,863 | 38,745 | 80,802 | 76,285 | ||||||||||||
Average earning assets | $ | 5,252,663 | $ | 4,461,018 | $ | 4,698,021 | $ | 4,856,842 | $ | 4,655,288 | |||||||
NIM (GAAP) |
| 3.14 | % |
| 3.40 | % |
| 3.25 | % |
| 3.26 | % |
| 3.25 | % | ||
NIM (TEY) (non-GAAP) |
| 3.27 | % |
| 3.56 | % |
| 3.40 | % |
| 3.40 | % |
| 3.40 | % | ||
Adjusted NIM (TEY) (non-GAAP) | 3.21 | % | 3.50 | % | 3.31 | % | 3.35 | % | 3.30 | % | |||||||
| |||||||||||||||||
EFFICIENCY RATIO |
|
|
|
|
|
|
|
|
| ||||||||
Noninterest expense (GAAP) | $ | 33,122 | $ | 31,415 | $ | 36,560 | $ | 64,537 | $ | 68,995 | |||||||
Net interest income (GAAP) | $ | 40,948 | $ | 37,698 | $ | 38,013 | $ | 78,646 | $ | 74,921 | |||||||
Noninterest income (GAAP) |
| 28,626 |
| 15,196 |
| 17,065 |
| 43,822 |
| 29,058 | |||||||
Total income | $ | 69,574 | $ | 52,894 | $ | 55,078 | $ | 122,468 | $ | 103,979 | |||||||
Efficiency ratio (noninterest expense/total income) (non-GAAP) |
| 47.61 | % |
| 59.39 | % |
| 66.38 | % |
| 52.70 | % |
| 66.35 | % | ||
ALLLTO TOTAL LOANS AND LEASES, EXCLUDING PPP LOANS | |||||||||||||||||
ALLL | $ | 60,827 | $ | 42,233 | $ | 41,104 | $ | 60,827 | $ | 41,104 | |||||||
Total loans and leases | $ | 4,140,259 | $ | 3,704,668 | $ | 3,910,519 | $ | 4,140,259 | $ | 3,910,519 | |||||||
Less: PPP loans | 358,052 | — | — | 358,052 | — | ||||||||||||
Total loans and leases, excluding PPP loans | $ | 3,782,207 | $ | 3,704,668 | $ | 3,910,519 | $ | 3,782,207 | $ | 3,910,519 | |||||||
ALLL to total loans and leases, excluding PPP loans | 1.61 | % | 1.14 | % | 1.05 | % | 1.61 | % | 1.05 | % | |||||||
LOAN GROWTH ANNUALIZED, EXCLUDING PPP LOANS |
|
|
|
|
|
|
|
|
| ||||||||
Total loans and leases | $ | 4,140,259 | $ | 3,704,668 | $ | 3,910,519 | $ | 4,140,259 | $ | 3,910,519 | |||||||
Less: PPP loans |
| 358,052 |
| — |
| — |
| 358,052 |
| — | |||||||
Total loans and leases, excluding PPP loans | $ | 3,782,207 | $ | 3,704,668 | $ | 3,910,519 | $ | 3,782,207 | $ | 3,910,519 | |||||||
Loan growth annualized, excluding PPP loans |
| 8.37 | % |
| 1.57 | % |
| 13.57 | % |
| 4.99 | % |
| 9.52 | % |
* 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%.
46
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NET INTEREST INCOME - (TAX EQUIVALENT BASIS)
Net interest income, on a tax equivalent basis, increased 7% to $42.7 million for the quarter ended June 30, 2020 compared to the same quarter of the prior year, and increased 5% to $82.2 million for the six months ended June 30, 2020 compared to the same period of the prior year. Excluding the tax equivalent adjustments, net interest income increased 8% for the quarter ended June 30, 2020 compared to the same quarter of the prior year, and increased 5% for the six months ended June 30, 2020 compared to the same period of the prior year. Net interest income improved due to the following factors:
● | Continued organic loan and deposit growth; |
● | Significant growth in PPP loans in the early part of the second quarter of 2020; |
● | Reduction in higher cost wholesale funds with strong core deposit growth including noninterest bearing deposits; and |
● | Significant reduction in cost of funds. |
A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:
Tax Equivalent Basis | GAAP | |||||||||||||||||||||||||||
For the Quarter Ended | For the Quarter Ended |
| ||||||||||||||||||||||||||
June 30, | March 31, | June 30, | June 30, | March 31, | June 30, | |||||||||||||||||||||||
2020 | 2020 | 2019 | 2020 | 2020 | 2019 | |||||||||||||||||||||||
Average Yield on Interest-Earning Assets | 3.86 | % | 4.58 | % | 4.78 | % | 3.70 | % | 4.39 | % | 4.63 | % | ||||||||||||||||
Average Cost of Interest-Bearing Liabilities | 0.80 | % | 1.33 | % | 1.76 | % | 0.79 | % | 1.33 | % | 1.76 | % | ||||||||||||||||
Net Interest Spread | 3.06 | % | 3.24 | % | 3.02 | % | 2.91 | % | 3.07 | % | 2.87 | % | ||||||||||||||||
NIM | 3.27 | % | 3.56 | % | 3.40 | % | 3.14 | % | 3.40 | % | 3.25 | % | ||||||||||||||||
NIM Excluding Acquisition Accounting Net Accretion | 3.21 | % | 3.50 | % | 3.31 | % | 3.10 | % | 3.37 | % | 3.15 | % |
Tax Equivalent Basis | GAAP |
| ||||||||||||||||||||||||||
For the Six Months Ended | For the Six Months Ended |
| ||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, |
| ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 |
| ||||||||||||||||||||||||
Average Yield on Interest-Earning Assets | 4.19 | % | 4.76 | % | 4.02 | % | 4.60 | % | ||||||||||||||||||||
Average Cost of Interest-Bearing Liabilities | 1.05 | % | 1.74 | % | 0.78 | % | 1.74 | % | ||||||||||||||||||||
Net Interest Spread | 3.14 | % | 3.02 | % | 3.24 | % | 2.86 | % | ||||||||||||||||||||
NIM | 3.40 | % | 3.40 | % | 3.26 | % | 3.25 | % | ||||||||||||||||||||
NIM Excluding Acquisition Accounting Net Accretion | 3.35 | % | 3.30 | % | 3.21 | % | 3.15 | % | ||||||||||||||||||||
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 Quarter Ended | For the Six Months Ended | ||||||||||||||||
June 30, | March 31, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||
Acquisition Accounting Net Accretion in NIM | $ | 736 | $ | 625 | $ | 1,076 | $ | 1,361 | $ | 2,145 |
NIM on a tax equivalent basis was down 29 basis points on a linked quarter basis. Excluding acquisition accounting net accretion, NIM was down 29 basis points on a linked quarter basis. The decrease in net interest margin during the quarter was due to a 72 basis point decline in the yield on earning assets, partially offset by a 53 basis point decline in total cost of interest-bearing funds (due to both mix and rate). Due to significant core deposit growth outpacing loans throughout
47
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
the quarter, the Company carried excess liquidity of approximately $400 million which contributed to 30 bps of the decline in NIM. Excluding the impact of this excess liquidity, Adjusted NIM would have been stable with the first quarter.
The Company’s management closely monitors and manages NIM. From a profitability standpoint, an important challenge for the Company's subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs. Management continually addresses this issue with pricing and other balance sheet
strategies which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage NIM through derivatives.
In response to the COVID-19 pandemic, the Federal Reserve decreased interest rates by a total of 150 basis points in March 2020. These decreases impact the comparability of net interest income between 2019 and 2020.
