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Section 1: 10-K (10-K)

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Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019.

Commission file number: 0‑22208

QCR HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

42‑1397595

(State of incorporation)

(I.R.S. Employer Identification No.)

3551 7th Street, Moline, Illinois 61265

(Address of principal executive offices)

(309) 736‑3580

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 Par Value

QCRH

The Nasdaq Global Market

 

Securities registered pursuant to Section 12(g) of the Exchange Act:

Preferred Share Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  [ ]  No  [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes  [ ]  No  [ X ]

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 past 90 days.  Yes  [ X ]  No  [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

                                                                                                                                                                                                Yes  [ X ]   No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer [ ]

Accelerated filer  [X]

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 Act). Yes  [   ]  No  [ X ]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price quoted on The Nasdaq Global Market on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $522,033,613.

As of February 28, 2020 the Registrant had outstanding 15,867,838 shares of common stock, $1.00 par value per share.

Documents incorporated by reference:

Part III of Form 10‑K  incorporates by reference portions of the proxy statement for annual meeting of stockholders to be held in May 2020.

 

 

 

Table of Contents

QCR HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

Page
Number(s)

Part I 

 

 

 

 

Item 1.

Business

4

 

Item 1A.

Risk Factors

12

 

Item 1B.

Unresolved Staff Comments

25

 

Item 2.

Properties

25

 

Item 3.

Legal Proceedings

25

 

Item 4.

Mine Safety Disclosures

25

 

 

 

 

Part II 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

 

Item 6.

Selected Financial Data

28

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

General

29

 

 

Executive Overview

29

 

 

Long-Term Financial Goals

30

 

 

Strategic Developments

31

 

 

GAAP to Non-GAAP Reconciliations

32

 

 

Net Interest Income and Margin (Tax Equivalent Basis)(Non-GAAP)

34

 

 

Critical Accounting Policies

36

 

 

Results of Operations

38

 

 

Interest Income

38

 

 

Interest Expense

38

 

 

Provision for Loan/Lease Losses

38

 

 

Noninterest Income

39

 

 

Noninterest Expenses

41

 

 

Income Tax Expense

42

 

 

Financial Condition

43

 

 

Overview

43

 

 

Investment Securities

43

 

 

Loans/Leases

44

 

 

Allowance for Estimated Losses on Loans/Leases

45

 

 

Nonperforming Assets

48

 

 

Deposits

48

 

 

Short-Term Borrowings

49

 

 

FHLB Advances and Other Borrowings

49

 

 

Subordinated Notes

50

 

 

Stockholders’ Equity

50

 

 

Liquidity and Capital Resources

51

 

 

Commitments, Contingencies, Contractual Obligations, and Off-Balance Sheet Arrangements

52

 

 

Impact of Inflation and Changing Prices

53

 

 

Forward-Looking Statements

53

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

54

 

Item 8.

Consolidated Financial Statements

56

 

 

Consolidated Balance Sheets as of December 31, 2019 and 2018

58

 

 

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and   2017

59

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Table of Contents

 

 

Consolidated Statements of Comprehensive Income for the years ended December 31,    2019, 2018 and 2017

60

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

61

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

62

 

 

Notes to Consolidated Financial Statements

64

 

 

Note 1 Nature of Business and Significant Accounting Policies

64

 

 

Note 2 Sales/Mergers/Acquisitions

79

 

 

Note 3 Investment Securities

88

 

 

Note 4 Loans/Leases Receivable

92

 

 

Note 5 Premises and Equipment

103

 

 

Note 6 Goodwill and Intangibles

105

 

 

Note 7 Derivatives and Hedging Activities

107

 

 

Note 8 Deposits

109

 

 

Note 9 Short-Term Borrowings

110

 

 

Note 10 FHLB Advances

111

 

 

Note 11 Other Borrowings and Unused Lines of Credit

112

 

 

Note 12 Subordinated Notes

113

 

 

Note 13 Junior Subordinated Debentures

114

 

 

Note 14 Federal and State Income Taxes

114

 

 

Note 15 Employee Benefit Plans

117

 

 

Note 16 Stock-Based Compensation

118

 

 

Note 17 Regulatory Capital Requirements and Restrictions on Dividends

120

 

 

Note 18 Earnings Per Share

122

 

 

Note 19 Commitments and Contingencies

123

 

 

Note 20 Quarterly Results of Operations (Unaudited)

124

 

 

Note 21 Parent Company Only Financial Statements

125

 

 

Note 22 Fair Value

128

 

 

Note 23 Business Segment Information

131

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

132

 

Item 9A.

Controls and Procedures

132

 

Item 9B.

Other Information

135

 

 

 

 

Part III 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

136

 

Item 11.

Executive Compensation

136

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

136

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

136

 

Item 14.

Principal Accountant Fees and Services

137

 

 

 

 

Part IV 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

138

 

Item 16.

