10-K 1 qcrh-20181231x10k.htm 10-K qcrh_Current_Folio_10K

 

 

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, 2018.

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:

Common stock, $1.00 Par Value 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.  [ X ]

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, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $624,586,534.

As of February 28, 2019 the Registrant had outstanding 15,738,761 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 2019.

 

 

 


 

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

23

 

Item 2.

Properties

24

 

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

43

 

 

Financial Condition

43

 

 

Overview

43

 

 

Investment Securities

43

 

 

Loans/Leases

44

 

 

Allowance for Estimated Losses on Loans/Leases

46

 

 

Nonperforming Assets

48

 

 

Deposits

49

 

 

Short-Term Borrowings

49

 

 

FHLB Advances and Other Borrowings

49

 

 

Stockholders’ Equity

50

 

 

Liquidity and Capital Resources

51

 

 

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

53

 

 

Impact of Inflation and Changing Prices

54

 

 

Forward-Looking Statements

54

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

55

 

Item 8.

Consolidated Financial Statements

57

 

 

Consolidated Balance Sheets as of December 31, 2018 and 2017

59

 

 

Consolidated Statements of Income for the years ended December 31, 2018, 2017 and   2016

60

 

 

Consolidated Statements of Comprehensive Income for the years ended December 31,    2018, 2017 and 2016

61

2


 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016

62

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016

63

 

 

Notes to Consolidated Financial Statements

65

 

 

Note 1 Nature of Business and Significant Accounting Policies

65

 

 

Note 2 Mergers/Acquisitions

79

 

 

Note 3 Investment Securities

90

 

 

Note 4 Loans/Leases Receivable

94

 

 

Note 5 Premises and Equipment

105

 

 

Note 6 Goodwill and Intangibles

106

 

 

Note 7 Derivatives and Hedging Activities

108

 

 

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 Junior Subordinated Debentures

114

 

 

Note 13 Federal and State Income Taxes

115

 

 

Note 14 Employee Benefit Plans

117

 

 

Note 15 Stock-Based Compensation

118

 

 

Note 16 Regulatory Capital Requirements and Restrictions on Dividends

120

 

 

Note 17 Earnings Per Share

122

 

 

Note 18 Commitments and Contingencies

123

 

 

Note 19 Quarterly Results of Operations (Unaudited)

124

 

 

Note 20 Parent Company Only Financial Statements

125

 

 

Note 21 Fair Value

128

 

 

Note 22 Business Segment Information

131

 

 

Note 23 Subsequent Event Subordinated Notes

132

 

 

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

133

 

Item 9A.

Controls and Procedures

133

 

Item 9B.

Other Information

136

 

 

 

 

Part III 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

137

 

Item 11.

Executive Compensation

137

 

Item 12.

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

137

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

137

 

Item 14.

Principal Accountant Fees and Services

138

 

 

 

 

Part IV 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

139

 

Item 16.

Form 10‑K Summary

143

 

 

 

 

 

 

Signatures 

144

 

 

Appendix A. Supervision and Regulation

146

 

 

Appendix B. Guide 3 Information

157

 

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.

 

3


 

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, Rockford and Springfield communities through the following five wholly-owned banking subsidiaries, 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;

·

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

·

RB&T, which is based in Rockford, Illinois, and commenced operations in 2005.

 

On October 1, 2018, the Company acquired the Bates Companies, headquartered in Rockford, Illinois.   The acquisition of the Bates Companies enhances the wealth management services of the Company by adding approximately $704 million of assets under management as of October 1, 2018.

On July 1, 2018, the Company merged with Springfield Bancshares, the holding company of SFC Bank, headquartered in Springfield, Missouri. 

On October 1, 2017, the Company acquired Guaranty Bank, headquartered in Cedar Rapids, Iowa. On December 2, 2017, the Company merged Guaranty Bank with and into CRBT with CRBT as the surviving bank.

On August 31, 2016, the Company acquired CSB, located in Ankeny, Iowa (Des Moines MSA).

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

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 five subsidiary banks wholly-owned by the Company: QCBT, CRBT, CSB, SFC Bank and RB&T. See the Consolidated Financial Statements incorporated herein generally, and Note 22 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 $1.62 billion and $1.54 billion as of December 31, 2018 and 2017, 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 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 $1.38 billion and $1.31 billion as of December 31, 2018 and 2017, respectively.

