UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to________

Commission file number 0-22208

QCR HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	42-1397595
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3551 7^th Street, Moline, Illinois 61265

(Address of principal executive offices, including zip code)

(309) 736-3580

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 Par Value	QCRH	The Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒      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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒      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 ☐		Non-accelerated filer ☐
Smaller reporting company ☐		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐      No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: As of November 1, 2022, the Registrant had outstanding 16,884,419 shares of common stock, $1.00 par value per share.

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QCR HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page Number(s)
Part I	FINANCIAL INFORMATION
	Item 1	Consolidated Financial Statements (Unaudited)
		Consolidated Balance Sheets As of September 30, 2022 and December 31, 2021	4
		Consolidated Statements of Income For the Three Months Ended September 30, 2022 and 2021	5
		Consolidated Statements of Income For the Nine Months Ended September 30, 2022 and 2021	6
		Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2022 and 2021	7
		Consolidated Statements of Changes in Stockholders' Equity For the Three and Nine Months Ended September 30, 2022 and 2021	8
		Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2022 and 2021	9
		Notes to Consolidated Financial Statements	11
		Note 1. Summary of Significant Accounting Policies	11
		Note 2. Acquisition	12
		Note 3. Investment Securities	15
		Note 4. Loans/Leases Receivable	18
		Note 5. Derivatives and Hedging Activities	28
		Note 6. Subordinated Notes	31
		Note 7. Income Taxes	32
		Note 8. Earnings Per Share	32
		Note 9. Fair Value	33
		Note 10. Business Segment Information	35
		Note 11. Regulatory Capital Requirements	36
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations
		Introduction	38
		General	38
		Critical Accounting Policies and Critical Accounting Estimates	38
		Executive Overview	39
		Strategic Financial Metrics	41
		Strategic Developments	42
		GAAP to Non-GAAP Reconciliations	42
		Net Interest Income - (Tax Equivalent Basis)	45
		Results of Operations		49
		Interest Income		49
		Interest Expense		50
		Provision for Credit Losses		50

2

		Noninterest Income	51
		Noninterest Expense	54
		Income Taxes	57
		Financial Condition	58
		Investment Securities	58
		Loans/Leases	59
		Allowance for Credit Losses on Loans/Leases and OBS Exposures	60
		Nonperforming Assets	62
		Deposits	63
		Borrowings	64
		Stockholders' Equity	65
		Liquidity and Capital Resources	66
		Special Note Concerning Forward-Looking Statements	67
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	69
	Item 4	Controls and Procedures	71
Part II	OTHER INFORMATION
	Item 1	Legal Proceedings	72
	Item 1A	Risk Factors	72
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	72
	Item 3	Defaults Upon Senior Securities	72
	Item 4	Mine Safety Disclosures	72
	Item 5	Other Information	72
	Item 6	Exhibits	73
Signatures

Throughout this Quarterly Report on Form 10-Q, we use certain acronyms and abbreviations, as defined in Note 1 to the Consolidated Financial Statements.

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

As of September 30, 2022 and December 31, 2021

	September 30,		December 31,
	2022		2021
	(dollars in thousands)
Assets
Cash and due from banks	$	86,282	$	37,490
Federal funds sold		28,210		12,370
Interest-bearing deposits at financial institutions		42,833		75,292
Securities held to maturity, at amortized cost, net of allowance for credit losses		539,713		472,385
Securities available for sale, at fair value		339,737		337,830
Total securities		879,450		810,215
Loans receivable held for sale		3,054		3,828
Loans/leases receivable held for investment		6,005,556		4,676,304
Gross loans/leases receivable		6,008,610		4,680,132
Less allowance for credit losses		(90,489)		(78,721)
Net loans/leases receivable		5,918,121		4,601,411
Bank-owned life insurance		105,825		62,424
Premises and equipment, net		115,274		78,530
Restricted investment securities		39,299		19,353
Other real estate owned, net		177		—
Goodwill		137,607		74,066
Intangibles		17,546		9,349
Derivatives		185,037		222,220
Other assets		174,388		93,412
Total assets	$	7,730,049	$	6,096,132
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,315,555	$	1,268,788
Interest-bearing		4,625,480		3,653,984
Total deposits		5,941,035		4,922,772
Short-term borrowings		85,180		3,800
Federal Home Loan Bank advances		335,000		15,000
Subordinated notes		232,743		113,850
Junior subordinated debentures		48,568		38,155
Derivatives		209,479		225,135
Other liabilities		140,972		100,410
Total liabilities		6,992,977		5,419,122
Stockholders' Equity:
Preferred stock, $1 par value; shares authorized 250,000 September 2022 and December 2021 - no shares issued or outstanding		—		—
Common stock, $1 par value; shares authorized 20,000,000 September 2022 - 16,885,485 shares issued and outstanding December 2021 - 15,613,460 shares issued and outstanding		16,885		15,613
Additional paid-in capital		372,086		273,768
Retained earnings		422,958		386,077
Accumulated other comprehensive income (loss):
Securities available for sale		(52,262)		5,925
Derivatives		(22,595)		(4,373)
Total stockholders' equity		737,072		677,010
Total liabilities and stockholders' equity	$	7,730,049	$	6,096,132

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended September 30, 2022 and 2021

	2022		2021
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	69,855	$	44,858
Securities:
Taxable		3,304		2,347
Nontaxable		4,955		4,160
Interest-bearing deposits at financial institutions		380		39
Restricted investment securities		673		262
Federal funds sold		100		1
Total interest and dividend income		79,267		51,667
Interest expense:
Deposits		12,570		3,273
Short-term borrowings		84		1
Federal Home Loan Bank advances		2,584		41
Other borrowings		53		—
Subordinated notes		2,518		1,554
Junior subordinated debentures		689		569
Total interest expense		18,498		5,438
Net interest income		60,769		46,229
Provision for credit losses		—		—
Net interest income after provision for credit losses		60,769		46,229
Noninterest income:
Trust department fees		2,537		2,714
Investment advisory and management fees		921		1,054
Deposit service fees		2,214		1,588
Gains on sales of residential real estate loans, net		641		954
Gains on sales of government guaranteed portions of loans, net		50		—
Swap fee income/capital markets revenue		10,545		24,885
Earnings on bank-owned life insurance		605		446
Debit card fees		1,453		1,085
Correspondent banking fees		189		265
Loan related fee income		652		550
Fair value gain (loss) on derivatives		904		(17)
Other		384		1,128
Total noninterest income		21,095		34,652
Noninterest expense:
Salaries and employee benefits		29,175		28,207
Occupancy and equipment expense		6,033		4,122
Professional and data processing fees		4,477		3,568
Acquisition costs		315		—
Post-acquisition compensation, transition and integration costs		62		—
FDIC insurance, other insurance and regulatory fees		1,497		1,108
Loan/lease expense		390		308
Net cost of (income from) and gains/losses on operations of other real estate		19		(1,346)
Advertising and marketing		1,437		1,095
Communication		639		457
Supplies		289		298
Bank service charges		568		525
Correspondent banking expense		218		201
Intangibles amortization		787		508
Payment card processing		477		346
Trust expense		227		188
Other		1,136		1,802
Total noninterest expense		47,746		41,387
Net income before income taxes		34,118		39,494
Federal and state income tax expense		4,824		7,929
Net income	$	29,294	$	31,565
Basic earnings per common share	$	1.73	$	2.02
Diluted earnings per common share	$	1.71	$	1.99
Weighted average common shares outstanding		16,900,968		15,635,123
Weighted average common and common equivalent shares outstanding		17,110,691		15,869,798
Cash dividends declared per common share	$	0.06	$	0.06

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Nine Months Ended September 30, 2022 and 2021

	2022		2021
	(dollars in thousands, except share data)
Interest and dividend income:
Loans/leases, including fees	$	173,855	$	128,639
Securities:
Taxable		8,792		6,521
Nontaxable		13,750		12,146
Interest-bearing deposits at financial institutions		584		110
Restricted investment securities		1,439		718
Federal funds sold		114		1
Total interest and dividend income		198,534		148,135
Interest expense:
Deposits		21,231		9,935
Short-term borrowings		87		4
Federal Home Loan Bank advances		3,447		66
Other borrowings		53		—
Subordinated notes		5,888		4,718
Junior subordinated debentures		1,926		1,692
Total interest expense		32,632		16,415
Net interest income		165,902		131,720
Provision for credit losses		8,284		6,713
Net interest income after provision for loan/lease losses		157,618		125,007
Noninterest income:
Trust department fees		7,997		8,363
Investment advisory and management fees		2,940		3,033
Deposit service fees		5,992		4,488
Gains on sales of residential real estate loans, net		1,943		3,475
Gains on sales of government guaranteed portions of loans, net		69		—
Swap fee income/capitals markets revenue		29,971		48,010
Securities losses, net		—		(88)
Earnings on bank-owned life insurance		1,301		1,368
Debit card fees		3,959		3,144
Correspondent banking fees		710		848
Loan related fee income		1,814		1,732
Fair value gain (loss) on derivatives		2,242		73
Other		572		2,991
Total noninterest income		59,510		77,437
Noninterest expenses:
Salaries and employee benefits		82,774		76,098
Occupancy and equipment expense		15,948		12,195
Professional and data processing fees		12,513		10,713
Acquisition costs		4,139		—
Post-acquisition compensation, transition and integration costs		4,858		—
Disposition costs		—		8
FDIC insurance, other insurance and regulatory fees		4,201		3,159
Loan/lease expense		1,418		1,065
Net cost of (income from) and gains/losses on operations of other real estate		77		(1,420)
Advertising and marketing		3,396		2,575
Communication		1,626		1,317
Supplies		772		779
Bank service charges		1,719		1,620
Correspondent banking expense		630		599
Intangibles amortization		2,067		1,524
Payment card processing		1,365		1,114
Trust expense		609		550
Other		2,207		2,394
Total noninterest expenses		140,319		114,290
Net income before income taxes		76,809		88,154
Federal and state income tax expense		8,649		16,258
Net income	$	68,160	$	71,896
Basic earnings per common share	$	4.25	$	4.54
Diluted earnings per common share	$	4.20	$	4.48
Weighted average common shares outstanding		16,030,371		15,829,124
Weighted average common and common equivalent shares outstanding		16,243,921		16,058,420
Cash dividends declared per common share	$	0.18	$	0.18

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three and Nine Months Ended September 30, 2022 and 2021

	Three Months Ended September 30,
	2022		2021
	(dollars in thousands)
Net income	$	29,294	$	31,565
Other comprehensive loss:
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(23,069)		(3,194)
		(23,069)		(3,194)
Unrealized losses on derivatives:
Unrealized holding losses arising during the period before tax		(8,955)		(342)
Less reclassification adjustment for caplet amortization before tax		(261)		(181)
		(8,694)		(161)
Other comprehensive loss, before tax		(31,763)		(3,355)
Tax benefit		(6,980)		(809)
Other comprehensive loss, net of tax		(24,783)		(2,546)
Comprehensive income	$	4,511	$	29,019

	Nine Months Ended September 30,
	2022		2021
	(dollars in thousands)
Net income	$	68,160	$	71,896
Other comprehensive income (loss):
Unrealized losses on securities available for sale:
Unrealized holding losses arising during the period before tax		(76,814)		(4,290)
Less reclassification adjustment for losses included in net income before tax		—		(88)
		(76,814)		(4,202)
Unrealized gains (losses) on derivatives:
Unrealized holding gains (losses) arising during the period before tax		(23,769)		3,383
Less reclassification adjustment for caplet amortization before tax		(723)		(495)
		(23,046)		3,878
Other comprehensive loss, before tax		(99,860)		(324)
Tax benefit		(23,451)		(205)
Other comprehensive loss, net of tax		(76,409)		(119)
Comprehensive income (loss)	$	(8,249)	$	71,778

See Notes to Consolidated Financial Statements (Unaudited)

7

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

Three and Nine Months Ended September 30, 2022 and 2021

							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss) Income		Total
	(dollars in thousands)
Balance December 31, 2021	$	15,613	$	273,768	$	386,077	$	1,552	$	677,010
Net income		—		—		23,624		—		23,624
Other comprehensive (loss), net of tax		—		—		—		(27,340)		(27,340)
Common cash dividends declared, $0.06 per share		—		—		(939)		—		(939)
Repurchase and cancellation of 77,500 shares of common stock
as a result of a share repurchase program		(77)		(1,338)		(3,000)		—		(4,415)
Stock-based compensation expense		—		751		—		—		751
Issuance of common stock under employee benefit plans		44		(811)		—		—		(767)
Balance, March 31, 2022	$	15,580	$	272,370	$	405,762	$	(25,788)	$	667,924
Net income		—		—		15,242		—		15,242
Other comprehensive (loss), net of tax		—		—		—		(24,286)		(24,286)
Common cash dividends declared, $0.06 per share		—		—		(1,059)		—		(1,059)
Issuance of 2,071,291 shares of common stock
as a result of acquisition of Guaranty Federal Bancshares		2,071		115,143		—		—		117,214
Repurchase and cancellation of 602,500 shares of common stock
as a result of a share repurchase program		(603)		(13,258)		(19,155)		—		(33,016)
Stock-based compensation expense		—		545		—		—		545
Issuance of common stock under employee benefit plans		16		558		—		—		574
Balance, June 30, 2022	$	17,064	$	375,358	$	400,790	$	(50,074)	$	743,138
Net income		—		—		29,294		—		29,294
Other comprehensive (loss), net of tax		—		—		—		(24,783)		(24,783)
Repurchase and cancellation of 190,000 shares of common stock
as a result of a share repurchase program		(190)		(4,181)		(6,114)		—		(10,485)
Common cash dividends declared, $0.06 per share		—		—		(1,012)		—		(1,012)
Stock-based compensation expense		—		382		—		—		382
Issuance of common stock under employee benefit plans		11		527		—		—		538
Balance, September 30, 2022	$	16,885	$	372,086	$	422,958	$	(74,857)	$	737,072

							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive
	Stock		Capital		Earnings		(Loss)		Total
	(dollars in thousands)
Balance December 31, 2020	$	15,806	$	275,807	$	300,804	$	1,376	$	593,793
Impact of adoption of ASU 2016-13		—		—		(937)		—		(937)
Net income		—		—		17,982		—		17,982
Other comprehensive (loss), net of tax		—		—		—		(1,751)		(1,751)
Common cash dividends declared, $0.06 per share		—		—		(949)		—		(949)
Stock-based compensation expense		—		841		—		—		841
Issuance of common stock under employee benefit plans		38		(298)		—		—		(260)
Balance, March 31, 2021	$	15,844	$	276,350	$	316,900	$	(375)	$	608,719
Net income		—		—		22,349		—		22,349
Other comprehensive income, net of tax		—		—		—		4,179		4,179
Common cash dividends declared, $0.06 per share		—		—		(951)		—		(951)
Repurchase and cancellation of 100,000 shares of common stock
as a result of a share repurchase program		(100)		(1,826)		(2,874)		—		(4,800)
Stock-based compensation expense		—		520		—		—		520
Issuance of common stock under employee benefit plans		20		440		—		—		460
Balance, June 30, 2021	$	15,764	$	275,485	$	335,424	$	3,803	$	630,476
Net income		—		—		31,565		—		31,565
Other comprehensive (loss), net of tax		—		—		—		(2,546)		(2,546)
Repurchase and cancellation of 193,153 shares of common stock
as a result of a share repurchase program		(193)		(3,134)		(6,040)		—		(9,367)
Common cash dividends declared, $0.06 per share		—		—		(946)		—		(946)
Stock-based compensation expense		—		504		—		—		504
Issuance of common stock under employee benefit plans		19		109		—		—		128
Balance, September 30, 2021	$	15,590	$	272,964	$	360,003	$	1,257	$	649,814

See Notes to Consolidated Financial Statements (Unaudited)

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QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2022 and 2021

	2022		2021
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	68,160	$	71,896
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		5,699		4,087
Provision for credit losses		8,284		6,713
Stock-based compensation expense		1,678		1,865
Deferred compensation expense accrued		3,027		3,288
Gains on other real estate owned, net		(19)		(1,754)
Amortization of premiums on securities, net		939		1,506
Caplet amortization		723		495
Fair value gain on derivatives		(2,242)		(73)
Securities losses, net		—		88
Loans originated for sale		(82,009)		(157,392)
Proceeds on sales of loans		88,010		161,173
Gains on sales of residential real estate loans		(1,943)		(3,475)
Gains on sales of government guaranteed portions of loans		(69)		—
Losses on sales and disposals of premises and equipment		520		1,457
Amortization of intangibles		2,067		1,524
Accretion of acquisition fair value adjustments, net		(2,893)		(1,251)
Increase in cash value of bank-owned life insurance		(1,301)		(1,368)
Increase in other assets		(33,840)		(37,632)
Increase in other liabilities		21,843		13,161
Net cash provided by operating activities	$	76,634	$	64,308
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold		(15,840)		2,095
Net decrease in interest-bearing deposits at financial institutions		49,593		22,755
Proceeds from sales of other real estate owned		223		4,592
Activity in securities portfolio:
Purchases		(173,331)		(151,702)
Calls, maturities and redemptions		30,597		81,000
Paydowns		27,311		50,177
Sales		111,375		23,874
Activity in restricted investment securities:
Purchases		(19,885)		(4,280)
Redemptions		2,159		2,447
Net increase in loans/leases originated and held for investment		(524,877)		(353,616)
Purchase of premises and equipment		(27,119)		(7,866)
Proceeds from sales of premises and equipment		413		22
Purchase of bank-owned life insurance		(10,000)		—
Net cash acquired from acquisition		144,973		—
Net cash used in investing activities	$	(404,408)	$	(330,502)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		(58,310)		272,691
Net increase (decrease) in short-term borrowings		81,380		(3,830)
Activity in Federal Home Loan Bank advances:
Net change in short-term and overnight advances		320,000		15,000
Prepayments		(16,000)		—
Activity in other borrowings:
Proceeds from other borrowings		10,000		—
Paydown of revolving line of credit		(10,000)		—
Prepayments on brokered and public time deposits		—		—
Prepayments of subordinated notes		—		(5,000)
Proceeds from subordinated notes		100,000		—
Payment of cash dividends on common stock		(2,933)		(2,847)
Proceeds from issuance of common stock, net		345		328
Repurchase and cancellation of shares		(47,916)		(14,167)
Net cash provided by financing activities	$	376,566	$	262,175
Net increase (decrease) in cash and due from banks		48,792		(4,019)
Cash and due from banks, beginning		37,490		61,329
Cash and due from banks, ending	$	86,282	$	57,310

9

QCR HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

Nine Months Ended September 30, 2022 and 2021

	2022		2021
	(dollars in thousands)
Supplemental disclosure of cash flow information, cash payments (receipts) for:
Interest	$	32,046	$	18,617
Income/franchise taxes		107		36,987
Supplemental schedule of noncash investing activities:
Change in accumulated other comprehensive income, unrealized losses on securities available for sale and derivative instruments, net		(76,409)		(118)
Transfers of loans to other real estate owned		326		2,812
Decrease in the fair value of back-to-back interest rate swap assets and liabilities		(48,195)		(25,503)
Dividends payable		1,012		946
Supplemental disclosure of cash flow information for acquisitions:
Fair value of assets acquired:
Cash and due from banks	$	171,844	$	—
Interest-bearing deposits at financial institutions		17,134		—
Securities		143,017		—
Loans receivable, net		801,697		—
Bank-owned life insurance		32,100		—
Premises and equipment, net		16,257		—
Restricted investment securities		2,220		—
Other real estate owned		55		—
Intangibles		10,264		—
Other assets		23,685		—
Total assets acquired	$	1,218,273	$	—
Fair value of liabilities assumed:
Deposits	$	1,076,573	$	—
FHLB advances		16,000		—
Subordinated debentures		19,621
Junior subordinated debentures		10,310		—
Other liabilities		15,225		—
Total liabilities assumed		1,137,729		—
Net assets acquired	$	80,544	$	—
Consideration paid:
Cash paid *	$	26,871	$	—
Common stock		117,214		—
Total consideration paid		144,085		—
Goodwill	$	63,541	$	—
*Net cash acquired at closing totaled $145.0 million for acquisition of Guaranty Bank in 2022.
See Notes to Consolidated Financial Statements (Unaudited)

10

Part I

Item 1

QCR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2022

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:  The interim unaudited Consolidated Financial Statements contained herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2022. Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the audited Consolidated Financial Statements, have been omitted.

The financial information of the Company included herein has been prepared in accordance with GAAP for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. Any differences appearing between the numbers presented in financial statements and management's discussion and analysis are due to rounding. The results of the interim period ended September 30, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022, or for any other period.

The acronyms and abbreviations identified below are used throughout this Quarterly Report on Form 10-Q. It may be helpful to refer back to this page as you read this report.

ACL: Allowance for credit losses
Allowance: Allowance for credit losses	GFED: Guaranty Federal Bancshares, Inc.
AOCI: Accumulated other comprehensive income (loss)	HTM: Held to maturity
ASC: Accounting Standards Codification	LIBOR: London Inter-Bank Offered Rate
ASU: Accounting Standards Update	LIHTC: Low-income housing tax credit
Bates Companies: Bates Financial Advisors, Inc., Bates	m2: m2 Equipment Finance, LLC
Financial Services, Inc., Bates Securities, Inc. and	NIM: Net interest margin
Bates Financial Group, Inc.	NPA: Nonperforming asset
BOLI: Bank-owned life insurance	NPL: Nonperforming loan
Caps: Interest rate cap derivatives	OBS: Off-balance sheet
CECL: Current Expected Credit Losses	OREO: Other real estate owned
Community National: Community National Bancorporation	OTTI: Other-than-temporary impairment
COVID-19: Coronavirus Disease 2019	PCAOB: Public Company Accounting Oversight Board
CRBT: Cedar Rapids Bank & Trust Company	PCD: Purchased credit deteriorated loan
CRE: Commercial real estate	PCI: Purchased credit impaired
CSB: Community State Bank	PPP: Paycheck Protection Program
C&I: Commercial and industrial	Provision: Provision for credit losses
EBA: Excess balance account	QCBT: Quad City Bank & Trust Company
EPS: Earnings per share	ROAA: Return on average assets
Exchange Act: Securities Exchange Act of 1934, as	ROAE: Return on average equity
amended	SBA: U.S. Small Business Administration
FASB: Financial Accounting Standards Board	SEC: Securities and Exchange Commission
FDIC: Federal Deposit Insurance Corporation	SFCB: Springfield First Community Bank
Federal Reserve: Board of Governors of the Federal	SFG: Specialty Finance Group
Reserve System	TA: Tangible assets
FHLB: Federal Home Loan Bank	TCE: Tangible common equity
FRB: Federal Reserve Bank of Chicago	TDRs: Troubled debt restructurings
Guaranty: Guaranty Bank, formerly known as Springfield First	TEY: Tax equivalent yield
Community Bank	The Company: QCR Holdings, Inc.