Form 10‑K Summary

142

 

 

 

 

 

 

Signatures 

143

 

 

Appendix A. Supervision and Regulation

145

 

 

Appendix B. Guide 3 Information

156

 

Throughout the Notes to the Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, and remaining sections of this Form 10-K (including appendices), we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

 

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Table of Contents

Part I

Item 1.    Business

General. QCR Holdings, Inc. is a multi-bank holding company headquartered in Moline, Illinois, that was formed in February 1993 under the laws of the state of Delaware. In 2016, the Company elected to operate as a financial holding company under the BHCA. The Company serves the Quad Cities, Cedar Rapids, Waterloo/Cedar Falls, Des Moines/Ankeny and Springfield communities through the following four wholly-owned banking subsidiaries (collectively, the “Banks”), which provide full-service commercial and consumer banking and trust and asset management services:

·

QCBT, which is based in Bettendorf, Iowa, and commenced operations in 1994;

·

CRBT, which is based in Cedar Rapids, Iowa, and commenced operations in 2001;

·

CSB, which is based in Ankeny, Iowa, and was acquired in 2016; and

·

SFC Bank, which is based in Springfield, Missouri, and was acquired in 2018.

 

On November 30, 2019, the Company sold substantially all of the assets and transferred substantially all of the deposits and certain other liabilities of the Company’s wholly-owned subsidiary, RB&T.  Prior to this time, the Company provided full service banking services to the Rockford community.

On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois.   The acquisition of the Bates Companies has enhanced the wealth management services of the Company.

On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri.  From that time, the Company has operated SFC Bank as an independent banking subsidiary.

See Note 2 to the Consolidated Financial Statements for further discussion on mergers, acquisitions and sales.

The Company engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT based in Brookfield, Wisconsin.

Subsidiary Banks. Segments of the Company have been established by management as defined by the structure of the Company’s internal organization, focusing on the financial information that the Company’s operating decision-makers routinely use to make decisions about operating matters. The Company’s primary segment, Commercial Banking, is geographically divided by markets into secondary segments which correspond to the four subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB and SFC Bank. See the Consolidated Financial Statements incorporated herein generally, and Note 23 to the Consolidated Financial Statements specifically, for additional business segment information.

QCBT was capitalized on October 13, 1993, and commenced operations on January 7, 1994. QCBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. QCBT provides full service commercial, correspondent, and consumer banking and trust and asset management services in the Quad Cities and adjacent communities through its five offices that are located in Bettendorf and Davenport, Iowa and in Moline, Illinois. QCBT, on a consolidated basis with m2, had total segment assets of $1.68 billion and $1.62 billion as of December 31, 2019 and 2018, respectively.

CRBT is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Cedar Rapids in June 2001, operating as a branch of QCBT. The Cedar Rapids branch operation then began functioning under the CRBT charter in September 2001. Acquired branches of CNB operate as a division of CRBT under the name “Community Bank & Trust.”  CRBT provides full-service commercial and consumer banking and trust and asset management services to Cedar Rapids, Marion and Waterloo/Cedar Falls, Iowa and adjacent communities through its eight facilities. The headquarters for CRBT is located in downtown Cedar Rapids with three other branches located in Cedar Rapids, one branch in Marion, two branches located in Waterloo and one branch located in Cedar Falls. CRBT had total segment assets of $1.57 billion and $1.38 billion as of December 31, 2019 and 2018, respectively.

CSB is an Iowa-chartered commercial bank that is a member of the Federal Reserve System. CSB was acquired by the Company in 2016. CSB provides full-service commercial and consumer banking to Des Moines, Iowa and adjacent communities through its headquarters located in Ankeny, Iowa and its nine other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $853.8 million and $785.4 million as of December 31, 2019 and 2018, respectively.

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Table of Contents

SFC Bank is a Missouri-chartered commercial bank that is a member of the Federal Reserve System. SFC Bank was acquired by the the Company in 2018 through a merger with Springfield Bancshares.  SFC Bank provides full-service commercial and consumer banking to the Springfield, Missouri area through its headquarters located on Glenstone Avenue in Springfield and its branch facility located on East Primrose in Springfield.  SFC Bank had total segment assets of $748.8 million and $632.8 million as of December 31, 2019 and 2018, respectively.

Other Operating Subsidiaries. m2, which is based in Brookfield, Wisconsin, is engaged in the business of leasing machinery and equipment to C&I businesses under direct financing lease contracts.  The Bates Companies, which are based in Rockford, Illinois, are engaged in the business of wealth management services.