4


 

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 and adjacent communities through its headquarters located in Ankeny and its nine other branch facilities throughout the greater Des Moines area. CSB had total segment assets of $785.4 million and $670.5 million as of December 31, 2018 and 2017, respectively.

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 $632.8 million as of December 31, 2018.

RB&T is an Illinois-chartered commercial bank that is a member of the Federal Reserve System. The Company commenced operations in Rockford, Illinois in September 2004, operating as a branch of QCBT, and that operation began functioning under the RB&T charter in January 2005. RB&T provides full-service commercial and consumer banking and trust and asset management services to Rockford and adjacent communities through its headquarters located on Guilford Road at Alpine Road in Rockford and its branch facility located in downtown Rockford. RB&T had total segment assets of $509.6 million and $461.7 million as of December 31, 2018 and 2017, 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, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Amount Outstanding

    

Amount Outstanding

    

 

    

Interest

 

 

Interest

 

 

 

 

as of

 

as of

 

 

 

Rate as of

 

 

Rate as of

Name

 

Date Issued

 

December 31, 2018

 

December 31, 2017

 

Interest Rate

 

December 31, 2018

 

 

December 31, 2017

QCR Holdings Statutory Trust II

 

February 2004

 

$

10,310,000

 

$

10,310,000

 

2.85% over 3-month LIBOR

 

5.65

%  

 

 

4.54

%

QCR Holdings Statutory Trust III

 

February 2004

 

 

8,248,000

 

 

8,248,000

 

2.85% over 3-month LIBOR

 

5.65

%  

 

 

4.54

%

QCR Holdings Statutory Trust V

 

February 2006

 

 

10,310,000

 

 

10,310,000

 

1.55% over 3-month LIBOR

 

3.99

%  

 

 

2.91

%

Community National Statutory Trust II

 

September 2004

 

 

3,093,000

 

 

3,093,000

 

2.17% over 3-month LIBOR

 

4.96

%  

 

 

3.80

%

Community National Statutory Trust III

 

March 2007

 

 

3,609,000

 

 

3,609,000

 

1.75% over 3-month LIBOR

 

4.54

%  

 

 

3.32

%

Guaranty Bankshares Statutory Trust I

 

May 2005

 

 

4,640,000

 

 

4,640,000

 

1.75% over 3-month LIBOR

 

4.54

%  

 

 

3.34

%

 

 

 

 

$

40,210,000

 

$

40,210,000

 

Weighted Average Rate

 

4.94

%  

 

 

3.82

%

 

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.  The Company entered into interest rate swaps to hedge against rising rates on its variable rate trust preferred securities.  See Note 7 to the Consolidated Financial Statements for additional information regarding these interest rate swaps.

Guaranty Bankshares Statutory Trust I was acquired in 2017 as part of the acquisition of Guaranty Bank and is further discussed in Note 12 to the Consolidated Financial Statements.

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.

5


 

The Company and its subsidiaries collectively employed 755 and 641 FTEs at December 31, 2018 and 2017, respectively. The majority of the increase in FTEs during 2018 was the result of the additions of  SFC Bank and the Bates Companies and new positions created to accommodate the increased scale of our operations.

The Federal Reserve is the primary federal regulator of the Company, QCBT, CRBT, CSB, SFC Bank and RB&T.  QCBT, CRBT and CSB are also regulated by the Iowa Superintendent of Banking, SFC Bank is regulated by the Missouri Division of Finance and RB&T is regulated by the IDFPR. 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 $24.3 million, $25.2 million, and $12.9 million, respectively, as of December 31, 2018. In accordance with Missouri regulation, the legal lending limit to one borrower for SFC Bank, calculated as 15% of aggregate capital, totaled $8.6 million as of December 31, 2018. In accordance with Illinois regulation, the legal lending limit to one borrower for RB&T, calculated as 25% of aggregate capital, totaled $12.6 million as of December 31, 2018. 