The Company's average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:
For the Three Months Ended June 30, | ||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||
Average | Earned | Yield or | Average | Earned | Yield or | |||||||||||||||
| Balance |
| or Paid |
| Cost |
| Balance |
| or Paid |
| Cost | |||||||||
(dollars in thousands) | ||||||||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Federal funds sold | $ | 865 | $ | 1 |
| 0.46 | % | $ | 9,690 | $ | 56 |
| 2.32 | % | ||||||
Interest-bearing deposits at financial institutions |
| 533,483 |
| 134 |
| 0.10 | % |
| 182,651 |
| 1,168 |
| 2.56 | % | ||||||
Investment securities (1) |
| 697,559 |
| 6,536 |
| 3.77 | % |
| 644,999 |
| 6,062 |
| 3.77 | % | ||||||
Restricted investment securities |
| 21,234 |
| 288 |
| 5.46 | % |
| 21,007 |
| 290 |
| 5.54 | % | ||||||
Gross loans/leases receivable (1) (2) (3) |
| 3,999,522 |
| 43,417 |
| 4.37 | % |
| 3,839,674 |
| 48,413 |
| 5.06 | % | ||||||
Total interest earning assets | 5,252,663 | 50,376 |
| 3.86 | % | 4,698,021 | 55,989 |
| 4.78 | % | ||||||||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash and due from banks | 82,171 | 82,394 | ||||||||||||||||||
Premises and equipment |
| 73,376 |
| 78,008 | ||||||||||||||||
Less allowance |
| (42,878) |
| (41,224) | ||||||||||||||||
Other |
| 434,865 |
| 260,701 | ||||||||||||||||
Total assets | $ | 5,800,197 | $ | 5,077,900 | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-bearing deposits | $ | 2,840,860 |
| 2,429 |
| 0.34 | % | $ | 2,461,768 |
| 8,271 |
| 1.35 | % | ||||||
Time deposits |
| 809,233 |
| 3,337 |
| 1.66 | % |
| 1,013,391 |
| 5,554 |
| 2.20 | % | ||||||
Short-term borrowings |
| 25,064 |
| 22 |
| 0.35 | % |
| 16,145 |
| 81 |
| 2.01 | % | ||||||
FHLB advances |
| 95,616 |
| 347 |
| 1.46 | % |
| 76,154 |
| 601 |
| 3.17 | % | ||||||
Other borrowings |
| — |
| — |
| — | % |
| 10,550 |
| 92 |
| 3.50 | % | ||||||
Subordinated notes | 68,480 | 994 | 5.84 | % | 68,239 | 993 | 5.84 | % | ||||||||||||
Junior subordinated debentures |
| 37,891 |
| 573 |
| 6.07 | % |
| 37,731 |
| 576 |
| 6.12 | % | ||||||
Total interest-bearing liabilities | 3,877,144 | 7,702 |
| 0.80 | % | 3,683,978 | 16,168 |
| 1.76 | % | ||||||||||
Noninterest-bearing demand deposits | 1,082,532 | 796,232 | ||||||||||||||||||
Other noninterest-bearing liabilities | 284,461 | 99,427 | ||||||||||||||||||
Total liabilities | 5,244,137 | 4,579,637 | ||||||||||||||||||
Stockholders' equity |
| 556,060 |
| 498,263 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 5,800,197 | $ | 5,077,900 | ||||||||||||||||
Net interest income | $ | 42,674 | $ | 39,821 | ||||||||||||||||
Net interest spread |
|
|
| 3.06 | % |
|
|
| 3.02 | % | ||||||||||
Net interest margin |
|
|
| 3.14 | % |
|
|
| 3.25 | % | ||||||||||
Net interest margin (TEY)(Non-GAAP) |
|
|
| 3.27 | % |
|
|
| 3.40 | % | ||||||||||
Adjusted net interest margin (TEY)(Non-GAAP) | 3.21 | % | 3.31 | % | ||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities |
| 135.48 | % |
|
|
| 127.53 | % |
|
|
(1) | Interest earned and yields on nontaxable investment securities and nontaxable 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. |
48
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Analysis of Changes of Interest Income/Interest Expense
For the Three Months Ended June 30, 2020
Inc./(Dec.) | Components | |||||||||
from | of Change (1) | |||||||||
| Prior Period (1) |
| Rate |
| Volume |
| ||||
2020 vs. 2019 | ||||||||||
(dollars in thousands) | ||||||||||
INTEREST INCOME |
|
|
|
|
|
| ||||
Federal funds sold | $ | (55) | $ | (26) | $ | (29) | ||||
Interest-bearing deposits at financial institutions |
| (1,033) |
| (6,343) |
| 5,310 | ||||
Investment securities (2) |
| 474 |
| (14) |
| 488 | ||||
Restricted investment securities |
| (2) |
| (16) |
| 14 | ||||
Gross loans/leases receivable (2) (3) |
| (4,996) |
| (16,223) |
| 11,227 | ||||
Total change in interest income | (5,612) | (22,622) | 17,010 | |||||||
INTEREST EXPENSE |
|
|
| |||||||
Interest-bearing deposits | (5,842) | (13,308) | 7,466 | |||||||
Time deposits | (2,217) | (1,218) | (999) | |||||||
Short-term borrowings | (59) | (250) | 191 | |||||||
Federal Home Loan Bank advances | (254) | (1,008) | 754 | |||||||
Other borrowings | (92) | (46) | (46) | |||||||
Subordinated notes | 1 | — | 1 | |||||||
Junior subordinated debentures | (4) | (16) | 12 | |||||||
Total change in interest expense | (8,467) | (15,846) | 7,379 | |||||||
Total change in net interest income | $ | 2,855 | $ | (6,776) | $ | 9,631 |
(1) | The column "Inc./(Dec.) from Prior Period" 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 nontaxable 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. |
49
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
For the Six Months Ended June 30, | ||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
Interest | Average | Interest | Average | |||||||||||||||||
Average | Earned | Yield or | Average | Earned | Yield or | |||||||||||||||
| Balance |
| or Paid |
| Cost |
| Balance |
| or Paid |
| Cost |
| ||||||||
(dollars in thousands) | ||||||||||||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Federal funds sold | $ | 3,095 | $ | 18 |
| 1.17 | % | $ | 12,713 | $ | 150 |
| 2.38 | % | ||||||
Interest-bearing deposits at financial institutions |
| 331,048 |
| 495 |
| 0.30 | % |
| 169,057 |
| 2,091 |
| 2.49 | % | ||||||
Investment securities (1) |
| 658,433 |
| 12,616 |
| 3.85 | % |
| 652,727 |
| 12,158 |
| 3.76 | % | ||||||
Restricted investment securities |
| 21,300 |
| 546 |
| 5.16 | % |
| 21,146 |
| 598 |
| 5.70 | % | ||||||
Gross loans/leases receivable (1) (2) (3) |
| 3,842,966 |
| 87,474 |
| 4.58 | % |
| 3,799,645 |
| 94,795 |
| 5.03 | % | ||||||
Total interest earning assets | 4,856,842 |
| 101,149 |
| 4.19 | % | 4,655,288 |
| 109,792 |
| 4.76 | % | ||||||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Cash and due from banks | 90,799 | 80,513 | ||||||||||||||||||
Premises and equipment, net |
| 73,641 |
| 77,266 | ||||||||||||||||
Less allowance for estimated losses on loans/leases |
| (39,439) |
| (40,843) | ||||||||||||||||
Other |
| 392,401 |
| 250,978 | ||||||||||||||||
Total assets | $ | 5,374,242 | $ | 5,023,201 | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest-bearing demand deposits | $ | 2,610,248 |
| 7,756 |
| 0.60 | % | $ | 2,374,939 |
| 15,445 |
| 1.31 | % | ||||||
Time deposits |
| 797,184 |
| 7,216 |
| 1.82 | % |
| 1,012,925 |
| 10,859 |
| 2.16 | % | ||||||
Short-term borrowings |
| 22,190 |
| 86 |
| 0.78 | % |
| 15,261 |
| 152 |
| 2.01 | % | ||||||
Federal Home Loan Bank advances |
| 103,512 |
| 796 |
| 1.55 | % |
| 111,755 |
| 1,662 |
| 3.00 | % | ||||||
Other borrowings |
| — |
| — |
| — | % |
| 27,126 |
| 539 |
| 4.01 | % | ||||||
Subordinated notes | 68,449 | 1,988 | 5.84 | % | 53,438 | 1,557 | 5.88 | |||||||||||||
Junior subordinated debentures |
| 37,872 |
| 1,144 |
| 6.07 | % |
| 37,709 |
| 1,148 |
| 6.14 | % | ||||||
Total interest-bearing liabilities | 3,639,455 |
| 18,986 |
| 1.05 | % | 3,633,151 |
| 31,362 |
| 1.74 | % | ||||||||
Noninterest-bearing demand deposits | 936,223 | 803,266 | ||||||||||||||||||
Other noninterest-bearing liabilities | 247,697 | 96,441 | ||||||||||||||||||
Total liabilities | 4,823,374 | 4,532,858 | ||||||||||||||||||
Stockholders' equity |
| 550,869 |
| 490,343 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 5,374,242 | $ | 5,023,201 | ||||||||||||||||
Net interest income | $ | 82,163 | $ | 78,430 | ||||||||||||||||
Net interest spread |
|
|
| 3.14 | % |
|
|
| 3.02 | % | ||||||||||
Net interest margin |
|
|
| 3.26 | % |
|
|
| 3.25 | % | ||||||||||
Net interest margin (TEY)(Non-GAAP) |
|
|
| 3.40 | % |
|
|
| 3.40 | % | ||||||||||
Adjusted net interest margin (TEY)(Non-GAAP) | 3.35 | % | 3.30 | % | ||||||||||||||||
Ratio of average interest earning assets to average interest-bearing liabilities |
| 133.45 | % |
|
|
| 128.13 | % |
|
|
(1) | Interest earned and yields on nontaxable investment securities and nontaxable 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. |
50
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Analysis of Changes of Interest Income/Interest Expense | |||||||||
For the six months ended June 30, 2020 | |||||||||
Inc./(Dec.) | Components | ||||||||
from | of Change (1) | ||||||||
| Prior Period (1) |
| Rate |
| Volume | ||||
2020 vs. 2019 | |||||||||
(dollars in thousands) | |||||||||
INTEREST INCOME |
|
|
|
|
|
| |||
Federal funds sold | $ | (132) | $ | (53) | $ | (79) | |||
Interest-bearing deposits at other financial institutions |
| (1,596) |
| (4,631) |
| 3,035 | |||
Investment securities (2) |
| 458 |
| 342 |
| 116 | |||
Restricted investment securities |
| (52) |
| (65) |
| 13 | |||
Gross loans/leases receivable (2) (3) |
| (7,321) |
| (10,368) |
| 3,047 | |||
Total change in interest income | (8,643) | (14,775) | 6,132 | ||||||
INTEREST EXPENSE |
|
|
| ||||||
Interest-bearing demand deposits | (7,689) | (11,727) | 4,038 | ||||||
Time deposits | (3,643) | (1,552) | (2,091) | ||||||
Short-term borrowings | (66) | (198) | 132 | ||||||
Federal Home Loan Bank advances | (866) | (752) | (114) | ||||||
Other borrowings | (539) | (270) | (269) | ||||||
Subordinated notes | 431 | — | 431 | ||||||
Junior subordinated debentures | (4) | — | (4) | ||||||
Total change in interest expense | (12,376) | (14,499) | 2,123 | ||||||
Total change in net interest income | $ | 3,733 | $ | (276) | $ | 4,009 |
(1) | The column "Inc./(Dec.) from Prior Period" 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 nontaxable 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. |
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.
Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies:
GOODWILL
The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment. In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Due to the economic impact of COVID-19 during the first quarter of 2020, management concluded that factors such as the decline in macroeconomic conditions led to the occurrence of a triggering event and therefore an interim impairment test over goodwill was performed as of March 31, 2020. There was no occurrence of a triggering event in the second quarter of 2020, therefore no impairment test of goodwill was performed as of June 30, 2020. When such an assessment is
51
Part I
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
performed, should the Company conclude that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital. 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.