11

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries which include the accounts of four commercial banks:  QCBT, CRBT, CSB and GB. All are state-chartered commercial banks and all are members of the Federal Reserve system. The Company also engages in direct financing lease contracts through m2, a wholly-owned subsidiary of QCBT. All material intercompany transactions and balances have been eliminated in consolidation.

Pending accounting developments: In March 2020, the FASB issued ASU 2020-4, “Reference Rate Reform,” which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued.

Management has assessed the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition. Specifically, management has identified all of the financial instruments with LIBOR exposure which includes certain commercial loans, interest rate swaps, interest rate caps, and certain securities.  In all cases, management has determined a plan of transition from LIBOR to a different index.  The transition will happen prior to the expiration of published LIBOR rates on June 30, 2023.  Management expects the transition to have a minimal impact to the Company’s financial statements.

In April 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures.  Under the standard, the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 is eliminated and guidance on “vintage disclosures” is amended to require disclosure of current-period gross write-offs by year of origination.  The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.  For public companies that have adopted ASC 326, the changes take effect in reporting periods beginning after December 15, 2022.  Management is currently analyzing the anticipated impact of the statement on the Company’s financial statements.

NOTE 2 – ACQUISITION

On April 1, 2022, the Company completed its previously announced acquisition of GFED and on April 2, 2022 merged GFED’s bank subsidiary into SFCB, the Company’s Springfield-based charter.  The combined bank changed its name to Guaranty Bank.

Stockholders of GFED received for each share of GFED common stock owned, at the election of each stockholder,  subject to proration and adjustment, (1) $30.50 in cash, (2) 0.58775 shares of the Company’s common stock, or (3) mixed consideration of $6.10 in cash and 0.4702 shares of the Company’s common stock.  On March 31, 2022, the last trading date before the closing date, the Company’s common stock closed at $56.59, resulting in stock consideration valued at $117.2 million and total cash consideration paid by the Company of $26.9 million.  The Company funded the cash portion of the purchase price through operating cash.

The acquisition of GFED supports the strategic goals of the Company. It allows for increased product and service capabilities of the combined bank and it will result in strong growth in Springfield, MO and its surrounding communities.

The Company accounted for the business combination under the acquisition method of accounting in accordance with ASC 805.  The Company recognized the full fair value of the assets acquired and liabilities assumed at the acquisition date, net of applicable income tax effects.  The Company considers all purchase accounting adjustments as provisional and fair values are subject to refinement for up to one year after the closing date due to timing of third party reports and management’s reviews of reports.

The excess of the consideration paid over the fair value of the net assets acquired is recorded as goodwill.  This goodwill is not deductible for tax purpose.

12

The fair values of the assets acquired and liabilities assumed including the consideration paid and resulting goodwill is as follows:

	As of
	April 1, 2022
	(dollars in thousands)
ASSETS
Cash and due from banks	$	171,844
Interest-bearing deposits at financial institutions		17,134
Securities		143,017
Loans/leases receivable, net		801,697
Bank-owned life insurance		32,100
Premises and equipment		16,257
Restricted investment securities		2,220
Other real estate owned		55
Intangibles		10,264
Other assets		23,685
Total assets acquired	$	1,218,273
LIABILITIES
Deposits	$	1,076,573
FHLB advances		16,000
Subordinated notes		19,621
Junior subordinated debentures		10,310
Other liabilities		15,225
Total liabilities assumed	$	1,137,729
Net assets acquired	$	80,544
CONSIDERATION PAID:
Cash	$	26,871
Common stock		117,214
Total consideration paid	$	144,085
Goodwill	$	63,541

The Company acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect the Company’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. The Company recorded an accretable discount of $12.0 million on the non-PCD loans. The Company also recorded an ACL for non-PCD loans at the time of acquisition through provision expense of $11.0 million.

The carrying amount of loans acquired and classified as PCD is as follows:

	Guaranty Bank
	April 1, 2022
	(dollars in thousands)
Principal balance of PCD loans at acquisition	$	38,711
Allowance for credit losses at acquisition		(5,902)
Non-credit discount at acquisition		(1,366)
Fair value of PCD loans at acquisition	$	31,443

13

Premises and equipment acquired with a fair value of $16.3 million includes sixteen branch locations. The fair value was determined with the assistance of a third party appraiser.  The assets and related fair value adjustments will be recognized as an increase in depreciation expense over 39 years.

The Company recorded a core deposit intangible totaling $10.3 million, which is the portion of the acquisition purchase price that represents the value assigned to the existing deposit base.  The core deposit intangible has a finite life and is amortized using an accelerated method over the estimated useful life of the deposits (estimated to be ten years).

The following table presents the changes in the carrying amount of core deposit intangibles, gross carrying amount, accumulated amortization, and net book value:

	September 30, 2022
	(dollars in thousands)
Balance at acquisition	$	10,264
Amortization expense		(588)
Balance at the end of the period	$	9,676
Gross carrying amount	$	10,264
Accumulated amortization		(588)
Net book value	$	9,676

The following presents the remaining estimated amortization of the core deposit intangible:

Year ending, December 31,	Amount
	(dollars in thousands)
2022	$	295
2023		1,162
2024		1,138
2025		1,109
2026		1,076
Thereafter		4,896
	$	9,676

The following table presents the assumed borrowings as of the acquisition date:

	Amount	Rate	Terms	Maturity Date	Collateral
	(dollars in thousands)
FHLB advance	6,500	0.59%	monthly interest payments; principal due at maturity	5/15/2023	commercial and residential real estate loans
FHLB advance	6,500	0.82%	monthly interest payments; principal due at maturity	5/15/2025	commercial and residential real estate loans
FHLB advance	3,000	1.12%	monthly interest payments; principal due at maturity	5/17/2027	commercial and residential real estate loans
Subordinated notes	19,621	5.25%	monthly interest payments; principal due at maturity	9/30/2030	unsecured
Junior subordinated debentures	10,310	4.09%	monthly interest payments; principal due at maturity	2/23/2036	unsecured
Fair value of borrowings assumed	$ 45,931

The Company prepaid the $16.0 million of FHLB advances in full shortly after closing.

During the first nine months of 2022, the Company incurred $4.1 million of expenses related to the acquisition, comprised primarily of legal, accounting, investment banking costs and personnel costs, and $4.9 million of post-acquisition, compensation, transition and integration costs, comprised primarily of personnel costs, IT integration and data conversion costs related to the acquisition. GB results are included in the consolidated statements of income effective on the acquisition date.  

14

Unaudited pro forma combined operating results for the three and nine months ended September 30, 2022 and 2021, giving effect to the GFED acquisition as if it had occurred as of January 1, 2021, are as follow:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022			2021
	(dollars in thousands, except per share data)
Net interest income	$	60,769	$	56,684	$	175,743	$	161,229
Noninterest income	$	21,095	$	40,170	$	61,747	$	88,386
Net income	$	29,294	$	35,567	$	70,691	$	82,354
Earnings per common share:
Basic	$	1.73	$	2.01	$	4.23	$	4.60
Diluted	$	1.71	$	1.98	$	4.18	$	4.54

NOTE 3– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2022 and December 31, 2021 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
September 30, 2022:
Securities HTM:
Municipal securities	$	538,861	$	1,564	$	(30,022)	$	510,403
Other securities		1,050		—		(6)		1,044
	$	539,911	$	1,564	$	(30,028)	$	511,447
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	23,389	$	22	$	(2,884)	$	20,527
Residential mortgage-backed and related securities		76,680		—		(7,836)		68,844
Municipal securities		241,292		23		(55,972)		185,343
Asset-backed securities		19,654		170		(194)		19,630
Other securities		47,700		—		(2,307)		45,393
	$	408,715	$	215	$	(69,193)	$	339,737

*     HTM securities shown on the balance sheet of $539.7 million represent amortized cost of $539.9 million, net of allowance for credit losses of $198 thousand as of September 30, 2022.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2021:
Securities HTM:
Municipal securities	$	471,533	$	49,715	$	—	$	521,248
Other securities		1,050		—		(1)		1,049
	$	472,583	$	49,715	$	(1)	$	522,297
Securities AFS:
U.S. govt. sponsored agency securities	$	23,370	$	254	$	(296)	$	23,328
Residential mortgage-backed and related securities		92,431		2,672		(780)		94,323
Municipal securities		163,253		5,228		(215)		168,266
Asset-backed securities		26,372		752		—		27,124
Other securities		24,568		251		(30)		24,789
	$	329,994	$	9,157	$	(1,321)	$	337,830

*     HTM securities shown on the balance sheet of $472.4 million represent amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.

The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

15

The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2022 and December 31, 2021, are summarized as follows:

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
September 30, 2022:
Securities HTM:
Municipal securities	$	385,027	$	(30,022)	$	—	$	—	$	385,027	$	(30,022)
Other securities		544		(6)		—		—		544		(6)
	$	385,571	$	(30,028)	$	—	$	—	$	385,571	$	(30,028)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	8,705	$	(349)	$	10,530	$	(2,535)	$	19,235	$	(2,884)
Residential mortgage-backed and related securities		51,073		(3,671)		17,669		(4,165)		68,742		(7,836)
Municipal securities		175,686		(53,159)		6,536		(2,813)		182,222		(55,972)
Asset-backed securities		10,742		(194)		—		—		10,742		(194)
Other securities		39,900		(2,203)		896		(104)		40,796		(2,307)
	$	286,106	$	(59,576)	$	35,631	$	(9,617)	$	321,737	$	(69,193)

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2021:
Securities HTM:
Other securities	$	1,049	$	(1)	$	—	$	—	$	1,049	$	(1)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,802	$	(156)	$	3,035	$	(140)	$	12,837	$	(296)
Residential mortgage-backed and related securities		5,363		(67)		19,406		(713)		24,769		(780)
Municipal securities		13,287		(211)		1,001		(4)		14,288		(215)
Other securities		4,528		(30)		—		—		4,528		(30)
	$	32,980	$	(464)	$	23,442	$	(857)	$	56,422	$	(1,321)

At September 30, 2022, the investment portfolio included 701 securities. Of this number, 639 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 10.46% of the total amortized cost of the portfolio. Of these 639 securities, there were 30 securities that had an unrealized loss for twelve months or more.

The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Municipal		Other				Municipal		Other				Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total		securities		securities		Total		securities		securities		Total
Allowance for credit losses:
Beginning balance	$	198	$	—	$	198	$	173	$	1	$	174	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		—		—		—		—		—		—		182		1		183
Provision for credit loss expense		—		—		—		—		—		—		—		—		—		(9)		—		(9)
Balance, ending	$	198	$	—	$	198	$	173	$	1	$	174	$	198	$	—	$	198	$	173	$	1	$	174

16

There were no sales of securities for the three months ended September 30, 2022 and September 30, 2021. All sales of securities for the nine months ended September 30, 2022 and September 30, 2021 were securities identified as AFS.

	Nine Months Ended
	September 30, 2022		September 30, 2021
Proceeds from sales of securities	$	111,375	$	23,874
Gross gains from sales of securities		—		—
Gross losses from sales of securities		—		(88)

Upon the closing of the GFED acquisition, the Company sold a large portion of the acquired securities portfolio to improve the efficiency of the combined balance sheets.

The amortized cost and fair value of securities as of September 30, 2022 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,061	$	3,046
Due after one year through five years		15,199		14,862
Due after five years		521,651		493,539
	$	539,911	$	511,447
Securities AFS:
Due in one year or less	$	8,558	$	8,535
Due after one year through five years		3,760		3,705
Due after five years		300,063		239,023
		312,381		251,263
Residential mortgage-backed and related securities		76,680		68,844
Asset-backed securities		19,654		19,630
	$	408,715	$	339,737

Portions of the U.S. government sponsored agency securities and municipal securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity, summarized as follows:

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Municipal securities	$	305,743	$	295,096
Securities AFS:
Municipal securities		237,105		181,201
Other securities		46,277		44,017
	$	283,382	$	225,218

As of September 30, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 119 issuers with fair values totaling $107.1 million and revenue bonds issued by 182 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $588.6 million. The Company also held investments in general obligation bonds in 22 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 29 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company also held

17

investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2022 and as of December 31, 2021, the Company held revenue bonds of two issuers, both located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to the Company’s loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of September 30, 2022, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of September 30, 2022, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.

NOTE 4 – LOANS/LEASES RECEIVABLE

The composition of the loan/lease portfolio as of September 30, 2022 and December 31, 2021 is presented as follows:

	September 30, 2022		December 31, 2021
	(dollars in thousands)
C&I:
C&I - revolving	$	332,996	$	248,483
C&I - other *		1,415,996		1,346,602
		1,748,992		1,595,085
CRE - owner occupied		627,558		421,701
CRE - non-owner occupied		920,876		646,500
Construction and land development		1,149,503		918,571
Multi-family		933,118		600,412
Direct financing leases**		33,503		45,191
1-4 family real estate***		487,508		377,361
Consumer		107,552		75,311
		6,008,610		4,680,132
Allowance for credit losses		(90,489)		(78,721)
	$	5,918,121	$	4,601,411
** Direct financing leases:
Net minimum lease payments to be received	$	36,541	$	49,362
Estimated unguaranteed residual values of leased assets		165		165
Unearned lease/residual income		(3,203)		(4,336)
		33,503		45,191
Plus deferred lease origination costs, net of fees		288		568
		33,791		45,759
Less allowance for credit losses		(1,037)		(1,546)
	$	32,754	$	44,213

*     Includes equipment financing agreements outstanding at m2, totaling $267.2 million and $225.1 million as of September 30, 2022 and December 31, 2021, respectively and PPP loans totaling $79 thousand and $28.2 million as of September 30, 2022 and December 31, 2021, respectively.

**   Management performs an evaluation of the estimated unguaranteed residual values of leased assets on an annual basis, at a minimum. The evaluation consists of discussions with reputable and current vendors, which is combined with management's expertise and understanding of the current states of particular industries to determine informal valuations of the equipment. As necessary and where available, management will utilize valuations by independent appraisers. The majority of leases with residual values contain a lease options rider, which requires the lessee to pay the residual value directly, finance the payment of the residual value, or extend the lease term to pay the residual value. In these cases, the residual value is protected and the risk of loss is minimal.

18

*** Includes residential real estate loans held for sale totaling $3.1 million and $3.8 million as of September 30, 2022 and December 31, 2021, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $23.4 million and $15.0 million at September 30, 2022 and December 31, 2021, respectively, and was included in other assets on the consolidated balance sheets.

Changes in remaining discounts on acquired loans for the three and nine months ended September 30, 2022 and 2021, respectively, are presented as follows:

	Three months ended		Nine months ended
	September 30, 2022		September 30, 2022
	(dollars in thousands)
Balance at the beginning of the period	$	(12,989)	$	(1,533)
Discount added at acquisition		—		(13,381)
Accretion recognized		1,148		3,073
Balance at the end of the period	$	(11,841)	$	(11,841)

	Three months ended		Nine months ended
	September 30, 2021		September 30, 2021
	(dollars in thousands)
Balance at the beginning of the period	$	(2,189)	$	(3,139)
Accretion recognized		505		1,455
Balance at the end of the period	$	(1,684)	$	(1,684)

The aging of the loan/lease portfolio by classes of loans/leases as of September 30, 2022 and December 31, 2021 is presented as follows:

	As of September 30, 2022
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)
C&I:
C&I - revolving	$	332,996		$	—		$	—		$	—		$	—	$		332,996
C&I - other		1,408,004			3,721			674			3			3,594			1,415,996
CRE - owner occupied		624,534			—			—			—			3,024			627,558
CRE - non-owner occupied		913,366			565			—			—			6,945			920,876
Construction and land development		1,148,080			255			—			—			1,168			1,149,503
Multi-family		933,118			—			—			—			—			933,118
Direct financing leases		33,288			59			27			—			129			33,503
1-4 family real estate		484,322			—			809			—			2,377			487,508
Consumer		107,163			115			—			—			274			107,552
	$	5,984,871		$	4,715		$	1,510		$	3		$	17,511		$	6,008,610
As a percentage of total loan/lease portfolio		99.60	%		0.08	%		0.03	%		0.00	%		0.29	%		100.00	%

	As of December 31, 2021
										Accruing Past
				30-59 Days			60-89 Days			Due 90 Days or			Nonaccrual
Classes of Loans/Leases	Current			Past Due			Past Due			More			Loans/Leases			Total
	(dollars in thousands)
C&I
C&I - revolving	$	248,483		$	—		$	—		$	—		$	—		$	248,483
C&I - other		1,337,034			859			7,308			1			1,400			1,346,602
CRE - owner occupied		421,701			—			—			—			—			421,701
CRE - non-owner occupied		646,500			—			—			—			—			646,500
Construction and land development		918,498			—			—			—			73			918,571
Multi-family		600,412			—			—			—			—			600,412
Direct financing leases		44,174			10			160			—			847			45,191
1-4 family real estate		374,912			1,325			716			—			408			377,361
Consumer		75,272			8			—			—			31			75,311
	$	4,666,986		$	2,202		$	8,184		$	1		$	2,759		$	4,680,132
As a percentage of total loan/lease portfolio		99.57	%		0.05	%		0.17	%		0.00	%		0.06	%		100.00	%

19

NPLs by classes of loans/leases as of September 30, 2022 and December 31, 2021 are presented as follows:

	As of September 30, 2022
	Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	More		with an ACL		without an ACL		Total NPLs		Total NPLs
	(dollars in thousands)
C&I:
C&I - revolving	$	—	$	—	$	—	$	—	-	%
C&I - other		3		3,292		302		3,597	20.54
CRE - owner occupied		—		1,669		1,355		3,024	17.27
CRE - non-owner occupied		—		68		6,877		6,945	39.65
Construction and land development		—		889		279		1,168	6.67
Multi-family		—		—		—		—	-
Direct financing leases		—		54		75		129	0.74
1-4 family real estate		—		1,076		1,301		2,377	13.57
Consumer		—		274		—		274	1.56
	$	3	$	7,322	$	10,189	$	17,514	100.00	%

	As of December 31, 2021
	Accruing Past		Nonaccrual		Nonaccrual
	Due 90 Days or		Loans/Leases		Loans/Leases				Percentage of
Classes of Loans/Leases	More		with an ACL		without an ACL		Total NPLs		Total NPLs
		(dollars in thousands)
C&I:
C&I - revolving	$	—	$	—	$	—	$	—	-	%
C&I - other		1		1,130		270		1,401	50.77
CRE - owner occupied		—		—		—		—	-
CRE - non-owner occupied		—		—		—		—	-
Construction and land development		—		73		—		73	2.64
Multi-family		—		—		—		—	-
Direct financing leases		—		115		732		847	30.69
1-4 family real estate		—		408		—		408	14.78
Consumer		—		31		—		31	1.12
	$	1	$	1,757	$	1,002	$	2,760	100.00	%

The Company did not recognize any interest income on nonaccrual loans during the three and nine months ended September 30, 2022 and 2021.

Changes in the ACL loans/leases by portfolio segment for the three and nine months ended September 30, 2022 and 2021, respectively, are presented as follows:

	Three Months Ended September 30, 2022
					CRE		CRE		Construction				1-4
	C&I -		C&I -		Owner		Non-Owner		and Land		Multi-		Family
	Revolving		Other*		Occupied		Occupied		Development		Family		Real Estate		Consumer		Total
	(dollars in thousands)
Balance, beginning	$	5,179	$	28,093	$	11,065	$	12,049	$	16,388	$	12,783	$	5,513	$	1,355	$	92,425
Provision		1		1,652		(606)		(161)		(693)		437		(276)		(23)		331
Charge-offs		—		(1,915)		—		—		(562)		—		(5)		(7)		(2,489)
Recoveries		—		176		—		—		—		43		—		3		222
Balance, ending	$	5,180	$	28,006	$	10,459	$	11,888	$	15,133	$	13,263	$	5,232	$	1,328	$	90,489

*   Included within the C&I – Other column are ACL on leases with a beginning balance of $1.6 million, provision of $91 thousand, charge-offs of $708 thousand and recoveries of $65 thousand. ACL on leases was $1.0 million as of September 30, 2022.

20

	Nine Months Ended September 30, 2022
					CRE		CRE		Construction				1-4
	C&I -		C&I -		Owner		Non-Owner		and Land		Multi-		Family
	Revolving		Other***		Occupied		Occupied		Development		Family		Real Estate		Consumer		Total
	(dollars in thousands)
Balance, beginning	$	3,907	$	25,982	$	8,501	$	8,549	$	16,972	$	9,339	$	4,541	$	930	$	78,721
Initial ACL recorded for PCD loans		600		7		2,481		1,076		1,100		481		137		20		5,902
Provision**		673		4,185		(529)		2,328		(2,377)		3,400		559		384		8,623
Charge-offs		—		(2,790)		—		(193)		(562)		—		(5)		(15)		(3,565)
Recoveries		—		622		6		128		—		43		—		9		808
Balance, ending	$	5,180	$	28,006	$	10,459	$	11,888	$	15,133	$	13,263	$	5,232	$	1,328	$	90,489

**  Provision for the nine months ended September 30, 2022, included $11.0 million related to the acquired Guaranty Bank non-PCD loans.

*** Included within the C&I - Other column are ACL on leases with a beginning balance of $1.5 million, provision of $249 thousand, charge-offs of $931 thousand and recoveries of $173 thousand.  ACL on leases was $1.0 million as of September 30, 2022.

	Three Months Ended September 30, 2021
									CRE		CRE		Construction				Direct		Residential		1-4
			C&I -		C&I -				Owner		Non-Owner		and Land		Multi-		Financing		Real		Family
	C&I		Revolving		Other*		CRE		Occupied		Occupied		Development		Family		Leases		Estate		Real Estate		Consumer		Total
	(dollars in thousands)
Balance, beginning	$	—	$	3,177	$	32,325	$	—	$	8,020	$	8,911	$	13,640	$	6,977	$	—	$	—	$	4,925	$	919	$	78,894
Provision		—		(262)		(276)		—		(62)		25		2,141		923		—		—		(558)		(36)		1,895
Charge-offs		—		—		(283)		—		—		—		—		—		—		—		—		(4)		(287)
Recoveries		—		—		109		—		4		50		—		—		—		—		—		5		168
Balance, ending	$	—	$	2,915	$	31,875	$	—	$	7,962	$	8,986	$	15,781	$	7,900	$	—	$	—	$	4,367	$	884	$	80,670

*   Included within the C&I – Other column are ACL on leases with adoption impact of $2.0 million, negative provision of $212 thousand, charge-offs of $72 thousand and recoveries of $52 thousand. ACL on leases was $1.7 million as of September 30, 2021.