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. As of January 1, 2017, the Company implemented 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

 

$

14,000

 

$

11,750

 

$

8,000

CRBT

 

$

13,000

 

$

11,000

 

$

7,500

CSB

 

$

9,500

 

$

8,000

 

$

5,500

SFC Bank

 

$

9,000

 

$

7,500

 

$

5,000

RB&T

 

$

4,500

 

$

3,750

 

$

2,500

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 five 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

6


 

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, 2018 for the loan portfolio organized by loan type, reflected as a percentage of the subsidiary bank’s gross loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QCBT

 

CRBT

 

CSB

 

SFC Bank

 

 

RB&T

 

 

Maximum

    

 

    

Maximum

    

 

    

Maximum

    

 

 

Maximum

    

 

 

 

Maximum

    

 

 

 

Percentage

 

As of

 

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, 

 

 

per Loan

 

December 31, 

 

Type of Loan *

Policy

 

2018

 

Policy

 

2018

 

Policy

 

2018

 

Policy

 

2018

 

 

Policy

 

2018

 

One-to-four family residential

30

%  

13

%  

25

%  

11

%  

35

%  

13

%

20

%  

18

%

 

30

%  

17

%

Multi-family

15

%  

 3

%  

15

%  

 8

%  

15

%  

 1

%

10

%  

 7

%

 

15

%  

 4

%

Farmland

 5

%  

 1

%  

 5

%  

 —

%  

15

%  

 2

%

 2

%  

 1

%

 

 5

%  

 —

%

Non-farm, nonresidential

50

%  

26

%  

50

%  

29

%  

50

%  

33

%

50

%  

45

%

 

50

%  

36

%

Construction and land development

20

%  

 4

%  

15

%  

 7

%  

35

%  

16

%

15

%  

 8

%

 

20

%  

 5

%

C&I

60

%  

28

%  

60

%  

36

%  

50

%  

24

%

20

%  

18

%

 

60

%  

30

%

Loans to individuals

10

%  

 1

%  

10

%  

 1

%  

10

%  

 —

%

 5

%  

 1

%

 

10

%  

 1

%

Lease financing

30

%  

10

%  

 5

%  

 —

%  

 5

%  

 —

%

N/A

%  

 —

%

 

20

%  

 —

%

Bank stock loans

**

 

**

 

10

%  

 —

%  

 —

%

 —

%

N/A

%  

 —

%

 

10

%  

 —

%

All other loans

15

%  

14

%  

10

%  

 8

%  

10

%  

11

%

 6

%  

 2

%

 

10

%  

 7

%

 

  

 

100

%  

  

 

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, 2018, QCBT’s bank stock loans totaled 32% of risk-based capital.

The following table presents total loans/leases by major loan/lease type and subsidiary as of December 31, 2018 and 2017. 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, 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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

C&I loans

 

$

384,401

 

42

%  

$

66,758

 

31

%  

$

402,146

 

41

%  

$

148,198

 

30

%  

$

N/A

 

N/A

%  

$

133,013

 

36

%  

$

1,134,516

 

38

%

CRE loans

 

 

384,684

 

42

%  

 

 —

 

 —

%  

 

455,443

 

47

%  

 

291,254

 

60

%  

 

N/A

 

N/A

%  

 

172,111

 

47

%  

 

1,303,492

 

44

%

Direct financing leases

 

 

 —

 

 —

%  

 

141,290

 

66

%  

 

 —

 

 —

%  

 

158

 

 —

%  

 

N/A

 

N/A

%  

 

 —

 

 —

%  

 

141,448

 

 5

%

Residential real estate loans

 

 

114,818

 

12

%  

 

 —

 

 —

%  

 

62,755

 

 6

%  

 

38,831

 

 8

%  

 

N/A

 

N/A

%  

 

42,242

 

12

%  

 

258,646

 

 9

%

Installment and other consumer loans

 

 

36,360

 

 4

%  

 

 —

 

 —

%  

 

54,448

 

 6

%  

 

10,814

 

 2

%  

 

N/A

 

N/A

%  

 

16,989

 

 5

%  

 

118,611

 

 4

%

Deferred loan/lease origination costs, net of fees

 

 

1,254

 

 —

%  

 

7,188

 

 3

%  

 

(821)

 

 —

%  

 

(180)

 

 —

%  

 

N/A

 

N/A

%  

 

331

 

 —

%  

 

7,772

 

 —

%  

 

 

$

921,517

 

100

%  

$

215,236

 

100

%  

$

973,971

 

100

%  

$

489,075

 

100

%  

$

N/A

 

N/A

%  

$

364,686

 

100

%  

$

2,964,485

 

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.