During the first quarter of 2020, the Company incurred goodwill impairment expense of $500 thousand related to the Bates Companies. This was the result of the announcement of a sale of the Bates Companies as discussed in Note 9 of the Consolidated Financial Statements.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company's allowance methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance that management believes is appropriate at each reporting date. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
The Company believes the COVID-19 pandemic may have an adverse effect on the credit quality of its loan portfolio during the remainder of 2020. Disruption to the Company’s customers could result in increased loan delinquencies and defaults resulting in an increase in quantitative allocations. Management believes impaired loans may increase in the future as a result of the COVID-19 pandemic, having a direct impact on the specific component of the allowance for loan and lease losses.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income decreased 10%, comparing the second quarter of 2020 to the same period of 2019, and decreased 8% comparing the first half of 2020 to the same period of 2019. This decrease was primarily the result of a reduction in average yields on loans and leases.
Overall, the Company's average earning assets increased 12%, comparing the second quarter of 2020 to the second quarter of 2019. During the same time period, excess liquidity increased by 15%. Average gross loans and leases increased 4%, while average investment securities increased 8% during the same time period. Average earning assets increased 4%, comparing the first half of 2020 to the same period of 2019. Excess liquidity increased by $235 million comparing the first half of 2020 to the same period of 2019. Average gross loans and leases and average investment securities both increased slightly during the same time period. The increases in excess liquidity were the result of outsized growth in core deposits led by the Company’s correspondent banking client base.
The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.
INTEREST EXPENSE
Interest expense for the second quarter of 2020 decreased 52% from the second quarter of 2019 and decreased 39%, comparing the first half of 2020 to the same period of 2019. The cost of funds on the Company’s average interest-bearing liabilities has decreased with the current rate environment. During the last month of the first quarter, market interest rates fell as the Federal Reserve cut the Federal Funds rate by 150 bps to a range of 0%-0.25%. As a direct result, the Company’s interest expense declined sharply on a linked-quarter basis.
The Company's management intends to continue to shift the mix of funding from wholesale funds to well-priced core deposits, including noninterest-bearing deposits. Continuing this trend is expected to strengthen the Company's franchise value, reduce funding costs and increase fee income opportunities through deposit service charges.
52
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
PROVISION FOR LOAN/LEASE LOSSES
The Company’s provision for loan and lease losses totaled $19.9 million for the second quarter of 2020, which is significantly higher than $1.9 million for the second quarter of 2019. Provision for the first six months of 2020 totaled $28.3 million, which was up from $4.1 million in the first six months of 2019. The increase in the provision for loan and lease losses was primarily due to increased qualitative allocations in response to deteriorating economic conditions related to the effects of COVID-19.
The Company anticipates the provision to be elevated in future periods due to the broad reach of COVID-19 across many impacted individuals and industries. The dramatic slowdown in economic activity will likely negatively impact the credit quality of the Company’s loan portfolio with increased levels of loan defaults. The CARES Act provides significant resources for individuals and industries that could lessen the impact of COVID-19, in addition to the Company’s own loan relief programs.
The Company has elected to defer its implementation of CECL as allowed by the CARES Act. See Note 1 of the Consolidated Financial Statements for further discussion.
The provision is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, the local, state and national economies and risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.
In accordance with GAAP for business combination accounting, acquired loans are recorded at fair value; therefore, no allowance is associated with such loans at acquisition. As acquired loans renew, the discount associated with those loans is eliminated and the Company must establish an allowance through provision. This provision, when coupled with net charge-offs of $3.46 million for the first six months of 2020, increased the Company's allowance to $60.8 million at June 30, 2020. As of June 30, 2020, the Company's allowance to total loans/leases was 1.47%, which was up from 1.14% at March 31, 2020 and 1.05% at June 30, 2019. Management continues to evaluate the allowance needed on acquired loans factoring in the net remaining discount ($5.5 million and $9.3 million at June 30, 2020 and June 30, 2019, respectively).
The following table represents the current balance of loans to customers with concentrations in industries that management has deemed to have a higher risk of being impacted by COVID-19:
As of June 30, |
| ||||
2020 | |||||
| % of Total Gross |
| |||
Amount |
| Loans and Leases | |||
(dollars in thousands) |
| ||||
Retail and Lessors of Property Secured by Retail Property | $ | 236,147 | 5.70 | % | |
Hotels | 86,543 | 2.09 | |||
Restaurants (full service and limited service only) | 41,077 | 0.99 | |||
Arts & Entertainment | 30,513 | 0.74 | |||
Aviation | — | 0.00 | |||
Energy | — | 0.00 | |||
$ | 394,280 | 9.52 | % | ||
Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.
53
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NONINTEREST INCOME
The following tables set forth the various categories of noninterest income for the three and six months ended June 30, 2020 and 2019.
Three Months Ended |
| ||||||||||||
June 30, | June 30, |
| |||||||||||
| 2020 |
| 2019 |
| $ Change |
| % Change |
| |||||
(dollars in thousands) | |||||||||||||
Trust department fees | $ | 2,227 | $ | 2,361 | $ | (134) | (5.7) | % | |||||
Investment advisory and management fees |
| 1,399 |
| 1,888 |
| (489) | (25.9) | ||||||
Deposit service fees |
| 1,286 |
| 1,658 |
| (372) | (22.4) | ||||||
Gains on sales of residential real estate loans, net |
| 1,196 |
| 489 |
| 707 | 144.6 | ||||||
Gains on sales of government guaranteed portions of loans, net |
| — |
| 39 |
| (39) | (100.0) | ||||||
Swap fee income |
| 19,927 |
| 7,891 |
| 12,036 | 152.5 | ||||||
Securities gains (losses), net |
| 65 |
| (52) |
| 117 | (100.0) | ||||||
Earnings on bank-owned life insurance |
| 612 |
| 412 |
| 200 | 48.5 | ||||||
Debit card fees |
| 775 |
| 914 |
| (139) | (15.2) | ||||||
Correspondent banking fees |
| 198 |
| 172 |
| 26 | 15.1 | ||||||
Other |
| 941 |
| 1,293 |
| (352) | (27.2) | ||||||
Total noninterest income | $ | 28,626 | $ | 17,065 | $ | 11,561 | 67.7 | % |
Six Months Ended |
| ||||||||||||
June 30, | June 30, |
| |||||||||||
| 2020 |
| 2019 |
| $ Change | % Change |
| ||||||
(dollars in thousands) | |||||||||||||
Trust department fees | $ | 4,539 | $ | 4,854 | $ | (315) | (6.5) | % | |||||
Investment advisory and management fees |
| 3,126 |
| 3,624 |
| (498) | (13.7) | ||||||
Deposit service fees |
| 2,763 |
| 3,212 |
| (449) | (14.0) | ||||||
Gains on sales of residential real estate loans, net |
| 1,848 |
| 858 |
| 990 | 115.4 | ||||||
Gains on sales of government guaranteed portions of loans, net |
| — |
| 70 |
| (70) | (100.0) | ||||||
Swap fee income |
| 26,731 |
| 11,089 |
| 15,642 | 141.1 | ||||||
Securities gains (losses), net |
| 65 |
| (52) |
| 117 | (100.0) | ||||||
Earnings on bank-owned life insurance |
| 941 |
| 952 |
| (11) | (1.2) | ||||||
Debit card fees |
| 1,533 |
| 1,706 |
| (173) | (10.1) | ||||||
Correspondent banking fees |
| 413 |
| 388 |
| 25 | 6.4 | ||||||
Other |
| 1,863 |
| 2,357 |
| (494) | (21.0) | ||||||
Total noninterest income | $ | 43,822 | $ | 29,058 | $ | 14,764 | 50.8 | % |
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 $291.3 million in the second quarter of 2020, however assets under management decreased $183.4 million in the first six months of 2020 due to deteriorating economic conditions caused by the COVID-19 pandemic. With the decrease in assets under management, trust department fees decreased 7%, comparing the first six months of 2020 to the same period of the prior year. 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.
Investment advisory and management fees decreased 26%, comparing the second quarter of 2020 to the same period of the prior year and they decreased 14% when comparing the first half of 2020 to the first half of 2019. Brokerage assets decreased $124.1 million in the first six months of 2020 due to deteriorating economic conditions caused by the COVID-
54
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
19 pandemic. Similar to trust department fees, investment advisory and management fees are largely determined based on the value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations. The levels of trust and brokerage assets under management were negatively impacted by the decline in the market as a result of COVID-19.
Deposit service fees decreased 22% comparing the second quarter of 2020 to the same period of the prior year, and decreased 14% when comparing the first half of 2020 to the same period of the prior year. This decrease was primarily due to the sale of RB&T, as well as lower transactional volume due to current economic conditions. The Company continues to emphasize shifting the mix of deposits from brokered and retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.
Gains on sales of residential real estate loans, net, increased 145% when comparing the second quarter of 2020 to the same period of the prior year, and increased 115% when comparing the first half of 2020 to the same period of the prior year. The increase was primarily due to the refinancing of residential real estate loans with lower interest rates in the first half of 2020.
The Company did not have any gains on the sale of government-guaranteed portions of loans for the three or six months ended June 30, 2020. Large fluctuations can occur from quarter-to-quarter and year-to-year. The Company continues to leverage its expertise by taking advantage of programs offered by the SBA and the USDA. In some cases, it is more beneficial for the Company to sell the government-guaranteed portion on the secondary market for a premium rather than retain the loans in the Company's portfolio. Sales activity for government-guaranteed portions of loans tends to fluctuate depending on the demand for loans that fit the criteria for the government guarantee. Further, the size of the transactions can vary and, as the gain is determined as a percentage of the guaranteed amount, the resulting gain on sale can vary. Recently, competitors have been offering SBA loan candidates traditional financing without a guarantee and the Company is not willing to relax its structure for those lending opportunities.