	Nine Months Ended September 30, 2021
									CRE		CRE		Construction				Direct		Residential		1-4
			C&I -		C&I -				Owner		Non-Owner		and Land		Multi-		Financing		Real		Family
	C&I		Revolving		Other**		CRE		Occupied		Occupied		Development		Family		Leases		Estate		Real Estate		Consumer		Total
	(dollars in thousands)
Balance, beginning	$	35,421	$	—	$	—	$	42,161	$	—	$	—	$	—	$	—	$	1,764	$	3,732	$	—	$	1,298	$	84,376
Adoption of ASU 2016-13		(35,421)		2,982		29,130		(42,161)		8,696		11,428		11,999		5,836		(1,764)		(3,732)		5,042		(137)		(8,102)
Provision		—		(67)		4,271		—		(732)		(637)		3,782		2,214		—		—		(502)		(582)		7,747
Charge-offs		—		—		(1,949)		—		—		(1,876)		—		(150)		—		—		(690)		(9)		(4,674)
Recoveries		—		—		423		—		(2)		71		—		—		—		—		517		314		1,323
Balance, ending	$	—	$	2,915	$	31,875	$	—	$	7,962	$	8,986	$	15,781	$	7,900	$	—	$	—	$	4,367	$	884	$	80,670

** Included within the C&I – Other column are ACL on leases with a beginning balance of $1.8 million, adoption impact of $685 thousand, negative provision of $491 thousand, charge-offs of $400 thousand and recoveries of $186 thousand.  ACL on leases was $1.7 million as of September 30, 2021.

21

The composition of the ACL loans/leases by portfolio segment based on evaluation method are as follows:

	As of September 30, 2022
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total
	(dollars in thousands)
C&I :
C&I - revolving	$	3,475	$	329,521	$	332,996	$	1,123	$	4,057	$	5,180
C&I - other*		10,704		1,438,795		1,449,499		2,679		25,327		28,006
		14,179		1,768,316		1,782,495		3,802		29,384		33,186
CRE - owner occupied		25,531		602,027		627,558		2,925		7,534		10,459
CRE - non-owner occupied		28,537		892,339		920,876		814		11,074		11,888
Construction and land development		11,480		1,138,023		1,149,503		472		14,661		15,133
Multi-family		1,305		931,813		933,118		397		12,866		13,263
1-4 family real estate		4,139		483,369		487,508		355		4,877		5,232
Consumer		601		106,951		107,552		57		1,271		1,328
	$	85,772	$	5,922,838	$	6,008,610	$	8,822	$	81,667	$	90,489

*   Included within the C&I – Other category are leases individually evaluated of $129 thousand with a related allowance for credit losses of $17 thousand and leases collectively evaluated of $33.4 million with a related allowance for credit losses of $1.0 million.

	As of December 31, 2021
	Amortized Cost of Loans Receivable						Allowance for Credit Losses
	Individually		Collectively				Individually		Collectively
	Evaluated for		Evaluated for				Evaluated for		Evaluated for
	Credit Losses		Credit Losses		Total		Credit Losses		Credit Losses		Total
	(dollars in thousands)
C&I :
C&I - revolving	$	2,638	$	245,845	$	248,483	$	168	$	3,739	$	3,907
C&I - other*		13,456		1,378,337		1,391,793		743		25,239		25,982
		16,094		1,624,182		1,640,276		911		28,978		29,889
CRE - owner occupied		3,841		417,860		421,701		1,264		7,237		8,501
CRE - non-owner occupied		25,006		621,494		646,500		—		8,549		8,549
Construction and land development		10,436		908,135		918,571		11		16,961		16,972
Multi-family		—		600,412		600,412		—		9,339		9,339
1-4 family real estate		2,950		374,411		377,361		329		4,212		4,541
Consumer		350		74,961		75,311		39		891		930
	$	58,677	$	4,621,455	$	4,680,132	$	2,554	$	76,167	$	78,721

*   Included within the C&I – Other category are leases individually evaluated of $847 thousand with a related allowance for credit losses of $35 thousand and leases collectively evaluated of $44.4 million with a related allowance for credit losses of $1.5 million.

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses as of September 30, 2022 and December 31, 2021:

	As of September 30, 2022
					Non
	Commercial		Owner-occupied		Owner-Occupied		Owner Occupied
	Assets		CRE		Real Estate		Real Estate		Securities		Equipment		Other		Total
	(dollars in thousands)
C & I:
C&I - revolving	$	3,370	$	—	$	—	$	—	$	—	$	105	$	—	$	3,475
C&I - other*		2,192		213		—		—		115		6,457		1,727		10,704
		5,562		213		—		—		115		6,562		1,727		14,179
CRE - owner occupied		—		25,465		—		66		—		—		—		25,531
CRE - non-owner occupied		—		—		28,537		—		—		—		—		28,537
Construction and land development		—		—		11,480		—		—		—		—		11,480
Multi-family		—		—		1,305		—		—		—		—		1,305
1-4 family real estate		—		—		1,087		3,052		—		—		—		4,139
Consumer		—		—		—		586		—		—		15		601
	$	5,562	$	25,891	$	42,409	$	3,704	$	115	$	6,562	$	1,742	$	85,772

*   Included within the C&I – Other category are leases individually evaluated of $129 thousand with primary collateral of equipment.

22

	As of December 31, 2021
					Non
	Commercial		Owner-occupied		Owner-Occupied		Owner Occupied
	Assets		CRE		Real Estate		Real Estate		Securities		Equipment		Other		Total
	(dollars in thousands)
C & I:
C&I - revolving	$	2,518	$	—	$	—	$	—	$	—	$	120	$	—	$	2,638
C&I - other*		683		—		—		2,471		134		9,877		291		13,456
		3,201		—		—		2,471		134		9,997		291		16,094
CRE - owner occupied		—		—		—		3,841		—		—		—		3,841
CRE - non-owner occupied		—		—		25,006		—		—		—		—		25,006
Construction and land development		—		—		10,362		74		—		—		—		10,436
Multi-family		—		—		—		—		—		—		—		—
1-4 family real estate		—		—		817		2,133		—		—		—		2,950
Consumer		—		—		—		340		—		1		9		350
	$	3,201	$	—	$	36,185	$	8,859	$	134	$	9,998	$	300	$	58,677

*   Included within the C&I – Other category are leases individually evaluated of $847 thousand with primary collateral of equipment.

For certain C&I loans, all CRE loans, certain construction and land development loans, all multifamily loans and certain 1-4 family residential loans, the Company’s credit quality indicator consists of internally assigned risk ratings.  Each such loan is assigned a risk rating upon origination. The risk rating is reviewed every 15 months, at a minimum, and on an as-needed basis depending on the specific circumstances of the loan.

For certain C&I loans (including equipment financing agreements and direct financing leases), certain construction and land development, certain 1-4 family real estate loans, and all consumer loans, the Company’s credit quality indicator is performance determined by delinquency status.  Delinquency status is updated daily by the Company’s loan system.

23

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of September 30, 2022:

	As of September 30, 2022
	Term Loans
	Amortized Cost Basis by Origination Year
													Revolving
													Loans
Internally Assigned													Amortized
Risk Rating	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	321,834	$	321,834
Special Mention (Rating 6)		—		—		—		—		—		—		7,687		7,687
Substandard (Rating 7)		—		—		—		—		—		—		3,475		3,475
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	332,996	$	332,996
C&I - other
Pass (Ratings 1 through 5)	$	370,548	$	285,959	$	199,399	$	91,020	$	76,707	$	114,363	$	—	$	1,137,996
Special Mention (Rating 6)		411		446		303		808		—		315		—		2,283
Substandard (Rating 7)		2,065		70		743		5,142		329		117		—		8,466
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	373,024	$	286,475	$	200,445	$	96,970	$	77,036	$	114,795	$	—	$	1,148,745
CRE - owner occupied
Pass (Ratings 1 through 5)	$	118,943	$	182,373	$	160,151	$	34,834	$	30,025	$	50,994	$	11,166	$	588,486
Special Mention (Rating 6)		4,647		—		2,884		—		998		1,747		4,852		15,128
Substandard (Rating 7)		2,625		1,452		16,502		1,662		1,208		495		—		23,944
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	126,215	$	183,825	$	179,537	$	36,496	$	32,231	$	53,236	$	16,018	$	627,558
CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	233,256	$	220,873	$	189,327	$	90,524	$	64,557	$	50,156	$	7,082	$	855,775
Special Mention (Rating 6)		1,168		912		15,692		—		12,873		6,262		—		36,907
Substandard (Rating 7)		1,089		694		10,833		15,306		—		—		272		28,194
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	235,513	$	222,479	$	215,852	$	105,830	$	77,430	$	56,418	$	7,354	$	920,876
Construction and land development
Pass (Ratings 1 through 5)	$	327,140	$	337,617	$	250,387	$	31,708	$	30,447	$	—	$	22,788	$	1,000,087
Special Mention (Rating 6)		324		160		—		—		—		—		—		484
Substandard (Rating 7)		486		10,471		—		—		—		—		—		10,957
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	327,950	$	348,248	$	250,387	$	31,708	$	30,447	$	—	$	22,788	$	1,011,528
Multi-family
Pass (Ratings 1 through 5)	$	188,557	$	264,565	$	225,525	$	134,853	$	104,267	$	9,735	$	2,861	$	930,363
Special Mention (Rating 6)		—		46		—		1,404		—		—		—		1,450
Substandard (Rating 7)		—		—		1,305		—		—		—		—		1,305
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	188,557	$	264,611	$	226,830	$	136,257	$	104,267	$	9,735	$	2,861	$	933,118
1-4 family real estate
Pass (Ratings 1 through 5)	$	33,264	$	37,161	$	17,381	$	11,533	$	5,119	$	5,128	$	3,093	$	112,679
Special Mention (Rating 6)		—		34		—		—		—		—		—		34
Substandard (Rating 7)		198		—		177		—		430		52		—		857
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	33,462	$	37,195	$	17,558	$	11,533	$	5,549	$	5,180	$	3,093	$	113,570
Consumer
Pass (Ratings 1 through 5)	$	168	$	824	$	457	$	42	$	200	$	671	$	1,985	$	4,347
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		119		—		—		119
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	168	$	824	$	457	$	42	$	319	$	671	$	1,985	$	4,466
Total	$	1,284,889	$	1,343,657	$	1,091,066	$	418,836	$	327,279	$	240,035	$	387,095	$	5,092,857

24

	As of September 30, 2022
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2022		2021		2020		2019		2018		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - other
Performing	$	144,806	$	78,379	$	29,596	$	10,530	$	2,580	$	172	$	—	$	266,063
Nonperforming		288		747		56		97		—		—		—		1,188
Total C&I - other	$	145,094	$	79,126	$	29,652	$	10,627	$	2,580	$	172	$	—	$	267,251
Construction and land development
Performing	$	80,160	$	48,094	$	4,391	$	3,379	$	211	$	458	$	758	$	137,451
Nonperforming		524		—		—		—		—		—		—		524
Total Construction and land development	$	80,684	$	48,094	$	4,391	$	3,379	$	211	$	458	$	758	$	137,975
Direct financing leases
Performing	$	13,169	$	5,636	$	6,640	$	5,135	$	2,237	$	557	$	—	$	33,374
Nonperforming		—		35		75		9		10		—		—		129
Total Direct financing leases	$	13,169	$	5,671	$	6,715	$	5,144	$	2,247	$	557	$	—	$	33,503
1-4 family real estate
Performing	$	75,114	$	116,168	$	94,924	$	19,598	$	12,461	$	53,145	$	1,008	$	372,418
Nonperforming		29		174		955		6		—		356		—		1,520
Total 1-4 family real estate	$	75,143	$	116,342	$	95,879	$	19,604	$	12,461	$	53,501	$	1,008	$	373,938
Consumer
Performing	$	10,533	$	4,427	$	3,988	$	1,332	$	1,394	$	1,408	$	79,730	$	102,812
Nonperforming		159		12		12		13		32		46		—		274
Total Consumer	$	10,692	$	4,439	$	4,000	$	1,345	$	1,426	$	1,454	$	79,730	$	103,086
Total	$	324,782	$	253,672	$	140,637	$	40,099	$	18,925	$	56,142	$	81,496	$	915,753

* Performing = loans/leases accruing and less than 90 days past due. Nonperforming = loans/leases on nonaccrual and accruing loans/leases that are greater than or equal to 90 days past due.

25

The following tables show the credit quality indicator of loans by class of receivable and year of origination as of December 31, 2021:

	As of December 31, 2021
	Term Loans
	Amortized Cost Basis by Origination Year
													Revolving
													Loans
Internally Assigned													Amortized
Risk Rating	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - revolving
Pass (Ratings 1 through 5)	$	—	$	—	$	—	$	—	$	—	$	—	$	245,212	$	245,212
Special Mention (Rating 6)		—		—		—		—		—		—		633		633
Substandard (Rating 7)		—		—		—		—		—		—		2,638		2,638
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - revolving	$	—	$	—	$	—	$	—	$	—	$	—	$	248,483	$	248,483
C&I - other
Pass (Ratings 1 through 5)	$	391,532	$	362,256	$	133,678	$	82,177	$	83,419	$	53,310	$	—	$	1,106,372
Special Mention (Rating 6)		3,580		373		349		—		336		2		—		4,640
Substandard (Rating 7)		506		2,366		7,138		396		55		46		—		10,507
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total C&I - other	$	395,618	$	364,995	$	141,165	$	82,573	$	83,810	$	53,358	$	—	$	1,121,519
CRE - owner occupied
Pass (Ratings 1 through 5)	$	118,014	$	143,045	$	47,660	$	30,523	$	17,038	$	46,185	$	11,477	$	413,942
Special Mention (Rating 6)		637		—		—		233		1,846		1,202		—		3,918
Substandard (Rating 7)		—		—		2,080		1,239		522		—		—		3,841
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - owner occupied	$	118,651	$	143,045	$	49,740	$	31,995	$	19,406	$	47,387	$	11,477	$	421,701
CRE - non-owner occupied
Pass (Ratings 1 through 5)	$	176,813	$	145,712	$	88,697	$	63,849	$	55,752	$	28,808	$	8,592	$	568,223
Special Mention (Rating 6)		7,295		20,881		1,802		12,230		5,494		5,580		—		53,282
Substandard (Rating 7)		1,105		6,297		15,563		1,087		943		—		—		24,995
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total CRE - non-owner occupied	$	185,213	$	172,890	$	106,062	$	77,166	$	62,189	$	34,388	$	8,592	$	646,500
Construction and land development
Pass (Ratings 1 through 5)	$	394,045	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	892,425
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		10,362		—		—		—		—		—		—		10,362
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Construction and land development	$	404,407	$	248,360	$	126,941	$	106,790	$	3,012	$	—	$	13,277	$	902,787
Multi-family
Pass (Ratings 1 through 5)	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		—		—		—		—		—
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Multi-family	$	266,120	$	197,224	$	74,033	$	47,486	$	5,609	$	7,376	$	2,564	$	600,412
1-4 family real estate
Pass (Ratings 1 through 5)	$	47,097	$	24,029	$	16,188	$	7,569	$	5,845	$	5,213	$	3,079	$	109,020
Special Mention (Rating 6)		37		—		—		—		—		—		—		37
Substandard (Rating 7)		—		178		—		437		201		—		—		816
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total 1-4 family real estate	$	47,134	$	24,207	$	16,188	$	8,006	$	6,046	$	5,213	$	3,079	$	109,873
Consumer
Pass (Ratings 1 through 5)	$	1,558	$	487	$	108	$	216	$	—	$	824	$	2,031	$	5,224
Special Mention (Rating 6)		—		—		—		—		—		—		—		—
Substandard (Rating 7)		—		—		—		137		—		—		—		137
Doubtful (Rating 8)		—		—		—		—		—		—		—		—
Total Consumer	$	1,558	$	487	$	108	$	353	$	—	$	824	$	2,031	$	5,361
Total	$	1,418,701	$	1,151,208	$	514,237	$	354,369	$	180,072	$	148,546	$	289,503	$	4,056,636

26

	As of December 31, 2021
	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
Delinquency Status *	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(dollars in thousands)
C&I - other
Performing	$	117,163	$	54,261	$	33,390	$	14,274	$	4,200	$	455	$	—	$	223,743
Nonperforming		95		177		644		368		42		14		—		1,340
Total C&I - other	$	117,258	$	54,438	$	34,034	$	14,642	$	4,242	$	469	$	—	$	225,083
Direct financing leases
Performing	$	6,690	$	12,130	$	11,638	$	9,235	$	3,695	$	956	$	—	$	44,344
Nonperforming		—		732		—		52		18		45		—		847
Total Direct financing leases	$	6,690	$	12,862	$	11,638	$	9,287	$	3,713	$	1,001	$	—	$	45,191
Construction and land development
Performing	$	12,857	$	2,080	$	—	$	494	$	—	$	—	$	280	$	15,711
Nonperforming		—		—		—		—		73		—		—		73
Total Construction and land development	$	12,857	$	2,080	$	—	$	494	$	73	$	—	$	280	$	15,784
1-4 family real estate
Performing	$	104,005	$	78,713	$	19,001	$	10,784	$	10,533	$	43,976	$	68	$	267,080
Nonperforming		—		—		—		106		—		302		—		408
Total 1-4 family real estate	$	104,005	$	78,713	$	19,001	$	10,890	$	10,533	$	44,278	$	68	$	267,488
Consumer
Performing	$	4,891	$	4,020	$	2,114	$	1,660	$	593	$	1,230	$	55,411	$	69,919
Nonperforming		—		—		15		—		15		1		—		31
Total Consumer	$	4,891	$	4,020	$	2,129	$	1,660	$	608	$	1,231	$	55,411	$	69,950
Total	$	245,701	$	152,113	$	66,802	$	36,973	$	19,169	$	46,979	$	55,759	$	623,496

As of September 30, 2022 and December 31, 2021, TDRs totaled $227 thousand and $494 thousand, respectively.

For each class of financing receivable, the following presents the number and recorded investment of TDRs, by type of concession, that were restructured during the three and nine months ended September 30, 2022 and September 30, 2021.  The difference between the pre-modification recorded investment and the post-modification recorded investment would be any partial charge-offs at the time of restructuring.

For the three months ended September 30, 2022

For the nine months ended September 30, 2022

Pre-

Post-

Pre-

Post-

Number of

Modification

Modification

Number of

Modification

Modification

Loans/

Recorded

Recorded

Specific

Loans/

Recorded

Recorded

Specific

Classes of Loans/Leases

Leases

Investment

Investment

Allowance

Leases

Investment

Investment

Allowance

(dollars in thousands)

Direct Financing Leases

1

$

71

$

71

$

—

2

$

122

$

122

$

—

	For the three months ended September 30, 2021							For the nine months ended September 30, 2021
		Pre-		Post-					Pre-		Post-
	Number of	Modification		Modification				Number of	Modification		Modification
	Loans/	Recorded		Recorded		Specific		Loans/	Recorded		Recorded		Specific
Classes of Loans/Leases	Leases	Investment		Investment		Allowance		Leases	Investment		Investment		Allowance
	(dollars in thousands)
CONCESSION - Extension of Maturity
1-4 family real estate	—		—		—		—	1		2,532		2,532		—
CONCESSION - Interest Rate Adjusted Below Market
1-4 family real estate	—	$	—	$	—	$	—	1	$	54	$	54	$	6
Consumer	—		—		—		—	1		13		13		6
	—	$	—	$	—	$	—	2	$	67	$	67	$	12
TOTAL	—	$	—	$	—	$	—	3	$	2,599	$	2,599	$	12

For the three and nine months ended September 30, 2022 and September 30, 2021, none of the Company's TDRs redefaulted within 12 months subsequent to restructure, where default is defined as delinquency of 90 days or more and/or placement on nonaccrual status. There were no TDRs that were restructured and charged off for the three and nine months ended September 30, 2022.

27

Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2022 and 2021 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(dollars in thousands)
Balance, beginning	$	6,878	$	9,987	$	6,886	$	—
Impact of adopting ASU 2016-13		—		—		—		9,117
Provisions (credited) to expense		(331)		(1,895)		(339)		(1,025)
Balance, ending	$	6,547	$	8,092	$	6,547	$	8,092

* Provision for the nine months ended September 30, 2022 included $1.4 million related to the acquired Guaranty Bank OBS exposures

NOTE 5 – DERIVATIVES AND HEDGING ACTIVITIES

Derivatives are summarized as follows as of September 30, 2022 and December 31, 2021:

	September 30, 2022		December 31, 2021
	(dollars in thousands)
Assets:
Interest rate caps - hedged	$	9,191	$	927
Interest rate caps		2,480		238
Interest rate swaps - hedged		506		—
Interest rate swaps		172,860		221,055
	$	185,037	$	222,220
Liabilities:
Interest rate collars - hedged	$	(541)	$	—
Interest rate swaps - hedged		(36,078)		(4,080)
Interest rate swaps		(172,860)		(221,055)
	$	(209,479)	$	(225,135)

The Company uses interest rate swap, cap and collar instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.  