Trust Preferred Subsidiaries. Following is a listing of the Company’s non-consolidated subsidiaries formed for the issuance of trust preferred securities, including pertinent information as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Amount Outstanding

    

Amount Outstanding

    

 

    

Interest

 

 

Interest

 

 

 

 

as of

 

as of

 

 

 

Rate as of

 

 

Rate as of

Name

 

Date Issued

 

December 31, 2019

 

December 31, 2018

 

Interest Rate

 

December 31, 2019

 

 

December 31, 2018

QCR Holdings Statutory Trust II

 

February 2004

 

$

10,310

 

$

10,310

 

2.85% over 3-month LIBOR

 

4.79

%  

 

 

5.65

%

QCR Holdings Statutory Trust III

 

February 2004

 

 

8,248

 

 

8,248

 

2.85% over 3-month LIBOR

 

4.79

%  

 

 

5.65

%

QCR Holdings Statutory Trust V

 

February 2006

 

 

10,310

 

 

10,310

 

1.55% over 3-month LIBOR

 

3.54

%  

 

 

3.99

%

Community National Statutory Trust II

 

September 2004

 

 

3,093

 

 

3,093

 

2.17% over 3-month LIBOR

 

4.08

%  

 

 

4.96

%

Community National Statutory Trust III

 

March 2007

 

 

3,609

 

 

3,609

 

1.75% over 3-month LIBOR

 

3.64

%  

 

 

4.54

%

Guaranty Bankshares Statutory Trust I

 

May 2005

 

 

4,640

 

 

4,640

 

1.75% over 3-month LIBOR

 

3.64

%  

 

 

4.54

%

 

 

 

 

$

40,210

 

$

40,210

 

Weighted Average Rate

 

4.18

%  

 

 

4.94

%

 

Securities issued by all of the trusts listed above mature 30 years from the date of issuance, but are all currently callable at par at any time. Interest rate reset dates vary by trust. 

Business. The Company’s principal business consists of attracting deposits and investing those deposits in loans/leases and securities. The deposits of the subsidiary banks are insured to the maximum amount allowable by the FDIC. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest earned on its loans/leases and securities and the interest paid on deposits and borrowings. The Company’s operating results are affected by economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities, as described more fully in this Form 10‑K. Its operating results also can be affected by trust fees, investment advisory and management fees, deposit service charge fees, gains on the sale of residential real estate and government guaranteed loans, earnings from BOLI and other noninterest income. Operating expenses include employee compensation and benefits, occupancy and equipment expense, professional and data processing fees, advertising and marketing expenses, bank service charges, FDIC and other insurance, loan/lease expenses and other administrative expenses.

The Company and its subsidiaries collectively employed 697 and 755 FTEs at December 31, 2019 and 2018, respectively. The decrease in FTEs during 2019 was primarily the result of the sale of RB&T’S operations.

The Federal Reserve is the primary federal regulator of the Company, QCBT, CRBT, CSB and SFC Bank.  QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking and SFC Bank is regulated by the Missouri Division of Finance. The FDIC, as administrator of the DIF, also has regulatory authority over the subsidiary banks. See Appendix A for more information on the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.

Lending/Leasing. The Company and its subsidiaries provide a broad range of commercial and retail lending/leasing and investment services to corporations, partnerships, individuals, and government agencies. The subsidiary banks actively market their services to qualified lending and deposit clients. Officers actively solicit the business of new clients entering their market areas as well as long-standing members of the local business community. The Company has an established lending/leasing policy which includes a number of underwriting factors to be considered in making a loan/lease, including, but not limited to, location, loan-to-value ratio, cash flow, collateral and the credit history of the borrower.

In accordance with Iowa regulation, the legal lending limit to one borrower for QCBT, CRBT and CSB, calculated as 15% of aggregate capital, was $26.7 million, $28.7 million, and $15.3 million, respectively, as of December 31, 2019. In accordance with Missouri regulation, the legal lending limit to one borrower for SFC Bank, calculated as 15% of aggregate capital, totaled $10.7 million as of December 31, 2019.

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Table of Contents

The Company recognizes the need to prevent excessive concentrations of credit exposure to any one borrower or group of related borrowers. As such, the Company has established an in-house lending limit, which is lower than each subsidiary bank’s legal lending limit, in an effort to manage individual borrower exposure levels.

The in-house lending limit is the maximum amount of credit each subsidiary bank will extend to a single borrowing entity or group of related entities. The Company implements a tiered approach, based on the risk rating of the borrower. Under the most recent in-house limit, total credit exposure to a single borrowing entity or group of related entities will not exceed the following, subject to certain exceptions:

 

 

 

 

 

 

 

 

 

 

 

 

High Quality

 

Medium Quality

 

Low Quality

 

    

(Risk Ratings 1-3)

    

(Risk Rating 4)

    

(Risk Ratings 5-8)

 

 

(dollars in thousands)

QCBT

 

$

16,000

 

$

13,500

 

$

9,000

CRBT

 

$

14,500

 

$

12,000

 

$

8,000

CSB

 

$

9,500

 

$

8,000

 

$

5,500

SFC Bank

 

$

9,000

 

$

7,500

 

$

5,000

QCRH Consolidated

 

$

25,000

 

$

19,000

 

$

12,500

 

The QCRH Consolidated amount represents the maximum amount of credit that all affiliated banks, when combined, will extend to a single borrowing entity or group of related entities, subject to certain exceptions.

In addition, m2’s in-house lending limit is $1.0 million to a single leasing entity or group of related entities, subject to certain exceptions.