7


 

Loan approval is generally based on the following factors:

·

Ability and stability of current management of the borrower;

·

Stable earnings with positive financial trends;

·

Sufficient cash flow to support debt repayment;

·

Earnings projections based on reasonable assumptions;

·

Financial strength of the industry and business; and

·

Value and marketability of collateral.

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

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

·

Minimum debt service coverage ratio;

·

Minimum current ratio;

·

Maximum debt to tangible net worth ratio; and/or

·

Minimum tangible net worth.

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

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 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.

8


 

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, 2018 and 2017:

 

 

 

 

 

 

 

 

    

2018

    

2017

 

 

Amount

 

Amount

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Administration of urban planning & rural development

 

$

111,579

 

$

83,344

Hotels & motels

 

 

83,106

 

 

73,200

Bank holding companies

 

 

75,601

 

 

66,950

Skilled nursing care facilities

 

 

53,134

 

 

60,989

General medical & surgical hospitals

 

 

36,895

 

 

35,217

 

These loan categories are defined by industry-standard NAICS codes – refer to NAICS.com for category descriptions.

 

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, 2018 and 2017, approximately 28% and 26%, respectively, of the CRE loan portfolio was owner-occupied.

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

9


 

Following is a listing of the significant industries within the Company’s CRE loan portfolio as of December 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

 

 

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Lessors of Nonresidential Buildings

 

$

612,327

 

34

%  

$

388,648

 

30

%

Lessors of Residential Buildings

 

 

346,270

 

19

%  

 

199,047

 

15

%

Hotels

 

 

81,345

 

 5

%  

 

70,447

 

 5

%

Nonresidential Property Managers

 

 

69,885

 

 4

%  

 

51,621

 

 4

%

Land Subdivision

 

 

48,378

 

 3

%  

 

44,192

 

 3

%

New Housing For-Sale Builders

 

 

47,598

 

 3

%

 

61,480

 

 5

%

Other *

 

 

560,308

 

32

%  

 

488,057

 

38

%

Total CRE Loans

 

$

1,766,111

 

100

%  

$

1,303,492

 

100

%

 

*   “Other” consists of all other industries. None of these had concentrations greater than $42.6 million, or 2.4%, of total CRE loans as of December 31, 2018.

Following is a breakdown of non owner-occupied CRE by property type as of December 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

2017

 

    

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Office

 

$

255,452

 

25

%  

$

169,655

 

22

%

Retail

 

 

232,022

 

23

%  

 

143,685

 

18

%

Multi-family

 

 

189,137

 

18

%  

 

133,174

 

17

%

Industrial/warehouse

 

 

93,503

 

 9

%  

 

76,186

 

10

%

Hotel/motel

 

 

89,906

 

 9

%  

 

37,401

 

 5

%

Other

 

 

168,650

 

16

%  

 

224,246

 

29

%

Total income-producing CRE

 

$

1,028,670

 

100

%  

$

784,347

 

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, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

2017

 

    

Amount

    

%

    

Amount

    

%

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

$

61,055

 

30

%  

$

16,416

 

19

%

Office

 

 

17,692

 

 9

%  

 

12,033

 

14

%

Retail

 

 

10,285

 

 5

%  

 

11,580

 

13

%

Hotel/motel

 

 

5,679

 

 3

%  

 

3,604

 

 4

%

Industrial/warehouse

 

 

4,591

 

 2

%  

 

8,407

 

10

%

Other

 

 

106,532

 

51

%  

 

36,195

 

41

%

Total non-residential construction loans

 

$

205,834

 

100

%  

$

88,235

 

100

%

 

Additionally, the Company had approximately $52.3 million and $81.3 million of residential construction loans outstanding as of December 31, 2018 and 2017, respectively. Of this amount, approximately 72% was considered speculative, while 28% was pre-sold at December 31, 2018 and approximately 79% was considered speculative, while 21% was pre-sold at December 31, 2017.

10


 

Direct Financing Leasing

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

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

·

Computer systems;

·

Photocopy systems;

·

Fire trucks;

·

Specialized road maintenance equipment;

·

Medical equipment;

·

Commercial business furnishings;

·

Vehicles classified as heavy equipment;

·

Trucks and trailers;

·

Equipment classified as plant or office equipment; and

·

Marine boat lifts.

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

·

Leases collateralized by non-marketable items;

·

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

·

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