As a result of the low interest rate environment and its continued focus across all subsidiary banks, the Company was able to execute numerous interest rate swaps on select commercial loans, including tax credit project loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront fee dependent upon the pricing. Management will continue to review opportunities to execute these swaps at all of its subsidiary banks, as the circumstances are appropriate for the borrowers and the Company. An optimal interest rate swap candidate must be of a certain size and sophistication which can lead to volatility in activity from quarter to quarter. Swap fee income totaled $19.9 million for the second quarter of 2020, compared to $7.9 million for the second quarter of 2019. Swap fee income totaled $26.7 million for the first half of 2020, compared to $11.1 million in the first half of 2020. The increase in swap fee income for the first six months of 2020, as compared to all prior periods, was due to both the volume and the size of the transactions executed. Future levels of swap fee income are somewhat dependent upon prevailing interest rates.
Securities gains totaled $65 thousand for the three and six months ended June 30, 2020. By comparison, securities losses totaled $52 thousand for the three and six months ended June 30, 2019.
Earnings on BOLI increased 49% comparing the second quarter of 2020 to the second quarter of 2019, and decreased 1% comparing the first half of 2020 to the first half of 2019. There were no purchases of BOLI within the last 12 months. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets and can lead to volatility in earnings. 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 decreased 15% comparing the second quarter of 2020 to the second quarter of the prior year, and decreased 10% comparing the first half
55
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
of 2020 to the first half of 2019. 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 retail deposit product with a higher interest rate that incentivizes debit card activity.
Correspondent banking fees increased 15% comparing the second quarter of 2020 to the second quarter of the prior year, and increased 6% comparing the first half of 2020 to the first half of 2019. The fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees. Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 191 banks in Iowa, Illinois, Missouri and Wisconsin.
Other noninterest income decreased 27% comparing the second quarter of 2020 to the second quarter of the prior year, and decreased 21% comparing the first half of 2020 to the first half of 2019. This decrease was primarily due to the sale of RB&T.
56
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
NONINTEREST EXPENSE
The following tables set forth the various categories of noninterest expense for the three and six months ended June 30, 2020 and 2019.
Three Months Ended |
| ||||||||||||
June 30, | June 30, |
| |||||||||||
| 2020 |
| 2019 |
| $ Change |
| % Change |
| |||||
(dollars in thousands) | |||||||||||||
Salaries and employee benefits | $ | 21,304 | $ | 22,749 | $ | (1,445) |
| (6.4) | % | ||||
Occupancy and equipment expense |
| 3,748 |
| 3,533 |
| 215 |
| 6.1 | |||||
Professional and data processing fees |
| 3,646 |
| 3,031 |
| 615 |
| 20.3 | |||||
Post-acquisition compensation, transition and integration costs |
| 70 |
| 708 |
| (638) |
| (90.1) | |||||
Disposition costs | (83) |
| — |
| (83) |
| 100.0 | ||||||
FDIC insurance, other insurance and regulatory fees |
| 908 |
| 926 |
| (18) |
| (1.9) | |||||
Loan/lease expense |
| 339 |
| 312 |
| 27 |
| 8.7 | |||||
Net cost of (income from) and gains/losses on operations of other real estate |
| (332) |
| 1,182 |
| (1,514) |
| (128.1) | |||||
Advertising and marketing |
| 552 |
| 1,037 |
| (485) |
| (46.8) | |||||
Bank service charges |
| 501 |
| 508 |
| (7) |
| (1.4) | |||||
Loss on liability extinguishment | 429 |
| — |
| 429 |
| 100.0 | ||||||
Correspondent banking expense |
| 212 |
| 206 |
| 6 |
| 2.9 | |||||
Intangibles amortization |
| 548 |
| 615 |
| (67) |
| (10.9) | |||||
Other |
| 1,280 |
| 1,753 |
| (473) |
| (27.0) | |||||
Total noninterest expense | $ | 33,122 | $ | 36,560 | $ | (3,438) |
| (9.4) | % |
Six Months Ended |
| ||||||||||||
June 30, | June 30, |
| |||||||||||
| 2020 |
| 2019 |
| $ Change |
| % Change |
| |||||
(dollars in thousands) | |||||||||||||
Salaries and employee benefits |
| $ | 39,823 |
| $ | 43,628 |
| $ | (3,805) |
| (8.7) | % | |
Occupancy and equipment expense |
|
| 7,780 |
|
| 7,227 |
|
| 553 |
| 7.7 | ||
Professional and data processing fees |
|
| 7,015 |
|
| 5,781 |
|
| 1,234 |
| 21.3 | ||
Post-acquisition compensation, transition and integration costs |
|
| 221 |
|
| 842 |
|
| (621) |
| (73.8) | ||
Disposition costs | 434 |
| — |
| 434 |
| 100.0 | ||||||
FDIC insurance, other insurance and regulatory fees |
|
| 1,591 |
|
| 1,890 |
|
| (299) |
| (15.8) | ||
Loan/lease expense |
|
| 567 |
|
| 526 |
|
| 41 |
| 7.8 | ||
Net cost of (income from) and gains/losses on operations of other real estate |
|
| (319) |
|
| 1,480 |
|
| (1,799) |
| (121.6) | ||
Advertising and marketing |
|
| 1,234 |
|
| 1,822 |
|
| (588) |
| (32.3) | ||
Bank service charges |
|
| 1,005 |
|
| 991 |
|
| 14 |
| 1.4 | ||
Losses on liability extinguishment, net | 576 | — | 576 |
| 100.0 | ||||||||
Correspondent banking expense |
|
| 428 |
|
| 410 |
|
| 18 |
| 4.4 | ||
Intangibles amortization |
|
| 1,097 |
|
| 1,147 |
|
| (50) |
| (4.4) | ||
Goodwill Impairment | 500 | — | 500 | 100.0 | |||||||||
Other |
|
| 2,585 |
|
| 3,251 |
|
| (666) |
| (20.5) | ||
Total noninterest expense |
| $ | 64,537 |
| $ | 68,995 |
| $ | (4,458) |
| (6.5) | % | |
Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency.
Salaries and employee benefits, which is the largest component of noninterest expense, decreased from the second quarter of 2019 to the second quarter of 2020 by 6%. This line item also decreased 9% when comparing the first half of 2020 to the first half of 2019. This decrease was primarily related to the sale of RB&T, deferred costs due to PPP loans and reduced bonus and incentive compensation due to the impact of COVID-19.
57
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Occupancy and equipment expense increased 6% comparing the second quarter of 2020 to the same period of the prior year, and increased 8% comparing the first half of 2020 to the same period of the prior year. The increased expense was due to higher information technology service contract costs and increases in repairs and maintenance costs to existing buildings.
Professional and data processing fees increased 20% comparing the second quarter of 2020 to the same period in 2019, and increased 21% comparing the first half of 2020 to the same period of the prior year. This increased expense was mostly due to higher data processing costs.
Post-acquisition costs totaled $70 thousand for the second quarter of 2020 as compared to $708 thousand for the same period of the prior year. Post-acquisition costs totaled $221 thousand for the first half of 2020 as compared to $842 thousand for the same period of the prior year. These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to previous mergers/acquisitions.
Disposition costs totaled $434 thousand for the first half of 2020. The costs were primarily legal, accounting, personnel costs and IT deconversion costs related to the sale of RB&T in the fourth quarter of 2019. There were no disposition costs for the first quarter or first half of 2019.
FDIC insurance, other insurance and regulatory fee expense decreased 2%, comparing the second quarter of 2020 to the second quarter of 2019, and decreased 16% comparing the first half of 2020 to the same period of the prior year. The decrease in expense was due to the award of assessment credits by the FDIC in September 2019 that carried forward into 2020.
Loan/lease expense increased 9% when comparing the second quarter of 2020 to the same quarter of 2019, and increased 8% comparing the first half of 2020 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.
Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net income from and gains/losses on operations of other real estate totaled $332 thousand for the second quarter of 2020, compared to net cost of and gains/losses on operations of other real estate of $1.2 million for the second quarter of 2019. Net income from and gains/losses on operations of other real estate totaled $319 thousand for the first half of 2020 compared to net cost of and gains/losses on operations of other real estate of $1.5 million for the same period of the prior year. In the first half of 2020, the Company has sold OREO property of $4 million with corresponding gains of $369 thousand.
Advertising and marketing expense decreased 47% comparing the second quarter of 2020 to the second quarter of 2019, and decreased 32% comparing the second half of 2020 to the same period of the prior year. The decrease in expense was primarily due to the sale of RB&T.
Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, decreased 1% when comparing the second quarter of 2020 to the same quarter of 2019, and increased 1% comparing the first half of 2020 to the same period of the prior year. As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses will also increase.
Losses on liability extinguishment were $429 thousand for the second quarter of 2020 and $576 thousand for the first half of 2020. These losses relate to the prepayment of certain high-cost brokered and public certificates of deposit. There were no losses on debt extinguishment for the three and six months ended June 30, 2019.
Correspondent banking expense increased 3% when comparing the second quarter of 2020 to the second quarter of 2019 and increased 4% when comparing the first half of 2020 to the same period of the prior year. These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.
58
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Intangibles amortization expense decreased 11% when comparing the second quarter of 2020 to the same quarter of 2019 and decreased 4% when comparing the first half of 2020 to the same period of the prior year. The second quarter of 2019 included $82 thousand of intangible amortization expense related to the finalization of purchase accounting related to the acquisition of Bates Companies.
Goodwill impairment expense totaled $500 thousand in the first half of 2020 related to the sale of the Bates Companies. There was no goodwill impairment expense in the first half of 2019.
Other noninterest expense decreased 27% when comparing the second quarter of 2020 to the second quarter of 2019, and decreased 21% when comparing the first half of 2020 to the same period of the prior year. This was primarily due to the sale of RB&T. Included in other noninterest expense are items such as subscriptions, sales and use tax and expenses related to wealth management.