As part of the loan monitoring activity at the four subsidiary banks, credit administration personnel interact closely with senior bank management. For example, the internal loan committee of each subsidiary bank meets weekly. The Company has a separate in-house loan review function to analyze credits of the subsidiary banks.   To complement the in-house loan review, an independent third-party performs external loan reviews. Historically, management has attempted to identify problem loans at an early stage and to aggressively seek a resolution of those situations.

The Company recognizes that a diversified loan/lease portfolio contributes to reducing risk in the overall loan/lease portfolio. The specific loan/lease portfolio mix is subject to change based on loan/lease demand, the business environment and various economic factors. The Company actively monitors concentrations within the loan/lease portfolio to ensure appropriate diversification and concentration risk is maintained.

Specifically, each subsidiary bank’s total loans as a percentage of average assets may not exceed 85%. In addition, following are established policy limits and the actual allocations for the subsidiary banks as of December 31, 2019 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s gross loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCBT

 

CRBT

 

CSB

 

SFC Bank

 

 

 

Maximum

    

 

    

Maximum

    

 

    

Maximum

    

 

    

Maximum

    

 

 

 

 

Percentage

 

As of

 

Percentage

 

As of

 

Percentage

 

As of

 

Percentage

 

As of

 

 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

per Loan

 

December 31, 

 

 

Type of Loan *

Policy

 

2019

 

Policy

 

2019

 

Policy

 

2019

 

Policy

 

2019

 

 

One-to-four family residential

30

%  

12

%  

25

%  

 9

%  

35

%  

12

%  

30

%  

15

%

 

Multi-family

15

%  

 2

%  

15

%  

 8

%  

15

%  

 3

%  

20

%  

 7

%

 

Farmland

 5

%  

 —

%  

 5

%  

 —

%  

15

%  

 2

%  

 5

%  

 1

%

 

Non-farm, nonresidential

50

%  

22

%  

50

%  

24

%  

50

%  

28

%  

50

%  

44

%

 

Construction and land development

20

%  

 8

%  

15

%  

12

%  

35

%  

19

%  

15

%  

10

%

 

C&I

60

%  

30

%  

60

%  

36

%  

50

%  

27

%  

20

%  

17

%

 

Loans to individuals

10

%  

 1

%  

10

%  

 1

%  

10

%  

 —

%  

 5

%  

 1

%

 

Lease financing

30

%  

 7

%  

 5

%  

 —

%  

 5

%  

 —

%  

 5

%  

 —

%

 

Bank stock loans

**

 

 —

 

10

%  

 —

%  

 —

%

 —

%  

20

%  

 —

%

 

All other loans

15

%  

18

%  

10

%  

10

%  

10

%  

 9

%  

15

%  

 5

%

 

 

  

 

100

%  

  

 

100

%  

  

 

100

%  

  

 

100

%

 


*   The loan types above are as defined and reported in the subsidiary banks’ quarterly Reports of Condition and Income (also known as Call Reports).

** QCBT’s maximum percentage for bank stock loans is 150% of risk-based capital (bank stock loan commitments are limited to 200% of risk-based capital). At December 31, 2019, QCBT’s bank stock loans totaled 58% of risk-based capital.

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Table of Contents

 

The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2019 and 2018. Residential real estate loans held for sale are included in residential real estate loans below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

m2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

QCBT

 

Lease Funds

 

CRBT

 

CSB

 

SFC Bank

 

RB&T

 

Total

 

 

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

    

%

    

$

 

%

 

 

 

(dollars in thousands)

 

As of December 31, 2019

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

C&I loans

 

$

474,264

 

43

%  

$

141,977

 

60

%  

$

536,294

 

46

%  

$

234,527

 

37

%  

$

120,763

 

22

%  

$

N/A

 

N/A

%  

$

1,507,825

 

41

%

CRE loans

 

 

455,389

 

42

%  

 

 —

 

 —

%  

 

554,101

 

47

%  

 

350,159

 

55

%  

 

376,747

 

69

%  

 

N/A

 

N/A

%  

 

1,736,396

 

47

%

Direct financing leases

 

 

 —

 

 —

%  

 

87,869

 

37

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

N/A

 

N/A

%  

 

87,869

 

 2

%

Residential real estate loans

 

 

122,675

 

11

%  

 

 —

 

 —

%  

 

49,544

 

 4

%  

 

40,224

 

 6

%  

 

27,461

 

 5

%  

 

N/A

 

N/A

%  

 

239,904

 

 7

%

Installment and other consumer loans

 

 

38,706

 

 4

%  

 

 —

 

 —

%  

 

35,362

 

 3

%  

 

14,272

 

 2

%  

 

21,012

 

 4

%  

 

N/A

 

N/A

%  

 

109,352

 

 3

%

Deferred loan/lease origination costs, net of fees

 

 

1,897

 

 —

%  

 

6,889

 

 3

%  

 

(338)

 

 —

%  

 

88

 