The Company has entered into interest rate caps to hedge against the risk of rising interest rates on liabilities.  The liabilities consist of $300.0 million of deposits and the benchmark rates hedged vary at 1-month LIBOR, 3-month LIBOR and the Prime Rate. The interest rate caps are designated as cash flow hedges in accordance with ASC 815.  An initial premium of $3.5 million was paid upfront for the caps executed.  The details of the interest rate caps are as follows:  

			Balance Sheet					Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2022		December 31, 2021
(dollars in thousands)
Deposits	1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.75	%	$	120	$	5
Deposits	1/1/2020	1/1/2023	Derivatives - Assets		50,000	1.57	%		221		11
Deposits	1/1/2020	1/1/2023	Derivatives - Assets		25,000	1.80	%		111		5
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.75	%		797		60
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		50,000	1.57	%		1,593		125
Deposits	1/1/2020	1/1/2024	Derivatives - Assets		25,000	1.80	%		796		62
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.75	%		1,379		161
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		50,000	1.57	%		2,783		332
Deposits	1/1/2020	1/1/2025	Derivatives - Assets		25,000	1.80	%		1,391		166
				$	300,000			$	9,191	$	927

28

For derivative instruments that are designated as unhedged, the change in fair value of the derivative instrument is recognized into current earnings. The details of the unhedged interest rate caps are as follows:

		Balance Sheet					Fair Value as of
Effective Date	Maturity Date	Location	Notional Amount		Strike Rate		September 30, 2022		December 31, 2021
(dollars in thousands)
1/1/2020	1/1/2023	Derivatives - Assets	$	25,000	1.90	%	$	128	$	3
2/1/2020	2/1/2024	Derivatives - Assets		25,000	1.90	%		867		62
3/1/2020	3/1/2025	Derivatives - Assets		25,000	1.90	%		1,485		173
			$	75,000			$	2,480	$	238

The Company uses interest rate collars in an effort to manage future interest rate exposure on variable rate loans.  The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap.  The details of the interest rate collars are as follows:

Fair Value as of

Hedged Item

Effective Date

Maturity Date

Location

Notional Amount

Cap Strike Rate

Floor Strike Rate

September 30, 2022

December 31, 2021

Loans

10/1/2022

10/1/2026

Derivatives - Liabilities

$

50,000

4.40

%

2.44

%

$

(541)

$

N/A

The Company has entered into interest rate swaps to hedge against the risk of declining interest rates on floating rate loans.    All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815.  The details of the interest rate swaps are as follows:

			Balance Sheet							Fair Value as of
Hedged Item	Effective Date	Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2022		December 31, 2021
(dollars in thousands)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities	$	35,000	1.40	%	1.79	%	$	(5,968)	$	(17)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		50,000	1.40	%	1.79	%		(8,527)		(25)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		40,000	1.40	%	1.79	%		(6,833)		(34)
Loans	7/1/2021	7/1/2031	Derivatives - Liabilities		25,000	1.40	%	1.79	%		(4,263)		(13)
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		15,000	1.91	%	1.79	%		(1,248)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	1.79	%		(4,159)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		35,000	1.91	%	1.79	%		(2,911)		N/A
Loans	4/1/2022	4/1/2027	Derivatives - Liabilities		50,000	1.91	%	1.79	%		(4,159)		N/A
				$	300,000					$	(38,068)	$	(89)

The Company has entered into interest rate swaps to hedge against the risk of rising rates on its variable rate trust preferred securities. All of the interest rate swaps are designated as cash flow hedges in accordance with ASC 815.  The details of the interest rate swaps are as follows:

				Balance Sheet							Fair Value as of
Hedged Item	Effective Date		Maturity Date	Location	Notional Amount		Receive Rate		Pay Rate		September 30, 2022		December 31, 2021
		(dollars in thousands)
QCR Holdings Statutory Trust II	9/30/2018		9/30/2028	Derivatives - Liabilities	$	10,000	6.52	%	5.85	%	$	513	$	(1,035)
QCR Holdings Statutory Trust III	9/30/2018		9/30/2028	Derivatives - Liabilities		8,000	6.52	%	5.85	%		410		(828)
QCR Holdings Statutory Trust V	7/7/2018		7/7/2028	Derivatives - Liabilities		10,000	4.06	%	4.54	%		510		(996)
Community National Statutory Trust II	9/20/2018		9/20/2028	Derivatives - Liabilities		3,000	5.70	%	5.17	%		153		(309)
Community National Statutory Trust III	9/15//2018		9/15/2028	Derivatives - Liabilities		3,500	5.04	%	4.75	%		177		(360)
Guaranty Bankshares Statutory Trust I	9/15/2018		9/15/2028	Derivatives - Liabilities		4,500	5.04	%	4.75	%		227		(463)
Guaranty Statutory Trust II*	12/15/2005		2/23/2036	Derivatives - Assets		10,310	4.41	%	4.09	%		506		N/A
					$	49,310					$	2,496	$	(3,991)

*Acquired on 4/1/2022 with GFED acquisition.

Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent that they are included in the assessment of effectiveness, are recorded as a component of AOCI.

The Company has also entered into interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap with a customer while at the same time entering into an equal and offsetting interest rate swap with a third-party financial institution. Additionally, the Company receives an upfront, non-refundable fee from the counterparty, dependent upon the pricing that is recognized upon receipt from the counterparty.  Because the Company acts as an intermediary for the customer, changes in the fair

29

value of the underlying derivative contracts, for the most part, offset each other and do not significantly impact the Company’s results of operations.

Interest rate swaps that are not designated as hedging instruments are summarized as follows:

		September 30, 2022			December 31, 2021
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
	(dollars in thousands)
Non-Hedging Interest Rate Derivatives Assets:
Interest rate swap contracts	$	2,331,961	$	172,860	$	2,024,599	$	221,055
Non-Hedging Interest Rate Derivatives Liabilities:
Interest rate swap contracts	$	2,331,961	$	172,860	$	2,024,599	$	221,055

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and nine  months ended September 30, 2022 and September 30, 2021 are as follows:

	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
	Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense
	(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	79,267	$	18,498	$	51,667	$	5,438
The effects of cash flow hedging:
Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		(259)		-		181
Interest rate swaps on variable rate loans		(426)		-		-		-
Interest rate swaps on junior subordinated debentures		-		73		-		285

	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Interest and		Interest		Interest and		Interest
	Dividend Income		Expense		Dividend Income		Expense
	(dollars in thousands)
Income and expense line items presented in the consolidated statements of income	$	198,534	$	32,632	$	148,135	$	16,415
The effects of cash flow hedging:
Gain (loss) on cash flow hedges:
Interest rate caps on deposits		-		202		-		495
Interest rate swaps on variable rate loans		715		-		502		-
Interest rate swaps on junior subordinated debentures		-		536		-		830

The Company’s hedged interest rate swaps and non-hedged interest rate swaps are collateralized with cash and investment securities with carrying values as follows:

	September 30, 2022		December 31, 2021
	(dollars in thousands)
Cash	$	2,001	$	21,100
U.S treasuries and govt. sponsored agency securities		3,492		3,555
Municipal securities		101,588		139,166
Residential mortgage-backed and related securities		45,650		65,104
	$	152,731	$	228,925

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements.  The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information.  Additionally, the Company manages financial institution counterparty credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, and uses ISDA master agreements, central clearing mechanisms and counterparty limits.  The agreements contain bilateral collateral agreements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps.  

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The Company manages the risk of default by its borrower/customer counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company underwrites the combination of the base loan amount and potential swap exposure and focuses on high quality borrowers with strong collateral values. The majority of the Company’s swapped loan portfolio consists of loans on projects, with loan-to-values including the potential swap exposure that is below 65%.  The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

NOTE 6 – SUBORDINATED NOTES

The details of the Company’s subordinated notes are as follows:

		Amount Outstanding	Interest Rate			Amount Outstanding	Interest Rate
		as of September 30, 2022	as of September 30, 2022			as of December 31, 2021	as of December 31, 2021		Maturity Date
		(dollars in thousands)
Subordinated debenture dated 9/14/20	$	50,000	5.125	%	$	50,000	5.125	%	9/15/2030
Subordinated debenture dated 2/1/19		65,000	5.375	%		65,000	5.375	%	2/15/2029
Subordinated debenture dated 7/29/20*		20,000	5.250	%		N/A	N/A		9/30/2030
Subordinated debenture dated 8/18/22		55,000	5.950	%		N/A	N/A		9/1/2037
Subordinated debenture dated 8/18/22		45,000	5.500	%		N/A	N/A		9/1/2032
Debt issuance costs		(2,257)				(1,150)
Total Subordinated Debentures	$	232,743			$	113,850
*Assumed in acquisition of GFED

On April 1, 2022, the Company acquired, through the GFED acquisition $20.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 30, 2030. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.25% per year, from and including July 29, 2020 to, but excluding September 30, 2025 or earlier redemption. From and including September 30, 2025 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 519 basis points. Interest on the subordinated notes is payable semi-annually, commencing on September 30, 2020 through September 30, 2025. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 30, 2025, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

On August 18, 2022, the Company completed a private offering of $55.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 1, 2037. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.95% per year, from and including September 1, 2022 to, but excluding September 1, 2032 or earlier redemption. From and including September 1, 2032 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 300 basis points. Interest on the subordinated notes is payable quarterly, commencing on December 1, 2022. The notes are redeemable, in whole or in part, at any time upon the occurrence of certain events. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 1, 2032, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

On August 18, 2022, the Company also completed a private offering of $45.0 million in aggregate principal amount of fixed-to-floating subordinated notes that mature on September 1, 2032. The subordinated notes, which qualify as Tier 2 capital for the Company, will bear interest at a fixed rate of 5.50% per year, from and including September 1, 2022 to, but excluding September 1, 2027 or earlier redemption. From and including September 1, 2027 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate, which is expected to be the then three-month Term SOFR, plus 279 basis points. Interest on the subordinated notes is payable semi-annually, commencing on March 1, 2023 through September 1, 2027 and quarterly thereafter. The notes are redeemable, in whole or in part, at any time upon the occurrence of certain events. The subordinated notes may be redeemed at the Company’s option, in whole or in part, on any interest payment date on or after September 1, 2027, at a redemption price equal to

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100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. The subordinated notes are subordinate in the right of payment to the Company’s senior indebtedness and the indebtedness and other liabilities of the subsidiary banks.

NOTE 7 – INCOME TAXES

A reconciliation of the expected federal income tax expense to the income tax expense included in the consolidated statements of income is as follows for the three and nine months ended September 30, 2022 and September 30, 2021:

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2022				2021				2022				2021
			% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)
Computed "expected" tax expense	$	7,165	21.0	%	$	8,293	21.0	%	$	16,130	21.0	%	$	18,512	21.0	%
Tax exempt income, net		(3,003)	(8.8)			(2,032)	(5.1)			(7,701)	(10.0)			(5,553)	(6.3)
Bank-owned life insurance		(127)	(0.4)			(93)	(0.2)			(273)	(0.4)			(287)	(0.3)
State income taxes, net of federal benefit, current year		1,616	4.7			1,799	4.6			3,889	5.1			4,070	4.6
Provision adjustment from accounting method change		—	—			—	—			(1,181)	(1.5)			—	—
Tax credits		(359)	(1.1)			(57)	(0.1)			(890)	(1.2)			(171)	(0.2)
Income from tax credit equity investments		(337)	(1.0)			(3)	—			(939)	(1.2)			(8)	—
Acquisition costs		78	0.2			—	—			450	0.6			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(46)	(0.1)			(107)	(0.3)			(520)	(0.7)			(311)	(0.4)
Other		(163)	(0.5)			129	0.2			(316)	(0.4)			6	—
Federal and state income tax expense	$	4,824	14.1	%	$	7,929	20.1	%	$	8,649	11.3	%	$	16,258	18.4	%

NOTE 8 - EARNINGS PER SHARE

The following information was used in the computation of EPS on a basic and diluted basis:

		Three months ended			Nine months ended
		September 30,			September 30,
		2022		2021		2022		2021
	(dollars in thousands, except share data)
Net income	$	29,294	$	31,565	$	68,160	$	71,896
Basic EPS	$	1.73	$	2.02	$	4.25	$	4.54
Diluted EPS	$	1.71	$	1.99	$	4.20	$	4.48
Weighted average common shares outstanding		16,900,968		15,635,123		16,030,371		15,829,124
Weighted average common shares issuable upon exercise of stock options
and under the employee stock purchase plan		209,723		234,675		213,550		229,296
Weighted average common and common equivalent shares outstanding		17,110,691		15,869,798		16,243,921		16,058,420

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NOTE 9 – FAIR VALUE

Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:

● Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

● Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

● Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Assets and liabilities measured at fair value on a recurring basis comprise the following at September 30, 2022 and December 31, 2021:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
	(dollars in thousands)
September 30, 2022:
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	20,527	$	—	$	20,527	$	—
Residential mortgage-backed and related securities		68,844		—		68,844		—
Municipal securities		185,343		—		185,343		—
Asset-backed securities		19,630		—		19,630		—
Other securities		45,393		—		45,393		—
Derivatives		185,037		—		185,037		—
Total assets measured at fair value	$	524,774	$	—	$	524,774	$	—
Derivatives	$	209,479	$	—	$	209,479	$	—
Total liabilities measured at fair value	$	209,479	$	—	$	209,479	$	—
December 31, 2021:
Securities AFS:
U.S. govt. sponsored agency securities	$	23,328	$	—	$	23,328	$	—
Residential mortgage-backed and related securities		94,323		—		94,323		—
Municipal securities		168,266		—		168,266		—
Asset-backed securities		27,124		—		27,124		—
Other securities		24,789		—		24,789		—
Derivatives		222,220		—		222,220		—
Total assets measured at fair value	$	560,050	$	—	$	560,050	$	—
Derivatives	$	225,135	$	—	$	225,135	$	—
Total liabilities measured at fair value	$	225,135	$	—	$	225,135	$	—

The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs).

Interest rate caps, swaps and collars are used for the purpose of hedging interest rate risk on various financial assets and liabilities, further described in Note 5 to the Consolidated Financial Statements. Interest rate swaps are also executed for select commercial customers.  The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs).

Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when a loan/lease is collaterally dependent).

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Assets measured at fair value on a non-recurring basis comprised the following at September 30, 2022 and December 31, 2021:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
September 30, 2022:
Loans/leases evaluated individually	$	29,665	$	—	$	—	$	29,665
OREO		191		—		—		191
	$	29,856	$	—	$	—	$	29,856
December 31, 2021:
Loans/leases evaluated individually	$	6,618	$	—	$	—	$	6,618

Loans/leases evaluated individually are valued at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level Fair Value Measurements
	Fair Value		Fair Value
	September 30,		December 31,
	2022		2021		Valuation Technique	Unobservable Input	Range
	(dollars in thousands)
Loans/leases evaluated individually	$	29,665	$	6,618	Appraisal of collateral	Appraisal adjustments	-10.00	%	to	-30.00	%
OREO		191		—	Appraisal of collateral	Appraisal adjustments	0.00	%	to	-35.00	%

For the loans/leases evaluated individually, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs.

There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the three months ended September 30, 2022 and 2021.

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The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

	Fair Value	As of September 30, 2022				As of December 31, 2021
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
		(dollars in thousands)
Cash and due from banks	Level 1	$	86,282	$	86,282	$	37,490	$	37,490
Federal funds sold	Level 2		28,210		28,210		12,370		12,370
Interest-bearing deposits at financial institutions	Level 2		42,833		42,833		75,292		75,292
Investment securities:
HTM	Level 2		539,713		511,447		472,385		522,297
AFS	Level 2		339,737		339,737		337,830		337,830
Loans/leases receivable, net	Level 3		27,468		29,665		6,128		6,618
Loans/leases receivable, net	Level 2		5,890,653		5,838,442		4,595,283		4,478,899
Derivatives	Level 2		185,037		185,037		222,220		222,220
Deposits:
Nonmaturity deposits	Level 2		5,247,595		5,247,595		4,501,424		4,501,424
Time deposits	Level 2		693,440		674,507		421,348		419,453
Short-term borrowings	Level 2		85,180		85,180		3,800		3,800
FHLB advances	Level 2		335,000		334,732		15,000		15,000
Subordinated notes	Level 2		232,743		251,677		113,850		116,203
Junior subordinated debentures	Level 2		48,568		42,094		38,155		31,072
Derivatives	Level 2		209,479		209,479		225,135		225,135

NOTE 10 – BUSINESS SEGMENT INFORMATION

Selected financial and descriptive information is required to be disclosed for reportable operating segments, applying a “management perspective” as the basis for identifying reportable segments. The management perspective is determined by the view that management takes of the segments within the Company when making operating decisions, allocating resources, and measuring performance. The segments of the Company have been defined by the structure of the Company's internal organization, focusing on the financial information that the Company's operating decision-makers routinely use to make decisions about operating matters.

The Company’s Commercial Banking business is geographically divided by markets into the operating segments which are the four subsidiary banks wholly owned by the Company:  QCBT, CRBT, CSB, and GB. Each of these operating segments offers similar products and services, but is managed separately due to different pricing, product demand, and consumer markets. Each offers commercial, consumer, and mortgage loans and deposit services.

The Company's All Other segment includes the corporate operations of the parent and operations of all other consolidated subsidiaries and/or defined operating segments that fall below the segment reporting thresholds.  

35

Selected financial information on the Company's business segments is presented as follows as of and for the three and nine months ended September 30, 2022 and 2021:

	Commercial Banking										Intercompany		Consolidated
	QCBT		CRBT		CSB		GB*		All other		Eliminations		Total
	(dollars in thousands)
Three Months Ended September 30, 2022
Total revenue	$	26,583	$	34,157	$	14,127	$	25,523	$	36,283	$	(36,311)	$	100,362
Net interest income		18,117		17,160		10,183		18,196		(3,242)		355		60,769
Provision for credit losses		554		(35)		(269)		(250)		—		—		—
Net income (loss) from continuing operations		7,758		14,475		4,106		9,196		29,542		(35,783)		29,294
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,344		2,184		14,018		—		—		17,546
Total assets		2,218,166		2,108,614		1,270,426		2,107,407		1,045,774		(1,020,338)		7,730,049
Three Months Ended September 30, 2021
Total revenue	$	22,630	$	41,415	$	11,445	$	10,886	$	36,749	$	(36,806)	$	86,319
Net interest income		16,862		14,784		9,303		7,058		(2,121)		343		46,229
Provision for loan/lease losses		247		(733)		596		(110)		—		—		—
Net income (loss) from continuing operations		8,704		19,730		3,243		4,590		31,740		(36,442)		31,565
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,824		2,816		5,217		—		—		9,857
Total assets		2,106,631		2,019,018		1,140,933		880,143		828,808		(961,025)		6,014,508
Nine Months Ended September 30, 2022
Total revenue	$	72,785	$	91,083	$	37,534	$	57,036	$	91,989	$	(92,383)	$	258,044
Net interest income		53,971		46,576		29,365		42,789		(7,845)		1,046		165,902
Provision for loan/lease losses		(88)		(971)		(554)		9,897		—		—		8,284
Net income (loss) from continuing operations		26,153		38,860		11,606		13,327		68,982		(90,768)		68,160
Goodwill		3,223		14,980		9,888		109,516		—		—		137,607
Intangibles		—		1,344		2,184		14,018		—		—		17,546
Total assets		2,218,166		2,108,614		1,270,426		2,107,407		1,045,774		(1,020,338)		7,730,049
Nine Months Ended September 30, 2021
Total revenue	$	65,590	$	98,270	$	32,677	$	28,813	$	86,699	$	(86,477)	$	225,572
Net interest income		48,800		42,395		26,343		19,606		(6,342)		918		131,720
Provision for loan/lease losses		2,495		759		2,718		741		—		—		6,713
Net income (loss) from continuing operations		24,547		42,271		8,414		10,544		72,008		(85,888)		71,896
Goodwill		3,223		14,980		9,888		45,975		—		—		74,066
Intangibles		—		1,824		2,816		5,217		—		—		9,857
Total assets		2,106,631		2,019,018		1,140,933		880,143		828,808		(961,025)		6,014,508
* On April 1, 2022, the Company acquired GFED and merged its subsidiary bank, Guaranty Bank, into Springfield First Community Bank with the combined bank operating under the Guaranty Bank name.

NOTE 11 – REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the subsidiary banks' financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain OBS items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the subsidiary banks to maintain minimum amounts and ratios (set forth in the following table) of total common equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets, each as defined by regulation.  Management believes, as of September 30, 2022 and December 31, 2021, that the Company and the subsidiary banks met all capital adequacy requirements to which they are subject.

Under the regulatory framework for prompt corrective action, to be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage and common equity Tier 1 ratios as set forth in the following tables. The Company and the subsidiary banks’ actual capital amounts and ratios as of September 30, 2022 and

36

December 31, 2021 are presented in the following tables (dollars in thousands).  As of September 30, 2022 and December 31, 2021, each of the subsidiary banks met such capital requirements to be “well capitalized”.

										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
	( dollars in thousands)
As of September 30, 2022:
Company:
Total risk-based capital	$	1,031,057	14.38	%	$	573,558	>	8.00	%	$	752,795	>	10.50	%	$	716,948	>	10.00	%
Tier 1 risk-based capital		708,601	9.88			430,169	>	6.00			609,406	>	8.50			573,558	>	8.00
Tier 1 leverage		708,601	9.56			296,423	>	4.00			296,423	>	4.00			370,528	>	5.00
Common equity Tier 1		660,033	9.21			322,627	>	4.50			501,864	>	7.00			466,016	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	267,060	12.98	%	$	164,649	>	8.00	%	$	216,101	>	10.50	%	$	205,811	>	10.00	%
Tier 1 risk-based capital		241,281	11.72			123,486	>	6.00			174,939	>	8.50			164,649	>	8.00
Tier 1 leverage		241,281	10.96			88,058	>	4.00			88,058	>	4.00			110,072	>	5.00
Common equity Tier 1		241,281	11.72			92,615	>	4.50			144,068	>	7.00			133,777	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	292,124	14.80	%	$	157,855	>	8.00	%	$	207,185	>	10.50	%	$	197,319	>	10.00	%
Tier 1 risk-based capital		267,441	13.55			118,391	>	6.00			167,721	>	8.50			157,855	>	8.00
Tier 1 leverage		267,441	13.20			81,049	>	4.00			81,049	>	4.00			101,312	>	5.00
Common equity Tier 1		267,441	13.55			88,794	>	4.50			138,123	>	7.00			128,257	>	6.50
Community State Bank:
Total risk-based capital	$	137,056	11.69	%	$	93,787	>	8.00	%	$	123,096	>	10.50	%	$	117,234	>	10.00	%
Tier 1 risk-based capital		122,387	10.44			70,341	>	6.00			99,649	>	8.50			93,787	>	8.00
Tier 1 leverage		122,387	9.90			49,457	>	4.00			49,457	>	4.00			61,821	>	5.00
Common equity Tier 1		122,387	10.44			52,755	>	4.50			82,064	>	7.00			76,202	>	6.50
Guaranty Bank:
Total risk-based capital	$	231,638	11.84	%	$	156,513	>	8.00	%	$	205,423	>	10.50	%	$	195,641	>	10.00	%
Tier 1 risk-based capital		207,174	10.59			117,385	>	6.00			166,295	>	8.50			156,513	>	8.00
Tier 1 leverage		207,174	10.56			78,491	>	4.00			78,491	>	4.00			98,113	>	5.00
Common equity Tier 1		207,174	10.59			88,039	>	4.50			136,949	>	7.00			127,167	>	6.50

										For Capital					To Be Well
										Adequacy Purposes					Capitalized Under
					For Capital					With Capital					Prompt Corrective
	Actual				Adequacy Purposes					Conservation Buffer					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount			Ratio
	( dollars in thousands)
As of December 31, 2021:
Company:
Total risk-based capital	$	814,629	14.77	%	$	441,100	>	8.00	%	$	578,944	>	10.50	%	$	551,375	>	10.00	%
Tier 1 risk-based capital		631,649	11.46			330,825	>	6.00			468,669	>	8.50			441,100	>	8.00
Tier 1 leverage		631,649	10.46			241,579	>	4.00			241,579	>	4.00			301,974	>	5.00
Common equity Tier 1		593,494	10.76			248,119	>	4.50			385,962	>	7.00			358,394	>	6.50
Quad City Bank & Trust:
Total risk-based capital	$	247,658	13.29	%	$	149,126	>	8.00	%	$	195,727	>	10.50	%	$	186,407	>	10.00	%
Tier 1 risk-based capital		224,253	12.03			111,844	>	6.00			158,446	>	8.50			149,126	>	8.00
Tier 1 leverage		224,253	10.45			85,873	>	4.00			85,873	>	4.00			107,341	>	5.00
Common equity Tier 1		224,253	12.03			83,883	>	4.50			130,485	>	7.00			121,164	>	6.50
Cedar Rapids Bank & Trust:
Total risk-based capital	$	277,673	14.85	%	$	149,595	>	8.00	%	$	196,343	>	10.50	%	$	186,993	>	10.00	%
Tier 1 risk-based capital		254,279	13.60			112,196	>	6.00			158,944	>	8.50			149,595	>	8.00
Tier 1 leverage		254,279	12.59			80,777	>	4.00			80,777	>	4.00			100,971	>	5.00
Common equity Tier 1		254,279	13.60			84,147	>	4.50			130,895	>	7.00			121,546	>	6.50
Community State Bank:
Total risk-based capital	$	123,365	11.95	%	$	82,601	>	8.00	%	$	108,413	>	10.50	%	$	103,251	>	10.00	%
Tier 1 risk-based capital		110,410	10.69			61,951	>	6.00			87,763	>	8.50			82,601	>	8.00
Tier 1 leverage		110,410	9.67			45,676	>	4.00			45,676	>	4.00			57,095	>	5.00
Common equity Tier 1		110,410	10.69			46,463	>	4.50			72,276	>	7.00			67,113	>	6.50
Guaranty Bank:
Total risk-based capital	$	101,067	13.39	%	$	60,369	>	8.00	%	$	79,235	>	10.50	%	$	75,462	>	10.00	%
Tier 1 risk-based capital		91,625	12.14			45,277	>	6.00			64,142	>	8.50			60,369	>	8.00
Tier 1 leverage		91,625	11.08			33,088	>	4.00			33,088	>	4.00			41,360	>	5.00
Common equity Tier 1		91,625	12.14			33,958	>	4.50			52,823	>	7.00			49,050	>	6.50

37

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This section reviews the financial condition and results of operations of the Company and its subsidiaries as of and for the three months ending September 30, 2022. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends. When reading this discussion, also refer to the Consolidated Financial Statements and related notes in this report. Page locations and specific sections and notes that are referred to in this discussion are listed in the table of contents.