INCOME TAXES
In the second quarter of 2020, the Company incurred income tax expense of $2.8 million. During the first half of the year, the Company incurred income tax expense of $4.7 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and six months ended June 30, 2020 and 2019.
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
% of | % of | % of | % of | ||||||||||||||||||||
Pretax | Pretax | Pretax | Pretax | ||||||||||||||||||||
| Amount |
| Income |
| Amount |
| Income |
| Amount |
| Income |
| Amount |
| Income |
| |||||||
(dollars in thousands) | |||||||||||||||||||||||
Computed "expected" tax expense | $ | 3,472 |
| 21.0 | % | $ | 3,481 |
| 21.0 | % | $ | 6,226 |
| 21.0 | % | $ | 6,491 |
| 21.0 | % | |||
Tax exempt income, net |
| (1,247) |
| (7.5) |
| (1,068) |
| (6.5) |
| (2,472) |
| (8.3) |
| (2,175) |
| (7.1) | |||||||
Bank-owned life insurance |
| (115) |
| (0.7) |
| (87) |
| (0.5) |
| (170) |
| (0.6) |
| (200) |
| (0.6) | |||||||
State income taxes, net of federal benefit, current year |
| 776 |
| 4.7 |
| 772 |
| 4.7 |
| 1,453 |
| 4.9 |
| 1,421 |
| 4.6 | |||||||
Tax credits |
| (116) |
| (0.7) |
| (38) |
| (0.2) |
| (232) |
| (0.8) |
| (77) |
| (0.3) | |||||||
True-up adjustment to year-end provision | — | — | — | — | — | — | (715) | (2.3) | |||||||||||||||
Excess tax benefit on stock options exercised and restricted stock awards vested |
| 2 |
| — |
| (54) |
| (0.3) |
| (262) |
| (0.9) |
| (154) |
| (0.5) | |||||||
Other |
| 26 |
| 0.1 |
| 67 |
| 0.3 |
| 139 |
| 0.5 |
| (104) |
| (0.3) | |||||||
Federal and state income tax expense | $ | 2,798 |
| 16.9 | % | $ | 3,073 |
| 18.5 | % | $ | 4,682 |
| 15.8 | % | $ | 4,487 |
| 14.5 | % |
The effective tax rate for the quarter ended June 30, 2020 was 16.9%, which was a decrease from the effective tax rate of 18.5% for the quarter ended June 30, 2019. The effective tax rate for the six months ended June 30, 2020 was 15.8%, which was an increase over the effective tax rate of 14.5% for the six months ended June 30, 2019. During the first quarter of 2019 and in conjunction with the Company’s year-end tax preparation process, the Company identified a one-time true-up adjustment of $715 thousand. Excluding this, the Company’s effective tax rate was approximately 16.8% for the six months ended June 30, 2019.
59
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
FINANCIAL CONDITION
Following is a table that represents the major categories of the Company’s balance sheet. On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T. As a result, those assets and liabilities of RB&T are not included in the Company’s results of its financial condition as of June 30, 2020, March 31, 2020 and December 31, 2019, the removal of which impacts balance sheet comparisons to June 30, 2019.
As of | |||||||||||||||||||||||||
June 30, 2020 | March 31, 2020 |
| December 31, 2019 | June 30, 2019 |
| ||||||||||||||||||||
(dollars in thousands) |
| ||||||||||||||||||||||||
| Amount |
| % |
| Amount |
| % |
|
| Amount |
| % |
| Amount |
| % |
| ||||||||
Cash, federal funds sold, and interest-bearing deposits | $ | 231,477 |
| 4 | % | $ | 376,535 |
| 7 | % | $ | 233,945 |
| 5 | % | $ | 293,416 |
| 6 | % | |||||
Securities | 748,883 |
| 13 | % | 684,571 |
| 13 | % | 611,341 |
| 12 | % | 643,803 |
| 12 | % | |||||||||
Net loans/leases | 4,079,432 |
| 73 | % | 3,662,435 |
| 70 | % | 3,654,204 |
| 75 | % | 3,869,415 |
| 75 | % | |||||||||
Derivatives | 225,164 | 4 | % | 195,973 | 4 | % | 87,827 | 2 | % | 65,922 | 1 | % | |||||||||||||
Other assets | 309,040 | 6 | % | 301,803 | 6 | % | 309,767 | 6 | % | 322,296 | 6 | % | |||||||||||||
Assets held for sale | 10,765 |
| - | % | 10,758 |
| - | % | 11,966 |
| - | % | — |
| - | % | |||||||||
Total assets | $ | 5,604,761 |
| 100 | % | $ | 5,232,075 |
| 100 | % | $ | 4,909,050 |
| 100 | % | $ | 5,194,852 |
| 100 | % | |||||
Total deposits | $ | 4,349,775 |
| 78 | % | $ | 4,170,478 |
| 80 | % | $ | 3,911,051 |
| 80 | % | $ | 4,322,510 |
| 84 | % | |||||
Total borrowings | 376,250 |
| 7 | % | 244,399 |
| 5 | % | 278,955 |
| 5 | % | 230,953 |
| 4 | % | |||||||||
Derivatives | 233,589 | 4 | % | 203,744 | 4 | % | 88,437 | 2 | % | 69,556 | 1 | % | |||||||||||||
Other liabilities | 87,539 |
| 1 | % | 71,185 |
| 1 | % | 90,253 |
| 2 | % | 67,533 |
| 1 | % | |||||||||
Liabilities held for sale | 1,588 | - | % | 3,130 | 0 | % | 5,003 | - | % | — | - | % | |||||||||||||
Total stockholders' equity | 556,020 |
| 10 | % | 539,139 |
| 10 | % | 535,351 |
| 11 | % | 504,300 |
| 10 | % | |||||||||
Total liabilities and stockholders' equity | $ | 5,604,761 |
| 100 | % | $ | 5,232,075 |
| 100 | % | $ | 4,909,050 |
| 100 | % | $ | 5,194,852 |
| 100 | % |
During the second quarter of 2020, the Company's total assets increased $372.7 million, or 7% from March 31, 2020, to a total of $5.6 billion. The Company’s loans increased $417.0 million in the second quarter of 2020. Included in this amount was $358.1 million of PPP loans made to both new and existing customers. Total deposits increased $179.3 million in the second quarter of 2020 primarily due to an increase in noninterest-bearing demand deposits. Borrowings increased $131.9 million in the second quarter of 2020 which consisted primarily of an increase in overnight FRB borrowings of $70.0 million and an increase in short-term FHLB advances of $50.0 million. During the quarter, 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 quarter. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet.
INVESTMENT SECURITIES
The composition of the Company's securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the large majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment.
60
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Following is a breakdown of the Company's securities portfolio by type, the percentage of unrealized gains (losses) to carrying value on the total portfolio, and the portfolio duration:
As of | |||||||||||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 |
| June 30, 2019 |
| ||||||||||||||||||||
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| Amount |
| % | ||||||||||
(dollars in thousands) |
| ||||||||||||||||||||||||
U.S. govt. sponsored agency securities | $ | 17,472 |
| 2 | % | $ | 19,457 |
| 3 | % | $ | 20,078 |
| 3 | % | $ | 35,762 |
| 6 | % | |||||
Municipal securities |
| 526,192 |
| 71 | % |
| 493,664 |
| 72 | % |
| 447,853 |
| 73 | % |
| 440,852 |
| 68 | % | |||||
Residential mortgage-backed and related securities |
| 145,672 |
| 19 | % |
| 122,853 |
| 18 | % |
| 120,587 |
| 20 | % |
| 159,228 |
| 25 | % | |||||
Asset-backed securities | 39,797 | 5 | % | 28,499 | 4 | % | 16,887 | 3 | % | — | — | % | |||||||||||||
Other securities |
| 19,750 |
| 3 | % |
| 20,098 |
| 3 | % |
| 5,936 |
| 1 | % |
| 7,961 |
| 1 | % | |||||
$ | 748,883 |
| 100 | % | $ | 684,571 |
| 100 | % | $ | 611,341 |
| 100 | % | $ | 643,803 |
| 100 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Securities as a % of Total Assets |
| 13.36 | % |
|
| 13.11 | % |
|
| 12.45 | % |
|
| 12.39 | % |
| |||||||||
Net Unrealized Gains as a % of Amortized Cost |
| 4.16 | % |
|
| 3.73 | % |
|
| 4.88 | % |
|
| 3.23 | % |
| |||||||||
Duration (in years) |
| 6.3 |
|
| 6.7 |
|
|
| 6.7 |
|
| 6.4 |
| ||||||||||||
Yield on investment securities (tax equivalent) | 3.77 | % | 3.95 | % | 3.80 | % | 3.77 | % |
Management monitors the level of unrealized gains/losses including performing quarterly reviews of individual securities for evidence of OTTI. Management identified no OTTI in any of the periods presented.
The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities. The asset-backed securities, which are comprised of collateral loan obligations, are backed by pools of senior secured commercial loans and were AAA rated as of June 30, 2020.
See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.
LOANS/LEASES
Total loans/leases, excluding PPP loans (non-GAAP), grew 8.4% on an annualized basis during the second quarter of 2020 and 5.0% year-to-date. The Company experienced several large payoffs during the first quarter, which impacted loan growth, as well as slower growth in the first half of the year due to the pandemic. The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following table.