 —

%  

 

323

 

 —

%  

 

N/A

 

N/A

%  

 

8,859

 

 —

%  

 

 

$

1,092,931

 

100

%  

$

236,735

 

100

%  

$

1,174,963

 

100

%  

$

639,270

 

100

%  

$

546,306

 

100

%  

$

N/A

 

N/A

%  

$

3,690,205

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

C&I loans

 

$

425,500

 

42

%  

$

103,404

 

45

%  

$

458,170

 

44

%  

$

201,871

 

35

%  

$

95,910

 

20

%  

$

144,555

 

36

%  

$

1,429,410

 

38

%

CRE loans

 

 

421,032

 

42

%  

 

 —

 

 —

%  

 

486,084

 

47

%  

 

327,775

 

56

%  

 

332,547

 

70

%  

 

198,673

 

49

%  

 

1,766,111

 

48

%

Direct financing leases

 

 

 —

 

 —

%  

 

117,968

 

52

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

 —

 

 —

%  

 

117,968

 

 3

%

Residential real estate loans

 

 

120,855

 

12

%  

 

 —

 

 —

%  

 

57,469

 

 6

%  

 

39,190

 

 7

%  

 

30,706

 

 9

%  

 

42,539

 

11

%  

 

290,759

 

 8

%

Installment and other consumer loans

 

 

35,325

 

 4

%  

 

 —

 

 —

%  

 

36,563

 

 3

%  

 

13,696

 

 2

%  

 

16,450

 

 1

%  

 

17,348

 

 4

%  

 

119,382

 

 3

%

Deferred loan/lease origination costs, net of fees

 

 

1,759

 

 —

%  

 

7,274

 

 3

%  

 

(815)

 

 —

%  

 

(81)

 

 —

%  

 

188

 

 —

%  

 

799

 

 —

%  

 

9,124

 

 —

%  

 

 

$

1,004,471

 

100

%  

$

228,646

 

100

%  

$

1,037,471

 

100

%  

$

582,451

 

100

%  

$

475,801

 

100

%  

$

403,914

 

100

%  

$

3,732,754

 

100

%

 

Proper pricing of loans is necessary to provide adequate return to the Company’s stockholders. Loan pricing, as established by the subsidiary banks’ internal loan committees, includes consideration for the cost of funds, loan maturity and risk, origination and maintenance costs, appropriate stockholder return, competitive factors, and the economic environment. The portfolio contains a mix of loans with fixed and floating interest rates. Management attempts to maximize the use of interest rate floors on its variable rate loan portfolio. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for more discussion on the Company’s management of interest rate risk.

C&I Lending

As noted above, the subsidiary banks are active C&I lenders. The current areas of emphasis include loans to small and mid-sized businesses with a wide range of operations such as wholesalers, manufacturers, building contractors, business services companies, other banks, and retailers. The banks provide a wide range of business loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of facilities, equipment and other purposes. Since 2010, the subsidiary banks have been active in participating in lending programs offered by the SBA and USDA. Under these programs, the government entities will generally provide a guarantee of repayment ranging from 50% to 85% of the principal amount of the qualifying loan.

Loan approval is generally based on the following factors:

·

Ability and stability of current management of the borrower;

·

Stable earnings with positive financial trends;

·

Sufficient cash flow to support debt repayment;

·

Earnings projections based on reasonable assumptions;

·

Financial strength of the industry and business; and

·

Value and marketability of collateral.

For C&I loans, the Company assigns internal risk ratings which are largely dependent upon the aforementioned approval factors. The risk rating is reviewed annually or on an as needed basis depending on the specific circumstances of the loan. See Note 1 to the Consolidated Financial Statements for additional information, including the internal risk rating scale.

As part of the underwriting process, management reviews current borrower financial statements. When appropriate, certain C&I loans may contain covenants requiring maintenance of financial performance ratios such as, but not limited to:

·

Minimum debt service coverage ratio;

·

Minimum current ratio;

·

Maximum debt to tangible net worth ratio; and/or

·

Minimum tangible net worth.

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Establishment of these financial performance ratios depends on a number of factors, including risk rating and the specific industry in which the borrower is engaged.

Collateral for these loans generally includes accounts receivable, inventory, equipment, and real estate. The Company’s lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans must exceed the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. Approved non-real estate collateral types and corresponding maximum advance percentages for each collateral type are listed below.

 

 

 

Approved Collateral Type

    

Maximum Advance %

 

 

 

Financial Instruments

 

  

U.S. Government Securities

 

90% of market value

Securities of Federal Agencies

 

90% of market value

Municipal Bonds rated by Moody’s As “A” or better

 

80% of market value

Listed Stocks

 

75% of market value

Mutual Funds

 

75% of market value

Cash Value Life Insurance

 

95%, less policy loans

Savings/Time Deposits (Bank)

 

100% of current value

Penny Stocks

 

0%

 

 

 

General Business

 

  

Accounts Receivable

 

80% of eligible accounts

Inventory

 

50% of value

Crop and Grain Inventories

 

80% of current market value

Livestock

 

80% of purchase price, or current market value; or higher if cross-collateralized with other assets

Fixed Assets (Existing)

 

50% of net book value, or 75% of orderly liquidation appraised value

Fixed Assets (New)

 

80% of cost, or higher if cross-collateralized with other assets

Leasehold Improvements

 

0%

 

Generally, if the above collateral is part of a cross-collateralization with other approved assets, then the maximum advance percentage may be higher.