Additionally, a comprehensive list of the acronyms and abbreviations used throughout this discussion is included in Note 1 to the Consolidated Financial Statements.

GENERAL

The Company was formed in February 1993 for the purpose of organizing QCBT.  Over the past twenty-nine years, the Company has grown to include four banking subsidiaries and a number of nonbanking subsidiaries.  As of September 30, 2022, the Company had $7.7 billion in consolidated assets, including $5.9 billion in net loans/leases, and $5.9 billion in  deposits.  The financial results of acquired/merged entities for the periods since their acquisition/merger are included in this report.  Further information related to acquired/merged entities has been presented in the annual reports previously filed with the SEC corresponding to the year of each acquisition/merger.  On April 1, 2022, the Company completed its acquisition of GFED and on April 2, 2022 merged Guaranty Bank, the banking subsidiary of GFED, into the Company’s Springfield-based charter, Springfield First Community Bank.  The combined bank changed its name to Guaranty Bank.

CRITICAL ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance, impairment of goodwill and the fair value of financial instruments.

Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the following as critical accounting policies and estimates:

GOODWILL

The Company records all assets and liabilities purchased in an acquisition, including intangibles, at fair value.  Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment.  In certain situations, interim impairment tests may be required if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A more detailed discussion of this critical accounting policy can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

As of November 30, 2021 the Company’s management performed an annual assessment at the reporting unit level and determined no goodwill impairment existed.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES AND OFF-BALANCE SHEET EXPOSURES

On January 1, 2021, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic326),” which replaces the incurred loss methodology with a current expected credit loss methodology, known as CECL. Additionally, CECL required an allowance for OBS exposures to be calculated using a current expected credit loss methodology. A more detailed discussion of this critical accounting policy can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.  A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities.  A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

FAIR VALUE OF SECURITIES

The fair value of securities is determined monthly and the securities are stated at fair value.  A more detailed discussion of this critical accounting estimate can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

EXECUTIVE OVERVIEW

The Company reported net income of $29.3 million and diluted EPS of $1.71 for the quarter ended September 30, 2022. By comparison, for the quarter ended June 30, 2022 the Company reported net income of $15.2 million and diluted EPS of $0.87.  For the quarter ended September 30, 2021, the Company reported net income of $31.6 million, and diluted EPS of $1.99.  For the nine months ended September 30, 2022, the Company reported net income of $68.2 million, and diluted EPS of $4.20.  By comparison, for the nine months ended September 30, 2021, the Company reported net income of $71.9 million and diluted EPS of $4.48.

The third quarter of 2022 was also highlighted by the following results and events:

● Reported net income of $29.3 million, or $1.71 per diluted share;

● Adjusted net income (non-GAAP) of $28.9 million, or $1.69 per diluted share;

● NIM of 3.46% and Adjusted NIM (TEY)(non-GAAP) of 3.65%;

● Annualized loan and lease growth of 14.5% for the quarter;

● Annualized deposit growth of 8.3% for the quarter;

● Nonperforming assets improved for the quarter and represented 0.23% of total assets;

● ACL to total loans/leases of 1.51%; and

● Increased total risk-based capital to 14.55% through the issuance of subordinated notes and strong earnings.

39

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Following is a table that represents various net income measurements for the Company.

	For the three months ended						For the nine months ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(dollars in thousands)
Net income	$	29,294	$	15,242	$	31,565	$	68,160	$	71,896
Diluted earnings per common share	$	1.71	$	0.87	$	1.99	$	4.20	$	4.48
Weighted average common and common equivalent shares outstanding		17,110,691		17,549,107		15,869,798		16,243,921		16,058,420

The Company reported adjusted net income (non-GAAP) of $28.9 million, with adjusted diluted EPS of $1.69 for the three months ended September 30, 2022.  See section titled “GAAP to Non-GAAP Reconciliations” for additional information.  Adjusted net income for the three months ended September 30, 2022 excludes a number of non-recurring items, after-tax, as set forth in the GAAP to Non-GAAP Reconciliation section, most significantly $321 thousand of acquisition cost. In addition, adjusted net income excludes fair value gain on derivatives of $714 thousand.  The Company reported adjusted net income (non-GAAP) of $83.7 million, with adjusted diluted EPS of $5.15 for the nine months ended September 30, 2022.  Adjusted net income for the nine months ended September 30, 2022 excludes a number of non-recurring items, after-tax, most significantly $3.7 million of acquisition costs, $3.8 million of post-acquisition compensation, transition and integration costs and $9.8 million of CECL Day 2 provision.

The increase in weighted average common shares outstanding when comparing the nine months ended September 30, 2022 to September 30, 2021 was primarily due to the common stock issuance in connection with the acquisition of GFED and discussed in Note 2 to the Consolidated Financial Statements.

Following is a table that represents the major income and expense categories for the Company:

	For the three months ended						For the nine months ended
	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(dollars in thousands)
Net interest income	$	60,769	$	59,400	$	46,229	$	165,902	$	131,720
Provision for credit losses		—		11,200		—		8,284		6,713
Noninterest income		21,095		22,782		34,652		59,510		77,437
Noninterest expense		47,746		54,248		41,387		140,319		114,290
Federal and state income tax expense		4,824		1,492		7,929		8,649		16,258
Net income	$	29,294	$	15,242	$	31,565	$	68,160	$	71,896

Following are some noteworthy changes in the Company's financial results:

● Net interest income in the third quarter of 2022 increased 2% compared to the second quarter of 2022.  Net interest income increased 31% when comparing to the third quarter of 2021 and 26% when comparing the first nine months of 2022 to the same period of the prior year. The increase was due to an increase in average earning assets, primarily attributable to the GFED transaction, but also due to increased NIM expansion.

● Provision expense in the third quarter of 2022 decreased $11.2 million compared to the second quarter of 2022. The decrease was due to a CECL Day 2 provision for credit losses on acquired loans with the GFED transaction recorded in the second quarter.  Provision expense increased $1.6 million when comparing the first nine months of 2022 to the same period in the prior year. The increase was primarily due to the GFED acquisition.  

40

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

● Noninterest income in the third quarter of 2022 decreased $1.7 million, or 7%, compared to the second quarter of 2022. Noninterest income decreased $13.6 million, or 39%, compared to the third quarter of 2021.  Noninterest income decreased $17.9 million, or 23%, when comparing the first nine months of 2022 to the same period of the prior year. The decrease was primarily due to lower capital markets revenue from swap fee income due to client project delays caused by ongoing supply chain disruptions and inflationary pressures.

● Noninterest expense decreased $6.5 million, or 12%, in the third quarter of 2022 compared to the second quarter of 2022. This decrease was primarily due to acquisition costs and post-acquisition compensation, transition and integration costs of $6.8 million in the second quarter related to the acquisition of GFED. Noninterest expense increased $6.4 million, or 15%, compared to the third quarter of 2021 and increased $26.0 million, or 23%, when comparing the first nine months of 2022 to the same period in the prior year.  The increase was primarily due to acquisition costs and post-acquisition compensation, transition and integration costs of $9.0 million associated with the acquisition of GFED as well as six months of operating expenses in 2022 for the combined Guaranty Bank entity as compared to 2021.  See Note 2 of the Consolidated Financial Statements for further discussion.

STRATEGIC FINANCIAL METRICS

The Company has established certain strategic financial metrics by which it manages its business and measures its performance. The goals are periodically updated to reflect changes in business developments. While the Company is determined to work prudently to achieve these metrics, there is no assurance that they will be met. Moreover, the Company's ability to achieve these metrics may be affected by the factors discussed under “Forward Looking Statements” as well as the factors detailed in the “Risk Factors” section included under Item 1A. of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The Company's long-term strategic financial metrics are as follows:

● Generate loan and lease growth of 9% per year, funded by core deposits;

● Grow fee-based income by at least 6% per year; and

● Limit our annual operating expense growth to 5% per year.

The following table shows the evaluation of the Company’s strategic financial metrics:

			Year to Date*
Strategic Financial Metric*	Key Metric	Target	September 30, 2022			June 30, 2022			September 30, 2021
Loan and lease growth organically **	Loans and leases growth	> 9% annually		15.7	%		14.0	%		18.0	%
Fee income growth***	Fee income growth	> 6% annually		(23.9)	%		(26.1)	%		(7.5)	%
Improve operational efficiencies and hold noninterest expense growth***	Noninterest expense growth	< 5% annually		15.1	%		10.4	%		3.3	%

* Ratios and amounts provided for these measurements represent year-to-date actual amounts for the respective period that are then annualized for comparison. The calculations provided exclude non-core noninterest income and noninterest expense.

** Loan and lease growth excludes the initial loan balances from the GFED acquisition and PPP loans.

***Fee income growth and noninterest expense growth are both impacted by the GFED acquisition.

It should be noted that these initiatives are long-term targets.  

41

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

STRATEGIC DEVELOPMENTS

The Company has taken the following actions during the third quarter of 2022 to support its corporate strategy:

● The Company grew loans and leases in the third quarter of 2022 by 14.5% on an annualized basis driven by both our specialty finance group and our traditional commercial lending and leasing businesses.

● Correspondent banking has continued to be a core line of business for the Company. The Company is competitively positioned with experienced staff, software systems and processes to continue growing in the four states currently served – Iowa, Wisconsin, Missouri and Illinois. The Company acted as the correspondent bank for 187 downstream banks with average total noninterest bearing deposits of $302.9 million and average total interest-bearing deposits of $313.8 million during the first nine months of 2022. By comparison, the Company acted as the correspondent bank for 186 downstream banks with average total noninterest bearing deposits of $350.0 million and average total interest-bearing deposits of $317.5 million during the first nine months of 2021. This line of business provides a strong source of noninterest bearing and interest bearing deposits, fee income, high-quality loan participations and bank stock loans.  The Company also manages off-balance sheet liquidity held at the Federal Reserve on behalf of the downstream banks of $426.7 million as of September 30, 2022 as compared to $793.2 million for the quarter ended June 30, 2022.

● The Company is focused on executing interest rate swaps on select commercial loans, including LIHTC permanent loans. The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent on the pricing. Management believes that these swaps help position the Company more favorably for rising rate environments.  The Company will continue to review opportunities to execute these swaps at all of its subsidiary banks as appropriate for the borrowers and the Company. Levels of capital markets revenue from swap fee income are influenced by prevailing interest rates.  Capital markets revenue from swap fee income totaled $10.5 million for the quarter and $30.0 million for the first nine months of 2022.  Capital markets revenue from swap fees averaged $15.2 million per quarter for the year 2021 and $10.7 million for the last four quarters.

● In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $1.1 billion in the first nine months of 2022 due to market value fluctuations.  There were 268 new relationships added in the first nine months of 2022 totaling $341.4 million of new assets under management. Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the value of the investments within the fully-managed trusts. The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

● Noninterest expense for the first nine months of 2022 totaled $140.3 million as compared to $114.3 million in the first nine months of 2021. The increase was primarily due to $9.0 million of acquisition costs and post-acquisition compensation, transition and integration costs in 2022 related to the acquisition of GFED as discussed in the Company’s financial statements and the accompanying notes.  In addition, the increase is due to six months of operating expenses in 2022 for the combined Guaranty Bank entity as compared to 2021.

GAAP TO NON-GAAP RECONCILIATIONS

The following table presents certain non-GAAP financial measures related to the “TCE/TA ratio”, “adjusted net income”, “adjusted EPS”, “adjusted ROAA”, “NIM (TEY)”, “adjusted NIM”, “efficiency ratio” and “loan growth annualized

42

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

excluding acquired and PPP loans”. In compliance with applicable rules of the SEC, all non-GAAP measures are reconciled to the most directly comparable GAAP measure, as follows:

● TCE/TA ratio (non-GAAP) is reconciled to stockholders' equity and total assets;

● Adjusted net income, adjusted EPS and adjusted ROAA (all non-GAAP measures) are reconciled to net income;

● NIM (TEY) (non-GAAP), adjusted NIM (TEY) (non-GAAP) and adjusted NIM, excluding PPP income (TEY) (non-GAAP) are reconciled to NIM;

● Efficiency ratio (non-GAAP) is reconciled to noninterest expense, net interest income and noninterest income; and

● Loan growth annualized excluding acquired and PPP loans is reconciled to total loans and leases.

The TCE/TA non-GAAP ratio has been a focus for investors and management believes that this ratio may assist investors in analyzing the Company's capital position without regard to the effects of intangible assets.

The following tables also include several “adjusted” non-GAAP measurements of financial performance. The Company's management believes that these measures are important to investors as they exclude non-recurring income and expense items; therefore, they provide a better comparison for analysis and may provide a better indicator of future performance.

NIM (TEY) is a financial measure that the Company's management utilizes to take into account the tax benefit associated with certain tax-exempt loans and securities. It is standard industry practice to measure net interest margin using tax-equivalent measures. In addition, the Company calculates NIM without the impact of acquisition accounting net accretion (adjusted NIM), as accretion amounts can fluctuate widely, making comparisons difficult.

The efficiency ratio is a ratio that management utilizes to compare the Company to its peers. It is a standard ratio used to calculate overhead as a percentage of revenue in the banking industry and is widely utilized by investors.

Loan growth annualized, excluding acquired and PPP loans, is a ratio that management utilizes to compare the Company to its peers. The Company’s management believes this financial measure is important to investors as total loans and leases for the quarter ended September 30, 2022 were materially higher due to the addition of acquired loans and for the quarter ended September 30, 2021 were materially higher due to the addition of PPP loans.  By excluding the acquired loans and PPP loans, the investor is provided a better comparison to prior periods for analysis.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

	As of
GAAP TO NON-GAAP	September 30,			June 30,			September 30,
RECONCILIATIONS	2022			2022			2021
	(dollars in thousands, except per share data)
TCE/TA RATIO
Stockholders' equity (GAAP)	$	737,072		$	743,138		$	649,814
Less: Intangible assets		155,153			155,940			83,923
TCE (non-GAAP)	$	581,919		$	587,198		$	565,891
Total assets (GAAP)	$	7,730,049		$	7,392,941		$	6,014,508
Less: Intangible assets		155,153			155,940			83,923
TA (non-GAAP)	$	7,574,896		$	7,237,001		$	5,930,585
TCE/TA ratio (non-GAAP)		7.68	%		8.11	%		9.54	%

43

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the Quarter Ended									For the Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2022			2022			2021			2022			2021
	(dollars in thousands, except per share data)
ADJUSTED NET INCOME
Net income (GAAP)	$	29,294		$	15,242		$	31,565		$	68,160		$	71,896
Less non-core items (post-tax) (*):
Income:
Securities losses, net	$	—		$	—		$	—		$	—		$	(69)
Fair value gain (loss) on derivatives		714			342			(13)			1,771			58
Gain on sale of loan		—			—			28			—			28
Total non-core income (non-GAAP)	$	714		$	342		$	15		$	1,771		$	17
Expense:
Disposition costs	$	—		$	—		$	—		$	—		$	7
Acquisition costs		321			1,932			—			3,715			—
Post-acquisition compensation, transition and integration costs		48			3,789			—			3,837			—
CECL Day 2 credit loss expense on acquired loans		—			8,651			—			8,651			—
CECL Day 2 credit loss expense on acquired OBS exposure		—			1,140			—			1,140			—
Separation agreement		—			—			—			—			734
Total non-core expense (non-GAAP)	$	369		$	15,512		$	—		$	17,343		$	741
Adjusted net income (non-GAAP)	$	28,949		$	30,412		$	31,550		$	83,732		$	72,620
ADJUSTED EPS
Adjusted net income (non-GAAP) (from above)	$	28,949		$	30,412		$	31,550		$	83,732		$	72,620
Weighted average common shares outstanding		16,900,968			17,345,324			15,635,123			16,030,371			15,829,124
Weighted average common and common equivalent shares outstanding		17,110,691			17,549,107			15,869,798			16,243,921			16,058,420
Adjusted EPS (non-GAAP):
Basic	$	1.71		$	1.75		$	2.02		$	5.22		$	4.59
Diluted	$	1.69		$	1.73		$	1.99		$	5.15		$	4.52
ADJUSTED ROAA
Adjusted net income (non-GAAP) (from above)	$	28,949		$	30,412		$	31,550		$	83,732		$	72,620
Average Assets	$	7,652,463		$	7,324,470		$	5,960,336		$	7,005,988		$	5,789,753
Adjusted ROAA (non-GAAP)		1.51	%		1.66	%		2.12	%		1.59	%		1.67	%
ADJUSTED NIM (TEY)*
Net interest income (GAAP)	$	60,769		$	59,400		$	46,229		$	165,902		$	131,720
Plus: Tax equivalent adjustment		4,459			3,396			2,708			10,785			7,411
Net interest income - tax equivalent (non-GAAP)	$	65,228		$	62,796		$	48,937		$	176,687		$	139,131
Less: Acquisition accounting net accretion		1,080			1,695			456			2,893			1,251
Adjusted net interest income		64,148			61,101			48,481			173,794			137,880
Less: PPP income		—			125			1,910			125			5,831
Adjusted net interest income, excluding PPP income	$	64,148		$	60,976		$	46,571		$	173,669		$	132,049
Average earning assets	$	6,975,857		$	6,742,095		$	5,451,571		$	6,452,867		$	5,330,338
NIM (GAAP)		3.46	%		3.53	%		3.36	%		3.44	%		3.30	%
NIM (TEY) (non-GAAP)		3.71	%		3.74	%		3.56	%		3.66	%		3.49	%
Adjusted NIM (TEY) (non-GAAP)		3.65	%		3.64	%		3.53	%		3.60	%		3.46	%
Adjusted NIM, excluding PPP income (TEY) (non-GAAP)		3.65	%		3.63	%		3.39	%		3.60	%		3.31	%
EFFICIENCY RATIO
Noninterest expense (GAAP)	$	47,746		$	54,248		$	41,387		$	140,319		$	114,290
Net interest income (GAAP)	$	60,769		$	59,400		$	46,229		$	165,902		$	131,720
Noninterest income (GAAP)		21,095			22,782			34,652			59,510			77,437
Total income	$	81,864		$	82,182		$	80,881		$	225,412		$	209,157
Efficiency ratio (noninterest expense/total income) (non-GAAP)		58.32	%		66.01	%		51.17	%		62.25	%		54.64	%
LOAN GROWTH, EXCLUDING ACQUIRED AND PPP LOANS
Total loans and leases	$	6,008,610		$	5,797,903		$	4,599,730		$	6,008,610		$	4,599,730
Less: Acquired loans		—			807,599			—			—			—
Less: PPP loans		79			79			83,575			79			83,575
Total loans and leases, excluding acquired and PPP loans	$	6,008,531		$	4,821,528		$	4,516,155		$	6,008,531		$	4,516,155
Loan growth, excluding acquired and PPP loans		14.54	%		14.00	%		23.04	%		15.73	%		16.08	%

*     Nonrecurring items (after-tax) are calculated using an estimated effective tax rate of 21% with the exception of acquisition costs which have an estimated effective tax rate of 10.25%.

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Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NET INTEREST INCOME - (TAX EQUIVALENT BASIS)

Net interest income, on a tax equivalent basis, increased 33% to $65.2 million for the quarter ended September 30, 2022 compared to the same quarter of the prior year, and increased 27% to $176.7 million for the nine months ended September 30, 2022. Net interest income, on a GAAP basis, increased 31% for the quarter ended September 30, 2022 compared to the same quarter of the prior year, and increased 26% for the nine months ended September 30, 2022 compared to the same period of the prior year. Net interest income improved due to the GFED acquisition, but also due to increased average loan growth and NIM expansion with the rapidly rising interest rate environment.