As of | |||||||||||||||||||||||||
June 30, 2020 | March 31, 2020 | December 31, 2019 | June 30, 2019 | ||||||||||||||||||||||
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| |||||||||
(dollars in thousands) | |||||||||||||||||||||||||
C&I loans* | $ | 1,850,110 |
| 45 | % | $ | 1,484,979 |
| 41 | % | $ | 1,507,825 |
| 41 | % | $ | 1,548,657 |
| 40 | % | |||||
CRE loans |
| 1,869,162 |
| 45 | % |
| 1,783,086 |
| 48 | % |
| 1,736,396 |
| 47 | % |
| 1,837,473 |
| 46 | % | |||||
Direct financing leases |
| 79,105 |
| 2 | % |
| 83,324 |
| 2 | % |
| 87,869 |
| 2 | % |
| 101,180 |
| 3 | % | |||||
Residential real estate loans |
| 241,069 |
| 6 | % |
| 237,742 |
| 6 | % |
| 239,904 |
| 7 | % |
| 293,479 |
| 8 | % | |||||
Installment and other consumer loans |
| 99,150 |
| 2 | % |
| 106,728 |
| 3 | % |
| 109,352 |
| 3 | % |
| 120,947 |
| 3 | % | |||||
Total loans/leases | $ | 4,138,596 |
| 100 | % | $ | 3,695,859 |
| 100 | % | $ | 3,681,346 |
| 100 | % | $ | 3,901,736 |
| 100 | % | |||||
Plus deferred loan/lease origination costs, net of fees |
| 1,663 |
| 8,809 |
|
| 8,859 |
|
| 8,783 |
|
| |||||||||||||
Less allowance |
| (60,827) |
| (42,233) |
|
| (36,001) |
|
| (41,104) |
|
| |||||||||||||
Net loans/leases | $ | 4,079,432 | $ | 3,662,435 | $ | 3,654,204 |
|
| $ | 3,869,415 |
|
|
*Excludes PPP loans totaling $358.1 million as of June 30, 2020.
As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans. Owner-occupied loans are generally considered to have less risk. As of June 30, 2020 and March 31, 2020, approximately 25% and 26% of the CRE loan portfolio was owner-occupied, respectively.
61
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
Following is a listing of significant industries within the Company's CRE loan portfolio:
As of June 30, | As of March 31, |
| As of December 31, |
| As of June 30, |
| ||||||||||||||||||
2020 | 2020 | 2019 | 2019 | |||||||||||||||||||||
| Amount |
| % |
| Amount |
| % |
|
| Amount |
| % |
| Amount |
| % |
| |||||||
(dollars in thousands) |
| |||||||||||||||||||||||
Lessors of Nonresidential Buildings | $ | 593,063 |
| 32 | % | $ | 546,384 |
| 31 | % | $ | 553,142 |
| 32 | % | $ | 612,526 |
| 33 | % | ||||
Lessors of Residential Buildings |
| 545,026 |
| 29 | % |
| 500,871 |
| 28 | % |
| 465,172 |
| 27 | % |
| 394,235 |
| 21 | % | ||||
Hotels |
| 70,675 |
| 4 | % |
| 56,573 |
| 3 | % |
| 63,720 |
| 4 | % |
| 82,180 |
| 5 | % | ||||
New Housing For-Sale Builders | 56,229 | 3 | % | 56,916 | 3 | % | 55,525 | 3 | % | 43,520 | 2 | % | ||||||||||||
Land Subdivision |
| 55,555 |
| 3 | % |
| 53,899 |
| 3 | % |
| 46,318 |
| 2 | % |
| 45,847 |
| 3 | % | ||||
Nonresidential Property Managers |
| 44,887 |
| 2 | % |
| 48,069 |
| 3 | % |
| 48,059 |
| 3 | % |
| 58,207 |
| 3 | % | ||||
Lessors of Other Real Estate Property |
| 40,248 |
| 2 | % |
| 42,260 |
| 2 | % |
| 39,297 |
| 2 | % |
| 36,706 |
| 2 | % | ||||
Other Activities Related to Real Estate | 38,044 | 2 | % | 39,352 | 2 | % | 42,060 | 2 | % | 32,652 | 2 | % | ||||||||||||
New Single-Family Housing Construction | 36,837 | 2 | % | 31,856 | 2 | % | 28,708 | 2 | % | 27,962 | 2 | % | ||||||||||||
Other * |
| 388,598 |
| 21 | % |
| 406,906 |
| 23 | % |
| 394,395 |
| 22 | % |
| 503,638 |
| 27 | % | ||||
Total CRE Loans | $ | 1,869,162 |
| 100 | % | $ | 1,783,086 |
| 100 | % | $ | 1,736,396 |
| 100 | % | $ | 1,837,473 |
| 100 | % |
* “Other” consists of all other industries. None of these had concentrations greater than $23.8 million, or approximately 1.3% of total CRE loans in the most recent period presented.
The Company's residential real estate loan portfolio includes the following:
● | Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid long-term interest rate risk. |
● | A limited amount of 15-year, 20-year and 30-year fixed rate residential real estate loans that meet certain credit guidelines. |
The remaining residential real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.
Following is a listing of significant equipment types within the m2 loan and lease portfolio:
As of June 30, | As of March 31, | As of December 31, | As of June 30, | ||||||||||||||||||||
2020 | 2020 | 2019 | 2019 | ||||||||||||||||||||
Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| ||||||||
(dollars in thousands) | |||||||||||||||||||||||
Trucks, Vans and Vocational Vehicles | $ | 59,782 |
| 26 | % | $ | 57,225 |
| 25 | % | $ | 55,749 |
| 24 | % | $ | 46,650 |
| 20 | % | |||
Manufacturing - General | 16,939 |
| 7 | % | 16,277 |
| 7 | % | 15,847 |
| 7 | % | 17,879 |
| 8 | % | |||||||
Food Processing Equipment | 16,244 |
| 7 | % | 16,703 |
| 7 | % | 16,742 |
| 7 | % | 15,863 |
| 7 | % | |||||||
Construction - General | 15,156 |
| 7 | % | 15,038 |
| 7 | % | 16,236 |
| 7 | % | 16,026 |
| 7 | % | |||||||
Marine - Travelifts | 11,642 |
| 5 | % | 10,908 |
| 5 | % | 11,556 |
| 5 | % | 11,659 |
| 5 | % | |||||||
Computer Hardware | 11,385 |
| 5 | % | 12,142 |
| 5 | % | 11,509 |
| 5 | % | 6,282 |
| 3 | % | |||||||
Trailers | 9,541 |
| 4 | % | 9,469 |
| 4 | % | 9,907 |
| 4 | % | 9,303 |
| 4 | % | |||||||
Other * | 92,071 |
| 39 | % | 90,821 |
| 40 | % | 92,301 |
| 41 | % | 107,014 |
| 46 | % | |||||||
Total m2 loans and leases | $ | 232,760 |
| 100 | % | $ | 228,583 |
| 100 | % | $ | 229,847 |
| 100 | % | $ | 230,676 |
| 100 | % |
* “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.
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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
ALLOWANCE FOR ESTIMATED LOSSES ON LOANS/LEASES
Changes in the allowance for the three and six months ended June 30, 2020 and 2019 are presented as follows:
Three Months Ended | Six Months Ended | ||||||||||
June 30, 2020 |
| June 30, 2019 |
| June 30, 2020 |
| June 30, 2019 | |||||
(dollars in thousands) | |||||||||||
Balance, beginning | $ | 42,233 | $ | 41,164 | $ | 36,001 | $ | 39,847 | |||
Provisions charged to expense |
| 19,915 |
| 1,941 |
| 28,282 |
| 4,075 | |||
Loans/leases charged off |
| (1,450) |
| (2,152) |
| (3,785) |
| (3,212) | |||
Recoveries on loans/leases previously charged off |
| 129 |
| 151 |
| 329 |
| 394 | |||
Balance, ending | $ | 60,827 | $ | 41,104 | $ | 60,827 | $ | 41,104 |
The adequacy of the allowance was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate allowance was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, 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.
The Company's levels of criticized and classified loans are reported in the following table.
As of | ||||||||||||||
Internally Assigned Risk Rating * |
| June 30, 2020 |
| March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 |
| |||||
(dollars in thousands) | ||||||||||||||
Special Mention (Rating 6) |
| $ | 104,608 |
| $ | 34,738 |
| $ | 19,952 | $ | 19,913 | |||
Substandard (Rating 7) |
| 39,855 |
| 36,612 |
| 33,649 | 40,935 | |||||||
Doubtful (Rating 8) |
| — |
| — |
| — | — | |||||||
| $ | 144,463 |
| $ | 71,350 |
| $ | 53,601 | $ | 60,848 | ||||
Criticized Loans ** |
| $ | 144,463 |
| $ | 71,350 |
| $ | 53,601 | $ | 60,848 | |||
Classified Loans *** |
| $ | 39,855 |
| $ | 36,612 |
| $ | 33,649 | $ | 40,935 | |||
Criticized Loans as a % of Total Loans/Leases | 3.49 | % | 1.93 | % | 1.45 | % | 1.56 | % | ||||||
Classified Loans as a % of Total Loans/Leases | 0.96 | % | 0.99 | % | 0.91 | % | 1.05 | % |
* Amounts above include the government guaranteed portion, if any. For the calculation of allowance, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.
** Criticized loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.
*** Classified loans are defined as commercial and industrial and commercial real estate loans with internally assigned risk ratings of 7 or 8, regardless of performance.
Criticized loans increased 102% and classified loans increased 9% from March 31, 2020 to June 30, 2020. Criticized loans increased 170% during the first six months of 2020 primarily due to loans related to borrowers in industries impacted by COVID-19 including hotels. Classified loan increased 18% during the first six months of 2020. The increase in classified
63
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
loans was due to a few isolated relationships. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.
As of | |||||||||||
| June 30, 2020 |
| March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 | ||||
Allowance / Gross Loans/Leases |
| 1.47 | % | 1.14 | % | 0.98 | % | 1.05 | % | ||
Allowance / NPLs |
| 463.69 | % | 310.72 | % | 403.87 | % | 283.10 | % |
Although management believes that the allowance at June 30, 2020 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision. Based on current economic indicators, the Company increased the economic allocations within the allowance for loan losses calculation. The Company anticipates that the allowance for loan losses as a percent of total loans may increase in future periods based on the belief that the credit quality of the loan portfolio could decline and loan defaults may increase as a result of the COVID-19 pandemic. Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.