The Company’s lending policy specifies maximum term limits for C&I loans. For term loans, the maximum term is generally seven years. Generally, term loans range from three to five years. For lines of credit, the maximum term is typically 365 days. For low income housing tax credits permanent loans, the maximum term is generally up to 20 years.

In addition, the subsidiary banks often take personal guarantees or cosigners to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower.

Following is a summary of the five largest industry concentrations within the C&I portfolio as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

    

2019

    

2018

 

 

Amount

 

Amount

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Administration of urban planning & rural development

 

$

133,157

 

$

111,579

Bank holding companies

 

 

92,185

 

 

75,601

Hotels & motels

 

 

64,867

 

 

83,106

Skilled nursing care facilities

 

 

39,881

 

 

53,134

General medical & surgical hospitals

 

 

34,184

 

 

36,895

 

These loan categories are defined by industry-standard NAICS codes – refer to NAICS.com for a description of each category.

 

 

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Table of Contents

CRE Lending

The subsidiary banks also make CRE loans. CRE loans are subject to underwriting standards and processes similar to C&I loans, in addition to those standards and processes specific to real estate loans. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The Company’s lending policy specifies maximum loan-to-value limits based on the category of CRE (commercial real estate loans on improved property, raw land, land development, and commercial construction). These limits are the same limits as, or in some situations, more conservative than, those established by regulatory authorities. Following is a listing of these limits as well as some of the other guidelines included in the Company’s lending policy for the major categories of CRE loans:

 

 

 

 

 

 

    

 

    

Maximum

CRE Loan Types

 

Maximum Advance Rate **

 

Term

CRE Loans on Improved Property *

 

80%

 

7 years

Raw Land

 

Lesser of 90% of project cost, or 65% of "as is" appraised value

 

12 months

Land Development***

 

Lesser of 85% of project cost, or 75% of "as-completed" appraised value

 

24 months

Commercial Construction Loans

 

Lesser of 85% of project cost, or 80% of "as-completed" appraised value

 

12 months

Residential Construction Loans to Builders

 

Lesser of 90% of project cost, or 80% of "as-completed" appraised value

 

12 months


*     Generally, the debt service coverage ratio must be a minimum of 1.25x for non-owner occupied loans and 1.15x for owner-occupied loans. For loans greater than $500 thousand, the subsidiary banks sensitize this ratio for deteriorated economic conditions, major changes in interest rates, and/or significant increases in vacancy rates.

**  These maximum rates are consistent with, or in some situations, more conservative than those established by regulatory authorities.

*** Generally, the maximum term for land development loans is 12 months but there are some situations where the maximum term would be 24 months.

The Company’s lending policy also includes guidelines for real estate appraisals and evaluations, including minimum appraisal and evaluation standards based on certain transactions. In addition, the subsidiary banks often take personal guarantees to help assure repayment.

In addition, management tracks the level of owner-occupied CRE loans versus non-owner occupied CRE loans. Owner-occupied CRE loans are generally considered to have less risk. As of December 31, 2019 and 2018, approximately 26% and 28%, respectively, of the CRE loan portfolio was owner-occupied.

In accordance with regulatory guidelines, the Company exercises heightened risk management practices when non-owner occupied CRE lending exceeds 300% of total risk-based capital or construction, land development and other land loans exceed 100% of total risk-based capital. Although CSB’s loan portfolio has historically been real estate dominated and its real estate portfolio levels exceed these policy limits, it has established a Credit Risk Committee to routinely monitor its real estate loan portfolio.

Following is a listing of the significant industries within the Company’s CRE loan portfolio as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

 

$

553,142

 

32

%  

$

612,327

 

34

%

Lessors of Residential Buildings

 

 

465,172

 

27

%  

 

346,270

 

19

%

Hotels

 

 

63,720

 

 4

%  

 

81,345

 

 5

%

New Housing For-Sale Builders

 

 

55,525

 

 3

%

 

47,598

 

 3

%

Nonresidential Property Managers

 

 

48,059

 

 3

%  

 

69,885

 

 4

%

Land Subdivision

 

 

46,318

 

 3

%  

 

48,378

 

 3

%

Other Activities Related to Real Estate

 

 

42,060

 

 2

%  

 

25,345

 

 2

%

Other *

 

 

462,400

 

26

%  

 

534,963

 

30

%

Total CRE Loans

 

$

1,736,396

 

100

%  

$

1,766,111

 

100

%

 

*   “Other” consists of all other industries. None of these had concentrations greater than $28.8 million, or 1.7%, of total CRE loans as of December 31, 2019.