A comparison of yields, spread and margin on a tax equivalent and GAAP basis is as follows:

	Tax Equivalent Basis						GAAP
	For the Quarter Ended						For the Quarter Ended
	September 30,		June 30,		September 30,		September 30,		June 30,		September 30,
	2022		2022		2021		2022		2022		2021
Average Yield on Interest-Earning Assets	4.76	%	4.26	%	3.96	%	4.55	%	4.05	%	3.79	%
Average Cost of Interest-Bearing Liabilities	1.43	%	0.74	%	0.58	%	1.45	%	0.74	%	0.59	%
Net Interest Spread	3.33	%	3.52	%	3.38	%	3.10	%	3.31	%	3.21	%
NIM (TEY) (Non-GAAP)	3.71	%	3.74	%	3.56	%	3.46	%	3.53	%	3.36	%
NIM Excluding Acquisition Accounting Net Accretion	3.65	%	3.64	%	3.53	%	3.47	%	3.50	%	3.38	%

	Tax Equivalent Basis						GAAP
	For the Nine Months Ended				For the Nine Months Endded
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Average Yield on Interest-Earning Assets	4.33	%	3.90	%	4.10	%		2.78	%
Average Cost of Interest-Bearing Liabilities	0.95	%	0.60	%	0.95	%		0.31	%
Net Interest Spread	3.38	%	3.30	%	3.16	%		2.47	%
NIM (TEY) (Non-GAAP)	3.66	%	3.49	%	3.44	%		3.30	%
NIM Excluding Acquisition Accounting Net Accretion	3.60	%	3.46	%	3.37	%		2.45	%

Acquisition accounting net accretion can fluctuate mostly depending on the payoff activity of the acquired loans.  In evaluating net interest income and NIM, it’s important to understand the impact of acquisition accounting net accretion when comparing periods. The above table reports NIM with and without the acquisition accounting net accretion to allow for more appropriate comparisons.  A comparison of acquisition accounting net accretion included in NIM is as follows:

	For the Quarter Ended						For the Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
	2022		2022		2021		2022		2021
	(dollars in thousands)						(dollars in thousands)
Acquisition Accounting Net Accretion in NIM	1,080	$	1,695	$	456	$	2,893	$	1,251

The Company’s management closely monitors and manages NIM.  From a profitability standpoint, an important challenge for the Company’s subsidiary banks and leasing company is focusing on quality growth in conjunction with the improvement of their NIMs.  Management continually addresses this issue with pricing and other balance sheet strategies which include better loan pricing, reducing reliance on very rate-sensitive funding, closely managing deposit rate changes and finding additional ways to manage cost of funds through derivatives.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

The Company's average balances, interest income/expense, and rates earned/paid on major balance sheet categories, as well as the components of change in net interest income, are presented in the following tables:

	For the Three Months Ended September 30,
	2022								2021
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	16,224		$	100		2.45	%	$	3,030		$	1		0.10	%
Interest-bearing deposits at financial institutions		54,799			380		2.76	%		99,024			39		0.16	%
Investment securities (1)		946,096			9,602		4.05	%		799,471			7,646		3.82	%
Restricted investment securities		42,638			673		6.18	%		20,910			262		4.97	%
Gross loans/leases receivable (1) (2) (3)		5,916,100			72,969		4.89	%		4,529,136			46,427		4.07	%
Total interest earning assets		6,975,857			83,724		4.76	%		5,451,571			54,375		3.96	%
Noninterest-earning assets:
Cash and due from banks		88,477								55,359
Premises and equipment		115,816								75,712
Less allowance		(92,164)								(78,884)
Other		474,477								456,578
Total assets	$	7,562,463							$	5,960,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits	$	3,862,556			10,889		1.12	%	$	3,041,941			2,183		0.28	%
Time deposits		593,490			1,681		1.12	%		461,210			1,090		0.94	%
Short-term borrowings		11,376			84		2.94	%		6,858			1		0.10	%
FHLB advances		418,239			2,584		2.42	%		54,293			41		0.30	%
Other borrowings		4,239			53		4.93	%		—			—		—	%
Subordinated notes		181,177			2,518		5.56	%		113,789			1,554		5.46	%
Junior subordinated debentures		48,551			689		5.56	%		38,084			569		5.84	%
Total interest-bearing liabilities		5,119,628			18,498		1.43	%		3,716,175			5,438		0.58	%
Noninterest-bearing demand deposits		1,435,152								1,276,725
Other noninterest-bearing liabilities		246,255								313,250
Total liabilities		6,801,035								5,306,150
Stockholders' equity		761,428								654,186
Total liabilities and stockholders' equity	$	7,562,463							$	5,960,336
Net interest income				$	65,226							$	48,937
Net interest spread							3.33	%							3.38	%
Net interest margin							3.46	%							3.36	%
Net interest margin (TEY)(Non-GAAP)							3.71	%							3.56	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.65	%							3.53	%
Adjusted net interest margin, excluding PPP income(TEY)(Non-GAAP)							3.65	%							3.39	%
Ratio of average interest-earning assets to average interest-bearing liabilities		136.26	%							146.70	%

(1) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate.

(2) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

(3) Non-accrual loans/leases are included in the average balance for gross loans/leases receivable in accordance with accounting and regulatory guidance.

46

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense

For the Three Months Ended September 30, 2022

	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2022 vs. 2021
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	99	$	84	$	15
Interest-bearing deposits at financial institutions		342		471		(129)
Investment securities (2)		1,956		483		1,473
Restricted investment securities		412		78		334
Gross loans/leases receivable (2) (3)		26,542		10,533		16,009
Total change in interest income		29,351		11,649		17,702
INTEREST EXPENSE
Interest-bearing deposits		8,706		7,988		718
Time deposits		591		237		354
Short-term borrowings		83		81		2
Federal Home Loan Bank advances		2,543		1,305		1,238
Other borrowings		53		—		53
Subordinated notes		964		29		935
Junior subordinated debentures		120		(164)		284
Total change in interest expense		13,060		9,476		3,584
Total change in net interest income	$	16,291	$	2,173	$	14,118

(1) The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

(2) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate.

(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

47

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

	For the Nine Months Ended September 30,
	2022								2021
				Interest		Average						Interest		Average
	Average			Earned		Yield or			Average			Earned		Yield or
	Balance			or Paid		Cost			Balance			or Paid		Cost
	(dollars in thousands)
ASSETS
Interest earning assets:
Federal funds sold	$	8,937		$	114		1.70	%	$	1,503		$	1		0.13	%
Interest-bearing deposits at financial institutions		63,740			584		1.23	%		101,225			110		0.15	%
Investment securities (1)		890,082			26,286		3.93	%		802,715			21,989		3.65	%
Restricted investment securities		34,071			1,439		5.57	%		19,540			718		4.85	%
Gross loans/leases receivable (1) (2) (3)		5,456,037			180,896		4.43	%		4,405,355			132,728		4.03	%
Total interest earning assets		6,452,867			209,319		4.33	%		5,330,338			155,546		3.90	%
Noninterest-earning assets:
Cash and due from banks		80,157								61,579
Premises and equipment, net		103,409								74,413
Less allowance for estimated losses on loans/leases		(84,360)								(81,941)
Other		453,915								405,364
Total assets	$	7,005,988							$	5,789,753
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits	$	3,629,735			17,704		0.65	%	$	3,000,766			6,219		0.28	%
Time deposits		508,067			3,527		0.93	%		449,996			3,716		1.10	%
Short-term borrowings		4,945			87		2.37	%		7,560			4		0.08	%
Federal Home Loan Bank advances		264,718			3,447		1.72	%		29,875			66		0.29	%
Other borrowings		1,429			53		4.90	%		—			—		—	%
Subordinated notes		143,104			5,888		5.49	%		115,927			4,718		5.43	%
Junior subordinated debentures		44,457			1,926		5.71	%		38,045			1,692		5.86	%
Total interest-bearing liabilities		4,596,455			32,632		0.95	%		3,642,169			16,415		0.60	%
Noninterest-bearing demand deposits		1,419,815								1,255,957
Other noninterest-bearing liabilities		244,849								264,044
Total liabilities		6,261,119								5,162,170
Stockholders' equity		744,869								627,583
Total liabilities and stockholders' equity	$	7,005,988							$	5,789,753
Net interest income				$	176,687							$	139,131
Net interest spread							3.38	%							3.30	%
Net interest margin							3.44	%							3.30	%
Net interest margin (TEY)(Non-GAAP)							3.66	%							3.49	%
Adjusted net interest margin (TEY)(Non-GAAP)							3.60	%							3.46	%
Adjusted net interest margin, excluding PPP income(TEY)(Non-GAAP)							3.60	%							3.31	%
Ratio of average interest earning assets to average interest-bearing liabilities		140.39	%							146.35	%

48

Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

Analysis of Changes of Interest Income/Interest Expense
For the nine months ended September 30, 2022
	Inc./(Dec.)		Components
	from		of Change (1)
	Prior Period (1)		Rate		Volume
	2022 vs. 2021
	(dollars in thousands)
INTEREST INCOME
Federal funds sold	$	113	$	80	$	33
Interest-bearing deposits at other financial institutions		474		557		(83)
Investment securities (2)		4,297		1,777		2,520
Restricted investment securities		721		120		601
Gross loans/leases receivable (2) (3)		48,168		14,155		34,013
Total change in interest income		53,773		16,689		37,084
INTEREST EXPENSE
Interest-bearing demand deposits		11,485		9,913		1,572
Time deposits		(189)		(799)		610
Short-term borrowings		83		86		(3)
Federal Home Loan Bank advances		3,381		1,303		2,078
Other borrowings		53		—		53
Subordinated notes		1,170		53		1,117
Junior subordinated debentures		234		(68)		302
Total change in interest expense		16,217		10,488		5,729
Total change in net interest income	$	37,556	$	6,201	$	31,355

(1) The column "Inc./(Dec.) from Prior Period" is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

(2) Interest earned and yields on nontaxable investment securities and nontaxable loans are determined on a tax equivalent basis using a 21% tax rate.

(3) Loan/lease fees are not material and are included in interest income from loans/leases receivable in accordance with accounting and regulatory guidance.

The Company’s operating results are also impacted by various sources of noninterest income, including trust department fees, investment advisory and management fees, deposit service fees, swap fee income, gains from the sales of residential real estate loans and government guaranteed loans, earnings on BOLI and other income.  Offsetting these items, the Company incurs noninterest expenses, which include salaries and employee benefits, occupancy and equipment expense, professional and data processing fees, FDIC and other insurance expense, loan/lease expense and other administrative expenses.

The Company’s operating results are also affected by economic and competitive conditions, particularly changes in interest rates, income tax rates, government policies and actions of regulatory authorities.

RESULTS OF OPERATIONS

INTEREST INCOME

Interest income (tax equivalent) increased 54%, comparing the third quarter of 2022 to the same period of 2021, and increased 35% when comparing the first nine months of 2022 to the same period of 2021. This was primarily due the GFED acquisition, but also due to an increase in the yield of average securities and average loans/leases as well as an increased volume of average loans/leases.

The Company intends to continue to grow quality loans and leases as well as its private placement tax-exempt securities portfolio to maximize yield while minimizing credit and interest rate risk.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

INTEREST EXPENSE

Interest expense (tax equivalent) for the third quarter of 2022 increased 240% from the third quarter of 2021, and increased 99% comparing the first nine months of 2022 to the same period of 2021.  The increase is primarily due to the GFED acquisition, however the Company has also grown organically at a significant pace over the past several years and core deposit growth has contributed to the majority of the growth.  The cost of funds on the Company’s average interest-bearing liabilities increased in conjunction with the rising rate environment. The Company’s cost of funds was 1.43% for the quarter ended September 30, 2022, which was up from 0.58% for the quarter ended September 30, 2021.   The Company’s cost of funds was 0.95% for the nine months ended September 30, 2022, which was up from 0.60% for the nine months ended September 30, 2021.

PROVISION FOR CREDIT LOSSES

The ACL is established through provision expense to provide an estimated ACL. The following table shows the components of the provision for credit losses for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
	(dollars in thousands)				(dollars in thousands)
Provision for credit losses - loans and leases	$	331	$	1,895	$	8,623	$	7,747
Provision for credit losses - off-balance sheet exposures		(331)		(1,895)		(339)		(1,025)
Provision for credit losses - held to maturity securities		—		—		—		(9)
Total provision for credit losses	$	—	$	—	$	8,284	$	6,713

The Company’s had no provision for credit losses for the third quarter of 2022 or for the third quarter of 2021.

The Company had total provision for credit losses of $8.3 million for the first nine months of 2022, which was up from $6.7 million in the first nine months of 2021. The increase in provision on loans and leases was driven by the CECL Day 2 credit loss expense of $11.0 million as a result of the GFED acquisition, offset by negative provision on the other charters. The provision related to OBS was a negative $339 thousand which included a $1.4 million provision related to the acquisition of GFED, compared to a negative $1.0 million for the nine months ended September 30, 2021.  The decrease was due to the decrease in the balance of those OBS exposures.

The ACL for loans and leases is established based on a number of factors, including the Company's historical loss experience, delinquencies and charge-off trends, economic and other forecasts, the local, state and national economies and risk associated with the loans/leases and securities in the portfolio as described in more detail in the “Critical Accounting Policies” section.

The Company had an ACL on loans/leases of 1.51% of total gross loans/leases at September 30, 2022, compared to 1.59% at June 30, 2022 and 1.75% at September 30, 2021.  Management evaluates the allowance needed on the acquired loans factoring in the remaining discount, which was $11.8 million and $1.7 million at September 30, 2022 and September 30, 2021, respectively.

Additional discussion of the Company's allowance can be found in the “Financial Condition” section of this Report.

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Part I

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

NONINTEREST INCOME

The following tables set forth the various categories of noninterest income for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended
	September 30,		September 30,
	2022		2021		$ Change		% Change
	(dollars in thousands)
Trust department fees	$	2,537	$	2,714	$	(177)	(6.5)	%
Investment advisory and management fees		921		1,054		(133)	(12.6)
Deposit service fees		2,214		1,588		626	39.4
Gains on sales of residential real estate loans, net		641		954		(313)	(32.8)
Gains on sales of government guaranteed portions of loans, net		50		—		50	100.0
Swap fee income/capital markets revenue		10,545		24,885		(14,340)	(57.6)
Earnings on bank-owned life insurance		605		446		159	35.7
Debit card fees		1,453		1,085		368	33.9
Correspondent banking fees		189		265		(76)	(28.7)
Loan related fee income		652		550		102	18.5
Fair value gain (loss) on derivatives		904		(17)		921	5,417.6
Other		384		1,128		(744)	(66.0)
Total noninterest income	$	21,095	$	34,652	$	(13,557)	(39.1)	%

	Nine Months Ended
	September 30,		September 30,
	2022		2021		$ Change		% Change
	(dollars in thousands)
Trust department fees	$	7,997	$	8,363	$	(366)	(4.4)	%
Investment advisory and management fees		2,940		3,033		(93)	(3.1)
Deposit service fees		5,992		4,488		1,504	33.5
Gains on sales of residential real estate loans, net		1,943		3,475		(1,532)	(44.1)
Gains on sales of government guaranteed portions of loans, net		69		—		69	100.0
Swap fee income/capital markets revenue		29,971		48,010		(18,039)	(37.6)
Securities gains (losses), net		—		(88)		88	(100.0)
Earnings on bank-owned life insurance		1,301		1,368		(67)	(4.9)
Debit card fees		3,959		3,144		815	25.9
Correspondent banking fees		710		848		(138)	(16.3)
Loan related fee income		1,814		1,732		82	4.7
Fair value gain (loss) on derivatives		2,242		73		2,169	2,971.2
Other		572		2,991		(2,419)	(80.9)
Total noninterest income	$	59,510	$	77,437	$	(17,927)	(23.2)	%

In recent years, the Company has been successful in expanding its wealth management client base. Trust department fees continue to be a significant contributor to noninterest income. Assets under management decreased by $208.8 million in the third quarter of 2022 and decreased by $716.4 million since September 30, 2021, due to market volatility.  Income is generated primarily from fees charged based on assets under administration for corporate and personal trusts and for custodial services. The majority of the trust department fees are determined based on the market value of the investments within the fully-managed trusts. Trust department fees decreased 7%, comparing the third quarter of 2022 to the same period of the prior year, and they decreased 4% when comparing the first nine months of 2022 to the first nine months of 2021.  The Company expects trust department fees to be negatively impacted during periods of significantly lower market valuations and positively impacted during periods of significantly higher market valuations.

Investment advisory and management fees decreased 13%, comparing the third quarter of 2022 to the same period of the prior year, and they decreased 3% when comparing the first nine months of 2022 to the first nine months of 2021. Similar

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

to trust department fees, investment advisory and management fees are largely determined based on the market value of the investments managed. As a result, fee income from this line of business fluctuates with market valuations.

Deposit service fees increased 39% comparing the third quarter of 2022 to the same period of the prior year, and increased 34% when comparing the first nine months of 2022 to the same period of the prior year. This increase was primarily due the GFED acquisition. The Company continues to emphasize shifting the mix of deposits from retail time deposits to non-maturity demand deposits across all its markets. With this continuing shift in mix, the Company has increased the number of demand deposit accounts, which tend to be lower in interest cost and higher in-service fees. The Company plans to continue this shift in mix and to further focus on growing deposit service fees.

Gains on sales of residential real estate loans, net, decreased 33% when comparing the third quarter of 2022 to the same period of the prior year, and decreased 44% when comparing the first nine months of 2022 to the same period of the prior year. The decrease was primarily due to decreased residential real estate purchase and the refinancing of residential real estate loans with higher interest rates in 2022.

The Company has grown its interest rate swap program significantly over the past several years.  The Company’s interest rate swap program consists of back-to-back interest rate swaps with two types of commercial borrowers: (1) traditional commercial loans of a certain minimum size and sophistication, and (2) LIHTC permanent loans.  Most of the growth has been in the latter category as the Company has grown relationships with strong LIHTC developers with many years of experience.  The LIHTC industry is strong and growing with an increased need for affordable housing.  The interest rate swaps allow commercial borrowers to pay a fixed interest rate while the Company receives a variable interest rate as well as an upfront nonrefundable fee dependent upon the pricing. Swap fee income/capital markets revenue totaled $10.5 million for the third quarter of 2022, compared to $24.9 million for the third quarter of 2021. Swap fee income/capital markets revenue totaled $30.0 million for the first nine months of 2022, compared to $48.0 million for the first nine months of 2021. Swap fee income relative to the increase in notional amount of the non-hedging interest rate swap contracts was 8.9% for the three months ended September 30, 2022, and 10.7% for the same period of the prior year.  Swap fee income relative to the increase in notional amount of the non-hedging interest rate swap contracts was 9.8% for the first nine months of 2022 as compared to 10.8% for the first nine months of 2021.  The decrease in the ratio was primarily due to the steepening of the yield curve. In the traditional commercial portfolio, the pricing is more competitive and the duration is shorter as compared to the LIHTC permanent loans.  The mix of loans with interest rate swaps continued to be heavily weighted towards LIHTC permanent loans.  Future levels of swap fee income are dependent upon the needs of our traditional commercial and LIHTC borrowers, and the size of the related nonrefundable swap fee may fluctuate depending on the interest rate environment.

There were no securities gains or losses for the three and nine months ended September 30, 2022.  There were no securities gains or losses for the three months ended September 30, 2021.  Securities losses totaled $88 thousand for the nine months ended September 30, 2021.  

Earnings on BOLI increased 36% comparing the third quarter of 2022 to the third quarter of 2021, and decreased 5% comparing the first nine months of 2022 to the first nine months of 2021. BOLI purchases totaled $10 million for the three and nine months ended September 30, 2022. There were no purchases of BOLI in 2021. Notably, a portion of the Company's BOLI is variable rate whereby returns are determined by the performance of the equity markets.  Management intends to continue to review its BOLI investments to be consistent with policy and regulatory limits in conjunction with the rest of its earning assets in an effort to maximize returns while minimizing risk.

Debit card fees are the interchange fees paid on certain debit card customer transactions. Debit card fees increased 34% comparing the third quarter of 2022 to the same period of the prior year, and increased 26% comparing the first nine months of 2022 to the same period of the prior year. The increase was primarily due to the GFED acquisition.  The fees can vary based on customer debit card usage, so fluctuations from period to period may occur. As an opportunity to maximize fees, the Company offers a deposit product with a higher interest rate that incentivizes debit card activity.

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Correspondent banking fees decreased 29% comparing the third quarter of 2022 to the same period of the prior year, and decreased 16% comparing the first nine months of 2022 to the first nine months of 2021. These fees are generally included in the earnings credit rates which incent the correspondent bank to maintain higher levels of noninterest bearing deposits to offset the correspondent banking fees.  Management will continue to evaluate earnings credit rates and the resulting impact on deposit balances and fees while balancing the ability to grow market share. Correspondent banking continues to be a core strategy for the Company, as this line of business provides a high level of deposits that can be used to fund loan growth as well as a steady source of fee income. The Company now serves approximately 187 banks in Iowa, Illinois, Missouri and Wisconsin.

Loan related fee income increased 19% comparing the third quarter of 2022 to the same period of the prior year, and increased 5% comparing the first nine months of 2022 to the first nine months of 2021.  The increase was primarily due to the increase in loan volume with the GFED acquisition.

Fair value gain (loss) on derivatives was $904 thousand in gains in the third quarter of 2022, as compared to $17 thousand in losses in the same period of the prior year.  Fair value gain on derivatives was $2.2 million for the nine months ended September 30, 2022 as compared to $73 thousand in the first nine months of 2021 due to the rapidly rising interest rate environment.  The Company uses interest rate swap, cap and collar instruments to manage interest rate risk related to the variability of interest payments due to changes in interest rates.  See Note 5 to the Consolidated Financial Statements for additional information.

Other noninterest income decreased 66% comparing the third quarter of 2022 to the third quarter of the prior year, and decreased 81% comparing the first nine months of 2022 to the first nine months of 2021.  The decrease was primarily due to lower equity investment income and lower gains on disposal of leased assets.