See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's allowance.
NONPERFORMING ASSETS
The table below presents the amount of NPAs and related ratios.
As of June 30, | As of March 31, | As of December 31, | As of June 30, | |||||||||||
| 2020 |
| 2020 |
| 2019 |
| 2019 | |||||||
(dollars in thousands) | ||||||||||||||
Nonaccrual loans/leases (1) (2) | $ | 12,099 | $ | 11,628 | $ | 7,902 | $ | 13,148 | ||||||
Accruing loans/leases past due 90 days or more |
| 99 |
| 1,419 |
| 33 |
| 58 | ||||||
TDRs - accruing |
| 920 |
| 545 |
| 979 |
| 1,313 | ||||||
Total NPLs |
| 13,118 |
| 13,592 |
| 8,914 |
| 14,519 | ||||||
OREO |
| 157 |
| 3,298 |
| 4,129 |
| 8,637 | ||||||
Other repossessed assets |
| 25 |
| 45 |
| 41 |
| — | ||||||
Total NPAs | $ | 13,300 | $ | 16,935 | $ | 13,084 | $ | 23,156 | ||||||
NPLs to total loans/leases |
|
| 0.32 | % |
| 0.37 | % |
| 0.24 | % | 0.37 | % | ||
NPAs to total loans/leases plus repossessed property |
| 0.32 | % |
| 0.46 | % |
| 0.35 | % | 0.59 | % | |||
NPAs to total assets |
| 0.24 | % |
| 0.32 | % |
| 0.27 | % | 0.45 | % |
(1) | Includes government guaranteed portion of loans, as applicable. |
(2) | Includes TDRs of $352 thousand at June 30, 2020, $298 thousand at March 31, 2020, $747 thousand at December 31, 2019, and $2.8 million at June 30, 2019. |
NPAs at June 30, 2020 were $13.3 million, down $3.6 million from March 31, 2020 and down $9.9 million from June 30, 2019. The decrease in NPAs in the second quarter of 2020 was primarily due to the sale of one OREO property. The improvement from prior year was primarily attributed to the sale of RB&T.
The ratio of NPAs to total assets was 0.24% at June 30, 2020, down from 0.32% at March 31, 2020 and down from 0.45% at June 30, 2019.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The large majority of the NPAs consist of nonaccrual loans/leases, accruing TDRs, and OREO. For nonaccrual loans/leases and accruing TDRs, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.
OREO is carried at the lower of carrying amount or fair value less costs to sell.
The Company's lending/leasing practices remain unchanged and asset quality remains a priority for management.
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. The Company expects that the majority of LRP participants will not be categorized as a TDR by meeting the CARES Act provisions. As of June 30, 2020, the program has provided 1,466 Bank modifications of loans to commercial and consumer clients totaling $491 million and 935 m2 modifications of loans and leases totaling $53 million, representing 11.86% and 1.2% of the total loan and lease portfolio, respectively.
DEPOSITS
Deposits increased $179.3 million during the second quarter of 2020, primarily due to an increase in noninterest bearing correspondent deposits, net of prepayment of large brokered certificates of deposits. The table below presents the composition of the Company's deposit portfolio.
As of |
| ||||||||||||||||||||||||
June 30, 2020 |
| March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 |
| ||||||||||||||||||
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| Amount |
| % | ||||||||||
(dollars in thousands) |
| ||||||||||||||||||||||||
Noninterest bearing demand deposits | $ | 1,177,482 |
| 27 | % | $ | 829,782 |
| 20 | % | $ | 777,224 |
| 20 | % | $ | 795,951 |
| 18 | % | |||||
Interest bearing demand deposits |
| 2,488,755 |
| 57 | % |
| 2,440,907 |
| 58 | % |
| 2,407,502 |
| 61 | % |
| 2,505,956 |
| 57 | % | |||||
Time deposits |
| 560,982 |
| 13 | % |
| 617,979 |
| 15 | % |
| 571,343 |
| 15 | % |
| 733,135 |
| 17 | % | |||||
Brokered deposits |
| 122,556 |
| 3 | % |
| 281,810 |
| 7 | % |
| 154,982 |
| 4 | % |
| 287,468 |
| 7 | % | |||||
$ | 4,349,775 |
| 100 | % | $ | 4,170,478 |
| 100 | % | $ | 3,911,051 |
| 100 | % | $ | 4,322,510 |
| 100 | % |
Quarter-end balances can greatly fluctuate due to large customer and correspondent bank activity. During the quarter, 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 quarter. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet. As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.
Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committees.
65
Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
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 | |||||||||||||
| June 30, 2020 |
| March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 |
| |||||
(dollars in thousands) | |||||||||||||
Overnight repurchase agreements | $ | 2,368 | $ | 2,377 | $ | 2,193 | $ | 2,181 | |||||
Federal funds purchased |
| 22,450 |
| 10,690 |
| 11,230 |
| 17,010 | |||||
Overnight federal reserve borrowings |
| 100,000 |
| 30,000 |
| — |
| — | |||||
$ | 124,818 | $ | 43,067 | $ | 13,423 | $ | 19,191 | ||||||
The Company's federal funds purchased and Federal Reserve borrowings fluctuate based on the short-term funding needs of the Company's subsidiary banks. At the end of the quarter, a large portion of the outsized correspondent banking deposits shifted off balance sheet temporarily which prompted some overnight borrowing. Subsequently, the majority of the balances have returned to the balance sheet.
As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.
The table below presents the Company's term and overnight FHLB advances.
As of | ||||||||||||
| June 30, 2020 | March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 | ||||||
| (dollars in thousands) | |||||||||||
Term FHLB advances |
| $ | 90,000 | $ | 55,000 |
| $ | 50,000 |
| $ | 46,433 | |
Overnight FHLB advances | 55,000 | 40,000 | 109,300 | 59,300 | ||||||||
$ | 145,000 | $ | 95,000 |
| $ | 159,300 |
| $ | 105,733 | |||
|
FHLB advances increased $50.0 million in the current quarter compared to the prior quarter due to the temporary liquidity need from the aforementioned temporary shift of excess liquidity straddling quarter-end. All of the net growth in advances were either overnight or shorter term with maximum maturities of 3 months.
The Company renewed its revolving credit note in the second quarter of 2020. At renewal, the line amount was increased from $20.0 million to $25.0 million. The interest on the revolving line of credit is now calculated at a rate per annum equal to the greater of (a) Prime less 0.50% and (b) 3.00% per annum. Prior to the renewal, the interest on the revolving line of credit was calculated at the effective LIBOR rate plus 2.25% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries. There was no outstanding balance on the revolving line of credit at June 30, 2020.
The Company had subordinated notes totaling $68.5 million as of June 30, 2020, relatively unchanged from $68.4 million as of December 31, 2019.
It is management's intention to reduce its reliance on wholesale funding, including FHLB advances and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
The table below presents the maturity schedule including weighted average interest cost for the Company's combined wholesale funding portfolio (defined as FHLB advances and brokered deposits).
June 30, 2020 | December 31, 2019 |
| |||||||||||
| Weighted |
| Weighted | ||||||||||
| Average |
| Average | ||||||||||
Maturity: |
| Amount Due |
| Interest Rate |
| Amount Due |
| Interest Rate |
| ||||
(dollars in thousands) | |||||||||||||
Year ending December 31: | |||||||||||||
2020 | $ | 214,156 | 0.63 | % | $ | 200,110 | 0.85 | % | |||||
2021 |
| 5,000 | 1.55 |
| 43,887 | 1.82 | |||||||
2022 | 28,400 | 1.65 | 50,285 | 1.79 | |||||||||
2023 |
| 20,000 | 1.84 |
| 20,000 | 1.84 | |||||||
Total Wholesale Funding |
| $ | 267,556 | 0.85 | % | $ | 314,282 | 1.20 | % | ||||
|
During the first six months of 2020, wholesale funding decreased $46.7 million as the Company grew core deposits to build on balance sheet liquidity and the Company used a portion of that excess liquidity to prepay brokered certificates of deposits.
STOCKHOLDERS' EQUITY
The table below presents the composition of the Company's stockholders' equity.
As of |
| ||||||||||||||
| June 30, 2020 |
| March 31, 2020 |
| December 31, 2019 |
| June 30, 2019 |
| |||||||
(dollars in thousands) |
| ||||||||||||||
Common stock | $ | 15,791 | $ | 15,774 | $ | 15,828 | $ | 15,773 | |||||||
Additional paid in capital |
| 274,315 |
| 273,867 |
| 274,785 |
| 272,744 | |||||||
Retained earnings |
| 267,081 |
| 254,287 |
| 245,836 |
| 216,741 | |||||||
AOCI (loss) |
| (1,167) |
| (4,789) |
| (1,098) |
| (958) | |||||||
Total stockholders' equity | $ | 556,020 | $ | 539,139 | $ | 535,351 | $ | 504,300 | |||||||
TCE / TA ratio (non-GAAP) |
| 8.48 | % |
| 8.76 | % |
| 9.25 | % |
| 8.05 | % |
* TCE is defined as total common stockholders' equity excluding goodwill and other intangibles. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.
AOCI improved $3.6 million during the quarter for mark-to-market adjustments on interest rate caps and an interest rate swap on trust preferred securities and an increase in net unrealized gains on AFS securities portfolio. Furthermore as it relates to the Company’s TCE/TA, the Company experienced net dilution as TCE/TA fell from 8.76% to 8.48% which was primarily driven by an inflated balance sheet at quarter-end. Specifically, the balance sheet was inflated by PPP loans totaling $358.1 million. Excluding the impact of PPP loans, the adjusted TCE/TA at June 30, 2020 was 9.03% (non-GAAP).