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Table of Contents

Following is a breakdown of non owner-occupied CRE by property type as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

2018

 

    

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

359,469

 

39

%  

$

189,137

 

18

%

Office

 

 

193,381

 

21

%  

 

255,452

 

25

%

Retail

 

 

175,602

 

19

%  

 

232,022

 

23

%

Hotel/motel

 

 

71,611

 

 8

%  

 

89,906

 

 9

%

Industrial/warehouse

 

 

68,978

 

 8

%  

 

93,503

 

 9

%

Other

 

 

44,569

 

 5

%  

 

168,650

 

16

%

Total income-producing CRE

 

$

913,610

 

100

%  

$

1,028,670

 

100

%

 

A portion of the Company’s construction portfolio is considered non-residential construction. Following is a summary of industry concentrations within that category as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

2018

 

    

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

169,523

 

50

%  

$

61,055

 

30

%

Office

 

 

24,950

 

 7

%  

 

17,692

 

 9

%

Retail

 

 

14,584

 

 4

%  

 

10,285

 

 5

%

Industrial/warehouse

 

 

8,388

 

 2

%  

 

4,591

 

 2

%

Hotel/motel

 

 

5,715

 

 2

%  

 

5,679

 

 3

%

Other

 

 

115,349

 

35

%  

 

106,532

 

51

%

Total non-residential construction loans

 

$

338,509

 

100

%  

$

205,834

 

100

%

 

Additionally, the Company had approximately $48.4 million and $52.3 million of residential construction loans outstanding as of December 31, 2019 and 2018, respectively. Of this amount, approximately 66% was considered speculative, while 34% was pre-sold at December 31, 2019, and approximately 72% was considered speculative, while 28% was pre-sold at December 31, 2018.

Direct Financing Leasing

m2 leases machinery and equipment to C&I customers under direct financing leases. All lease requests are subject to the credit requirements and criteria as set forth in the lending/leasing policy. In all cases, a formal independent credit analysis of the lessee is performed.

The following private and public sector business assets are generally acceptable to consider for lease funding:

·

Computer systems;

·

Photocopy systems;

·

Fire trucks;

·

Specialized road maintenance equipment;

·

Medical equipment;

·

Commercial business furnishings;

·

Vehicles classified as heavy equipment;

·

Trucks and trailers;

·

Equipment classified as plant or office equipment; and

·

Marine boat lifts.

 

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Table of Contents

m2 will generally refrain from funding leases of the following type:

·

Leases collateralized by non-marketable items;

·

Leases collateralized by consumer items, such as vehicles, household goods, recreational vehicles, boats, etc.;

·

Leases collateralized by used equipment, unless its remaining useful life can be readily determined; and

·

Leases with a repayment schedule exceeding seven years.

Residential Real Estate Lending

Generally, the subsidiary banks’ residential real estate loans conform to the underwriting requirements of Freddie Mac and Fannie Mae to allow the subsidiary banks to resell loans in the secondary market. The subsidiary banks structure most loans that will not conform to those underwriting requirements as adjustable rate mortgages that adjust in one to five years, and then retain these loans in their portfolios. Servicing rights are generally not retained on the loans sold in the secondary market. The Company’s lending policy establishes minimum appraisal and other credit guidelines.

The following table presents the originations and sales of residential real estate loans for the Company. Included in originations is activity related to the refinancing of previously held in-house mortgages.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 

 

 

2019

2018

2017

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Originations of residential real estate loans

 

$

183,491

 

$

87,133

 

$

38,079

 

Sales of residential real estate loans

 

$

141,195

 

$

51,010

 

$

33,165

 

Percentage of sales to originations

 

 

77

%  

 

59

%  

 

87

%

 

Installment and Other Consumer Lending

The consumer lending department of each subsidiary bank provides many types of consumer loans, including home improvement, home equity, motor vehicle, signature loans and small personal credit lines. The Company’s lending policy addresses specific credit guidelines by consumer loan type. In particular, for home equity loans and home equity lines of credit, the minimum credit bureau score is 650. For both home equity loans and lines of credit, the maximum advance rate is 90% of value with a minimum credit bureau score of 650. The maximum term on home equity loans is 10 years and maximum amortization is 15 years. The maximum term on home equity lines of credit is 10 years.

In some instances for all loans/leases, it may be appropriate to originate or purchase loans/leases that are exceptions to the guidelines and limits established within the Company’s lending policy described above. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are generally noted as such and specifically identified in loan/lease approval documents.

Competition. The Company currently operates in the highly competitive Quad Cities, Cedar Rapids, Marion, Waterloo/Cedar Falls, Des Moines and Springfield markets. Competitors include not only other commercial banks, credit unions, thrift institutions, and mutual funds, but also insurance companies, FinTech companies, finance companies, brokerage firms, investment banking companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as the Company. Many of these competitors compete across geographic boundaries and provide customers increasing access to meaningful alternatives to traditional banking services. The Company also competes in markets with a number of much larger financial institutions with substantially greater resources and larger lending limits.