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NONINTEREST EXPENSE

The following tables set forth the various categories of noninterest expense for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended
	September 30,		September 30,
	2022		2021		$ Change		% Change
	(dollars in thousands)
Salaries and employee benefits	$	29,175	$	28,207	$	968	3.4	%
Occupancy and equipment expense		6,033		4,122		1,911	46.4
Professional and data processing fees		4,477		3,568		909	25.5
Acquisition costs		315		—		315	100.0
Post-acquisition compensation, transition and integration costs		62		—		62	100.0
FDIC insurance, other insurance and regulatory fees		1,497		1,108		389	35.1
Loan/lease expense		390		308		82	26.6
Net cost of (income from) and gains/losses on operations of other real estate		19		(1,346)		1,365	(101.4)
Advertising and marketing		1,437		1,095		342	31.2
Communication		639		457		182	39.8
Supplies		289		298		(9)	(3.0)
Bank service charges		568		525		43	8.2
Correspondent banking expense		218		201		17	8.5
Intangibles amortization		787		508		279	54.9
Payment card processing		477		346		131	37.9
Trust expense		227		188		39	20.7
Other		1,136		1,802		(666)	(37.0)
Total noninterest expense	$	47,746	$	41,387	$	6,359	15.4	%

	Nine Months Ended
	September 30,		September 30,
	2022		2021		$ Change		% Change
	(dollars in thousands)
Salaries and employee benefits	$	82,774	$	76,098	$	6,676	8.8	%
Occupancy and equipment expense		15,948		12,195		3,753	30.8
Professional and data processing fees		12,513		10,713		1,800	16.8
Acquisition costs		4,139		—		4,139	100.0
Post-acquisition compensation, transition and integration costs		4,858		—		4,858	100.0
Disposition costs		—		8		(8)	(100.0)
FDIC insurance, other insurance and regulatory fees		4,201		3,159		1,042	33.0
Loan/lease expense		1,418		1,065		353	33.1
Net cost of (income from) and gains/losses on operations of other real estate		77		(1,420)		1,497	(105.4)
Advertising and marketing		3,396		2,575		821	31.9
Communication		1,626		1,317		309	23.5
Supplies		772		779		(7)	(0.9)
Bank service charges		1,719		1,620		99	6.1
Correspondent banking expense		630		599		31	5.2
Intangibles amortization		2,067		1,524		543	35.6
Payment card processing		1,365		1,114		251	22.5
Trust expense		609		550		59	10.7
Other		2,207		2,394		(187)	(7.8)
Total noninterest expense	$	140,319	$	114,290	$	26,029	22.8	%

Management places a strong emphasis on overall cost containment and is committed to improving the Company's general efficiency. One-time charges relating to acquisitions and employment separation expenses impacted expense in 2022 and 2021.  

Salaries and employee benefits, which is the largest component of noninterest expense, increased from the third quarter of 2021 to the third quarter of 2022 by 3%, and increased from the first nine months of 2021 to the first nine months of 2022

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by 9%.  The increased expense was primarily related to the GFED acquisition, which resulted in an increase of 165 full-time equivalent employees.  

Occupancy and equipment expense increased 46% comparing the third quarter of 2022 to the same period of the prior year, and increased 31% comparing the first nine months of 2022 to the first nine months of 2021. The increase was due to higher depreciation expense and computer hardware expense related to the GFED acquisition.

Professional and data processing fees increased 26% comparing the third quarter of 2022 to the same period in 2021, and increased 17% comparing the first nine months of 2022 to the first nine months of 2021.  The increase was primarily due to the GFED acquisition. Generally, professional and data processing fees can fluctuate depending on certain one-time project costs.  Management will continue to focus on minimizing such one-time costs and driving recurring costs down through contract negotiation or managed reduction in activity where costs are determined on a usage basis.

Acquisition costs totaled $315 thousand in the third quarter of 2022 and $4.1 million in the first nine months of 2022.  There were no acquisition costs incurred in the three and nine months ending September 30, 2021.  The acquisition costs, which were primarily legal, accounting and other professional fees, relate to the acquisition of GFED as discussed in Note 2 of the consolidated financial statements.

Post-acquisition compensation, transition and integration costs totaled $62 thousand in the third quarter of 2022 and $4.9 million in the first nine months of 2022.  There were no post-acquisition compensation, transition and integration costs incurred in the three and nine months ending September 30, 2021.  These costs were comprised primarily of personnel costs, IT integration and data conversion costs related to the acquisition of GFED.

There were no disposition costs for the first nine months of 2022, compared with $8 thousand for the first nine months of 2021.   The disposition costs in 2021 were comprised primarily of legal, accounting and personnel costs related to the sale of the Bates Companies in the third quarter of 2020.  

FDIC insurance, other insurance and regulatory fee expense increased 35%, comparing the third quarter of 2022 to the third quarter of 2021, and increased 33% comparing the first nine months of 2022 to the first nine months of 2021.  The increase in expense was due to the GFED acquisition as well as an increase in the asset size of the Company in 2022, which increased the Company’s insurance rates and expenses.

Loan/lease expense increased 27% when comparing the third quarter of 2022 to the same quarter of 2021, and increased 33% comparing the first nine months of 2022 to the same period of the prior year. Generally, loan/lease expense has a direct relationship with the level of NPLs; however, it may deviate depending upon the individual NPLs.

Net cost of (income from) and gains/losses on operations of other real estate includes gains/losses on the sale of OREO, write-downs of OREO and all income/expenses associated with OREO. Net cost of and gains/losses on operations of other real estate totaled $19 thousand for the third quarter of 2022, compared to net income from and gains/losses on operations of other real estate of $1.3 million for the third quarter of 2021. Net cost of and gains/losses on operations of other real estate totaled $77 thousand for the first nine of 2022, compared to net income from and gains/losses on operations of other real estate of $1.4 million for the first nine months of 2021. The large gain on sale of OREO for the three and nine months ended September 30, 2021, was related to the sale of a large property.

Advertising and marketing expense increased 31% comparing the third quarter of 2022 to the third quarter of 2021, and increased 32% comparing the first nine months of 2022 to the first nine months of 2021. The increase in expense was primarily due to the return to more normal operations during the second half of 2021 and first nine months of 2022 in response to improvements in the general economic environment tied to COVID-19 as compared to the first nine months of 2021 as well as the GFED acquisition.

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Communication expense increased 40% comparing the third quarter of 2022 to the third quarter of 2021, and increased 24% comparing the first nine months of 2022 to the first nine months of 2021.  The increase is primarily due to the GFED acquisition.

Supplies expense decreased 3% comparing the third quarter of 2022 to the third quarter of 2021, and decreased 1% comparing the first nine months of 2022 to the first nine months of 2021.

Bank service charges, a large portion of which includes indirect costs incurred to provide services to QCBT's correspondent banking customer portfolio, increased 8% when comparing the third quarter of 2022 to the same quarter of 2021, and increased 6% when comparing the first nine months of 2022 to the same period of 2021.  As transaction volumes continue to increase and the number of correspondent banking clients increases, the associated expenses are expected to also increase.

Correspondent banking expense increased 9% when comparing the third quarter of 2022 to the third quarter of 2021, and increased 5% when comparing the first nine months of 2022 to the same period of the prior year.  These are direct costs incurred to provide services to QCBT's correspondent banking customer portfolio, including safekeeping and cash management services.

Intangibles amortization expense increased 55% when comparing the third quarter of 2022 to the same quarter of 2021, and increased 36% when comparing the first nine months of 2022 to the same period of the prior year. The increase is due to the GFED acquisition.  These expenses will naturally decrease as intangibles become fully amortized unless there is an addition to intangible assets.

Payment card processing expense increased 38% when comparing the third quarter of 2022 to the same quarter of 2021 and increased 23% when comparing the first nine months of 2022 to the same period of the prior year.  The increase is due to the GFED acquisition.

Trust expense increased 21% when comparing the third quarter of 2022 to the same quarter of 2021, and increased 11% when comparing the first nine months of 2022 to the same period of the prior year. The increase was due to new relationships added in the first nine months of 2022 totaling $341.4 million of new assets under management.

Other noninterest expense decreased 37% when comparing the third quarter of 2022 to the third quarter of 2021, and decreased 8% when comparing the first nine months of 2022 to the same period of the prior year, primarily due to losses on disposal of fixed assets no longer in service.  Also included in other noninterest expense are other items such as subscriptions, sales and use tax and expenses related to wealth management.

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INCOME TAXES

In the third quarter of 2022, the Company incurred income tax expense of $4.8 million. During the first nine months of the year, the Company incurred income tax expense of $8.6 million. Following is a reconciliation of the expected income tax expense to the income tax expense included in the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021.

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2022				2021				2022				2021
			% of				% of				% of				% of
			Pretax				Pretax				Pretax				Pretax
	Amount		Income		Amount		Income		Amount		Income		Amount		Income
	(dollars in thousands)
Computed "expected" tax expense	$	7,165	21.0	%	$	8,293	21.0	%	$	16,130	21.0	%	$	18,512	21.0	%
Tax exempt income, net		(3,003)	(8.8)			(2,032)	(5.1)			(7,701)	(10.0)			(5,553)	(6.3)
Bank-owned life insurance		(127)	(0.4)			(93)	(0.2)			(273)	(0.4)			(287)	(0.3)
State income taxes, net of federal benefit, current year		1,616	4.7			1,799	4.6			3,889	5.1			4,070	4.6
Provision adjustment from accounting method change		—	—			—	—			(1,181)	(1.5)			—	—
Tax credits		(359)	(1.1)			(57)	(0.1)			(890)	(1.2)			(171)	(0.2)
Income from tax credit equity investments		(337)	(1.0)			(3)	—			(939)	(1.2)			(8)	—
Acquisition costs		78	0.2			—	—			450	0.6			—	—
Excess tax benefit on stock options exercised and restricted stock awards vested		(46)	(0.1)			(107)	(0.3)			(520)	(0.7)			(311)	(0.4)
Other		(163)	(0.5)			129	0.2			(316)	(0.4)			6	—
Federal and state income tax expense	$	4,824	14.1	%	$	7,929	20.1	%	$	8,649	11.3	%	$	16,258	18.4	%

The effective tax rate for the quarter ended September 30, 2022 was 14.1%, which was a decrease from the effective tax rate of 20.1% for the quarter ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 11.3%, which was a decrease from the effective tax rate of 18.4% for the nine months ended September 30, 2021.  The decrease was primarily due to:

● Increased tax-exempt income from loans and investments;

● Provision adjustment of $1.5 million from an accounting method change; and

● Increased tax credits and income from LIHTC equity investments.

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FINANCIAL CONDITION

Following is a table that represents the major categories of the Company’s balance sheet.

	As of
	September 30, 2022				June 30, 2022				December 31, 2021				September 30, 2021
	(dollars in thousands)
	Amount		%		Amount		%		Amount		%		Amount		%
Cash, federal funds sold, and interest-bearing deposits	$	157,325	2	%	$	148,911	2	%	$	125,152	2	%	$	128,136	2	%
Securities		879,450	11	%		879,918	12	%		810,215	13	%		828,719	14	%
Net loans/leases		5,918,121	77	%		5,705,478	77	%		4,601,411	75	%		4,519,060	75	%
Derivatives		185,037	2	%		97,455	1	%		222,220	4	%		198,393	3	%
Other assets		590,116	8	%		561,179	8	%		337,134	6	%		340,200	6	%
Total assets	$	7,730,049	100	%	$	7,392,941	100	%	$	6,096,132	100	%	$	6,014,508	100	%
Total deposits	$	5,941,035	76	%	$	5,820,657	78	%	$	4,922,772	80	%	$	4,871,828	81	%
Total borrowings		701,491	9	%		583,166	8	%		170,805	3	%		183,514	3	%
Derivatives		209,479	3	%		113,305	2	%		225,135	4	%		201,450	3	%
Other liabilities		140,972	2	%		132,675	2	%		100,410	2	%		107,902	2	%
Total stockholders' equity		737,072	10	%		743,138	10	%		677,010	11	%		649,814	11	%
Total liabilities and stockholders' equity	$	7,730,049	100	%	$	7,392,941	100	%	$	6,096,132	100	%	$	6,014,508	100	%

During the third quarter of 2022, the Company's total assets increased $337.1 million, or 5%, from June 30, 2022, to a total of $7.7 billion. The Company’s net loans/leases increased $212.6 million in the third quarter of 2022. Total deposits increased $120.4 million in the third quarter of 2022. Borrowings increased $118.3 million in the third quarter of 2022.  

INVESTMENT SECURITIES

The composition of the Company’s securities portfolio is managed to meet liquidity needs while prioritizing the impact on interest rate risk, maximizing return and minimizing credit risk. Over the years, the Company has further diversified the portfolio by decreasing U.S government sponsored agency securities and increasing residential mortgage-backed and related securities and tax-exempt municipal securities. Of the latter, the majority are privately placed tax-exempt debt issuances by municipalities located in the Midwest (with some in or near the Company's existing markets) and require a thorough underwriting process before investment and are generated by our specialty finance group.

Following is a breakdown of the Company's securities portfolio by type, the percentage of unrealized gains (losses) to carrying value, net of allowance for credit losses, on the total portfolio, and the portfolio duration:

	As of
	September 30, 2022					June 30, 2022					December 31, 2021					September 30, 2021
	Amount			%		Amount			%		Amount			%		Amount			%
	(dollars in thousands)
U.S. treasuries and govt. sponsored agency securities	$	20,527		2	%	$	20,448		2	%	$	23,328		3	%	$	23,689		3	%
Municipal securities		724,006		83	%		710,440		82	%		639,601		79	%		649,312		78	%
Residential mortgage-backed and related securities		68,844		8	%		81,247		9	%		94,323		12	%		100,744		12	%
Asset-backed securities		19,630		2	%		19,956		2	%		27,124		3	%		30,607		4	%
Other securities		46,443		5	%		47,827		5	%		25,839		3	%		24,367		3	%
	$	879,450		100	%	$	879,918		100	%	$	810,215		100	%	$	828,719		100	%
Securities as a % of total assets		11.38	%				11.90	%				13.29	%				13.78	%
Net unrealized gains (losses) as a % of Amortized Cost		(10.27)	%				(6.12)	%				7.17	%				6.67	%
Duration (in years)		9.0					7.8					8.2					8.2
Quarterly yield on investment securities (tax equivalent)		4.05	%				3.91	%				3.66	%				3.82	%

Due to the sharp increase in intermediate and long-term interest rates during the nine months ended September 30, 2022, the valuation of the Company’s AFS portfolio declined significantly. As a result, the Company’s net unrealized gain as

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a percentage of amortized cost changed from 7.17% as of December 31, 2021 to a net unrealized loss as a percentage of amortized cost of -10.27% as of September 30, 2022.

The Company has not invested in non-agency commercial or residential mortgage-backed securities or pooled trust preferred securities.

See Note 3 to the Consolidated Financial Statements for additional information regarding the Company's investment securities.

LOANS/LEASES

Total loans/leases, excluding acquired and PPP loans (non-GAAP), grew 14.5% on an annualized basis during the first nine months of 2022.  The mix of the loan/lease types within the Company's loan/lease portfolio is presented in the following tables.

	As of
	September 30, 2022				June 30, 2022				December 31, 2021				September 30, 2021
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
C&I - revolving	$	332,996	5	%	$	322,258	5	%	$	248,483	5	%	$	175,155	4	%
C&I - other *		1,415,996	24	%		1,403,689	24			1,346,602	29			1,465,580	32
CRE - owner occupied		627,558	10	%		628,565	11			421,701	9			434,014	9
CRE - non-owner occupied		920,876	15	%		889,530	15			646,500	14			644,850	14
Construction and land development		1,149,503	19	%		1,080,372	19			918,571	20			852,418	19
Multi-family		933,118	16	%		860,742	15			600,412	12			529,727	11
Direct financing leases		33,503	1	%		40,050	1			45,191	1			50,237	1
1-4 family real estate		487,508	8	%		473,141	8			377,361	8			376,067	8
Consumer		107,552	2	%		99,556	2			75,311	2			71,682	2
Total loans/leases	$	6,008,610	100	%	$	5,797,903	100	%	$	4,680,132	100	%	$	4,599,730	100	%
Less allowance		(90,489)				(92,425)				(78,721)				(80,670)
Net loans/leases	$	5,918,121			$	5,705,478			$	4,601,411			$	4,519,060

As CRE loans have historically been the Company's largest portfolio segment, management places a strong emphasis on monitoring the composition of the Company's CRE loan portfolio. For example, management tracks the level of owner-occupied CRE loans relative to non-owner-occupied loans because owner-occupied loans are generally considered to have less risk. As of September 30, 2022 and June 30, 2022, approximately 17% and 18% of the CRE loan portfolio (as defined below) was owner-occupied, respectively.

Following is a listing of significant industries within the Company's CRE loan portfolio.  These include loans in the following portfolio segments as of September 30, 2022:  CRE owner occupied, CRE non-owner occupied, certain construction and land development, multifamily and certain 1-4 family real estate.

	As of September 30,				As of June 30,				As of December 31,				As of September 30,
	2022				2022				2021				2021
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Lessors of Residential Buildings	$	1,745,720	48	%	$	1,618,186	47	%	$	1,316,851	49	%	$	1,194,234	46	%
Lessors of Nonresidential Buildings		618,190	17	%		601,708	17	%		557,859	21	%		569,477	22	%
Hotels		121,310	3	%		124,503	4	%		73,639	3	%		75,212	3	%
Lessors of Other Real Estate Property		66,157	2	%		64,211	2	%		60,605	2	%		50,576	2	%
New Housing For-Sale Builders		64,895	2	%		60,826	2	%		61,028	2	%		56,936	2	%
Other *		994,844	28	%		972,870	28	%		611,291	23	%		611,863	25	%
Total CRE Loans	$	3,611,116	100	%	$	3,442,304	100	%	$	2,681,273	100	%	$	2,558,298	100	%

*     “Other” consists of all other industries. None of these had concentrations greater than $55.0 million, or approximately 1.5% of total CRE loans in the most recent period presented.

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The Company’s construction and land development loan portfolio includes the following:

	As of
	September 30, 2022				June 30, 2022				December 31, 2021				September 30, 2021
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
LIHTC	$	705,487	61	%	$	641,460	59	%	$	587,151	64	%	$	530,391	62	%
Construction (commercial)		264,280	24			256,622	24			274,385	30			266,385	31
Construction (residential)		108,906	9			107,798	10			15,244	2			14,354	2
Land development		70,830	6			74,492	7			41,791	5			41,288	5
Total construction and land development	$	1,149,503	100	%	$	1,080,372	100	%	$	918,571	100	%	$	852,418	100	%

The Company's 1-4 family real estate loan portfolio includes the following:

● Certain loans that do not meet the criteria for sale into the secondary market. These are often structured as adjustable rate mortgages with maturities ranging from three to seven years to avoid long-term interest rate risk.

● A limited amount of 15-year, 20-year and 30-year fixed rate residential real estate loans that meet certain credit guidelines.

The remaining 1-4 family real estate loans originated by the Company were sold on the secondary market to avoid the interest rate risk associated with longer term fixed rate loans. Loans originated for this purpose were classified as held for sale and are included in the residential real estate loans above. The Company has not originated any subprime, Alt-A, no documentation, or stated income residential real estate loans throughout its history.

Following is a listing of significant equipment types within the m2 loan and lease portfolio:

	As of September 30,				As of June 30,				As of December 31,				As of September 30,
	2022				2022				2021				2021
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Trucks, Vans and Vocational Vehicles	$	69,328	23	%	$	69,383	24	%	$	69,392	26	%	$	68,387	26	%
Freightliners		22,256	7	%		17,471	6	%		10,386	4	%		6,000	2	%
Trailers		22,074	7	%		19,723	7	%		12,832	5	%		11,308	4	%
Tractor		17,297	6	%		15,255	5	%		10,508	4	%		9,188	3	%
Manufacturing - General		17,079	6	%		17,524	6	%		17,320	6	%		18,274	7	%
Construction - General		15,845	5	%		14,279	5	%		13,560	5	%		12,482	5	%
Food Processing Equipment		14,566	5	%		13,946	5	%		14,907	6	%		14,717	6	%
Marine - Travelifts		13,930	5	%		14,825	5	%		14,498	5	%		14,629	6	%
Computer Hardware		8,945	3	%		9,682	3	%		11,223	4	%		11,781	4	%
Computer Equipment		7,874	3	%		8,179	3	%		2,062	1	%		2,330	1	%
Other *		91,560	30	%		93,168	31	%		93,586	34	%		93,866	36	%
Total m2 loans and leases	$	300,754	100	%	$	293,435	100	%	$	270,274	100	%	$	262,962	100	%

*     “Other” consists of all other equipment types. None of these had concentrations greater than 3% of total m2 loan and lease portfolio in the most recent period presented.

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company's loan and lease portfolio.

ALLOWANCE FOR CREDIT LOSSES ON LOANS/LEASES AND OFF-BALANCE SHEET EXPOSURES

The adequacy of the ACL was determined by management based on factors that included the overall composition of the loan/lease portfolio, types of loans/leases, historical loss experience, loan/lease delinquencies, potential substandard and doubtful credits, economic conditions, collateral positions, government guarantees and other factors that, in management's judgment, deserved evaluation. To ensure that an adequate ACL was maintained, provisions were made based on a number of factors, including the increase in loans/leases and a detailed analysis of the loan/lease portfolio. The loan/lease portfolio is reviewed and analyzed quarterly with specific detailed reviews completed on all credits risk-rated less than “fair quality”, as described in Note 1 to the Consolidated Financial Statements contained in the Company's Annual Report  on Form 10-K for the year ended December 31, 2021, and carrying aggregate exposure in excess of $250 thousand. The

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adequacy of the allowance is monitored by the credit administration staff and reported to management and the board of directors.

Changes in the ACL for loans/leases for the three and nine months ended September 30, 2022 and 2021 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(dollars in thousands)				(dollars in thousands)
Balance, beginning	$	92,425	$	78,894	$	78,721	$	84,376
Impact of adopting ASU 2016-13		—		—		—		(8,102)
Initial ACL recorded for acquired PCD loans		—		—		5,902		—
Provision		331		1,895		8,623		7,747
Charge-offs		(2,489)		(287)		(3,565)		(4,674)
Recoveries		222		168		808		1,323
Balance, ending	$	90,489	$	80,670	$	90,489	$	80,670

Changes in the ACL for OBS exposures for the three and nine months ended September 30, 2022 and 2021 are presented as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
	(dollars in thousands)				(dollars in thousands)
Balance, beginning	$	6,878	$	9,987	$	6,886	$	—
Impact of adopting ASU 2016-13		—		—		—		9,117
Provisions (credited) to expense		(331)		(1,895)		(339)		(1,025)
Balance, ending	$	6,547	$	8,092	$	6,547	$	8,092

The Company recorded a $12.4 million provision for credit losses on loans and OBS exposures in the second quarter of 2022, for the CECL Day 2 provision as a result of the GFED acquisition.

The Company's levels of criticized and classified loans are reported in the following table.

	As of
Internally Assigned Risk Rating *	September 30, 2022			June 30, 2022			December 31, 2021			September 30, 2021
	(dollars in thousands)
Special Mention (Rating 6)	$	63,973		$	54,558		$	62,510		$	58,634
Substandard (Rating 7)		77,317			83,048			53,296			59,402
Doubtful (Rating 8)		—			—			—			—
	$	141,290		$	137,606		$	115,806		$	118,036
Criticized Loans **	$	141,290		$	137,606		$	115,806		$	118,036
Classified Loans ***	$	77,317		$	83,048		$	53,296		$	59,402
Criticized Loans as a % of Total Loans/Leases		2.35	%		2.37	%		2.47	%		2.57	%
Classified Loans as a % of Total Loans/Leases		1.29	%		1.43	%		1.14	%		1.29	%

*      Amounts above include the government guaranteed portion, if any. For the calculation of ACL, the Company assigns internal risk ratings of Pass (Rating 2) for the government guaranteed portion.