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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
LIQUIDITY AND CAPITAL RESOURCES
Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $534.3 million during the second quarter of 2020 and $334.1 million during the first six months of 2020. 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 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 June 30, 2020, the subsidiary banks had 29 lines of credit totaling $627.9 million, of which $294.4 million was secured and $333.5 million was unsecured. At June 30, 2020, the Company had $527.9 million of the $627.9 million available.
At December 31, 2019, the subsidiary banks had 27 lines of credit totaling $380.6 million, of which $45.3 million was secured and $335.3 million was unsecured. At December 31, 2019, the full $380.6 million was available.
The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $25.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2021. At June 30, 2020, the full $25.0 million was available.
As of June 30, 2020, the Company had $754.4 million in average correspondent banking deposits spread over 191 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.
Investing activities used cash of $560.2 million during the first six months of 2020, compared to $197.1 million for the same period of 2019. The net decrease in federal funds sold was $7.7 million for the first six months of 2020, compared to a net decrease of $16.2 million for the same period of 2019. The net decrease in interest-bearing deposits at financial institutions was $7.1 million for the first six months of 2020, compared to a net increase of $62.1 million for the same period of 2019. Proceeds from calls, maturities, and paydowns of securities were $34.5 million for the first six months of 2020, compared to $33.0 million for the same period of 2019. Purchases of securities used cash of $171.1 million for the first six months of 2020, compared to $10.7 million for the same period of 2019. Proceeds from sales of securities were $6.3 million for the first six months of 2020, compared to $4.7 million in proceed from sales of securities for the first six months of 2019. The net increase in loans/leases used cash of $447.4 million for the first six months of 2020 compared to $176.4 million for the same period of 2019.
Financing activities provided cash of $530.6 million for the first six months of 2020, compared to $170.2 million for same period of 2019. Net increases in deposits totaled $409.0 million for the first six months of 2020, compared to $345.6 million for the same period of 2019. During the first six months of 2020, the Company's short-term borrowings increased
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
$111.4 million, compared to a decrease in short-term borrowings of $9.6 million for the same period of 2019. Long-term FHLB advances increased $85.0 million during the first six months of 2020, compared to $5.0 million for the same period of 2020. In the first six months of 2020, the Company decreased short-term and overnight FHLB advances by $59.3 million. Maturities and principal payments on FHLB term advances totaled $40.0 million in the first six months of 2020. In the first six months of 2019, the Company decreased short-term and overnight FHLB advances by $130.9 million. Maturities and principal payments on FHLB term advances totaled $35.0 million and on other borrowings totaled $11.9 million in the first six months of 2019. Prepayments on other borrowings totaled $46.3 million in the first six months of 2019. Prepayments on brokered and public time deposits totaled $29.2 million during the first six months of 2020. During the first six months of 2019, proceeds from subordinated notes were $63.4 million.
Total cash provided by operating activities was $41.9 million for the first six months of 2020, compared to $29.3 million for the same period of 2019.
Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities and, most recently, subordinated notes.
The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 8 of the Consolidated Financial Statements for additional information regarding regulatory capital.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,” “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:
● | The strength of the local, state, and national economy (including the impact of the 2020 presidential election and the impact of tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulation). |
● | The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), or other adverse external 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. |
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Part I
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued
● | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB (including the new CECL impairment standards, that will change how the Company estimates credit losses when implemented). |
● | 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 acquisitions and the possibility that transaction costs may be greater than anticipated. |
● | The loss of key executives or employees. |
● | Changes in consumer spending. |
● | The costs, effects and outcomes of existing or future litigation. |
● | 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. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
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Part I
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.
In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.
Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the board of directors and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.
One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.
The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.
Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.
The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.
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Part I
Item 3
Application of the simulation model analysis for select interest rate scenarios at the most recent quarter-end available is presented in the following table:
NET INTEREST INCOME EXPOSURE in YEAR 1 |
| ||||||||
|
| As of June 30, |
| As of December 31, |
| As of December 31, |
| ||
INTEREST RATE SCENARIO | POLICY LIMIT |
| 2020 |
| 2019 |
| 2018 | ||
100 basis point downward shift |
| (10.0) | % | 0.6 | % | 0.5 | % | 0.7 | % |
200 basis point upward shift |
| (10.0) | % | 0.9 | % | 1.2 | % | (2.7) | % |
300 basis point upward shock |
| (25.0) | % | 7.2 | % | 4.9 | % | (9.0) | % |
The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at June 30, 2020 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).
Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.
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Part I
Item 4
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of June 30, 2020. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.
Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A Risk Factors
In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the following risk factors apply to the Company:
The outbreak of COVID-19 has led to an economic recession and other severe disruptions in the U.S. economy and has adversely disrupted banking and other financial activity and industries in the areas in which the Company operates. As a result, we are starting to see the impact of COVID-19 on our business, and we believe that it could be significant, adverse and potentially material.
Currently, COVID-19 is spreading through the United States and the world. The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. The resulting concerns on the part of the U.S. and global populations have resulted in a recessionary environment, reduced economic activity and caused significant volatility in the global stock markets. The Company has experienced disruptions across the Company’s business due to these effects, leading to decreased earnings and slowdowns in loan collections.
The outbreak of COVID-19 has resulted in a decline in our clients’ businesses, a decrease in consumer confidence, an increase in unemployment and a disruption in the services provided by our vendors. Continued disruption to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government has introduced a number of programs designed to soften the impact of COVID-19 on small businesses, once these programs expire, our borrowers may not be able to satisfy their financial obligations to us.
COVID-19 has impacted and will likely continue to impact businesses’ and consumers’ financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of the Company’s borrowers are in or have exposure to the hotel, restaurant, entertainment and retail industries and are located in areas that are or were quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on the Company’s direct lease financing, commercial real estate and consumer loan portfolios. Any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.
As a result of the COVID-19 pandemic we may experience adverse financial consequences due to a number of other factors, including, but not limited to:
● | a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill and other intangible assets that could result in an impairment charge being |
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recorded for that period, and adversely impact our results of operations and the ability of our subsidiary banks to pay dividends to us; |
● | the negative effect on earnings resulting from the subsidiary banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis; |
● | increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to our business continuity plan; |
● | the potential for reduced liquidity and its negative effect on our capital and leverage ratios; |
● | increased cyber and payment fraud risk due to increased online and remote activity; and |
● | other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it. |
Overall, we believe that the economic impact from COVID-19 may be severe and could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.
The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.
On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. In addition to implementing the programs contemplated by the CARES Act, the federal bank regulatory agencies have issued a steady stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation:
● | requiring banks to focus on business continuity and pandemic planning; |
● | adding pandemic scenarios to stress testing; |
● | encouraging bank use of capital buffers and reserves in lending programs; |
● | permitting certain regulatory reporting extensions; |
● | reducing margin requirements on swaps; |
● | permitting certain otherwise prohibited investments in investment funds; |
● | issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and |
● | providing credit under the CRA for certain pandemic-related loans, investments and public service. |
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The COVID-19 pandemic has significantly affected the financial markets, and the Federal Reserve has taken a number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies, programs and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material adverse effect on our business and results of operations.
COVID-19 has disrupted banking and other financial activities in the areas in which we operate and could potentially create widespread business continuity issues for us.
The COVID-19 pandemic has negatively impacted the ability of our employees and clients to engage in banking and other financial transactions in the geographic area in which we operate and could create widespread business continuity issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of an outbreak or escalation of the COVID-19 pandemic in our market area, including because of illness, quarantines, government actions or other restrictions in connection with the COVID-19 pandemic. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. Further, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our clients.
As a participating lender in the PPP, the Company and the subsidiary banks are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The subsidiary banks are participating as lenders in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has authorized an additional $310 billion funding for PPP loans; however, it is unknown if and when this the additional authorized amount will be exhausted and whether Congress will again authorize additional PPP loan funding.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. The Company and the subsidiary banks may be exposed to the risk of similar litigation, from both customers and non-customers that approached the banks regarding PPP loans, regarding their process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the subsidiary banks and is not resolved in a manner favorable to the Company or the banks, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The subsidiary banks also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the banks, such as an
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issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On February 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019. The Company suspended the repurchase of shares on March 16, 2020 due to the uncertainties related to the COVID-19 pandemic and it is uncertain when the Company will resume the repurchase of shares as part of this program in the future. All shares repurchased under the share repurchase program were retired.
Total number of shares | Maximum number |
| |||||||
purchased as part of | of shares that may yet | ||||||||
| Total number of | Average price | publicly announced | be purchased under |
| ||||
Period | shares purchased |
| paid per share |
| plans or programs |
| the plans or programs | ||
April 1-30, 2020 | — | — | 100,932 | 699,068 | |||||
May 1-31, 2020 | — | — | 100,932 | 699,068 | |||||
June 1-30, 2020 | — | — | 100,932 | 699,068 | |||||
Item 3 Defaults Upon Senior Securities
None
Item 4 Mine Safety Disclosures
Not applicable
Item 5 Other Information
None
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Part II
QCR HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6 Exhibits
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
32.1 | |
32.2 | |
101 | Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2020 and June 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and June 30, 2019; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and months ended June 30, 2020 and June 30, 2019; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019; and (vi) Notes to the Consolidated Financial Statements. |
104 | Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
QCR HOLDINGS, INC.
(Registrant)
Date | August 7, 2020 | /s/ Larry J. Helling | |
Larry J. Helling | |||
Chief Executive Officer | |||
Date | August 7, 2020 | /s/ Todd A. Gipple | |
Todd A. Gipple, President | |||
Chief Operating Officer | |||
Chief Financial Officer | |||
Date | August 7, 2020 | /s/ Nick W. Anderson | |
Nick W. Anderson | |||
Chief Accounting Officer | |||
(Principal Accounting Officer) |
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