Appendices. The commercial banking business is a highly regulated business. See Appendix A “Supervision and Regulation” for a discussion of the federal and state statutes and regulations that are applicable to the Company and its subsidiaries.

See Appendix B for tables and schedules that show selected financial statistical information relating to the business of the Company required to be presented pursuant to federal securities laws. Consistent with the information presented in the Form 10‑K, results are presented as of and for the fiscal years ended December 31, 2019, 2018, and 2017, as applicable.

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Table of Contents

Internet Site, Securities Filings and Governance Documents. The Company maintains an Internet site at www.qcrh.com. The Company makes available free of charge through this site its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. These filings are available at http://www.snl.com/IRW/Docs/1024092. Also available are many of its corporate governance documents, including the Business Code of Conduct and Ethics Policy (http://www.snl.com/IRW/govdocs/1024092).

Item 1A.    Risk Factors

In addition to the other information in this Annual Report on Form 10‑K, stockholders or prospective investors should carefully consider the following risk factors:

Conditions in the financial market and economic conditions, including conditions in the markets in which we operate, generally may adversely affect our business.

Our general financial performance is highly dependent upon the business environment in the markets where we operate and in particular, the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services it offers. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of these or other factors. For example, the coronavirus may have an adverse impact on international trade (including supply chains and export levels), travel, employee productivity and other economic activities, which could have a destabilizing effect on the financial markets and economic activity or cause the general economy in our market areas to decline.

While economic conditions have improved since the recession, there can be no assurance that this improvement will continue. Uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Downturns in the markets where our banking operations occur could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults, high or increased levels of problem assets and foreclosures and reduced wealth management fees resulting from lower asset values. Such conditions could adversely affect the credit quality of our loans, financial condition and results of operations.

Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:

·

difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

 

·

difficulties in supporting and transitioning customers of the target company;

 

·

diversion of financial and management resources from existing operations;

 

·

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

 

·

risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

 

12

Table of Contents

·

potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

 

·

risks of acquiring loans with deteriorated credit quality;

 

·

assumption of unanticipated problems or latent liabilities; and

 

·

inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.

We must effectively manage our credit risk.

There are risks inherent in making any loan, including risks inherent in dealing with specific borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our credit review department and an external third party. However, we cannot assure you that such approval and monitoring procedures will reduce these credit risks.

The majority of our subsidiary banks’ loan portfolios are invested in C&I and CRE loans, and we focus on lending to small to medium-sized businesses. The size of the loans we can offer to commercial customers is less than the size of the loans that our competitors with larger lending limits can offer. This may limit our ability to establish relationships with the area’s largest businesses. Smaller companies tend to be at a competitive disadvantage and generally have limited operating histories, less sophisticated internal record keeping and financial planning capabilities and fewer financial resources than larger companies. As a result, we may assume greater lending risks than financial institutions that have a lesser concentration of such loans and tend to make loans to larger, more established businesses. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. In addition to C&I and CRE loans, our subsidiary banks are also active in residential mortgage and consumer lending. Our borrowers may experience financial difficulties, and the level of nonperforming loans, charge-offs and delinquencies could rise, which could negatively impact our business through increased provision, reduced interest income on loans/leases, and increased expenses incurred to carry and resolve problem loans/leases.

C&I loans make up a large portion of our loan/lease portfolio.

C&I loans were $1.5 billion, or approximately 41% of our total loan/lease portfolio, as of December 31, 2019. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, equipment and real estate. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation value of the pledged collateral and enforcement of a personal guarantee, if any exists. Whenever possible, we require a personal guarantee or cosigner on commercial loans. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing these loans may lose value over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. In addition, a prolonged recovery period could harm or continue to harm the businesses of our C&I customers and reduce the value of the collateral securing these loans.

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Table of Contents

Our loan/lease portfolio has a significant concentration of CRE loans, which involve risks specific to real estate values.

CRE lending comprises a significant portion of our lending business. Specifically, CRE loans were $1.7 billion, or approximately 47% of our total loan/lease portfolio, as of December 31, 2019. Of this amount, $444.0 million, or approximately 26%, was owner-occupied. The market value of real estate securing our CRE loans can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.

Our allowance may prove to be insufficient to absorb losses in our loan/lease portfolio.

We establish our allowance for loan and lease losses in consultation with management of our subsidiaries and maintain it at a level considered adequate by management to absorb loan/lease losses that are inherent in the portfolio. The amount of future loan/lease losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2019, our allowance as a percentage of total gross loans/leases was 0.98%, and as a percentage of total NPLs was 403.87%. In accordance with GAAP for acquisition accounting, the loans acquired through the acquisitions of SFC Bank, Guaranty Bank and CSB were recorded at fair value; therefore, there was no allowance associated with SFC Bank’s, Guaranty Bank’s and CSB’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($7.0 million at December 31, 2019).