**    Criticized loans are defined as non-homogeneous loans with internally assigned risk ratings of 6, 7, or 8, regardless of performance.

***  Classified loans are defined as non-homogeneous loans with internally assigned risk ratings of 7 or 8, regardless of performance.

Criticized loans increased 3% and classified loans decreased 7% from June 30, 2022 to September 30, 2022. The Company continues its strong focus on improving credit quality in an effort to limit NPLs.

	As of
	September 30, 2022		June 30, 2022		December 31, 2021		September 30, 2021
ACL on loans/leases / Gross loans/leases	1.51	%	1.59	%	1.68	%	1.75	%
ACL on loans/leases / NPLs	516.67	%	387.66	%	2,825.21	%	1,180.77	%

Although management believes that the ACL at September 30, 2022 was at a level adequate to absorb losses on existing loans/leases, there can be no assurance that such losses will not exceed the estimated amounts or that the Company will

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not be required to make additional provisions in the future. Unpredictable future events could adversely affect cash flows for both commercial and individual borrowers, which could cause the Company to experience increases in problem assets, delinquencies and losses on loans/leases, and require further increases in the provision for credit losses.  Asset quality is a priority for the Company and its subsidiaries. The ability to grow profitably is in part dependent upon the ability to maintain that quality. The Company continually focuses efforts at its subsidiary banks and leasing company with the intention to improve the overall quality of the Company's loan/lease portfolio.

See Note 4 to the Consolidated Financial Statements for additional information regarding the Company's ACL.

NONPERFORMING ASSETS

The table below presents the amount of NPAs and related ratios.

	As of September 30,			As of June 30,			As of December 31,			As of September 30,
	2022			2022			2021			2021
	(dollars in thousands)
Nonaccrual loans/leases (1)	$	17,511		$	23,574		$	2,759		$	6,818
Accruing loans/leases past due 90 days or more		3			268			1			14
Total NPLs		17,514			23,842			2,760			6,832
Other repossessed assets		340			—			—			—
OREO		177			205			—			—
Total NPAs	$	18,031		$	24,047		$	2,760		$	6,832
NPLs to total loans/leases		0.29	%		0.41	%		0.06	%		0.15	%
NPAs to total loans/leases plus repossessed property		0.30	%		0.41	%		0.06	%		0.15	%
NPAs to total assets		0.23	%		0.33	%		0.05	%		0.11	%
Nonaccrual loans/leases to total loans/leases		0.29	%		0.41	%		0.06	%		0.15	%
ACL to nonaccrual loans		516.76	%		392.06	%		2,853.24	%		1,183.19	%

(1) Includes government guaranteed portion of loans, as applicable.

NPAs at September 30, 2022 were $18.0 million, down $6.0 million from June 30, 2022, and up $11.2 million from September 30, 2021.  The decrease in the third quarter 2022 was primarily the result of paydowns on several NPAs that were added during the second quarter of 2022.  The increase from the prior year was primarily the result of the GFED acquisition and two specific legacy relationships from the Company’s other charters. The ratio of NPAs to total assets was 0.23% at September 30, 2022, down from 0.33% at June 30, 2022, and up from 0.11% at September 30, 2021.

The majority of the NPAs consist of nonaccrual loans/leases. For nonaccrual loans/leases, management has thoroughly reviewed these loans/leases and has provided specific allowances as appropriate.

OREO is carried at the lower of carrying amount or fair value less costs to sell.

The Company's lending/leasing practices remain unchanged and asset quality remains a priority for management.

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DEPOSITS

Deposits increased $120.4 million during the third quarter of 2022.

The table below presents the composition of the Company's deposit portfolio.

	As of
	September 30, 2022				June 30, 2022				December 31, 2021				September 30, 2021
	Amount		%		Amount		%		Amount		%		Amount		%
	(dollars in thousands)
Noninterest bearing demand deposits	$	1,315,555	22	%	$	1,514,005	26	%	$	1,268,788	26	%	$	1,342,273	28	%
Interest bearing demand deposits		3,904,303	66	%		3,758,566	66	%		3,232,633	65	%		3,086,711	63	%
Time deposits		672,133	11	%		540,074	8	%		421,348	9	%		441,743	9	%
Brokered deposits		49,044	1	%		8,012	0	%		3	0	%		1,101	0	%
	$	5,941,035	100	%	$	5,820,657	100	%	$	4,922,772	100	%	$	4,871,828	100	%

The Company has been successful in growing its noninterest-bearing deposit portfolio over the past few years and growing average balances 12% in 2022.  Deposit balances can fluctuate due to large customer and correspondent bank activity.  During recent years, the Company had significant core deposit growth mostly from its correspondent banking clients.    As a result of strong core deposit growth, the Company reduced its reliance on higher cost CDs and brokered deposits.

The Company’s correspondent bank deposit portfolio and funds managed consists of the following:

● Noninterest-bearing deposits which represent correspondent banks’ operating cash used for processing transactions with the Federal Reserve,

● Money market deposits which represents excess liquidity, and

● EBA balances of the correspondent banks at the FRB.

Generally, the Company can modify the structure and interest rates paid for those correspondent bank deposits on the balance sheet for both the noninterest-bearing deposits and the money market deposits.  During the pandemic, this led to more of the correspondent bank portfolio excess liquidity to shift to their EBAs at the FRB which is managed by the Company, but is not on the Company’s balance sheet.  During the third quarter, the total liquidity of the correspondent bank portfolio returned to more normalized levels leading to the Company adding some of the EBA deposits onto our balance sheet. On average, over the past two years, the correspondent banks’ EBA portfolio ranged from $1.3 billion to $2.0 billion.  At the end of the third quarter, the total deposit portfolio was approximately $900 million which aligns more closely with pre-pandemic levels.

Management will continue to focus on growing its core deposit portfolio, including its correspondent banking business at QCBT, as well as shifting the mix from brokered and other higher cost deposits to lower cost core deposits. With the significant success achieved by QCBT in growing its correspondent banking business, QCBT has developed procedures to proactively monitor this industry concentration of deposits and loans. Other deposit-related industry concentrations and large accounts are monitored by the internal asset liability management committees.

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BORROWINGS

The subsidiary banks purchase federal funds for short-term funding needs from the FRB or from their correspondent banks. The table below presents the composition of the Company's short-term borrowings.

	As of
	September 30, 2022		June 30 2022		December 31, 2021		September 30, 2021
	(dollars in thousands)
Federal funds purchased	$	85,180	$	1,070	$	3,800	$	1,600

The Company's federal funds purchased fluctuate based on the short-term funding needs of the Company's subsidiary banks.  

As a result of their memberships in the FHLB of Des Moines, the subsidiary banks have the ability to borrow funds for short or long-term purposes under a variety of programs. The subsidiary banks can utilize FHLB advances for loan matching as a hedge against the possibility of changing interest rates and when these advances provide a less costly or more readily available source of funds than customer deposits.  

The table below presents the Company's overnight FHLB advances. The Company did not have any term FHLB advances for the dates in the table below.

	As of
	September 30, 2022		June 30, 2022		December 31, 2021		September 30, 2021
	(dollars in thousands)
Overnight FHLB advances	$	335,000	$	400,000	$	15,000	$	30,000

FHLB advances (all overnight) decreased $65.0 million in the current quarter compared to the prior quarter due to an increase in core deposits and borrowings from other upstream correspondents.

The Company renewed its revolving credit note in the second quarter of 2022.  At renewal, the line amount was increased from $25.0 million to $50.0 million.  Interest on the revolving line of credit was calculated at the greater of: (a) the effective Prime Rate less 0.50%  and (b) 3.00% per annum. The collateral on the revolving line of credit is 100% of the outstanding stock of the Company’s bank subsidiaries.  There was no outstanding balance on the revolving line of credit at September 30, 2022.

The Company had subordinated notes totaling $232.7 million as of September 30, 2022 and $133.6 million as of June 30, 2022.  The Company completed private placements of $100.0 million in aggregate principal amount of fixed-to-floating subordinated notes in the third quarter of 2022.  The Company acquired $19.6 million of subordinated notes during the second quarter of 2022 with the GFED acquisition.  See Note 6 of the Consolidated Financial Statements for additional information regarding the Company’s subordinated notes.

The Company acquired $10.3 million of junior subordinated debentures during the second quarter of 2022 with the GFED acquisition.

It is management's intention to reduce its reliance on wholesale funding, including FHLB advances and brokered deposits. Replacement of this funding with core deposits helps to reduce interest expense as wholesale funding tends to be higher cost. However, the Company may choose to utilize advances and/or brokered deposits to supplement funding needs, as this is a way for the Company to effectively and efficiently manage interest rate risk.

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The table below presents the maturity schedule including weighted average interest cost for the Company's combined wholesale funding portfolio (defined as FHLB advances and brokered deposits).

	September 30, 2022				December 31, 2021
			Weighted				Weighted
			Average				Average
Maturity:	Amount Due		Interest Rate		Amount Due		Interest Rate
	(dollars in thousands)
Year ending December 31:
2022	$	384,044	3.28	%	$	15,003	0.31	%
2023		—	—			—	—
2024		—	—			—	—
2025		—	—			—	—
Total Wholesale Funding	$	384,044	3.28	%	$	15,003	0.31	%

During the first nine months of 2022, wholesale funding, primarily overnight FHLB advances, increased $369.0 million due to strong loan growth.

STOCKHOLDERS' EQUITY

The table below presents the composition of the Company's stockholders' equity.

	As of
	September 30, 2022			June 30, 2022			December 31, 2021			September 30, 2021
	(dollars in thousands)
Common stock	$	16,885		$	17,064		$	15,613		$	15,590
Additional paid in capital		372,086			375,358			273,768			272,964
Retained earnings		422,958			400,790			386,077			360,003
AOCI		(74,857)			(50,074)			1,552			1,257
Total stockholders' equity	$	737,072		$	743,138		$	677,010		$	649,814
TCE / TA ratio (non-GAAP)		7.68	%		8.11	%		9.87	%		9.54	%

*     TCE/TA ratio is defined as total common stockholders' equity excluding goodwill and other intangibles divided by total assets. This ratio is a non-GAAP financial measure. See GAAP to Non-GAAP Reconciliations.

Due to the sharp increase in intermediate and long-term interest rates, the valuation of the Company’s AFS securities portfolio and certain hedged financial instruments declined significantly.  The valuation change, net of taxes, that flows through the Company’s AOCI was a net decline of $76.4 million for the first nine months of 2022.

On February 13, 2020, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 800,000 shares of its outstanding common stock, or approximately 5% of the outstanding shares as of December 31, 2019.  As of September 30, 2022, the Company had purchased 794,085 shares under the program and all shares purchased have been retired.

On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021.  As of September 30, 2022, the Company had purchased 470,000 shares under the program and all shares purchased have been retired.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide for customers' credit needs. The Company monitors liquidity risk through contingency planning stress testing on a regular basis. The Company seeks to avoid over-concentration of funding sources and to establish and maintain contingent funding facilities that can be drawn upon if normal funding sources become unavailable. One source of liquidity is cash and short-term assets, such as interest-bearing deposits in other banks and federal funds sold, which averaged $71.0. million during the third quarter of 2022 and $72.7. million during the first nine months of 2022. The Company's on balance sheet liquidity position can fluctuate based on short-term activity in deposits and loans.

The subsidiary banks have a variety of sources of short-term liquidity available to them, including federal funds purchased from correspondent banks, FHLB advances, wholesale structured repurchase agreements, brokered deposits, lines of credit, borrowing at the Federal Reserve Discount Window, sales of securities AFS, and loan/lease participations or sales. The Company also generates liquidity from the regular principal payments and prepayments made on its loan/lease portfolio, and on the regular monthly payments on its securities portfolio.

At September 30, 2022, the subsidiary banks had 28 lines of credit totaling $498.6 million, of which $27.8 million was secured and $470.8 million was uninsured. At September 30, 2022, the Company had $413.6 million of the $498.6 million available.

At December 31, 2021, the subsidiary banks had 31 lines of credit totaling $517.7 million, of which $61.7 million was secured and $456.0 million was unsecured. At December 31, 2021, the full $517.7 million was available.

The Company has emphasized growing the number and amount of lines of credit in an effort to strengthen this contingent source of liquidity. Additionally, the Company maintains a $50.0 million secured revolving credit note with a variable interest rate and a maturity of June 30, 2023. At September 30, 2022, the full $50.0 million was available.

As of September 30, 2022, the Company had $616.7 million in average correspondent banking deposits spread over 187 relationships. While the Company believes that these funds are relatively stable, there is the potential for large fluctuations that can impact liquidity. Seasonality and the liquidity needs of these correspondent banks can impact balances. Management closely monitors these fluctuations and runs stress scenarios to measure the impact on liquidity and interest rate risk with various levels of correspondent deposit run-off.

Investing activities used cash of $404.4. million during the first nine months of 2022, compared to $330.5 million for the same period of 2021. The net decrease in interest-bearing deposits at financial institutions was $49.6 million for the first nine months of 2022, compared to a net decrease of $22.8 million for the same period of 2021. Proceeds from calls, maturities, and paydowns of securities were $57.9 million for the first nine months of 2022, compared to $131.1 million for the same period of 2021. Purchases of securities used cash of $173.3 million for the first nine months of 2022, compared to $151.7 million for the same period of 2021. Proceeds from sales of securities were $111.4 million for the first nine months of 2022, compared to $23.8 million for the first nine months of 2021.  The net increase in loans/leases used cash of $524.9 million for the first nine months of 2022 compared to $353.6 million for the same period of 2021.

Financing activities provided cash of $376.6 million for the first nine months of 2022, compared to $262.2 million for same period of 2021. Net decreases in deposits totaled $58.3 million for the first nine months of 2022, compared to net increases in deposits of $272.7 million for the same period of 2021. During the first nine months of 2022, the Company's short-term borrowings increased $81.4 million, compared to a decrease in short-term borrowings of $3.8 million for the same period of 2021. There were no long-term FHLB advances during the first nine months of 2022 and 2021.  There were no maturities and principal payments on FHLB term advances in the first nine months of 2022 and 2021. Net increase in overnight advances totaled $320.0 million for the first nine months of 2022. Prepayment of FHLB advances totaled $16.0 million in the first nine months of 2022. In the first nine months of 2021, the Company increased overnight FHLB advances by $15.0 million.  Proceeds from subordinated notes totaled $100.0 million in the first nine months of 2022.  Prepayment

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of subordinated notes totaled $5.0 million during the first nine months of 2021.  Repurchase and cancellation of shares totaled $47.9 million in the first nine months of 2022, as compared to $14.2 million in the first nine months of 2021.

Total cash provided by operating activities was $76.6 million for the first nine months of 2022, compared to $64.3 million for the same period of 2021.

Throughout its history, the Company has secured additional capital through various sources, including the issuance of common and preferred stock, as well as trust preferred securities and, most recently, subordinated notes.

The Company (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and subsidiary banks' financial statements. Refer to Note 11 of the Consolidated Financial Statements for additional information regarding regulatory capital.

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “bode,” “predict,” “suggest,”  “project,” “appear,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should,” “likely,” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

● The strength of the local, state, and national and international economies (including effects of inflationary pressures and supply chain constraints).

● The economic impact of any future terrorist threats and attacks, widespread disease or pandemics (including the COVID-19 pandemic in the United States), acts of war or threats thereof and other adverse external events that could cause economic deterioration or instability in credit markets, and the response of the local, state and national governments to any such adverse external events.

● Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the FASB, the SEC or the PCAOB.

● Changes in state and federal laws, regulations and governmental policies concerning the Company’s general business.

● Changes in the interest rates and prepayment rates of the Company’s assets (including the impact of LIBOR phase-out).

● Increased competition in the financial services sector and the inability to attract new customers.

● Changes in  technology and the ability to develop and maintain secure and reliable electronic systems.

● Unexpected results of acquisitions which may include failure to realize the anticipated benefits of acquisitions and the possibility that transaction costs may be greater than anticipated.

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Part I

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS – continued

● The loss of key executives or employees.

● Changes in consumer spending.

● Unexpected outcomes of existing or new litigation involving the Company.

● The economic impact of exceptional weather occurrences such as tornadoes, floods and blizzards.

● The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. For a discussion of the factors that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, see the “Risk Factors” section included under Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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Part I

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, like other financial institutions, is subject to direct and indirect market risk. Direct market risk exists from changes in interest rates. The Company's net income is dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income.

In an attempt to manage the Company's exposure to changes in interest rates, management monitors the Company's interest rate risk. Each subsidiary bank has an asset/liability management committee of the board of directors that meets quarterly to review the bank's interest rate risk position and profitability, and to make or recommend adjustments for consideration by the full board of each bank.

Internal asset/liability management teams consisting of members of the subsidiary banks' management meet weekly to manage the mix of assets and liabilities to maximize earnings and liquidity and minimize interest rate and other risks. Management also reviews the subsidiary banks' securities portfolios, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the board's objectives in an effective manner. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty that can have an adverse effect on net income.

In adjusting the Company's asset/liability position, the board of directors and management attempt to manage the Company's interest rate risk while maintaining or enhancing net interest margins. At times, depending on the level of general interest rates, the relationship between long-term and short-term interest rates, market conditions and competitive factors, the board of directors and management may decide to increase the Company's interest rate risk position somewhat in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long-term and short-term interest rates.

One method used to quantify interest rate risk is a short-term earnings at risk summary, which is a detailed and dynamic simulation model used to quantify the estimated exposure of net interest income to sustained interest rate changes. This simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest sensitive assets and liabilities reflected on the Company's consolidated balance sheet. This sensitivity analysis demonstrates net interest income exposure annually over a five-year horizon, assuming no balance sheet growth, no balance sheet mix change, and various interest rate scenarios including no change in rates; 100, 200, 300, and 400 basis point upward shifts; and a 100 and 200 basis point downward shifts in interest rates, where interest-bearing assets and liabilities reprice at their earliest possible repricing date.

The model assumes parallel and pro rata shifts in interest rates over a twelve-month period for the 200 basis point upward shift and 100 and 200 basis point downward shifts. For the 400 basis point upward shift, the model assumes a parallel and pro rata shift in interest rates over a twenty-four month period.

Further, in recent years, the Company added additional interest rate scenarios where interest rates experience a parallel and instantaneous shift  (“shock”) upward of 100, 200, 300, and 400 basis points and a parallel and instantaneous shock downward of 100 and 200 basis points. The Company will run additional interest rate scenarios on an as-needed basis.

The asset/liability management committees of the subsidiary bank boards of directors have established policy limits of a 10% decline in net interest income for the 200 basis point upward parallel shift and the 100 basis point downward parallel shift. For the 300 basis point upward shock, the established policy limit is a 25% decline in net interest income. The increased policy limit is appropriate as the shock scenario is extreme and unlikely and warrants a higher limit than the more realistic and traditional parallel/pro-rata shift scenarios.

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Part I

Item 3

Application of the simulation model analysis for select interest rate scenarios at the most recent quarter-end available is presented in the following table:  

	NET INTEREST INCOME EXPOSURE in YEAR 1
			As of September 30,		As of December 31,		As of December 31,
INTEREST RATE SCENARIO	POLICY LIMIT		2022		2021		2020
100 basis point downward shift	(10.0)	%	(0.5)	%	(0.1)	%	—	%
200 basis point upward shift	(10.0)	%	(0.5)	%	3.1	%	2.5	%
300 basis point upward shock	(30.0)	%	(0.1)	%	11.6	%	10.3	%

Despite the shift in model results to a more neutral position, the Company remains moderately asset sensitive.  Management is conservative with the repricing assumptions on loans and deposits.  For example, management does not model any delay in deposit betas despite historical experience and practice of delays in deposit betas.  Finally, management models a variety of scenarios including some that stress key assumptions to help capture and isolate the impact of the management’s more conservative approach to the assumptions in the base model.

The simulation is within the board-established policy limits for all three scenarios. Additionally, for all of the various interest rate scenarios modeled and measured by management (as described above), the results at September 30, 2022 were within established risk tolerances as established by policy or by best practice (if the interest rate scenario didn't have a specific policy limit).

Interest rate risk is considered to be one of the most significant market risks affecting the Company. For that reason, the Company engages the assistance of a national consulting firm and its risk management system to monitor and control the Company's interest rate risk exposure.  Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities.

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Part I

Item 4

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act of 1934) as of September 30, 2022. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed in the reports filed and submitted under the Exchange Act was recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting. There have been no significant changes to the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1           Legal Proceedings

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

Item 1A        Risk Factors

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1.A, “Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2           Unregistered Sales of Equity Securities and Use of Proceeds

On May 19, 2022, the board of directors of the Company approved a share repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, up to 1,500,000 shares of its outstanding common stock, or approximately 10% of the outstanding shares as of December 31, 2021.  All shares repurchased under the share repurchase program during the third quarter were retired.

			Total number of shares	Maximum number
			purchased as part of	of shares that may yet
	Total number of	Average price	publicly announced	be purchased under
Period	shares purchased	paid per share	plans or programs	the plans or programs
July 1-31, 2022	190,000	55.18	190,000	1,035,915
August 1-31, 2022	—	—	—	1,035,915
September 1-30, 2022	—	—	—	1,035,915

Item 3           Defaults Upon Senior Securities

None

Item 4           Mine Safety Disclosures

Not applicable

Item 5           Other Information

None

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Part II

QCR HOLDINGS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 6           Exhibits

4.1	Certain instruments defining the rights of holders of long-term debt of the Company, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.
10.1	Form of Subordinated Note Purchase Agreement, dated August 18, 2022, by and among the Company and the purchasers identified therein (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 18, 2022.
10.2	Form of Registration Rights Agreement, dated August 18, 2022, by and among the Company and the purchasers identified therein (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 18, 2022.
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Inline XBRL Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2022 and September 30, 2021; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and September 30, 2021; (iv) Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2022 and September 30, 2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and September 30, 2021; and (vi) Notes to the Consolidated Financial Statements.
104	Inline XBRL cover page interactive data file pursuant to Rule 406 of Regulation S-T for the interactive data files referenced in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

QCR HOLDINGS, INC.

(Registrant)

Date	November 8, 2022	/s/ Larry J. Helling
		Larry J. Helling
		Chief Executive Officer
Date	November 8, 2022	/s/ Todd A. Gipple
		Todd A. Gipple, President
		Chief Operating Officer
		Chief Financial Officer
Date	November 8, 2022	/s/ Nick W. Anderson
		Nick W. Anderson
		Chief Accounting Officer
		(Principal Accounting Officer)

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